Gamestonk

2020 was a rough year. That goes without saying. It was hard to find motivation in writing a blog about Quitting Your Job when so many people were losing their jobs and seeking unemployment assistance. Their jobs quit them. So I watched and waited, trying to find that spark for inspiration to return to the blog-space.

Then came The Big Meme Short.

Because this event is playing out better than any movie that came out in 2020, we’ll take it one step at a time. It will also be partially subjective, because I “took part” so to speak, buying into the market — more for the experience than in any attempt to actually make money. Personally, I believe in investing and do so. I believe in acquiring assets and utilizing dividends (read my post on building a dividend ladder portfolio here). I bought up stocks in April last year and did well. What happened this week was not sane investing and I don’t recommend getting involved (it’s not over as of this writing) and if you do please exercise caution.

That being said: I am not an investing professional or hold any certifications or fancy paperwork that shows I’m a qualified analyst or that you should listen to me. Trade accordingly and consult a financial professional!

Prologue

Beware the average man the average woman…

Charles Bukowski “The Genius of the Crowd”

GameStop had been mentioned in investing circles over the past year, primarily because of Dr. Michael Burry taking a sizable position. Burry, if you didn’t know, was one of the prime movers of The Big Short (played by Christian Bale) and one of the first to bet against housing. As of June 2020, his fund, Scion, owned 4.26% of available GameStop (GME) shares. Fast forward to this past Monday, where Burry’s position of 1.7 million shares rose to $271 million — and that wasn’t even GME’s weekly high.

Meanwhile, on the other side of the internet, subreddit r/wallstreetbets, essentially a stock trading club of retail investors who discuss stock market strategies, was turning into an angry beehive. It’s worth noting that around the time the GME play got going, the subreddit had about 2.2 million subscribers. It is now up to 5.7 million ‘degenerates.’ Having lost large amounts of money in previous market plays to the big guys on Wall Street, the…shall we say, collective…of wallstreetbets came across the perfect target for revenge.

It involved shorts (I’ll try to keep this brief, but some context is needed). Yes, the same as Burry’s The Big Short. A short is simply a bet against a stock or asset. ‘To short’ something is to bet against. That’s the general term which comes from a ‘short selling’ action where you sell a stock short. An investor on the street can do this by borrowing shares from their brokerage, selling them immediately at market price, collecting the money as profit but owing the brokerage the shares.

Example: I short sell 100 shares of Big Company stock at $10/share. I collect $1,000, but I owe my brokerage (Fidelity, E-Trade, Schwab, etc) 100 shares of Big Company. The stock goes to $5/share, I buy 100 shares of Big Company and return them to the brokerage. I sold for $1,000 and bought back for $500, a difference of $500 which I keep as profit. Brokerage gets their shares back, the trade is over.

Shorting can be dangerous. Imagine if I sold Big Company shares at $10/share and it went to $15/share. Now I’m OUT all the profit AND still owe my brokerage the shares. In most cases, if the trade goes against you, the brokerage will demand their shares back (cause they’re losing money on the value increasing, this is called a margin call). They could also have the power to start selling other stocks in your account to buy back the shares you owe them.

Shorting is a common tactic on Wall Street; it’s done by big banks and hedge funds all the time. The ugly part of it is that with so much weight and money behind it, these funds can actually move the price of stocks in the direction they want them to go. Imagine being able to short Big Company stock and short so much of it it drives the price down in your favor (this is because of volume; when sellers outnumber buyers, the price goes down and vice versa).

So back to r/wallstreetbets. What they discovered was that GameStop (GME) was shorted by Wall Street by over 140%. What does that mean? It means GME stock was heavily bet — the number of shares shorted OUTNUMBERED the amount of available shares. And, if you remember from the example above, the shorted shares must be re-bought to close the position. So, ipso facto, there wasn’t enough shares available to close the position. When the trade was due to close on Friday, January 29, 2021 (last trading day of the month), Melvin Capital, and the other funds behind the short, would need to buy shares to close the short.

As anyone who invests knows, the law of supply and demand rules.

