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This work will reveal why some people work less, earn more, pay less in taxes, and feel more financially secure than others.

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The Cashflow Quadrant

Warner Books

Chapter One

In 1985, my wife, Kim, and I were homeless. We were unemployed and had little money left from our savings; our credit cards were exhausted; and we lived in an old brown Toyota with reclining seats that served as beds. At the end of one week, the harsh reality of who we were, what we were doing, and where we were headed began to sink in.

Our homelessness lasted for another two weeks. A friend, when she realized our desperate financial situation, offered us a room in her basement. We lived there for nine months.

We kept our situation quiet. For the most part, my wife and I looked quite normal on the surface. When friends and family were informed of our plight, the first question was always, "Why don't you get a job?"

At first we attempted to explain, but in most instances, we failed to clarify our reasons. To someone who values a job, it is difficult to explain why you might not want a job.

Occasionally, we did a few odd jobs and earned a few dollars here and there. But we did that only to keep food in our stomachs and gas in the car. Those few extra dollars were only fuel to keep us going toward our singular goal. I must admit that during moments of deep personal doubt, the idea of asafe, secure job with a paycheck was appealing. But because job security was not what we were looking for, we kept pushing on, living day to day, on the brink of the financial abyss.

That year, 1985, was the worst of our lives, as well as one of the longest. Anyone who says that money isn't important obviously has not been without it for long. Kim and I fought and argued often. Fear, uncertainty and hunger shortens the human emotional fuse, and often we fight with the person who loves us the most. Yet, love held the two of us together and our bond as a couple grew stronger because of the adversity. We knew where we were going; we just did not know if we would ever get there.

We knew we could always find a safe, secure, high-paying job. Both of us were college graduates with good job skills and solid work ethics. But we were not going for job security. We were going for financial freedom.

By 1989, we were millionaires. Although financially successful in some people's eyes, we still had not reached our dreams. We had not yet achieved 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.

IT DOESN'T TAKE MONEY TO MAKE MONEY

I started this book about being homeless and having nothing because I often hear people say, "It takes money to make money."

I disagree. To get from homeless in 1985 to rich in 1989 and then to become financially free by 1994 did not take money. We had no money when we started, and we were in debt.

It also does not take a good formal education. I have a college degree, and I can honestly say that achieving financial freedom had nothing to do with what I learned in college. I did not find much call for my years of studying calculus, spherical trigonometry, chemistry, physics, French, and English literature.

Many successful people have left school without receiving a college degree. People such as Thomas Edison, founder of General Electric; Henry Ford, founder of Ford Motor Co.; Bill Gates, founder of Microsoft; Ted Turner, founder of CNN; Michael Dell, founder of Dell Computers; Steve Jobs, founder of Apple Computer; and Ralph Lauren, founder of Polo. A college education is important for traditional professions, but not for how these people found great wealth. They developed their own successful businesses and that was what Kim and I were striving for.

SO WHAT DOES IT TAKE?

I am often asked, "If it doesn't take money to make money, and schools do not teach you how to become financially free, then what does it take?

My answer: It takes a dream, a lot of determination, a willingness to learn quickly, and the ability to use your God-given assets properly and to know which sector of the CASHFLOW Quadrant to generate your income from.

WHAT IS THE CASHFLOW QUADRANT?

The diagram below is the CASHFLOW Quadrant.

WHICH QUADRANT DO YOU GENERATE YOUR INCOME FROM?

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 someone else 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, different educational paths, and different types of people. Different people are attracted to different quadrants.

While money is all the same, the way it is earned can be vastly different. If you begin to look at the four different labels for each quadrant, you might want to ask yourself, "Which quadrant do you generate the majority of your income from?"

Each quadrant is different. To generate income from different quadrants requires different skills and a different personality, even if the person found in each quadrant is the same. Changing from quadrant to quadrant is like playing golf in the morning and then attending the ballet at night.

YOU CAN EARN INCOME IN ALL FOUR QUADRANTS

Most of us have the potential to generate income from all four quadrants. Which quadrant you or I choose to earn our primary income from is not so much what we learned in school; it is more about who we are at the core-our core values, strengths, weaknesses and interests. It is these core differences that attract us to or repel us from the four quadrants.

Yet, regardless of what we "do" professionally, we can still work in all four quadrants. For example, a medical doctor could choose to earn income as an "E," an employee, and join the staff of a large hospital, or work for the government in the public-health service, or become a military doctor, or join the staff of an insurance company needing a doctor on its staff.

This same doctor could also decide to earn income as an "S," a self-employed person, and start a private practice, setting up an office, hiring staff and building a private list of clients.

Or the doctor could decide to become a "B" and own a clinic or laboratory and have other doctors on staff. This doctor probably would hire a business manager to run the organization. In this case, the doctor would own the business, but not have to work in it. The doctor also could decide to own a business that has nothing to do with the medical field, while still practicing medicine somewhere else. In this case, the doctor would be earning income as both an "E" and as a "B."

As an "I," the doctor also could generate income from being an investor in someone else's business or in vehicles like the stock market, bond market and real estate.

The important words are "generate income from." It is not so much what we do, but more how we generate income.

DIFFERENT METHODS OF INCOME GENERATION

More than anything, it is the internal differences of our core values, strengths, weaknesses and interests that affect which quadrant we decide to generate our income from. Some people love being employees, while others hate it. Some people love owning companies, but do not want to run them. Others love owning companies and also love running them. Certain people love investing, while others only see the risk of losing money. Most of us are a little of each of these characters. Being successful in the four quadrants often means redirecting some internal core values.

