Many years ago, Robert Kiyosaki wrote a book titled “The Cashflow Quadrant.” This book changed my life and I’ve written about it numerous times over the years. In the book, he explained that there are four basic quadrants we can use to generate income. These four quadrants are:
1. E – As an employee
2. S – As a self employed professional – real estate sales person, insurance agents, doctors, accountants, lawyers, web designer
3. B – As a business owner
4. I – As an investor
Kiyosaki has expanded on the advantages and disadvantages of these four quadrants in his new book, “Why The Rich Are Getting Richer.”
“The S Quadrant is the TORTURE CHAMBER. It is the worst quadrant. The first thing that happens to a person who leaves the E quadrant is that expenses go up and income goes down. Then government rules and regulations are piled on you. You have no benefits – no medical and dental insurance, retirement plans, or paid vacations. Your income goes down because you’re no longer doing your job, which is to take care of your customers. Your new job is running and building a business and dealing with people who take your time and your money.”
Many people reading this generate a significant portion of their income in the S Quadrant. In other words, you’re operating in the torture chamber.
It actually gets worse for those in the S Quadrant. Kiyosaki estimates the total tax rate to be around 60% when you factor in self-employment taxes.
However, he continues by sharing that the S Quadrant is THE most important quadrant because if you succeed, you become a real entrepreneur and move into the B Quadrant.
In real estate sales, you move from a one person business to a large team generating sales without your day-to-day involvement.
When I first learned about these different quadrants after reading the Cashflow Quadrant, I was a real estate salesperson working for a small brokerage. Within months of learning about the different Quadrants, I had started my own real estate brokerage and began my journey to the B Quadrant, which you can read about in my book where I detail how I built and sold my real estate brokerage.
To be clear, the journey from the S Quadrant to the B Quadrant IS difficult.
You’ve got to hire, train and manage employees. You’ve got to have enough money to meet weekly payroll and payroll taxes. You’ve got to get an office and furnish it with desks, computers, phones. You’ve got to cover the business’s overhead. You’ve got to handle all of the accounting, taxes and administrative BS. You’ve got to have a continuous flow of new clients/customers coming in the door. You’ve got to provide great support to your customers and employees. If that’s not enough, you’ve got to put out fires on a daily basis.
You cannot build a success B Quadrant business without going through this journey. Every successful B Quadrant business has gone through this transition. Why would someone go through all of this? Is it really worth it?
Yes, it is worth it and the reason why is because you can use the income from your B Quadrant business to move into the I Quadrant and become a professional investor. Or you can sell your B Quadrant business and move into the I Quadrant.
Today, I generate 90% of my income as an investor. I used the income from my B Quadrant business to by income producing assets. These assets fund my lifestyle.
Here’s the real deal:
It is very difficult to generate enough income to buy income producing assets in the E and S Quadrants. This is because your income is limited to your personal effort. If you don’t work, you don’t get paid. When you do work, your income is limited by the number of hours in the day. In the B Quadrant, your income is unlimited because you can leverage your own effort through your employees. You can use your employees to make money when you’re not working.
Looking back, I’ve moved through Kiyosaki’s Quadrants sequentially starting as an employee in a large accounting firm. It seems that most people get stuck in either E or S Quadrants. They never move into the B or I quadrants.
The transition into the B Quadrant is hard, but I think staying in the E or S Quadrants is even harder.