Robert Kiyosaki is the author of “Rich Dad, Poor Dad”, the number 1 personal finance book for the last 20 years. In the book, Robert explained the cashflow quadrant which was told to him by his rich dad, his best friend’s father.
Robert mentioned how there were 4 types of people in the world of money or business. These 4 types were:
With the four types of people, the cashflow quadrant would then look like this:
On the left side are the employees (E) and the self-employed (S) and on the right side are the big business owners (B) and the investors (I). The idea of the cashflow quadrant is that the ideal place to be in is at the right side.
Here’s why being on the right side of the cashflow quadrant is better.
While this may be the case, this doesn’t mean that one can’t be wealthy being an employee or self-employed. However, if one wants to gain even more wealth while paying less taxes, they need to decide to transition from the left side of the quadrant to the right.
Here’s to give you more insights about the advantages and the disadvantages of being on the left and right side of the cashflow quadrant.
If you are already an employee or if you’re self-employed, you should know the advantages that you enjoy. For employees, you are being paid in exchange for time. If you are self-employed or if you’re a specialist (doctor, lawyer, etc), you are still actually paid in exchange of your time.
This is because you can’t delegate every task if you’re a small business owner or a specialist. The reason for this is because you are the best person who can do your job. Regardless of the amount of money you are being paid, it can be a disadvantage for you if time is the sacrifice.
Time is the most valuable resource in the world and every minute you use is a minute you can never take back. You can miss out on a lot of things. Just that already says a lot.
According to Tom Wheelwright, the tax advisor of Robert Kiyosaki himself, the average amount of tax that an employee pays is around 40%.
This doesn’t just apply to the United States but everywhere in the world. If you’re self-employed or if you own a small business, you might think that you’re in a better position but you’re actually paying much more in taxes, up to 60%.
If you’re self-employed, you also start from zero everyday. This means that nothing is compounded over time.
To summarize, the disadvantages of being an employee or being self-employed are:
Those that own a big business, having at least 500 employees or more, are only paying around 20% in taxes. This is according to Tom Wheelwright. The reason for this is because governments give incentives to large businesses for creating job opportunities.
In fact, the more jobs the business generates, the bigger the incentives are offered to them. Can you guess how much Amazon paid in corporate tax? The answer is zero and it is legal.
If you’re investing in a small business or if you’re an employee and want to start a business, it is a good idea to want to grow it into a big business in the future. This is so you could enjoy the incentives that are being offered to large businesses.
Investors have it even better. Professional investors can pay as little as 0%. Tax can be completely eliminated legally as an investor. The concept may seem simple but the process is complicated because of the legalities and all the investing terms that one needs to get around and master to understand it fully.
After all, if investing was easy, everyone would be an investor.
Every disadvantage that can be faced on the right side of the cashflow quadrant can be easily fixed. This is because being a large business owner and an investor is about passive income. This means earning money without having to work for it.
Meanwhile, the left side of the quadrant is about active income, working hard for the money. If there is any advantage, it’s the challenge or the difficulty of moving from the left side to the right side of the cashflow quadrant.
It requires capital and it can take one some time to accumulate it. With investing, it will also take a lot of years before it can start producing significant amount of income. However, that is the nature of investing so it doesn’t really count as a disadvantage.
To summarize, these are the advantages of owning a large business and or being an investor:
What are your thoughts about the cashflow quadrant of Robert Kiyosaki? Have you already read his book, “Rich Dad, Poor Dad”? We hope you learned something new in this article and that we’ve persuaded you enough to start investing and migrate to the right side of the cashflow quadrant.