Tuesday, February 5, 2013

The Rich Dad Poor Dad Story

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By Scott Shimberg

Many entrepreneurs have read, "Rich Dad Poor Dad", by Robert Kiyosaki. This book is a classic, as it shows how Kiyosaki was brought up by two dads. His own dad who taught him how to avoid danger and be sensible, and, his best friend's dad who taught him much regarding gaining wealth.

Each of "his" dads had their own opinion on how to be successful. One of his dads was the classic, "Poor Dad," who advised his son to go to college and "get a good job." This dad was after security, while the other, was a "Rich Dad." He advised him to build networks and build wealth through calculated risk and the use of systems.

He created the "Cash Flow Quadrant," a diagram that is widely used in personal finance lessons today.

[]Let's break this quadrant down:

Employees - People who trade their time for dollars.

Their income is based on 100% of their activity, meaning, they could just increase one factor which happens to be their wage. Acquiring a good paying, steady job is not as simple as it once was. Everything is changing quickly, and companies are outsourcing a lot of jobs, and technology is developing to replace many jobs once conducted by people. Many years ago, it was common sense to secure a good job, keep it for 40 years, and then retire to live on 40% of your wages. Nowadays, however, this is just not taking place. Also, someone ONLY in this section pays the majority of taxes, as they have no write-offs.

Self-Employed- People who "own" a job, trading time for dollars.

The American dream needs to be self-employed, right? The advantages about self employment ought to be great, right? Well possibly, until to you speak to someone who has done it and they tell you that the job owns them not the other way around. The problem is, you are restricted if you own your own small business because there are merely so many hours in a day. Small business owners consist of contractors, real estate agents, web developers and also consultants, just to name a few.

This is not true for all, but for the vast majority, their small business does not work and they find themselves back as an employee, working less hours but with the full realization that they might never achieve their dreams with a job.

Let's move to the right side of the Cash Flow Quadrant, and we see another story altogether. Remember, the right side of the Quadrant is where 95% of the wealth of the world is in the following situations:

Business Owners - Own a System

Businesses that own a structure, such as a McDonald's Franchise can profit by repetition of this system over and over. It is the method of duplication. Direct Sales is an example of owning a system, if you work to build a team which you train to duplicate yourself. It is possible to gain leverage when you use within a system, because the procedures of the system may keep on while you are not working. You can also earn money while you're on vacation, playing golf, hanging out with your family, or sleeping

Being a business owner is different than just being self-employed, at least in the way Kiyosaki defines the cashflow quadrant. A "business owner" is defined as someone who earns leveraged income. The income does NOT come from the sole efforts of the owner but from people associated with the business center or unit. This is where you can develop "cashflow" or passive income that is NOT tied to your individual daily efforts but from yours and the efforts of others. People with passive income have options in how they spend their life.

Investors - Money Makes Money on Your Money

Investors are those that have considerable leverage. These people can invest their money, so they can make money. The ultimate goal for many people would be to get to the fourth quadrant. This is when you no longer need to depend on your efforts or the efforts of others, your money is working to suit your needs and you are simply living off the interest or payouts. Many people cannot start in this quadrant but will work their way into it.

The Cash Flow Quadrant is a great demonstration of the different limitations of the mindsets of numerous people. Ultimately, all of us want to earn as much money as we can, for minimum effort possible, working on what we love to do the most.

Knowing the idea of the Cash Flow Quadrant is essential. It's not fun to work for years and years, only to discover that while you own your own business, in reality, the business owns you.

We found our way to the "B" quadrant - you can be there too!

Until the Next Time

Scott & Heidi

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