3 Step Guide to Financial Freedom By Robert Kiyosaki Rich Dad’s
Introduction
I often write about real-life investments. I do this because I want you to understand
how I use my financial education.
I write to encourage you to learn, study, practice, and possibly see the world differently.
Today, there is a lot of money in the world. There are trillions of dollars looking for a
home because governments of the world are printing trillions in counterfeit money,
aka fiat currency. Governments do not want the world to go into a depression, so they
print more funny money. This is why the price of gold and silver go up and why savers
are losers.
The problem is that this phony money is in the hands of only a few people. So, the
rich get richer, the poor and middle class grow poorer, the economy worsens, and the
problem grows bigger.
According to the U.S. Census Bureau, poverty in America increased to nearly 15
percent of the population in September 2010. This means over 4 million people moved
from the middle class into poverty. This is dangerous. This is not healthy.
With that said, there are three important parts to your financial education:
1. Learning the real difference between an asset and a liability. We will discuss
this below.
2. Learning which mindset you are in and knowing which one you need to be in.
This is why I have included the CASHFLOW® Quadrent section of this book.
Pay special attention at how the various quadrants define an asset. It is very
different. One will grow your success, the other will keep you in the rat race
forever.
3. Putting the first two parts into action and creating your own success. We’ll
cover the first two parts of financial education here in this eBook. When you
are ready to take action I highly recommend you start playing CASHFLOW®
the board game and CASHFLOW® the webgame (free at www.richdad.com)
to start practicing how you can free yourself from the rat race.
I am writing this eBook because it does not help heal the world if I do not share what I
know. That would be greedy. I write because I believe we need real financial education
before the world economy can truly recover. Ultimately, I write because I believe it is
better to teach you to fish than to give you a fish.
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The most important thing is
you need to know
One of the things I learned from my rich dad when I was nine years old was what
determined if something was an asset or a liability—and it is not what your banker or
your real estate broker calls it. What determines if something is an asset or a liability is
a very important word—probably the most important word in business and investing.
The word is cash flow. In other words, if the cash is flowing into your pocket, then the
item is an asset.
I have a lot of rental properties. Every month, cash flows into my pocket from that real
estate. However, with my personal residence, cash flows out of my pocket. My rich
dad would say, “My rental properties are assets, but my personal residence is a liability
because the cash is flowing out.” One of the reasons people struggle financially is
because they don’t understand the difference between assets and liabilities. Now, I’m
not saying, “Don’t buy a house, and don’t buy a big house.” I’m not saying, “Live cheaply
and frugally,” because I don’t believe in that. If you want to be successful financially,
the most important thing is you need to know the difference between an asset and a
liability. That requires financial literacy.
With this eBook, I will show you how to reduce some of your investment risk by
increasing your financial literacy.
Although I had a rich dad who taught me many things, I still came from a relatively
poor family. I’m not one of these rich kids whose daddy gave him a lot of money or a
big trust fund or a company to inherit. That’s not my story. In fact, back in 1985, my
wife, Kim, and I were homeless because one of my businesses had failed.
I don’t say that to be dramatic. It’s just to explain that I had to come off the streets. I
had to bounce back from a tremendous setback to achieve what I have today. All my
rich dad gave me was guidance on how to go from where I was to where I am today.
That’s what I want to share with you. I want to share the insight, wisdom, and my rich
dad’s teachings on how to become a wealthy person. I want to teach you how to fish
rather than give you a fish.
Now, what you’ll read may disrupt some of your thoughts and maybe some of your
core beliefs, but I want to reassure you that my rich dad knew what separated winners
from losers. The reason many people are not successful is because of fear. They say,
“I don’t want to invest because it’s risky,” or “I don’t want to start my own business
because it’s risky,” or “What happens if I lose money?” or “What happens if I fail?”
Rich Dad’s 3 Step Guide to Financial Freedom
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These words reflect the core value of security. The fear of failing, the need for a steady
paycheck, and a fear of change influence their core fears.