YOU CAN BE RICH OR POOR IN ALL FOUR QUADRANTS

It also is important to note that you can be rich or poor in all four quadrants. There are people who earn millions and people who go bankrupt in each of the quadrants. Being in one quadrant or the other does not necessarily guarantee financial success.

NOT ALL QUADRANTS ARE EQUAL

By knowing the different features of each quadrant, you'll have a better idea as to which quadrant, or quadrants, might be best for you.

For example, one of the many reasons I chose to work predominantly in the "B" and "I" quadrants is because of tax advantages. For most people working on the left side of the Quadrant, there are few legal tax breaks available. Yet, legal tax breaks abound on the right side of the Quadrant. By working to generate income in the "B" and "I" quadrants, I could acquire money faster and keep that money working for me longer, without losing large chunks to pay taxes.

DIFFERENT WAYS OF EARNING MONEY

When people ask why Kim and I were homeless, I tell them it was because of what my rich dad taught me about money. For me, money is important, yet I did not want to spend my life working for it. That is why I did not want a job. If we were going to be responsible citizens, Kim and I wanted to have our money work for us rather than spend our lives physically working for money.

That is why the CASHFLOW Quadrant is important. It distinguishes between the different ways in which money is generated. There are ways of being responsible and creating money, other than physically working for it.

DIFFERENT FATHERS-DIFFERENT IDEAS ABOUT MONEY

My highly educated dad had a strong belief that the love of money was evil. That to profit excessively meant you were greedy. He felt embarrassed when the newspapers published how much he made, because he felt he was too highly paid when compared with the schoolteachers who worked for him. He was a good, honest, hard working man who did his best to defend his point of view that money was not 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."

MONEY SUPPORTS LIFE

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 was not important. Rich dad believed that life was more important than money, but 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:

1. Having lots of time to raise his kids.

2. Having money to donate to charities and projects he supported.

3. Bringing jobs and financial stability to the community.

4. Having time and money to take care of his health.

5. Being able to travel the world with his family.

"Those things take money," said rich dad. "That is why money is important to me. Money is important, but I don't want to spend my life working for it."

CHOOSING THE QUADRANTS

One reason my wife and I focused on the "B" and "I" quadrants while we were homeless was because I had more training and education in those quadrants. It was because of my rich dad's guidance that I knew the different financial and professional advantages of each quadrant. For me, the quadrants of the right side, the "B" and "I" quadrants, offered the best opportunity for financial success and financial freedom.

Also, at 37 years old, I had experienced successes and failures in all four quadrants, which allowed me some degree of understanding about my own personal temperament, likes, dislikes, strengths and weaknesses. I knew which quadrants I did best in.

PARENTS ARE TEACHERS

It was my rich dad who often referred to the CASHFLOW Quadrant when I was a young boy. He would explain to me the difference between someone who was successful on the left side vs. the right side. Yet being young, I really did not pay much attention to what he said. I did not understand the difference between an employee's mind-set and a business owner's mind-set. I was just trying to survive in school.

Yet, I did hear his words, and soon his words began to make sense. Having two dynamic and successful father figures around me gave meaning to what each was saying. But it was what they were doing that allowed me to begin to notice the differences between the "E-S" side of the Quadrant and the "B-I" side. At first the differences were subtle, and then they became glaring.

For example, one painful lesson I experienced as a young boy was simply how much time one dad had available to spend with me vs. the other. As the success and prominence of both dads grew, it was obvious that one dad had less and less time to spend with his wife and four children. My real dad was always on the road, at meetings, or dashing off to the airport for more meetings. The more successful he got, the fewer dinners we had together as a family. Weekends, he spent at home in his crowded little office, buried under paperwork.

My rich dad, on the other hand, had more and more free time as his success grew. One of the reasons I learned so much about money, finance, business and life was simply because my rich dad had more and more free time for his children and me.

Another example is that both dads made more and more money as they became successful, but my real dad, the educated one, also got further into debt. So he'd work harder and suddenly find himself in a higher income-tax bracket. His banker and accountant would then tell him to buy a bigger house for the so-called "tax break." My dad would follow the advice and buy a bigger house, and soon he was working harder than ever so he could make more money to pay for the new house ... taking him even further away from his family.

My rich dad was different. He made more and more money, but paid less in taxes. He, too, had bankers and accountants, but he was not getting the same advice my highly educated dad was getting.

THE MAIN REASON

Yet, the driving force that would not allow me to stay on the left side of the Quadrant was what happened to my highly educated but poor dad at the peak of his career.

In the early 1970s, I was already out of college and in Pensacola, Florida, going through pilot training for the Marine Corps, on my way to Vietnam. My educated dad was now the Superintendent of Education for the State of Hawaii and a member of the governor's staff. One evening, my dad phoned me in my room on base.

"Son," he said. "I'm going to resign from my job and run for lieutenant governor of the state of Hawaii for the Republican Party."

I gulped and then said, "You're going to run for office against your boss?"

"That's right," he replied.

"Why?" I asked. "Republicans do not have a chance in Hawaii.

Continues...

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Excerpted from The Cashflow Quadrant by Robert T. Kiyosaki Sharon L. Lechter Copyright © 1999 by Robert T. Kiyosaki and Sharon L. Lechter. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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