Part One: Short Squeeze

I don’t know when the move to buy up GME started exactly. From the stock chart, the first big move was January 13, where volume spiked and the price rose sharply. For the purposes of this post, we’ll start there.

r/wallstreetbets was at a mere 2.2 million followers or so, but had garnered full buy-in from it’s members on the GameStop play. The price started to climb, more joined in. By the end of last week, I was seeing news about GameStop and ‘short squeeze’ in my news feed, but didn’t bother to look into it.

A ‘short squeeze’ occurs when the price of shorted stock suddenly and sharply rises. In order to ‘stop the bleeding’ (e.g., stop taking losses) a trader or hedge fund will begin to buy the stock back to fulfill the short trade. This, of course, causes the stock to continue to rise because the short seller has started buying too, and it feeds off itself. Stock rises, short seller buys to cover before the price goes up further, which causes the price to rise more, which causes the short seller to buy back more…et cetera.

To use my earlier example of shorting Big Company stock. I borrowed 100 shares and sold at $10, expecting it to go down. Instead, say it goes down to $6 but then starts to come back up. Panicked (and not wanting to lose my profit), I buy 25 shares at $6 — which adds to the increase in price. I still owe my broker 75 shares and the price is rising. So I buy 25 more shares at $8, still owing 50 and my profit is shrinking fast… If it goes to $10, I lose profit on my remaining 50 shares and if it keeps going over $10 I’m losing money. The phenomenon of the price rising against my short and me adding to it is a short squeeze: I’m the one getting squeezed.

I first checked the price of GameStock (GME) on Tuesday at the market open, finding it at about $143/share. My first response was “this is absurd,” the company is in no way worth that. This is a stock that back in October was under $10/share and their business model wasn’t very forward thinking (brick and mortar as games moved online). I checked the stock chart of GME:

At this point, I still had no idea r/wallstreetbets was behind it or what was even going on. From a chart and price perspective, this just looked like a pure mania play. The RSI (relative strength index), the green blob in the top right corner, showed 98+ which means the stock is white hot and severely overbought. My first instinct was to bet against the move using puts.

First: Why bet against it? The reasoning is that it continues to take more money to push a stock price up. Someone (or some fund) must be willing to buy at the current price. In order to sustain huge price gains, there must always be another buyer. The minute no one wants to buy a stock at a certain price, the selloff begins. This is what happened with the dot com crash and any subsequent crash of a stock or market after parabolic moves. I had played a similar trade back in April 2011 in silver:

In late April 2011, silver had climbed to incredibly high levels very quickly. The RSI was high and I knew it couldn’t stay up forever. I bought puts on SLV and within a week the price of silver collapsed. Most money I ever made trading in a day. So, to me, it looked like a similar setup for GME.

I went to make my trade in my Fidelity account but found I wasn’t registered to trade options (my silver play was done in an E-Trade account I’ve since abandoned). I applied, but had to wait at least three days. So, with no trade to make that day, I decided to research exactly what was going on — would I still get a chance to buy puts later in the week? Would the stock mania still be going? So I started to dig.

And I realized something incredible was happening.

Part Two: Can’t Stop. Won’t Stop. GameStop.

It turns out that the story behind GameStop’s ridiculous rise wasn’t the typical ‘rumor mill’ drive up found in past stock manias (remember JDS Uniphase?). It wasn’t a case of “Blue Horseshoe Loves GameStop.” It was a grassroots movement to ‘strike back’ against a faceless enemy in the Wall Street hedge fund. Resentment towards Wall Street for the 2008 housing crash was channeled now into this new play.

What savvy users like /DeepFuckingValue, Roaring Kitty, and r/wallstreetbets discovered was that the big players were extremely exposed on GameStop stock and would be required to buy it at any price. They could create an extremely painful (and expensive) short squeeze against the hedge funds shorting the stock, particularly Melvin Capital. So word was spread, and the degenerates of r/wallstreetstock began to buy GME stock. More importantly, they didn’t just buy — the message was to HOLD.