My wife and partner, Kim often speaks about this. She says, “I first started investing in
1989. Fearful and unsure of what I was doing, I stumbled around neighborhoods near
our home and finally found a cute 2-bedroom, 1-bath house that seemed to be a good
rental prospect. I nervously put in an offer, and with a little back-and-forth negotiation,
my offer was accepted. Now more fear kicked in. I was more focused on what I might
lose versus what I would get. I looked for every excuse possible for why I shouldn’t
buy that house. I somehow quieted my fear long enough to go ahead and buy the
property, taking very deep breaths along the way.”
The people who are going to be successful must first face their fear. I am not sure
you ever conquer your fears, but you can face them and overcome them as you find
success. Successful people, or “winners” as rich dad called them, take control of their
lives. They know that their mistakes are their opportunities to learn and to grow. The
fear of investing does not frighten them. It challenges them.
The CASHFLOW®
Quadrant
Why do some people get rich and others don’t? I think that question can be answered
from the diagram below known as the CASHFLOW® Quadrant.
My rich dad said there are four different
types of people in business. The “E,” the “S,”
the “B,” and the “I”. “E” stands for employee.
“S” stands for self-employed or small
business. “B” stands for big business or
business owner and “I” stands for investor.
The answer to why some people make
more money than others can be found in
the CASHFLOW® Quadrant. Before I explain
more specifically why some people get rich
and others do not, let’s get into the different
people found in the quadrant.
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On the left side of the CASHFLOW® Quadrant is the “E” and the “S,” which stands
for employee and self-employed or small business owner. On the right side of the
quadrant is the “B” and the “I,” which stands for business owner or big business and “I”
for investor.
In other words, if your cash flow comes from
a job, then you’re an employee. If your income
comes primarily from your investments, for
example, Kim and I are in the “I” Quadrant simply
because most of our income comes from
investments. That’s how I know where I am,
it’s where the cash flow comes from. If you’re
self-employed and you can’t stop working, then
you’re an “S.” A “B” Quadrant business owner is
somebody who has a business but can leave it
at-will and the income still continues to come in.
What determines which quadrant you’re in is, very
simply, where does your cash flow come from?
That’s why it is called the CASHFLOW® Quadrant.
If you’re on the left side, you’re on the “E” and
the “S.” Most of your income comes from a job.
This is the cash flow pattern of a poor person.
The money comes in and goes out the expense
column. Money in and money out. The cash flow
pattern of a middle class person also comes from
a job. Money comes in, but because they have
better credit history, they have lots of liabilities.
The reason you know something is a liability is
because a liability will also show up on the expense side of the financial statement.
Money comes in, then the liabilities trigger a monthly payment, and the money flows
out the expense column again.
What makes the rich “rich” is they have cash flow that doesn’t come from a job. It
actually comes from the asset column. For example, Kim and I own businesses, real
estate and stocks. The reason we don’t have to work is because cash flows out of our
asset column into our income column and that income from our assets pays off our
expenses. That’s why we’re financially free today.
The Rich Dad Company’s mission statement is to raise the financial well-being of
humanity. Another way of saying this is, to help people move from the ‘E’ and the ‘S’
Quadrants to the ‘B’ and the ‘I’.
Rich Dad’s 3 Step Guide to Financial Freedom
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Moving to the Right Side
of the Quadrant
My rich dad said, “If you’re going to be a business owner, you have to be able to
understand the four people found in the world of business. He said, “You can tell
an employee by simply listening to their words. An employee will always say, ‘I’m
looking for a safe, secure job.’ The moment you hear that; you know the quadrant they
come from or their core values or their belief system. It is what we call ‘the employee
mindset.’ The highest value for the E quadrant is security.” What rich dad was saying
was what drives employees is fear or uncertainty. They don’t like that so they seek
security as a response.
For the S quadrant, which is the self-employed or small business owner, rich dad said,
“You can always tell that person because their words are different. Their words go,
‘I’m going to charge you $100 per hour,’ or ‘My commission is 6%,’ or ‘I’ll get to it next
week. I don’t have time this week, because I’m all tied up.’” The value of an S or a small
business owner is independence. They don’t trust other people. Their theme song is
“Nobody Does It Better” or Frank Sinatra’s, “I Did It My Way.”
