The Rich Dad Poor Dad Mindset
by
Michael Eichenseer

You may have read the book “Rich Dad Poor Dad” which presents a number of very interesting career concepts, yet one of the most profound is something called the “Cashflow Quadrant” which suggests there are four broad categories in which people make an income; each with benefits and disadvantages. This article is going to offer an overview of these four categories that are:

Employee

To be an employee is the most common, yet often the most ineffective way to go about making money, because ultimately, as an employee you are trading time for money, and someone else is pulling the strings.  There are a number of tax disadvantages for employees, compared to business owners, who can write off some of their tax liability due to the expense of doing business. As an example, the business owner that commutes to his place of business and spends $20 each day on fuel or transport costs can claim this back as a tax deductible expense. This equates to $140 per week, or $7,280 per year. In contrast, the employee that pays the same amount to get to work each day, cannot claim this back against their tax bill, because everything is taken from source.

The lack of control that comes from being an employee is detrimental to your financial and career growth, as you are always having to jump through someone else’s hoops, and at any time the rug could be pulled from under you, in the sense that the company could make you redundant. Working for a corporation at the higher level does have its perks however, such as the fancy cars, business class travel, and decent remuneration. But being an employee is a little like renting rather than owning a house; you’re not building something that will become an asset (other than a pension). You are simply trading time for money, and when you stop trading time you stop receiving the money.

Small Business Owner

Many people today are taking the entrepreneurial leap to run their own small business. Often, they have worked in a particular industry for a long time for someone else, and now decide to go it alone, as they are sick of being a cog in the wheel and making someone else rich. However, the reality is that what they end up trading is the comfort, stability, and reassurance of having a regular income where they simply turn up to work do their tasks and get paid. Now, they are likely to have doubled the amount of time they are working and halved their salary. While previously, as an employee, they could have left their work at the office, a small business owner is constantly thinking about work and is rarely able to fully switch off.

The financial rewards of having a small business can be substantial, but for most people they are simply trading a job for a job they own. This is often an aspirational leap that is good for the ego, but bad for the wallet, and unfortunately leads to a high failure rate. That’s not to say some won’t be successful. And of course, anyone can make it today. But it’s important to understand the reality of the decision to start a small business, as a lot of times people migrate from full-time employment thinking the grass will be much greener on the other side, to realize that isn’t always the case.

Big Business Owner

Now, let’s make a clear differentiation here.  Small business owners, in this context, relate to people that ‘own their job’ such as a consultancy practice, a florist, a massage therapist or personal trainer, the key point is they are all trading their time for money.  The limitation being that you can be a great massage therapist, charging $100 an hour, yet there are only so many hours in each day that you can realistically work; therefore, you are subject to a ceiling with regard to your earning ability using this ‘small business’ model.

The big business, however, leverages systems and other people to create their income. Let’s imagine an ice cream van. This ice cream man generates $200 profit from selling ice creams. He is a small business owner. The big business owner goes out and buys five ice cream trucks and employs five people to serve ice cream. Each ice cream truck generates $200 ($1,000 per day) and each ice cream man makes $100 in salary. This results in a gross profit of $500 per day, yet the business owner himself, isn’t trading his time for money, in the same way as the ice cream man. He now has leverage. He has created a system and a network that is scalable. There’s nothing stopping him expanding the number of ice cream vans to 100, meaning he would be making $50,000 per day.  That’s the most important difference. There is leverage and scalability.

“Big Business” doesn’t have to be Coca Cola or Toyota, it’s an approach to business. The one woman massage therapist that goes around offices is a solo business owner; but there’s nothing stopping her getting a few more clients and working with other freelance massage therapists to facilitate the treatment. If she received $20 for a massage, but pays her therapists $10, she has a “big business” in this context, because she is leveraging assets and has the scalability to expand if necessary. The downside, of course, is that there’s often a fair amount of initial capital one requires to create such a business. But with the advent of the Internet, the barrier to entry has become much lower.

Investor

The investor has true leverage; rather than work for his or her money, in the conventional sense of swapping time for money, they put their money to work for them. Think of it this way: If you have $500,000 in a savings account that is earning interest of 10% each year, then, by doing nothing, that savings account is making $50,000 a year. Now, the challenge is getting that initial $500k in the first place, but the concept remains, investors create assets that generate income automatically.

The best example, that is accessible for most people is to purchase a house at auction, renovate it, split the home into four smaller self-contained units, and then rent each one out.  If your mortgage is $600 a month, but you are renting each of the four units at $400, you are making $1,000 each month in passive income; and there’s nothing to stop you owning a heap of houses. The point, with being an investor, is to put your money in assets that are going to appreciate; and have your money work for you rather than you trading your time for money.

Now that we understand the four main ways of making money, let’s look at three general principles to help you create a life of financial wealth and abundance:

Learn More

There’s a popular saying that states the “more you earn the more you learn”. This is a sound concept, however, when looking at education from a money making perspective, it should be noted that there are many people that dropout of college and financially surpass their well educated white collar friends by simply selling things on eBay.

That said, there is substantial value in going to college and having a stable education.  There are now many online university courses, such as those offered by Southern Cross University, that allow you to study advanced academic courses from the comfort of your own home without being required to attend lectures on campus. This flexible approach to academic learning means even those in full time employment can access education that will allow them to take their career to the next level.

With this in mind, it should be noted that learning is not limited to academic education. Indeed, if you were to learn how to invest in property, these skills are likely to get you much further in life, on a financial basis, than having a generic degree. There are some academic courses that are required to enter a particular profession, and these should be considered, but bear in mind, that oftentimes, you’ll find highly educated white collar workers attending weekend seminars on topics such as real estate investing, amazon trading, and digital marketing that are being led by people that didn’t go to college. They just got out there and did it. The one thing to bear in mind, when it comes to learning, is to ensure the time and money you put into the course provides a decent return on investment.

Get Leverage

You’ll want to find some way of getting leverage in your life.  We talked previously about the ice cream man and massage therapist, but let’s take this into a slightly more contemporary online vibe. You could set up a web design agency on a site like freelancer where you have a number of freelancers you work with, that charge, let’s say $8 per hour. Yet you charge clients $10 an hour, on the basis that you are the person that bridges the gap in communication; making sure requirements are understood and that the project runs smoothly. In this example, you would only be making a $2 per hour finders / project management fee, but because it is scalable, and you are leveraging other people’s efforts, there’s no reason why you couldn’t build this practice up to charging out 1,000 hours per week, thus making $2,000 each week.

Start Investing

Even if you have $100 in your bank account; invest, create assets.  Start investing in real estate. That’s the main difference between the “rich and the poor”.  The poor tend to spend money in order to derive pleasure or gain comfort (e.g. a fancy car, nice meal, or expensive outfit), whereas the wealthy invest their money in order to derive long-term financial stability (e.g. houses, savings accounts, stock portfolios).