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Visions of a brand new red Honda CR 125 motorcycle drifted in front of my eyes. It was 1990, the TV was on in the background, my MC Hammer pants were stylin’, and my parents had just given me what seemed like the Holy Grail to my future riches and glory (cue Indiana Jones music). To a boy of ten, the small wooden box with three slots on top, marked “Spend,” “Save,” and “Give” was all I needed to live the life of luxury and wealth that I knew I would someday have. I could literally hear the voice of Robin Leach from the black-and-white box TV set telling me about the Lifestyles of the Rich and Famous.
I’m not sure where they found the savings box, but with all the sincerity and earnestness of caring parents who want their child to learn how to manage money, Mom and Dad carefully explained the power of long-term savings goals. Their hope was that hidden in the message of saving money for the future would be the key to my financial freedom. College, a big house, and debt-free living—all things they had not had the benefit of obtaining in their own youth—were their dreams for me.
Like the thought that Columbus first discovered the American continent, the practice of teaching our kids to save money from a very young age so they can one day be rich is both ingrained in our culture, and totally wrong. Before the Dave Ramsay and Suze Orman disciples come through the screen to pound me into a pulp (or worse yet, in our digital age, jump directly to the comments section below and leave me a scathing response), let me explain.
To be clear, I am a firm believer in the importance, and power, of saving money every month and investing it in a reputable, zero-fee index fund. Compound interest is indeed one of the great wonders of the world, and regularly saving money over a long period of time is still the gold standard when it comes to having enough money to retire when we are in our golden years. Hopefully that will leave some of you appeased and keep my comment section free from the vitriol usually reserved for anarchists, left-wing nut jobs, right-wing nut jobs, and Martha Stewart.
What I don’t agree with is our dated practice of teaching our kids that the first, and sometimes only, lesson of money management is to save, spend, and give. When we focus on how they use their money, and how much of it they should hide away in a box/piggy bank, we are essentially telling them there is a limited amount of money in the world—it is a fixed pie. Furthermore, we are telling them every time they get a small piece of the pie they need to hoard it like the hordes are coming to take it away. Nothing could be further from the truth, and teaching our kids to focus on saving money is one of our biggest follies in teaching them to have a wealth mentality.
I can hear you saying to yourself, “Okay, Mr. Wealth Mentality Guy, if we don’t teach the kids to save their money, what should we teach them?” Let me tell you in the same way I teach kids, with a simple example.
Imagine a large 55 gallon barrel. I’m talking about those old barrels with the vertical wooden slats and a metal ring around the top and bottom to hold it together. Imagine you see the old wooden barrel and you are asked to use a smaller bucket to run water from a spigot a few hundred feet away over to the barrel and fill it up, one bucketful at a time. You realize that your small bucket is only about a gallon of water, at most, and it is going to take you a while, so you get hauling. Running back and forth from the spigot to the barrel, you pour in two or three full buckets of water, but when you return on the fourth run you notice that the barrel is still virtually empty. You then notice that the barrel is full of holes. Every time you pour in your bucket of water it all drains out through the holes and you are back to zero.
Let’s stop for a minute. Can you see the barrel and the holes? How are you feeling about running back and forth to that spigot, pouring in water only to have it drain out through the holes? If we apply this analogy to our finances (the water coming into the barrel is income and the holes in the barrel are expenses), we can pretty quickly see that most of us are doing this exact same futile exercise in our financial lives. We run to work every day back and forth putting buckets of water into our barrel only to see everything flowing out onto the ground in our expenses.
I know some of you have seen this example before, and you are probably thinking, “We need to fix the holes—lower our expenses—so we can keep more water (money) in the barrel.” I don’t disagree fixing or shrinking some of our holes in the money bucket will help us keep more of our earnings in the bank, but do any of you honestly think you will be able to reduce your expenses to zero? No matter how hard you work cutting back on eating out, skipping the Starbucks line in the morning, riding your bike to work, or any other expense reduction measures, you are still going to have significant holes in your barrel. In the very least you will still need to pay for shelter, food, clothes (you know, the basics of living). So even with our very best efforts to reduce our spending, we will still have to go back to the spigot every single day and continue to haul buckets of water, or else our barrel will go empty.
Depressing, right? But all of us know that the holes in the barrel are only one side of the equation. The other thing that we have direct control over in this analogy is the water going into the barrel. Many of us were handed a bucket as a kid (told to go to college and get a job) and now we find ourselves stuck running back and forth. It may sound simple, but what if we just hauled a hose out from the spigot to the barrel and turned it on and let it run? The barrel would stay perpetually full of water even if we left to go to the movie, to climb Mt. Everest, or to South America to help kids in an orphanage. Even with some pretty large expenses (as long as they weren’t obscene), we could keep our barrel full if we had the hose running all the time, day and night, whether we were working or not. And if you did want an obscene expense, like a huge home or a 1961 Chevrolet Convertible Corvette with a 3-speed manual transmission and 283 fuel-injected V8 (that was strangely specific), then all you would have to do is run multiple hoses to the barrel and let it rip.
Someone with a wealth mentality would never spend their time running back and forth to the water spigot. They would instead create a system that would provide water constantly to the barrel. A wealth mentality teaches us to create income streams that pay us whether we are working or not.
We will spend quite a bit of time in future blogs talking about how we can create these income streams, but for now, know that in your financial life it will not pay to focus on the expenses. To be wealthy, before you are too old to enjoy it, the focus has to be on income.
So, back to the beginning: what does all of this have to do with savings? Putting money into our savings account each month is just a special type of expense. You could argue that it is a good hole in our money barrel because all of it flows into a safe location where it can be used in the future, but it is still just an expense and a hole in our primary money barrel. While we hope that someday our savings barrel will be full enough to support us in retirement, it does nothing for our current wealth. That is why I say to go ahead and leave the savings hole in your money barrel. Save money so you can fall back on it if everything goes kaput, but make it automatic and then don’t give it another thought. With all of that extra time, start to figure out how you can create an income stream that will fill your bank account every day and night, whether you are working, sleeping, or sunbathing in the Virgin Islands.
That brings us full circle and I will say it again: stop teaching your kids to save. Instead, teach them how to earn, or even better, how to create. Once they are well on their way creating wealth, then teach them the skill of automatically saving some of their money. That is the wealth mentality way.