You can often tell an S quadrant person because in their minds they’re legends. “I’m
the best.” For example, I go to a chiropractor. In his mind, he’s the best chiropractor
in the world. I ask about the chiropractor across the street, and he says, “No, you
shouldn’t go to him, because I’m the best in the world.” Oftentimes, the S also stands
for highly specialized. It also stands for very smart, because in the S quadrant you’ll
find the smartest people from school. That’s where you find the doctors, accountants,
attorneys, and engineers. It also stands for solo. They like to do things on their own so
they’re a completely different breed of individual.
In my opinion, the S quadrant is the riskiest quadrant because they really don’t have
a safety net under them. For example, a friend of mine is a consultant. He lives in
the mountains of Colorado. He was driving home one night in his Land Rover. Then,
all of a sudden he slid off the road. He was in the hospital for 6 months. That meant
because he couldn’t work his family had no income coming in to them. To make
matters worse, my friend owned a lot of liabilities.
Another drawback of operating from the S quadrant is that the government taxes
the S quadrant much heavier than the B quadrant, so the S quadrant not only has
employees to deal with they have to deal with themselves. They have to deal with the
government, too. Plus, their income is often predicated upon their production. Now,
for some, S can also stand for the most satisfying. People say, “I really love my work. I
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love being a consultant” or “I love being a doctor.” However, S also stands for the less
secure.
My rich dad always said, “You need to mind your own business.” Sometimes the
problem with being on the E and the S side is you spend the vast amount of your
working hours minding somebody else’s business. Your boss’ job is not to make you
rich. That’s your job. The rich will always give people money for an asset, but the E
and the S think that money itself is the asset. The B quadrant investor knows that the
business is the asset, not the money, so they’ll always pay somebody. For instance,
I’ll always pay my employees and my specialists to build my asset. The asset is more
important than the money. So, the E and the S side oftentimes places more value on
money than assets.
My rich dad said, “If you’re going to be a business owner, you have to really understand
these types of people.” A business owner is looking for something different. A
business owner is looking for a system. In other words, McDonald’s is a brilliant
system for producing hamburgers. There are a lot of small business owners who
have hamburger shops, but they don’t have a system for producing the hamburger.
Investors rarely invest in an employee or a small business. The reason doctors’
practices oftentimes don’t fetch the high prices like an Internet company will fetch is
because a doctor’s practice is often only purchasable by another doctor. The market is
very limited.
The difference between the E and S and the B is a word called “leverage.” The S
business owner cannot afford to leave or stop working. My rich dad said, “You know
you’re a B quadrant business owner if you can leave your business for a year or more
and come back and find the business more profitable and running better without you.”
That is one of the big keys between a B business owner and an S business owner.
The S business owner, if they stop working, very often their income stops also. So,
as my rich dad said, “If you’re an E quadrant employee, you have a job. An S quadrant
business owner owns a job. That’s the difference.”
What a B quadrant or a big business person has is that they own a system. Today,
people think that in order to create a big business, they have to play in the world of
high tech. To that, I say, remember that Starbucks created a business system around
a cup of coffee and they became a billion-dollar company. So it’s not necessarily high
tech or the industry, it’s how you look at building the business. Are you building a
system?
This is the hard part for most people. Investors and venture capitalists generally only
invest in B quadrant businesses. The reason a lot of times E’s and S’s are not good
investors is because they really do not understand the B quadrant. Microsoft is a B
business. Joe’s Computer Repair Shop is an S quadrant business. An investor would
rarely invest in a computer consultant, but they’ll invest all day long in Microsoft. A
Rich Dad’s 3 Step Guide to Financial Freedom
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person who is putting money into a mutual fund is not really an investor. Although
it’s a form of investment, they’re really savers. In the I quadrant, an investor will say,
“What’s my return on investment?” also known as ROI.
