Rich Dad Fundamentals: CASHFLOW Quadrant

Rich Dad Fundamentals: CASHFLOW Quadrant

Trouble is brewing again for the US worker. In May, the job market came to a near grinding halt as the US added only 54,000 jobs and the jobless rate rose 9.1 percent.

Lawrence Summers drives home the plight of the US worker and economy in his latest article, “The Job Crisis”:

Even with the massive 2008-2009 policy effort that successfully prevented financial collapse and Depression, the United States is now half way to a lost economic decade. Over the last 5 years, from the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, about like Japan during the period when its bubble burst. At the same time the fraction of the population working has fallen from 63.1 to 58.4 percent, reducing the number of those with jobs by more than 10 million. The fraction of the population working remains almost exactly at its recession trough and recent reports suggest that growth is slowing.

At the same time jobs have dropped, corporate balance sheets have grown. As the Financial Times reports:

It is a remarkable scene being played out in boardrooms around the world. Less than three years on from the dark days of the financial crisis, companies are sitting on a bulging war chest of several thousand billion dollars of cash, according to calculations by financial analysts. What they do with that cash has even become elevated to a presidential matter, with Barack Obama urging US business in February to “get in the game” and spend some of the $1,900bn sitting idly on balance sheets.

One thing corporations aren’t going to do, despite the President’s call to “get in the game”, is start a hiring spree. Rather, most corporations are content to sit on a pile of money until asset pricing bottoms out and until more companies collapse, letting stronger companies scoop up the remains.

Many people grumble and complain that what these companies are doing is evil or that they’re being unpatriotic. While I’d like to see companies begin hiring, I don’t begrudge them for not hiring. Most are understandably cautious coming out of the worst financial crisis since the great depression, and the US economy has not done much to give them confidence in the future—especially since the S&P is talking about cutting the US credit rating.

Rather than get angry and frustrated, I encourage people to begin playing by the new rules of money, the very same rules that are making corporations rich while the middle class struggles to survive the horrible job market.

For years, I’ve taught on the CASHFLOW Quadrant. For some of you, this will be review. My hope is that for others, it will be the beginning of changing your mindset about money.

The CASHFLOW Quadrant is divided into four types of people.

E is for Employee

S is for Self-Employed or Specialist

B is for Big Business

I is for Investor

On the left side of the quadrant are Es and Ss. They pay the most in taxes and trade their time for money.

On the right side of the quadrant are Bs and Is. They pay the least in taxes and create or invest in assets that produce cash flow for them even when they’re sleeping.

It’s my belief that the dividing line between those who are struggling in today’s economy and those who are prospering is the line between the two sides of the CASHFLOW Quadrant.

In this downturn, it is employees and self-employed people who are struggling as jobs are scarce and the cost of living is rising. Because they have only their time to trade, and that is not in high demand, they are at a disadvantage. Additionally, the products they need in order to live like food, gas, and more are becoming more expensive.

On the other hand, those who own big businesses and who invest are becoming richer and richer. Corporations are sitting on piles of cash and investors are cherry picking the best assets at rock bottom pricing.

Many in the E and S quadrants are holding on for the economy to pick up, and if it does, they will do well as the demand for people’s time—employment—goes up. That being said, the will still pay the highest in taxes and still be under the mercy of their employers and the economy. Until then, they will struggle because they have nothing else to offer and no other way to make money. Employees and self-employed always do badly in a down economy.

Those in the B and I quadrants, however, are doing well and taking advantage of the downturn to get richer. And if the economy picks up, they’ll also do well as the assets they’re investing now will pay dividends at the lowest tax rates—sometimes zero—in the up market, all while retaining control over their money and investments. Unlike, Es and Ss, Big business and investors can do well in both down and up markets.

If you’re struggling in this downturn, I encourage you to begin changing your mindset. Start making plans and taking action to move from the left side of the CASHFLOW Quadrant to the right side. Invest in your financial education, begin a side business, or start investing for cash flow.

Start small and move onto bigger things, but have a goal to become a B or I. It won’t happen overnight, and it will be hard work. But if you’re diligent, plan well, and execute your plan, you’ll be much better off in the future whether the markets are up or down.

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