Paradigms of the Cash Flow Quadrant
In a previous post, Why Paradigms are so important, I outlined the importance of paradigms in regards to tackling problems and improving results. Robert Kiyosaki's book, "Cash Flow Quadrant", a follow up to "Rich Dad Poor Dad, talks about four paradigms, and their relation to creating wealth.
In this post, I will only be covering the basic paradigms of the cash flow quadrant and highly recommend Kiyosaki's "Cash Flow Quadrant" for a more in depth look into how the four paradigms- E-employee, S- sole proprietor, B- business person and I-investors- work. Of these, there are no wrong paradigms, they each have their own advantages and disadvantages.
The E- employee for example: as an employee you are at the mercy of your boss, and your company, you get few tax advantages (in fact the largest expense you have in your life is most likely taxes), and the only way to get a raise or "move up the ladder" is if someone above you says its OK. You sacrifice your life (in hours of the day) to make money- in essence you are sacrificing freedom and control for "job security", and less risk (or today, at least the illusion job security). Money is not as important to you as security. This all seems negative, until you experience the paradigm shift of trying to start and run your own business, then the E doesn't seem so bad after all to many people, and in fact, most people at least start out here.
In between the E and B paradigms lies the S- sole proprietor. The small business owners, professionals and contractors. These are often people who have moved from the E quadrant in search of freedom and independence- something you get little of in the flight to comfort that is the E. You get to pick your own hours (or so it seems at first) and you can charge whatever you want for your time (as long as you can get work at that rate). This seems like a holy grail for many people, and in fact for many it is. You do get more freedom and independence, and if you are in a field where you like to be doing the work (a technician) and garner the respect for it, like a doctor, a lawyer, artist, consultant, or an academic, this is most likely the way to go. You are in full control, and your success and failure is up to you and you alone. It is however a lot harder to start your own small business and run it, than it is to get a job working for someone else. Often times, being that the only way you can make money is, again, with your time, the only way to make more money is with more time, (or higher rates which are not always feasible). You do get some tax advantages, but then in some ways, you can also end up paying more taxes as well, so your mileage may vary. You also get no benefits except what you create for yourself. The main attraction here is freedom and independence along with the ability to do your own work (which you love), with an easy transition out of the E quadrant.
Kiyosaki is understandably very adamant about people going the route of the B and the I. For business owners, freedom and independence is also a top priority. The difference is- of low priority, is the need to take credit for their work. In fact, they perform best when they surround themselves with people who are smarter than they are, that can do better work than they can. Something the E and S paradigms usually find a little intimidating. B's want to create systems, not do work. This doesn't mean they are lazy, in fact, usually they are workaholics because they love what they do. Its just that creating systems is their thing. A system does have several advantages once its setup. For one, if your system is working, it requires very little of your time and effort to run.
McDonald's for example, is a system. Kiyosaki talks about this a lot in his books. They are not interested in making the best hamburger, they are interested in creating a system that sells hamburgers. And that system works very well. I think we all can make a better hamburger than McDonald's, but none of us can sell billions of them. So if your system doesn't need you to run, you don't have to be there very much, you can be doing other things while your system (business) is making money for you.
Businesses also enjoy some of the best tax advantages, because it is the businesses that take the risks, and creates the jobs for the E's. The paradigm here is of not doing the work, but finding people that can do it well, building them up constantly, and leading them to greatness. To do this, you need to always be learning, improving yourself, and thinking outside the box. The downsides to the B paradigm, are the extreme difficulty of successfully starting a business, but for some people, this is where they are happiest.
Those with the "I" paradigm are people who want money to work for them, they don't want to work for money. Those in the E,S, and B quadrants could also share the I paradigm, wanting to be investors and put their money to work in stocks, real estate or other investments. Those purely in the I quadrant are usually wealthy, or have a certain level of liquidity to be able to invest full time. This is the "fast lane", where you can snowball your wealth using the money you already have, investing in large deals- be they businesses or real estate investments. They also want to avoid the expense of taxes as much as possible and just pay their fair share. The main difficulty of entering the I quadrant, even if you have the right paradigm for it, is building the capital to invest. Often, because of this major obstacle, you usually have to start elsewhere in the E,S or B quadrants.
Everyone has a different view on the best methods for creating personal wealth (making money) for themselves. As mentioned above, there is no wrong paradigm, with one exception- if you really want to be in a different quadrant. If you are in the E quadrant for example, and want to get into the B quadrant, this will first take a shift in paradigms, or you will have a very hard time. Being in a quadrant of your choice has less to do with what you know or what skills you have and more to do with how you "see" work, money, and the world around you. The paradigm is the root.
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