The point I’m making here is that between the E, the S, the B, and the I, if a person
really wants to become rich, they need to fully assess their core competencies. In
other words, if you’re an employee making $50,000 a year, the chances are harder for
you to become rich because from the E quadrant, the taxes are the highest. Whereas
in the B quadrant, if you work really hard, you can expand or leverage out your time
with other people.
The people in the E and the S quadrant, the reason they have a harder time is because
for them time is money. In other words, a dentist can only work on so many people per
day. An employee only has so many hours in a day. The key word there is ‘leverage.’
How much leverage, or how much bang for your buck, or time, can you get? The E and
the S are limited, and ironically, the tax laws are written against the E and the S. The
best quadrant to get rich in is the B quadrant. They have the most leverage and the
most favorable tax laws.
What About Taxes?
Often people call me up and say, “Well, I formed my corporation so I can avoid taxes.”
To which I respond, “That’s illegal.” My point is this: If you do something strictly to
avoid taxes, that’s called tax evasion. Many people get in trouble because they’re
trying to avoid taxes. Becoming rich isn’t about avoiding taxes, it is knowing how to
use tax laws in your favor. You see, tax laws are written to benefit people who want
to be rich, not for people who want to avoid taxes. If you form a corporation strictly to
avoid taxes, that would be illegal. Many people operate in grey areas when it comes
to taxes. Rather than trying to avoid something dishonestly, you should have the best
legal advice possible. I don’t want anybody getting in trouble.
The reason why people on the right side of the quadrant pay less in taxes goes back
again to my favorite subject, which is financial literacy. If you can read a financial
statement, you’ll see why the people on the left pay more taxes than people on the
right. It is seen in a very simple thing called the income statement and balance sheet
for the employee. For employees, their first line item expense is taxes. For the B
quadrant person, taxes are their last line item. In other words, employees pay taxes
first, business owners pay taxes last. A business owner will try spending everything
they possibly can and then pay their taxes on what’s left. For example, business
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owners may start with $1,000 and spend $800 in expenses. They’ll only pay taxes on
$200. If an employee makes the same $1,000, they’re taxed on the $1,000.
The tax laws are written in favor of those who want to be rich, because the
government needs capitalists. They give me tax breaks because I build houses for
people and I start businesses, which create jobs. The tax laws are written in favor
of capitalism and against those who play it secure. Tax laws, tax breaks, and tax
loopholes are written for the rich and against everybody else. If you can understand
that, you can make a big change in your life.
Security vs. Freedom
My rich dad said, “When you say you want freedom, what you mean is you don’t
want to be attached to anything. That’s not to say there isn’t any fear, but that you
operate with a mindset of not needing anybody or anything to take care of you.” A
big difference between the left and right sides of the CASHFLOW Quadrant is that
employees and the self-employed need security. For the B and I side, the business
owner and the investor’s side, their need is for freedom. Personally, I’ve always chosen
freedom.
In explaining the CASHFLOW Quadrant to me, my rich dad said, “If you’re happy
being an employee or self-employed and it fulfills everything you want, then stay
there.” As our economy moves further away from the Industrial Age and more into
the Information Age, many people wonder why their efforts to become rich are not
working for them. The difference could be in their core values.
In other words, if your core value is security, like an employee, it might be very difficult
to shift over to the B or the I side. If your core value as an S, or self-employed, is
independence, trusting other people could be a very difficult process. The reason I
wrote The CASHFLOW® Quadrant was for people to examine themselves, examine
their core values, and decide whether or not making those core value changes are
worth making.
Rich Dad’s 3 Step Guide to Financial Freedom
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Different Quadrants Think
Differently About Assets
I started this eBook saying that most important thing is you need to know the
difference between an asset and a liability. I defined an asset as anything that puts
money in your pocket and a liability is anything that takes money out of your pocket.
That is the definition of the rich. The way those in the ‘B’ and ‘I’ side of the quadrant
define asset and liability.