They would buy up as many shares as they could get their hands on and deny them to the hedge funds. Then they would get their friends, family, and anyone who would listen, to buy and hold too. Because GME was shorted over 140%, more shares were needed to cover than were available, so denying ANY shares further would make things exponentially more painful. Supply and Demand was on full display as GME price rose.

As the price climbed, the redditors’ strategy appeared validated. The truth is, it was a smart play. They caught Melvin with their pants down. Why such a huge short play on GME? I don’t exactly know; GME had a been the target of short plays over the past two years. Maybe Wall Street knew they were a weak target whose stock price could be easily pushed down, particularly with GameStop closing their stores during the pandemic last year. A more insidious theory would suggest Melvin and others wanted to short GME to zero, folding the company and not having to buy back ANY shares, thus keeping 100% of their profit. Regardless, GME’s price was starting to “moon” as it climbed faster.

By Tuesday I noticed the stock and its chart. The grassroots movement was working. Profits garnered interest in what was going on. Interest prompted more buyers — but for the redditors it wasn’t necessarily to get rich, it was to be part of the experience. The GME play had gone viral…like a meme. GME was the first “memestock.” The real memes was also appearing.

When the pandemic started in 2020, lockdowns began and people on the street found themselves stuck at home, receiving stimulus checks and $600 Federal unemployment bonuses. With nothing else to do and/or no work, many took to the retail trading platforms Robinhood and M1 Finance. According to the NY Times, in the first three months of 2020, Robinhood “users traded nine times as many shares as E-Trade customers, and 40 times as many as Charles Schwab customers,” and according to CNBC, retail brokers in 2020 saw “record new account openings…despite the pandemic.” Credit where credit is due: Robinhood and M1 Finance and their $0 commission fee for trading helped force other larger brokers to compete, like Charles Schwab and Fidelity, and drop their commission to $0 as well.

These new retail investors moved like a swarm in 2020, charging after hot name stocks like Tesla (TSLA). The GameStop phenomenon presented itself as the next big target to buy. r/wallstreetbets (now up to 7 million followers in the second day of writing this post) would soon attract these millions of new street investors to their cause. Together, they pushed GameStop up to dizzying heights.

By Wednesday, GME was over $300 and Michael Burry — up 1,500% on the rally — was now calling the GameStop price rocket “unnatural” and “insane.”

Then something else began to happen. r/wallstreetbets continued to dig and found heavy short positions on other stocks too (just not has hefty as GME). From highshortinterest.com here (as of the end of the week of January 25th) the stocks with the highest short interest (GME lower than the 140% originally, down to 121% which means some shares were bought to cover some of the short):

On Wednesday I decided to enter the fold, just for fun. I had no plans to dive into GME stock head first and my options trading still hadn’t been approved by Fidelity (and still no word). For my own entertainment, I chose AMC stock — I love movies and it seemed an interesting play. It hadn’t rocketed up quite like GME did and maybe it would. I got to play a company related to movie and feel like part of this cultural event.

Someone clearly wasn’t happy with r/wallstreetbets. By Wednesday afternoon the subreddit was knocked out of commission, going ‘private’ and not being available to anyone who visited. Even further, the WallStreetBets Discord channel was banned outright. The subreddit would appear public again late Wednesday evening or early Thursday morning, but to this date, the Discord server is still gone. Was this a co-ordinated attack? There’s no doubt at this point WSB was pissing off powers that be.

I would personally experience the coming “fuckery” first hand the following day. It would also validate my original thesis on why GME was a good put choice back on Tuesday (again, before I knew anything about r/wallstreetbets involvement). As if things couldn’t get any wilder, Elon Musk tweeted that day just after market close, driving the price up even more with foreign investors:

Part Three: The House Always Wins…Or Does It?

