"Rich Dad's Cashflow Quadrant. Kiyosaki, Robert T. 2011"
This CASHFLOW Quadrant book is important because it is about finding your path in life. As you know, most people are programmed early in life to “Go to school and get a job.” School is about finding a job. It is not about finding your life's path.
In 1985, my wife Kim and I were homeless. When friends and family were informed of our plight, the first question was always, “Why don't you get a job?” We knew we could always find safe, secure, high-paying jobs. Both of us were college graduates with good job skills and solid work ethics. But we weren’t after job security. We wanted financial freedom.
By 1989, we were millionaires. Although financially successful in some people’s eyes, we still hadn’t reached our goal of true financial freedom. That took until 1994. By then, we never had to work again for the rest of our lives. Barring any unforeseen financial disaster, we were both financially free. Kim was 37 and I was 47.
The CASHFLOW Quadrant represents the different methods by which income or money is generated. For example, an employee earns money by holding a job and working for a person or a company. Self-employed people earn money working for themselves. A business owner owns a business that generates money, and investors earn money from their various investments—in other words, money generating more money.
Different methods of income generation require different frames of mind, different technical skills, and different educational paths. Different people are attracted to different quadrants.
My highly educated dad had a strong belief that the love of money was evil and that excessive profit meant you were greedy. He felt embarrassed when the newspapers published how much he made because he felt he was overcompensated in comparison to the teachers who worked for him. He was a good, honest, hardworking man who did his best to defend his point of view that money wasn’t important to his life.
My highly educated, yet poor, dad constantly said, “I’m not that interested in money.” “I’ll never be rich.” “I can’t afford it.” “Investing is risky.” “Money isn’t everything.”
My rich dad had a different point of view. He thought it foolish to spend your life working for money and to pretend that money wasn’t important. Rich dad believed that life was more important than money, but that money was important for supporting life. He often said, “You only have so many hours in a day, and you can only work so hard. So why work hard for money? Learn to have money and people work hard for you, and you can be free to do the things that are important.” To my rich dad, what was important was: Having lots of time to raise his kids. Having money to donate to charities and projects he supported. Bringing jobs and financial stability to the community. Having time and money to take care of his health. Being able to travel the world with his family. “Those things take money,” said rich dad. “That’s why money is important to me. Money is important, but I don’t want to spend my life working for it.”
The E (Employee) When I hear the words “secure” or “benefits,” I get a sense of who the speaker might be at the core. The word “secure” is a word often used in response to the emotion of fear. The key is that they want to feel secure and see it in writing. Uncertainty doesn’t make them happy; certainty does. Their internal workings say, “I’ll give you this if you promise to give me that in return.”
The S (Self-employed) These are people who want to “be their own boss” or like to “do their own thing.” I call this group the “do-it-yourselfers.” Often, when it comes to the subject of money, a hard-core S doesn’t like to have his or her income dependent on other people. In other words, if S’s work hard, they expect to get paid for their work.
The B (Business owner) This group of people could almost be the opposite of the S. Those who are true B’s like to surround themselves with smart people from all four categories: E, S, B, and I.
The I (Investor) Investors make money with money. They don’t have to work because their money is working for them. The I quadrant is the playground of the rich. Regardless of which quadrant people make their money in, if they hope someday to be rich, they ultimately must come to the I quadrant. It’s in the I quadrant that money becomes converted to wealth.
I wrote that Kim and I were millionaires by 1989, but we weren’t financially free until 1994. There’s a difference between being rich and being wealthy. The definition of wealth is the number of days you can survive without physically working (or anyone else in your household physically working) and still maintain your standard of living.
Regardless of how much money people make, ultimately they should put some in the I quadrant. The I quadrant is where your money makes more money. It’s based on the idea that your money works hard so you don’t have to work.
One of the reasons the rich get richer is because they can make millions and pay, legally, little or no tax on that money. That’s because they make money in the asset column, not in the income column. They make money as investors, not workers. Moreover, people who work for money are often taxed at higher rates than investors, and their taxes are withheld from their wages. They never even see that portion of their income.
The primary reason many people seek job security is because that’s what they are taught to seek, both at school and at home. As adults, millions of people still continue to follow that advice. Many of us are conditioned from our earliest days to think about job security, rather than financial security or financial freedom. And because most of us learn little to nothing about money at home or at school, it’s only natural that we cling ever more tightly to the idea of job security instead of reaching for freedom.
My highly educated dad worked hard too, but he worked hard on the left side. By working hard, getting promoted, and taking on more responsibility, he had less and less free time to spend with his kids. He would leave for work at 7 a.m., and many times we wouldn’t see him because we had to go to bed before he got home. That’s what happens when you work hard and become successful in the E and S quadrants. Success brings you less and less time, even if it does bring more money.
