A lot of people will think that the best place for their money to be is in a savings account, but that’s just not accurate, and quite frankly, it actually makes me very sad. In the most recent chapter that I’ve read in Rich Dad, Poor Dad, Robert Kiyosaki, author of Rich Dad, Poor Dad, talks about some of the surprising disadvantages of a savings account.
Honestly, I’ve always hated savings accounts. Especially my savings account with my main bank, Fifth Third, where I earn .01% interest, but even in general. While I always knew that they had a purpose, I think people will use Savings Accounts almost as a “Catch all” for any extra money.
I think that the following are the only things that should ever go into a savings account:
- Emergency Fund
- Anything that will be spent within 3 years
End of list.
If you want to fight me on the timeline of 3 years and you think it should be longer, that’s fine. That’s completely a personal choice. But the essence is really if it’s a short-term thing you’re saving for, I support a savings account. If it’s long-term, put that money to work in the market!
For instance, the things that we have in our savings account include our emergency fund, a grouping that I call NEBP, which is Non-Emergency Big Purchases for things like if we needed new tires for our car, a new water heater, the lawn mower broke, etc. Essentially, something that was unexpected but not really an ‘emergency’ per se. We also have money saved for vacation, a down-payment on our next home, a landscaping project that I’m planning, and other things!
I joined Ally for the interest rate, which while it has dropped to 1.5%, they’re still in the range with all of the other high-yield savings account options, and I will stay because of the interface, as I can have one savings account with 10 different categories to separate my money and make my planning easier.
But you’ll notice that all of these things are situations where I plan to use the money within 36 months honestly, with the exception of the Emergency Fund, which will hopefully never be used.
But Kiyosaki brings up an entirely different reason as to why there are major disadvantages to a savings account. Essentially, it comes down to one word – taxes.
When you put money into a savings account, you were taxed on it when you earned it and then you are also taxed on the interest that you earn. One of my favorite reoccurring themes that Kiyosaki hits on is he feels that financial IQ is made up of four main areas:
- Understanding Markets
- The Law
Avoiding taxes, which is really the main focus of this chapter, ties into Accounting and The Law. He talks about how the difference between someone that knows how to make the tax laws work for them vs the person that doesn’t is like the difference between someone walking and flying.
Kiyosaki boils it down to three steps that really differentiate business owners and then employees that work for corporations.
- Business Owners: Earn, Spend and then pay taxes.
- Employees: Earns, pays taxes and then spends.
There’s a pretty big difference written in there, and it really boils down to the fact that a business owner has the ability to spend before they pay taxes. That is a huge advantage when you’re using pre-tax money to cover costs. But how does this actually relate to you as an individual? Well, in many ways!
Kiyosaki says that if you own your own business, you can almost manipulate expenses to allow you to use pre-tax dollars in a way that an employee wouldn’t be able to. What exactly does that mean?
A business owner can use pre-tax dollars to host a business meeting, in say, Hawaii. If an employee was to go to Hawaii – that’s called a vacation, meaning post-tax dollars. What about car payments, insurance, repairs and health club memberships? If you own your own business – pre-tax. Employee? Post-tax.
Now, this doesn’t mean that you should open your own business simply to be able to use pre-tax money on things that you weren’t previously able to do, but it does give you yet one more reason as to why you should really think about being your own boss and making that jump into entrepreneurship.
I think that Kiyosaki also gave a really realistic way for the average person, looking to become that “Rich Dad”, to capitalize on this sort of mindset. The example that he gives is referencing the Internal Revenue Code 1031, which allows “seller to delay paying taxes on a piece of real estate that is sold for a capital gain through an exchange for a more expensive piece of real estate”.
So, if you sell a piece of property but then use those funds to upgrade, you can defer what you would normally owe on taxes, therefore you can just keep continuously upgrading, tax free!
You essentially can completely avoid taxes in this example until you get to the point where you finally liquidate once and for all, but until then, you were able to grow your real estate portfolio without any sort of penalty.
For instance, let’s say you bought a $100,000 house, sold it for 25% above what you paid for it ($125,000), and then were taxed at 25% on those gains. You then bought a $200,000 house, made another 25%, and then sold. You did the same thing one more time but with a $400,000.
If you were to pay taxes the whole way, you’d have ended up paying $43,750, but if you had taken advantage of “1031”, as the pros call it, then you only would’ve paid $25,000. $19,000 is a pretty big chunk of change for doing absolutely nothing different other than being knowledgeable of the tax laws.
At the end of the day, that’s all that Kiyosaki is trying to say – understand the tools and advantages that are setup for you and take them by the freaking horn! Don’t get screwed over by the tax man – you are the man, or woman, that is going to stick it to them instead!