On Wednesday I was in the game. There were struggles out of the gate; most major brokers were suffering delays in filling orders, likely due to heavy volume. At Tuesday’s close, AMC was just over $6. By pre-market, it had climbed over $12. I was able to finally get my trade through after the bell at 9:30am at $16.50. On Wednesday AMC climbed and closed at $19.90. News came out after the closing bell that Melvin Capital and Citron had exited their short (after getting absolutely leveled). The amount lost by these two hedge funds has varied in the news — Melvin Capital has supposedly lost $7 billion, 53% of their assets under management. GME was over $340/share and the trade was moving in the direction the Redditors planned. Wednesday evening, investing commentary site ZeroHedge reported “Hedge Funds Are Puking Longs to Cover Short-Squeeze Losses.” “Puking longs” means hedge funds are selling long positions to get cash to cover losses incurred due to losses caused by the short squeeze. This is what being margin called looks like.

On Thursday morning, the pre-market price of AMC hit $22. GME was up over $400. Both had been pushed up overnight by foreign traders in India and Europe. North America was getting ready for the next round of the fight when something I’ve never seen before happened.

Brokerages began to restrict only buying not selling. In fact, users were reporting Robinhood (and TD Ameritrade) had REMOVED the buy button for certain equities, namely GME and AMC.

So for all the “meme stocks” (e.g., the heavily shorted stocks pointed out by WSB), Robinhood and TDA were not allowing their users to buy. Promptly, the price on these stocks began to fall. With the retail traders shut out en masse, the sellers would overwhelm the buyers. My shares of AMC were down to $12 when the market opened, wiping out over $7/share in profit. GME price took it on the chin.

Robinhood was blasted across social media for the restrictions, prompting many to suggest alternatives. A Change.org petition appeared to remove Robinhood from the App Store. “How to delete Robinhood” was quickly trending on Google later that day as well. Protestors appeared in-person on Wall Street to demanding that “Robinhood has got to go.”

Robinhood was claiming they were restricting the stock purchases to protect themselves AND their investors. What it looked like was Robinhood was trying to prevent the dreaded failure to deliver (FTD) that would destroy Robinhood and its capital investors. By failing to deliver, they open themselves up to lawsuits and bankruptcy. By restricting purchases, it helps protect against FTD, but the PR damage was total. RH was a accused of being complicit with the hedge funds to help cover their GME shorts. If retail investors couldn’t buy and only sell, it helped drive down the GME price for the hedge funds to recover. In addition, only being able to sell and not buy might cause panic to the retail investor to get OUT of their Robinhood account, making them hit the “sell” button, thus driving the price lower.

Anyway, at this point I could see the severe shenanigans going on. AMC dropped to the $8 range and I was in the red in my tiny position. I debated just holding and waiting. Then I noticed that every time AMC started to climb back up, the price would halt. Somebody was enacting a trading halt on AMC and GME; I counted no less than 10 halts on the price of AMC before noon alone. Something was happening. After some debate, and the price climbing back to $10/share, I got out. I could have held — I thought about it — but I didn’t like the manipulation and dark forces at work. I took the loss and I’m totally fine with it. It was fun to play and dip my toe into this cultural event.

But Robinhood preventing people from buying shares of GME or AMC was only half of the situation. According to several RH users, the app was also selling their GameStock without their permission. Robinhood later denied this had happened, but users took to social media to share screenshots showing the confirmations their accounts had executed sell orders:

One redditor, Palidor206, described everything happening with Robinhood as such:

And meanwhile…

Part 4: Welcome to Thunderdome

This is a long post, so let’s recap:

  1. Savvy Redditors and a YouTube identified an exploitable play on short sellers of GameStock (GME) shares. They began buying up shares and holding, which encouraged others. The price of GME began to climb.
  2. Early this week GME climbed over $140/share and the number followers of the subreddit r/wallstreetbets exploded. On Wednesday at market open, brokers (including my own, Fidelity) lagged and struggled to keep up with volume.
  3. On Thursday, Robinhood and TD Ameritrade began restricting purchases of the ‘meme stocks’ — GME, AMC, NAKD, BB, NOK, etc. At first the buy button for these stocks was removed; eventually users were restricted to only 1 share. The sell button was always available.
  4. Public backlash at Robinhood exploded, with people protesting and flooding the App Store with 1-star reviews of the app (which Google later removed 100,000 of)

On Friday, although Robinhood restricted purchasing, GME price was back up. AMC was back up (dammit). Nokia (NOK) and BlackBerry (BB) either didn’t have the same force behind them or truly were just a meme as they slid, apparently due to lack of interest.

