“The only difference between a rich person and a poor person is what they do in their spare time.”Robert Kiyosaki
One of the segments I want to do with this blog I’m called “Required Reading,” which essentially is a combination book review and recommendation. I’ll write a post on a particularly educational or useful book and break down the top 5 takeaways.
If you’re reading this blog, you’re probably familiar with the name Robert Kiyosaki. He burst on the scene in 1997 with Rich Dad Poor Dad and has built an empire around financial literacy and education. Cashflow Quadrant was the follow up in 2000 to the hugely successful 1997 book and the Kiyosaki book that had the biggest impact on me.
I usually recommend this book very early to people who want to change their financial lives. It’s not a how-to book. It’s not a “baby step” book that tells you what to do. It’s a book that rewires your brain and changes how you think about money, jobs, and wealth. Kiyosaki breaks it down in very simple terms, exposing the reality behind things we take for granted, such as being an employee and the tax system. Cashflow Quadrant is very much required reading for anyone looking to break out of the rat race. Below are my top 5 takeaways from the book (but you should really read the whole thing):
#1. As an Employee, The System is Against You
The said ‘quadrant’ of the title is made up of four types of income: “E” (Employee), “S” (Specialist or Self-Employed), “B” (Business Owner), and “I” (Investor). The vast majority of people are “Es” and are also the most disadvantaged of the four. As an employee, taxes (income, social security, medicare, etc) are taken from you before you get any money. You pay taxes and get what’s left. As an “S” or “B” you have tax advantages, such as deductions and depreciation. These lower the amount that’s taxable; you spend money and pay taxes on what’s left. To make matters worse, “Es” are also taxed at the highest rates!
“Your boss cannot make you rich,” Kiyosaki writes. “The reality is, your boss’s job is not to make you rich. Your boss’s job is to make sure you get your paycheck.” Which is then taxed. If you remain an employee, you’re working hard for taxes and what’s left. Being an employee also usually takes away a lot of your time. You’re at the whim of a manager or company — you must adhere to their schedule and demands. If you’re unwise about your money skills and budgeting, “then all the money in the world cannot save you…if you budget your money wisely, and learn about either the “B” or “I” quadrant, then you are on your own path to great personal fortune, and, most importantly, freedom.”
What’s even more messed up is the fact that The System only gives tax breaks for “Es” if you go further into debt. Think about it: as a business owner, your expenses and the “cost of doing business” are deductible from your income, reducing what you pay taxes on; as an “E” the only tax breaks you get are from taking on debt like a home mortgage or student loans. These two (usually large) loans have tax deductible interest. But you have to go into big time debt just to get the deduction. Simply put, you want to get out of the “E” quadrant as fast as possible.
#2. In Debt vs Indebted
“The more people you are indebted to, the poorer you are. And the more people you have indebted to you, the wealthier you are. That is the game.”
This one is brilliantly simple. If you owe a bank a mortgage, another bank credit card debt, another institution student loan debt, your parents $100 you borrowed, you are in debt to someone else. Your earned money is taken away by these debts. However, if someone owes you, you earn money by these debts. As a property renter or bond buyer or lending via a Peer-to-Peer lending service, people are indebted to you. “We are all in debt to someone else,” says Kiyosaki. “The problems occur when the debt gets out of balance.”
“The world simply takes from the poor, the weak, the financially uninformed. If you have too much debt, the world takes everything you have…your time, your work, your home, your life, your confidence, and then they take your dignity, if you let them. I did not make up this game, I do not make the rules, but I do know the game…”
#3. Mind Your Own Business
Kiyosaki shatters “Industrial Age” adages and beliefs against the rock of reality that is the 21st century. “Go to school and get good grades, so you can find a safe, secure job with good pay and excellent benefits,” he points to as out-of-date advice. “Work hard so you can buy the home of your dreams. After all, your home is an assent and is your most important investment.” “Having a large mortgage is good because the government gives you a tax deduction for your interest payments.” “Buy now, pay later.”
As Kiyosaki points out, people who “blindly follow” the advice above often end up as employees (“making their bosses and owners rich”), debtors (“making banks and money lenders rich”), taxpayers (“making the government rich”), and consumers (“making many other businesses rich”) The people following this advice are making everyone else rich but themselves! “They work all their lives minding everyone else’s.”
To break out of this, you must move into the “B” and “I” quadrants. Move from the employee to the employer. How do you do this? Start a business. Offer a product or service. To enter the “I” quadrant as an investor, learn about finance and investing. Buy stocks or bonds that generate income. Or buy an existing franchise! Don’t work at McDonald’s, own one. It may seem like a leap, but as Kiyosaki will repeat over and over, it’s about financial education. Don’t grow other people’s businesses, grow your own.
#4. Assets and Liabilities
Find any YouTube interview with Kiyosaki (or read any of his books) and I guarantee you will hear him mention these two things. “An asset,” he likes to say, “puts money into my pocket. A liability takes money out of my pocket.” He punctuates this always by stating “your home is NOT an asset!” The mindset is that buying a home with a large mortgage is an asset — this is archaic thinking — because the mortgage interest is tax deductible. But you still have the monthly mortgage payment. And property taxes. And Private Mortgage Insurance (PMI) if you put down under 20%. Plus you have renovations and repairs. But a home becomes an asset when your rent it. The rent brings in monthly income. The repairs and renovations become tax deductible as business expenses.
Thinking more about these two things really changed my focus on spending money. When I spend money now, I think “is it an asset or a liability?” “Will it make my money or cost me money?” I get excited when I buy a new stock or more shares of a stock I already own. They’re going to go to work for me and make money. I had to buy a new car not long ago and groaned about the new liability — but if I use it to Uber or Amazon Flex, now it’s an asset because it puts money in my pocket. The gas I use and tires I purchase are now business expenses.
Assets and liabilities are as core to wealth as supply and demand.
#5. Other People’s Time and Money
“OPT” and “OPM” as Kiyosaki calls them are “found on the right side of the quadrant.” A “B” Business Owner and “I” investor become wealthy using other people’s time and money. It sounds sinister, but think it through. If you’re an employee, you have a job because someone built a business around an idea or product. Your paycheck is the direct result of someone else’s time and money. Put yourself on the other side of the equation: by putting in the time and money to start a business, you begin to earn back both at the expense of someone else’s who works for you.
The “I” quadrant is the most unique. In the “I”, Kiyosaki says “money works for you.” This is why I love investing so much. If I buy shares of Coca-Cola, the company is doing the work for me. The stock may increase in value, making me money. Then, every quarter, they pay me money in the form of a dividend. I don’t work for Coca-Cola. I don’t attend any meetings or drive anywhere. I don’t even get a paycheck from them. I get increased asset (there’s that word again!) value and a dividend. Best of all, I still have all of my time to dedicate to something else (or nothing, if I chose).
Kiyosaki: “A few years ago, I read this article that said most rich people received 70% of their income from investments, or the “I” quadrant, and less than 30% from wages, or the “E” quadrant. And if they were an “E”, chances were that they were employees of their own corporation.”
I have barely scratched the surface of Cashflow Quadrant with this post. It was one of the earliest books I read when I wanted to change my thinking on finances and wealth and it had one of the greatest impacts. It pulled back the curtain. It shook me out of a sleepwalking daze of going to work day in and day out, collecting a paycheck that was heavily taxed and withheld. It put me on the path to financial freedom. I cannot recommend it enough! To help you on your own personal wealth journey, I added a link to buy a copy below by clicking on the cover or here.