My educated dad didn’t manage money and people at work, although he thought he did. As the state superintendent of education, he was a government official with a multimillion dollar budget and thousands of employees. But it was not money he created. It was the taxpayers’ money, and his job was to spend all of it. If he didn’t spend it, the government would give him less money the next year. So at the end of each fiscal year, his goal was to deplete his budget, which meant he often hired more people to justify the next year’s budget. The funny thing was that the more people he hired, the more problems he had.
He always thought that the next promotion and pay raise would solve his problem. But the more money he made, the more the same things happened. He got deeper into debt and paid more in taxes.
The reality is that your boss’s job is not to make you rich. Your boss’s job is to make sure you get your paycheck. It’s your job to become rich if you want to. And that job begins the moment you receive your paycheck. If you have poor money-management skills, then all the money in the world won’t save you. If you budget your money wisely and learn about either the B or I quadrant, then you’re on your own path to great personal fortune and, most importantly, freedom.
In moving to the B quadrant, remember that your goal is to own a system and have people work that system for you.
There are three main types of business systems commonly in use today. They are: 1. Traditional C corporations—where you develop your own system 2. Franchises—where you buy an existing system 3. Network marketing—where you buy into and become part of an existing system
Today I recommend that people consider network marketing. Many famous franchises cost a million dollars or more to buy. Network marketing is like buying a personal franchise, often for less than $200. I know much of network marketing is hard work. But success in any quadrant is hard work. I personally generate no income as a network-marketing distributor. I researched several network-marketing companies and their compensation plans. While doing my research, I did join several companies, just because their products are so good and I use them as a consumer.
The average investor does not know the difference between investing for cash flow and investing for capital gains. Most investors invest for capital gains, hoping and praying the price of their stock or home goes up. As long as you have more cash flowing in than flowing out, your investment is a good investment.
When I was a small real estate investor investing in single-family homes, condos, and small 4- to 30-unit apartment buildings, it was difficult getting loans. The moment Kim and I began investing in apartment buildings with over 100 units, banks were more willing to lend us much more money. The reason? On 100-unit-plus properties priced in the millions, banks do not finance the investor. They finance the investment. In other words, on properties with over 100 units, banks look more closely at the investment than the investor.
In closing, I say the I quadrant is the most important quadrant for your future. No matter what you do for a living, how well you do in the I quadrant will determine your future. In other words, even if you make very little money in the E or S quadrant, financial education in the I quadrant is your ticket to freedom and financial security.
When I was in my mid-twenties, it dawned on me that the name of the game was to be the bank, but that didn’t mean to get a job as a banker. My advanced education was about to begin. It was during this period that my rich dad had me look up words like “mortgage,” “real estate,” and “finance.” I was beginning to train my mind to see what my eyes could not. He encouraged me to understand the game and, when I learned the game, I could do what I wanted with what I found. I decided to share my knowledge with anyone who was interested. He also had me read books on the great leaders of capitalism— people such as John D. Rockefeller, J. P. Morgan, and Henry Ford. They allowed me to see what my eyes could not. By reading books like these, I have been able to gain insights into the ups and downs, the cycles and trends, of the economy. A common theme in all of these books is that one of the biggest changes of all is right around the corner.
Historically, if people live to be 75 years of age, they live through two recessions and one depression. As baby boomers, we have gone through three recessions, and some question whether we are entering another depression. Maybe there will never be one, but history says there will. As the saying goes: “If your neighbor loses his job, it’s a recession. If you lose your job, it’s a depression.” The reason my rich dad had me read books on the great capitalists and the economists was so I could gain a longer view and a better perspective on where we have come from and where we are going.
Even when the economy appears to be in great shape, there are millions of people who are in various stages of depression. They may have a job, but deep down they know they are not getting ahead financially. They are angry at themselves and sad over their loss of time. Little do they know that they have been trapped by the Industrial-Age idea of “find a safe, secure job, and don’t worry about the future.”
Why did my rich dad recommend building businesses in C corporations and then buying real estate? Because the tax laws reward people who operate that way, but this subject is beyond the scope of this book. Just remember the words of immensely wealthy people such as Ray Kroc, founder of McDonald’s: “My business is not hamburgers. My business is real estate.” Or remember the words of my rich dad who drummed into my head, “Build businesses, and buy real estate.”
The Seven Steps to Finding Your Financial Fast Track
Step 1: It’s Time to Mind Your Own Business
Step 2: Take Control of Your Cash Flow
Step 3: Know the Difference Between Risk and Risky
Step 4: Decide What Kind of Investor You Want to Be
Step 5: Seek Mentors
Step 6: Make Disappointment Your Strength
Step 7: The Power of Faith