By this point, the emotions behind this retail investor flood went far beyond greed. Followers of r/wallstreetbets began sharing personal stories of why they were doing this. To them, it was personal. They remembered 2008 and what the hedge funds had done to their friends and family. It was payback. Braveheart memes abounded. Perhaps most fascinating about this whole thing was that many of these investors were on suicide missions: it didn’t matter if they made money or if they lost it all. They just wanted to make the hedge funds hurt.

Here’s the story of Space-Peanut on reddit (which has since been removed by a reddit mod, but is available here)

Here’s another one from chickenweng65:

These people don’t care if they lose everything. They don’t care if GME goes to $0. To the reddit investor this is war. They don’t care if it crashes everything down. It’s a new form of populist revolt. As Space-Peanut put it, “Taking money from me won’t hurt me, because I don’t value it at all. I’ll burn it all down just to spite them.”

It’s like being in a gunfight with Doc Holliday — he’s not afraid to take a bullet because you’d just be doing him a favor.

By the way, while writing this, r/wallstreetbets is now up to 7.5 million ‘degenerates.’

The redditors with new found money are now using it to taunt Wall Street publicly.

5. You Are Here

GME is at a mania pitch. The memes are coming hard and fast. There’s reason to think there’s some panic on Wall Street, or at least concern for the chain reaction caused by the Robinhood debacle. See, on Wall Street, everything is interconnected. Brokerages deal with banks and clearing houses. You buy and sell stock in your broker account and it seems instant, but a lot of time it takes days to settle or ‘clear.’ Worst of all, perhaps, is no one knows how deep things can go from one short squeeze.

It’s Sunday afternoon and markets will open in a few hours. What will tomorrow bring? Will GME continue its meteoric rise? Where will the reddit ‘hive-mind’ turn to next? This event with not be without consequence — hedge funds will probably need bailed out. Expect government regulatory commissions and investigations. Will things reach 2008 levels again?

Maybe. Who knows?

WSB has kicked over a rock, exposing what was beneath it. Then they picked up the rock and threw it at a bees’ nest. I expect WSB to be demonized by the media and ‘powers that be.’ These market distortions are they’re fault, after all. If only they had left GME alone this wouldn’t have happened.

What does all this have to do with Quitting Your Job? This blog is certainly not advocating jumping on a bandwagon or chasing the herd for profit. But the biggest takeaway here is the old Boy Scout maxim of “Always Be Prepared.” Weeks ago redditors found a great stock market play. Who knows when the next one will arrive. That also applies in the event the market crashes; if you’re ready, stocks or assets can be bought for cheap while everyone is selling. The other thing I see happening in r/wallstreetbets and Twitter is people on the street becoming interested in financial education — how the stock market works, how stock is traded, what terms mean what. They’re a long way from being savvy, but the interest and desire to learn more is there.

I’m still out on all these meme stocks. But I’m bingewatching the show and it’s fascinating.

Disclaimer: I do not own any of the stocks mentioned in this post. I do not hold GME. I also do not use Robinhood. Caveat emptor.

How to Build a Budget

The dreaded “B” word

“Either tell your money what to do, or end up wondering where it went.”

Dave Ramsey

I used to hate budgeting. Not that it seemed like too much work…just something about that damn “B” word used to cause me to groan and not want to do it. Maybe there was some stigma attached to the “I’m on a budget” mentality. It made me feel poor, cash-strapped, and destitute. The truth is, I can’t live without a budget now. I’m not poor. I’m not cash-strapped or destitute. I’m in control. Every month I fill out my budget and my money gets to work.