How do the ‘E’ and ‘S’ side define an asset? Generally, an ‘E’ and ‘S’ consider an asset
to be anything that has a value associated with it. They consider their house an asset.
They think of their car as an asset as well as money itself.
Basically, an ‘E’ and ‘S’ define an asset the same way a bank does. This definition has
two problems:
1. It encourages buying ‘toys’ and expensive items that are justified as being
assets.
2. It costs money both in the purchase phase, but in the maintence phase,
insurance phase and more.
The assets an ‘E’ and ‘S’ tends to collect actually make them poorer. They take money
out of one’s pocket. They accomplish the exact opposite of what assets of the
successful do. Assets for the ‘B’ and ‘I’ put money in their pockets.
So when I wrote The CASHFLOW® Quadrant to help people to examine themselves
and their values, I really wanted them to understand the different ways the different
quadrants view assets. Once that distinction is made, one can see why he/she is not
making financial progress in the ‘E’ and the ‘S’ quadrants. They keep buying assets
that make them poorer. The more money they make at their job, the more false assets
they buy and the poorer they actually become.
Now, aren’t some of your core values worth revisiting?
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Having It All
The path to financial freedom has never been easier. Today, we have people becoming
billionaires in less than 18 months and it’s due to the world we live in today. Anyone
desiring to become rich today first needs to have the core values and the financial
literacy to make the shift over. For me, I would say it was pretty difficult because I had
Industrial Age ideas. Making the shift was a hard process because I thought like an
old person. Today it’s never been easier if you’ll just change your thinking.
If security and comfort are your values, the transition may be difficult but it can be
done. It starts with education. For instance, on the B and the I side, I learned different
things, things that are not taught in school. One of the reasons I think the Rich Dad
message has been successful is that we’ve brought to the masses of people—in a
very simple way—the information and the education required to be a business owner
and investor.
For example, the reason most small businesses fail is because the average small
business owner was never taught how to read a financial statement, much less
understand the laws. That’s why so many of them fail. In the markets, as far as
investors go, 8 out of 10 investors don’t make money. Now, it doesn’t mean they lose
money; it means they just sort of break-even. I’ve had friends who make money one
day and, just like in Las Vegas, they give it back the next. They break even. The reason
for that is they haven’t been taught basic financial literacy, tax law, and corporate law.
POOR MIDDLE CLASS RICH
Rich Dad’s 3 Step Guide to Financial Freedom
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It is no longer appropriate just to be an E, S, B, or I. I think it is more important that
we, as individuals, seek knowledge, wisdom, and skills in all four quadrants, especially
when the world is changing so quickly. Below you will see three diagrams of an
income statement and a balance sheet. These represent the cash flow patterns of the
poor, the middle class, and the rich. By studying the different cash flow patterns of
the rich, the poor, and middle class, you may begin to understand what causes some
people to be rich and others to wonder why they are unable to get ahead financially.
A lot of times people say, “Well, I’d rather be rich than happy,” or “I’d rather be happy
than rich.” That idea comes from a point of view of scarcity. In other words, they think
they have to choose between being one or the other. You CAN have both. I think Yogi
Berra said it best. He said, “When you come to a fork in the road, take it.” The whole
reason behind me creating the Rich Dad Company is to have people expand their
thinking. Why not be rich AND happy?
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Summary
You have just learned about the first two parts of gaining your own financial
education:
1. Learning the real difference between an asset and a liability. And…
2. Learning which mindset you are currently trapped in and knowing which
mindset you need to have.
Don’t forget to continue your financial education with step three:
3. Putting the first two parts into action and creating your own success. When
you are ready to take action I highly recommend you start playing
CASHFLOW® the board game and CASHFLOW the webgame (free at www.
richdad.com)to start practicing how you can free yourself from the rat race.
As I stated earlier, this eBook only helps heal the world if we share what we know. We
need real financial education before the world economy can truly recover. Ultimately, I
write because I believe it is better to teach you to fish than to give you a fish. My wish
is for you to not only start fishing, but to pick up the cause and teach others to fish as
well.
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