Blog | Personal Finance

How to Cure Your Bad Money Habits

...Without Cutting Up Your Credit Cards

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When I was a young boy, I was rushed to the hospital for emergency surgery stemming from complications regarding an ear infection and chicken pox. At the same time, my mother was at home struggling with a weak heart. Not too long after, my younger brother was rushed to the hospital after hitting his head and my younger sister needed a knee operation. To top it all off, my youngest sister, Beth, had a baffling skin disorder that required multiple trips to the doctor.

The only person in our family who didn’t get sick during this time was my dad, but he may have contracted the worst disease of us all—heavy medical debt.

My siblings and I recovered from our hardships. My dad did not. From that point on, he struggled financially, carrying the burden of debt, including a mortgage. He had dreams to be a professor, but instead he compromised to take an administrative job for the State of Hawaii school system.

Later in life, in futile attempts to recapture what he’d lost after many years of sacrifice, my dad chased after a lot of get rich scams. Each time, he lost the little money he had saved up. He kept making bets, and they kept failing.

At the end of his life, my father lamented to me and my siblings about how little he had left to give us. Holding his hand, I cried with my father. He had dug a financial hole early in life, and he never dug out. I loved my dad, and it was one of the saddest things I’d ever seen.

I learned a lot from my dad about money. Unfortunately, it was more about what not to do rather than what to do, but those lessons were important. And fortunately, my best friend’s dad became a mentor to me, eventually becoming who I would call my rich dad.

Rich dad taught me many lessons about money that were in contrast both to what my natural father, my poor dad, said and did. Perhaps most important, rich dad taught me what it takes to dig out of a financial hole.

One lesson, in particular, was crucial: pay yourself first. And it’s that lesson I want to share with you today.

Decision Day

Now it’s time to make one of the most critical decisions in your life—will you take control of your finances or will you not.

If you take control of your finances, it will empower you to shape a new life for yourself. Getting financially healthy can seem like a huge undertaking, but the choice is really a series of smaller decisions. The decision to change your financial future is a mere preliminary. The decision to follow up, renewed each day you open your eyes, is the more critical choice.

How Deep Are You?

The problem with money problems is that things tend to pile on fast. You might make one financial mistake—or run into a spell of bad luck—but if it’s not quickly remedied, you soon start digging an even deeper hole.

To get a sense of how deeply dug in you are, look at the list below. If you can answer yes to any of the questions, put a check in the box:

Add up the checks in the boxes. Is your score 0? Good for you! You are in control.

If you score in the 1-5 range, however, you may need to reduce your debt. If you score in the 6 to 10 range, watch out! You may be headed towards a financial disaster. The higher the score, the more urgent it is that you increase your financial literacy.

You can manage your money without living below your means

There are financial gurus out there who say the only way out of debt is by cutting up your credit cards, forgoing your daily coffee (or avacado toast), or even putting your credit card in a freezer. Essentially they are saying, “Live below your means.”

There are many reasons that I do not subscribe to the live-below-your-means methodology. But essentially, I don’t think that advice solves the problem for anyone who wants to be wealthy. If a person wants to become wealthy, they need to learn how to respect the power of debt, know how to get into the right kind of debt, and learn how to harness the power of debt.

This all takes self-control—the ability to delay gratification. This is the beginning to changing how you think about money. Instead of saying, “I can’t afford it,” start saying, “How can I afford it?”

Debt isn’t your problem

I wrote a blog about why debt trumps savings, but there’s a big difference between the good debt and the bad debt that is drowning most of America’s middle and lower class.

Good debt makes money for you. It’s the debt you use to invest in assets that pay for themselves. Bad debt takes money out of your pocket and is spent on things like clothes, electronics, a mortgage, or car. The problem isn’t the debt; it’s the financial literacy to know the difference between good debt and bad debt.

At Rich Dad, we say you shouldn’t live below your means. Rather we say you should expand your means by purchasing assets so that eventually the income from your assets pays for things like clothes, electronics, a mortgage, or a car. Sometimes you’re dug so deep financially that expanding your means to match your debt level isn’t possible. For people in that unfortunate situation, a debt-reduction program is necessary, which means until they are debt free, they must live within their means.

But if you’re debt is under control, you should pay yourself first.

Pay Yourself First

So many people get the wrong idea when they hear me say you should pay yourself first to get ahead financially. They usually think it means “treat yourself,” which is absolutely far from what I mean.

To get ahead financially, you have to invest in assets. But most people can’t go out right now and buy a cash-flowing asset. Which is where the pay yourself first rules come into the picture.

With every single dollar that comes into your household, take 30% off the top. Whether the money comes from your paycheck, tax refund, or gift, follow this rule.

Then, take one-third and divide it up between three accounts: savings, investment, and charity. Your savings account becomes your rainy day fund. Your investment account will buy your assets, and your charity account will be your opportunity to give back (which is so important to Kim and me.)

How Kim and I did this

Perhaps you’re thinking, “Sure, that sounds easy when you make as much as you do. But what about me? I’m living paycheck to paycheck!”

Fair enough, but you should know that Kim and I have been there and done that. When we were first married, we were very poor. I was $1 million in debt, and at times we lived in our car or on the couch of a kind friend. During that time, we were hustling day and night to build our business, and we hired a bookkeeper named Betty.

Betty was great because she organized our finances and kept us honest about our financial situation. But the one thing Betty and us disagreed on was the idea to pay yourself first. Each month we instructed her to take the 30% off the top and apply to our savings, investments, and charity—and each month she moaned about what a bad idea it was (mostly because the money wasn’t there for it).

Yet, each month, we made it happen and Betty dutifully fulfilled our directive. As entrepreneurs, we worked together to figure out new ways to make up the shortfall. We’d find side jobs, or create a new product. We’d hustle our way forward. And in the end, we paid ourselves and paid our creditors. Betty almost had a heart attack, but it all worked out!

You can do this

The good news is you can do the same! Make this a habit. Once you embrace paying-yourself first, you will be surprised at how fast the money will grow. Once you start investing in assets, that’s when the fun starts and you are able to use that income to purchase things like cars and vacations. But only once you’ve replaced your salary with investment income.

It would be great if everyone had a rich dad and grew up learning financial literacy. Most of you didn’t have such an advantage. Don’t let that discourage you. Regardless of what did or didn’t happen in the past, when you’re ready to make big changes, amazing things can happen in a short time. Many great fortunes have been built by determined people who started out later in life, even people who were in considerable debt.

In my years of teaching, I’ve had the good fortune to meet and hear from tens of thousands of students who have taken the steps to get a financial education have turned their lives around. No matter what stage of life a person is in, if the desire to change is there, change is possible.

Download your free guide to getting your finances in order.