Smart, Successful, and Broke: The Financial Illiteracy Trap

A person can be highly educated, professionally successful, and financially illiterate.

It is that same fear, the fear of ostracism, that causes people to conform to, and not question, commonly accepted opinions or popular trends: “Your home is an asset.” “Get a bill consolidation loan and get out of debt.” “Work harder.” “It’s a promotion.” “Someday I’ll be a vice president.” “Save money.” “When I get a raise, I’ll buy us a bigger house.” “Mutual funds are safe.”

Many financial problems are caused by trying to keep up with the Joneses. Occasionally, we all need to look in the mirror and be true to our inner wisdom rather than our fears.

By the time Mike and I were 16 years old, we began to have problems in school. We were not bad kids. We just began to separate from the crowd. We worked for Mike’s dad after school and on weekends. Mike and I often spent hours after work just sitting at a table with his dad while he held meetings with his bankers, attorneys, accountants, brokers, investors, managers, and employees. Here was a man who had left school at 13 who was now directing, instructing, ordering, and asking questions of educated people. They came at his beck and call and cringed when he didn’t approve of them.

Here was a man who had not gone along with the crowd. He was a man who did his own thinking and detested the words, “We have to do it this way because that’s the way everyone else does it.” He also hated the word “can’t.” If you wanted him to do something, just say, “I don’t think you can do it.”

Mike and I learned more sitting in on his meetings than we did in all our years of school, college included. Mike’s dad was not book-smart, but he was financially educated and successful as a result. He told us over and over again, “An intelligent person hires people who are more intelligent than he is.” So Mike and I had the benefit of spending hours listening to and learning from intelligent people.

But because of this, Mike and I couldn’t go along with the standard dogma our teachers preached, and those caused problems. Whenever the teacher said, “If you don’t get good grades, you won’t do well in the real world,” Mike and I just raised our eyebrows. When we were told to follow set procedures and not deviate from the rules, we could see how school discouraged creativity. We started to understand why our rich dad told us that schools were designed to produce good employees, instead of employers. Occasionally, Mike or I would ask our teachers how what we studied was applicable in the real world, or why we never studied money and how it worked. To the latter question, we often got the answer that money was not important, that if we excelled in our education, the money would follow. The more we knew about the power of money, the more distant we grew from the teachers and our classmates.

My highly educated dad never pressured me about my grades, but we did begin to argue about money. By the time I was 16, I probably had a far better foundation with money than both my parents. I could keep books, I listened to tax accountants, corporate attorneys, bankers, real estate brokers, investors, and so forth. By contrast, my dad talked to other teachers.

One day my dad told me that our home was his greatest investment. A not-too-pleasant argument took place when I showed him why I thought a house was not a good investment.

The above diagram illustrates the difference in perception between my rich dad and my poor dad when it came to their homes. One dad thought his house was an asset, and the other dad thought it was a liability. I remember when I drew the following diagram for my dad showing him the direction of cash flow. I also showed him the ancillary expenses that went along with owning the home. A bigger home meant bigger expenses, and the cash flow kept going out through the expense column. Today, people still challenge me on the idea of a house not being an asset. I know that for many people, it is their dream as well as their largest investment. And owning your own home is better than nothing. I simply offer an alternate way of looking at this popular dogma. If my wife and I were to buy a bigger, flashier house, we realize it wouldn’t be an asset. It would be a liability since it would take money out of our pocket.