I was a meeting this week where the Cash Flow Quadrant came up. This is one of the most important financial concepts there is. This should be taught in schools. At my college, in the personal finance course, this never comes up. Understanding this diagram can mean the difference between living pay cheque to pay cheque, and living your dreams. Yes, it is that important.
The Employee quadrant*, is where most people fall. Here you trade valuable time for money. The only way to make more money is to spend more time working. (Less time with family) But, you seldom have the power to generate more hours. If there is no work, then there is no extra money. This is why so many people have a full time job and a part time job.
In this quadrant, you also have almost no deductions. In Canada, about the only deduction you have is the RRSP. You loose your taxes even before you get your cheque. This is the quadrant that the education system is set up to lock you into. Ever ask a teacher what the path to a good life is?? “Go to school, get good marks, then get a good JOB with a pension.” Those steps are supposed to get you your dream life.
If you bought into that fairy tale, how are things going? Are you living your dreams?? Or have you scaled down your dreams to fit your income??
The Self Employed quadrant*, is where you own your own JOB. This is where trades people, doctors, and lawyers fit. This is where they say you can be your own boss. Ask anyone who is self employed, how that is working out. As a self employed person, every one of your customers is a different boss. If you want paid, when an employee doesn’t show up for work, you have to go do their job, as well as your own. You might get a little more control of time than as an Employee.
You (Actually your business) at least, has some deductions. The great thing here is that your taxes are paid on profits. Therefore, you can deduct most of your expenses before calculating taxes.
The Business Owner quadrant*, is where you own a SYSTEM. People work for, or, within this system. In a business system just because one employee does not show up for work, the CEO does not have to do that job, just so the system can make money. Business systems often require many people with different skills to keep it running.
I get many students who are confused between the Self Employed and Business Owner. I will use a personal example. My dad owned his own business. He had as many as 12 employees. But he was Self Employed. He had not developed a business system that could run without his being there. If he was gone longer than 2 weeks the business suffered. A business owner can leave the business for several months and it still continues to run.
Tim Hortons (Restaurant Brands International) is a business system. A franchisee buys the Tim Hortons business system. The Tim Horton’s system is so good, that most franchisees do not have to actually work in the restaurants, so they are also business owners. But again, the System is the key. Please be aware, that many franchises are just ways to be self employed.
The Investor Quadrant*, is where your Money works so hard, that it makes more money. For me, this is the ultimate money machine. If you pour more money in, it pumps out higher amounts of money. It is a system that works without physical work on the part of the investor. Believe me, every investor works! You still have to look after, and maintain the money machine.
We have all heard the saying that Time is Money. But it also works backwards. Money is Time. Most people do not have the amount of time to spend with families, hobbies, etc, because they have to spend too much TIME working for MONEY. If you have lots of MONEY, you can afford to spend more TIME doing something else.
Most of us have started in the employee quadrant. How do we get to the other Quadrants. The answer is both simple and hard at the same time. Today with the internet, starting an online business is pretty easy and inexpensive. There are hundreds of books out there that tell you how. Are you good at a hobby? With a typical phone, and an inexpensive app, you can do videos on how to do that hobby, that others might be willing to buy. You can start a blog. If you get enough followers you can get advertising money.
You might still be in the employee quadrant, but you have now a hold in the self employed quadrant. If you can convert your business into a system, then you are in the business owner quadrant. Maybe you could join a proven business system and work that system.
Taking the profits from those, you could start investing. Using that cash to generate more cash. Open an online trading account and start investing. Take the profits from your business and put it back into the business to make it bigger or more efficient. Turn it into a working system and sell that. Buy some property and get income from that. There are several business systems out there that you can start part time and work into a full business.
The point is, that if you don’t know about the Quadrants, you can’t take advantage of them. So why don’t you learn this in school? Really don’t know. What I have learned about money and investing DID NOT come from school or the banks. Much was learned from making mistakes.
Now that you know about the quadrants, which are you in, and which one(s) do you want to be in??
*The Cash Flow Quadrant comes from the book CASHFLOW QUARDANT by Robert Kiyosaki.