I started budgeting in December 2017. I was doing a good job of putting every spare cent towards my debt. The bills got paid first, then everything left went to credit cards or student loan. When December 1 hit, I knew I had to set some aside for Christmas presents, but I wasn’t sure how much I’d have. I knew I DID NOT want to use credit cards for gifts (and undo all the payoff work I had spent the past six months accomplishing) so I made a budget. I determined all the “had to pays” like bills, gym memberships, and minimum student loan and car payment. From there I determined what I could spend on gifts and then what extra I could pay on credit cards (I was not going to let up on my momentum).

The next thing I knew, I had done my first budget.

I used that formula for the next month, then the next, and all of 2018. I still use it. It became more intricate. I put in formulas. I began to estimate what I thought my paychecks would bring in and budgeted accordingly; I was always conservative on my income estimates so I didn’t actually over budget. And you know what happened? I ALWAYS had money left over each month.

So let’s walk through it. For the columns, I have “Expenses”, “Budget”, “Actual”, “Percent Met”, and “Notes.” The first column is self explanatory. “Budget” and “Actual” are my estimated amount and actual amount I end up paying or can afford. For some of the expenses, like “LA Fitness” and “Hulu”, those are the set amounts every month which I just pay (LA Fitness is on there twice because I pay for my wife’s membership). That’s why the Budget and Actual amounts always match. “Percent Met” is just math porn for me: I like to know how far over or short I am on my estimate. For example, my savings this month I was able to pay extra to so I was way over 100% to my estimate. Lastly, notes are for personal comments or reminders. The $100 to my emergency fund was replenishment (I keep $1,000 in an immediate emergency fund for when shit breaks…not sure what I had to use it on back then but the $100 was to make up the shortage).

The second group of rows starts with “Current Bank.” Current bank is what I’m starting the month with. Because pay days didn’t always fall on the 1st of the month, I had carry over money from the previous month. This row shows what I’m starting with. The next two rows are pay days with my estimated pay and actual pay (I was wage plus commission, so it was impossible to predict my actual paycheck). The fourth row is money made from freelance work. I also have a row reminding me to pay myself 10% — I’m a huge fan of this ‘rule’, where I immediately put 10% of my income into savings. This line had a formula to determine immediately what 10% of my income that month was. “Remainder at end of month” showed me what I had left over, so I knew this was money I could either spend, save, or invest. I also tracked retirement contributions, and how much of my expenses were mandatory (i.e., gym memberships, hulu, stuff I couldn’t miss payments on or were on autopay) and optional (putting money aside for a movie project or E-Trade).

You may have noticed that some of the big bills were missing: mortgage and car. How about utilities? Food? Gas? For those bills, my wife and I split them. We have a joint bank account for paying those bills. Long ago we determined the monthly cost of our mortgage, car payment, utilities, and estimated food and gas costs. We each contribute the same amount from each of our paychecks into the joint account, which then pays those bills. This ensures 1) we don’t mix all our money and end up arguing over personal purchases and 2) all those bills get paid first. This is why my income looks so low on the spreadsheet — I’ve already deducted the amount that goes into the joint account. The rest are my personal bills.

Regardless of how you do it, those bills still need to be paid! So if you’re making your own budget, please make sure you include them on your month budget. I guarantee if you make a budget, you will find money. Maybe you’re overspending somewhere. Maybe you can cut an expense out or save somewhere. When I was trying to determine my wife and I’s monthly expenses for the joint account, I tracked every purchase for a month: grocery bills, gas for the car, weekly take out meal…I kept all the receipts and determined what we spent on average per month.

Budgeting is about being in control. You’re in control of you money, which helps you be in control of your life. It doesn’t have to be a rigid lifestyle either. Budgeting doesn’t mean not doing anything fun or enjoying yourself. Every month I allocate $100 to blow on whatever I want. It can be more if there’s leftover money in the budget. Or, I can save it away for a future larger purchase or trip. It’s not a monastic lifestyle. I don’t wear ratty clothes and have an empty house devoid of furniture and appliances. If you’re going to Quit Your Job, you must be in control of your finances!

If you’re interested in learning more about building a budget or getting control of your finances, check out these books below:

Required Reading: 5 Takeaways From Cashflow Quadrant

“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.