Blog | Entrepreneurship

Three Reasons to Build a Business

Building a business is the riskiest road for most people. But if you can survive and keep improving your skills, your potential for building real wealth is unlimited.

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One of the core models we use at Rich Dad is the CASHFLOW Quadrant.

It is a simple model for understanding four different ways of making a living in the world and the motivations of the people who operate in each quadrant.

To be financially free, you must move to the right side of the CASHFLOW Quadrant.

E is for employee

Employees crave security. My poor dad is an example of a classic E. He worked for the State of Hawaii educational system his entire life. To him there was nothing more important than a good, secure job. He could not understand why I would want to be a business owner and investor because he saw it as risky.

Employees don’t prioritize learning about money or how it works. When employees need more money, they look for a higher-paying job.

S is for self-employed

Most people move to the S quadrant when they become very skilled at their job and are tired of working for bosses they know they are better than. They still crave security, but they have a higher risk threshold than a traditional employee, and they are comfortable with a little more risk in order to be in control.

S quadrant people are doctors, lawyers, dentists, accountants, and other service-based businesses and consultants. Because they have very high-standards they don’t like to delegate. But this also means they only make money while they’re working. So they don’t really own a business. They own a job. The only way they can make more money is to bill more hours.

B stands for Business Owner

Business owners don’t want to own a job. They want to own a system or a product that makes money even when they aren’t working. They are master delegators, and they are the ones who produce jobs and grow the economy. The best part of owning a business is that even when you are not working, it is making you money. More than anything, business owners crave freedom and growth.

When business owners need more money, they create a new product or create or acquire a new system that produces money.

I stands for Investor

Investors are the most financially educated people in the quadrants. They understand that if you find assets that provide consistent cash flow, you never have to work a day in your life. Even more, they know how to use other people’s money (OPM) to purchase these assets, and they enjoy the lowest tax percentage of anyone in the quadrant. Investors are motivated by having money work for them, not the other way around. When they need more money, they look for an opportunity to acquire an asset that produces more passive income.

Why you should start a business if you want to be rich

If you want to be rich, it’s imperative that you move from being an employee or self-employed to the right side of the quadrant as a business owner or investor.

Simply put, until you can make money without working, you will never scale. There are only so many hours you can work in a day. And working too many hours is a quick trip to the grave at worst, or a miserable existence at best.

There is a difference in the quality of money made on the left and right side of the cashflow quadrants as well. Money made as an employee or self-employed is referred to as earned income. It is, unfortunately, the highest taxed income. Money made as a business owner or an investor is referred to as passive income. It is the lowest taxed income.

Finally, while you can make good money as an employee or self-employed person, you are never truly rich.

If you want to be rich, you have to move to the right side of the cashflow quadrant. Do this simple exercise. Grab a piece of paper and put a line down the middle from top to bottom. List your income on the left side and your expenses on the right. Now cover your income column. If you didn’t work, how would you pay for your expenses? For most people, this causes an uptick in heart rate!

Business owners and investors don’t have this problem. They create assets that give them cash flow month in and month out. When they do it to the point where it covers their expenses, they never have to work a day in their life again. That is truly rich.

Reasons to start a business

I love to travel around the world speaking about starting and building businesses. It’s encouraging to see that the spirit of entrepreneurism is growing among young people today. But I don’t believe that starting a business is just for the young.

I believe that you’re never too old and you’re never too young to build a business. It’s true that Bill Gates was very young when he started Microsoft, but Colonel Sanders was 66 when he started Kentucky Fried Chicken!

Regardless of whether you’re old or young, however, it’s important to understand why you should build a business. Rich dad said, “There are three reasons for building a business rather than simply creating an asset.”

Providing access to cash flow

In his book, How to Be Rich, Paul Getty states that his first rule is that you must be in business for yourself. He goes on to imply that you will never get rich working for someone else.

One of the reasons rich dad started so many businesses was that he had excess cash flow from his other businesses. He also had the time because his businesses required minimal effort on his part. This allowed him the free time and extra money to keep investing more and more assets tax-free. That is why he became rich so quickly and why he said to “mind your own business.”

Selling the business

The problem with having a job is that you cannot sell it, regardless of how hard you work.

“For something to be valuable,” said rich dad, “there must be many more people than you who want it.”

When I was working for Xerox in 1975 as a salesman, I met a young man who owned four quick copy shops in Honolulu. While in school, he had run the university’s copy shop and learned the business side of the operation. After school, there were no jobs. So, he started his own copy shop, eventually growing his business to four locations in bigger downtown office buildings with long-term leases.

A major copy chain came to town and made him an offer he couldn’t refuse: $750,000, which was a lot of money in those days. He took the money, bought a boat, gave $500,000 to a professional money manager, and sailed around the world. When he returned a year and a half later, the money manager had grown his investments to $900,000. So, the man just sailed off again.

Taking it public

This was rich dad’s idea of becoming what he called “the ultimate investor.” It was building a business and taking it public that made Bill Gates, Henry Ford, Warren Buffett, Ted Turner, and Anita Roddick very, very wealthy. They were the selling shareholders while we were all buying the shares. They were the insiders, while we were outsiders trying to look in.

In the end, building a business is one of the most exciting and rewarding things you can do in life…and it can really pay off. As rich dad said, “As a business owner, you don’t have to be right 51 percent of the time. You need to be right only once.” He also said, “Building a business is the riskiest road for most people. But if you can survive and keep improving your skills, your potential for wealth is unlimited. If you avoid risk and play it safe on the E and S side, you may be safer, but you’ll also limit what you can truly earn.”

Original publish date: December 17, 2014

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