Monday, July 12, 2010

The Four Quadrants

Robert T Kiyosaki
 The Cashflow Quadrant
Are we all aware that most of us if not all are inside a quadrant financially? We are all included in a system that affects the society, economy and the emotional world. Do you also know that the quadrant we are in determines our well being, success and personality? Is there any relevance and importance to know where we are in these quadrants? These are questions we need to know because these are the key's to our goal and success.
From the book of Mr. Robert T Kiyosaki's "Cashflow Quadrant" I have learned that all people generating income are all part of a quadrant. We affect the whole stability of the world financial growth and we determine the future ahead of us. In the book, Robert had classified the four quadrants into specific areas where we generate our income and he also quoted the importance of each quadrant. The four quadrants are classified as "E - Employee", "S - Self Employed", "B - Business Owners", "I - Investors". This quadrants shown below are the core foundations of the economy.

Looking into the diagram as seen above, we can now determine which quadrant we are in and where we get our income. Before we go into the pros and cons of each quadrant let's first know what the meaning of each quadrants.

First Quadrant is the "E" for Employee - This is a quadrant that is composed of people earning from their physical or active work. This people are usually getting their paychecks every 15th and 30th of the month. They earn money toiling and thinking for their company in return of cash every month. This quadrant is more of a give and take process wherein the employee gives their service to the company on an hourly basis and the company in return will give money for their hours of work.

Second Quadrant is the "S" for Self Employed - This quadrant much the same as employees but they do not work for a company or a boss. They are their own boss and they work on their own time schedule. This people are rendering products or services offered to by them personally. In the book, it also states that this people are the "SMART" people because they are more specialized. An example would be Attorneys, Doctors, Accountants, Dentists, Small Business Owners, and the list goes on and on. These people are earning income from the specialized services or products they offer and sell.

Third Quadrant is the "B" for Business Owners - This quadrant is where owners of a company belongs. They have employees work for them and they work as bosses on their company. They are the pillars of the economy and the major organs of a nation. This people start businesses that create jobs, investment options, and product standards. They usually earn from the profit of the company made by its employees.

The Fourth and Last Quadrant is the "I" for Investors - This quadrant is composed of people that invest in businesses, services, properties etch. This people usually have large amounts of money and fuel the market. This people are good in spotting opportunities and they invest their money to that an idea hoping that it would create more money for them. This people usually earn from other peoples time, effort, and ideas.
With that definition being said, we can now discuss the different pros and cons of these four different quadrants.

Let's start from the first quadrant, the EMPLOYEE.
The employee quadrant is the motor of a company. This people are the ones responsible for the execution of the process that interconnects into a system that creates the end product. These are individuals that do everything from scratch and it may it be services, products or both. They work in return for money. The great thing of being an employee is that you can work with a "built in system". All they need is a little training and a little practice and everything is automatic. They work on an hourly basis and they have a steady paycheck. They also have benefits such as insurances, social security, HMO benefits, Retirement benefit, and others (every company varies in giving benefits). They can also work out more for their career path meaning they can work harder to get bigger money from the company (going up the corporate ladder). They also have the chance to negotiate their salaries to other companies for better compensation and benefits.
The bad thing about being an employee is that you do not control the system. You are only required to move with in your boundaries inside the company and if you want to move more you'll have to work more for you to be promoted and have a bigger space to move. This people also cannot control their time. The company dictates your time of work and usually they don't pay you when you work outside of your scheduled work. They also need to report to people on top of them. They are called bosses, supervisors, managers etch. They have to report every detail of their work to their superiors to have an accurate view of their performance. If they don't perform well the company will have to look for a better one to replace you.

This people also have disadvantages when it comes to taxes. They cannot have any tax breaks from withholding taxes, Insurance taxes, social security taxes and so on so forth. They cannot pay their self first because they have to pay the government first.

The second quadrant is the SELF EMPLOYED.
The Self Employed quadrant can also be called "Smart", "Specialized" and "Small Business Owners". They are their own boss. They render services or products and they want to have a personal touch selling this to their clients. The self employed quadrant is where most of the smart educated people go after graduation. They always want control and they have control over everything that they do. Good things about being self employed are that these people hold their time. They can sell, render and market their product or services any time they want. They can also work anytime they want and they can do anything they want. They are also being paid in big amounts of money because of their specialization. This quadrant also controls their businesses. They control the direction of his company and his cash flow.
The bad thing about being self employed is that if they don't work, they don't earn. These people are being paid because of their effort not by the hour. They also have to get their own benefits because no one will give it to them for free. They also have disadvantages on taxes because they are not only taxed from withholding but also from professional taxes and other relevant taxes applicable to specialized people. They also have to work harder to be paid bigger and this means to attend school again to get a more specialized skill and then after acquiring it they charge their client more money for their services or product. In short no work, no pay and more pay, more work.

The third quadrant is the BUSINESS OWNER.
This quadrant is where the Big Business Owners are. They are the creators of jobs. They are the new Royalty of this generation. People usually work for these people. They hire people to do all the work for them. They often create Ideas, and then hire people to systematically implement the ideas they have and hire more people execute it. These people are visionaries but does not want to be venturing alone. They always have people on the front line to take care of all the work for their idea. They always control all the businesses they have and they can change the direction of the company whenever they want. One good thing about being a Business owner is that he earns from the time and effort of his employees. He also has the advantages to put all his needs to the company’s payables such as Cars, Food, Insurances, Properties, Communications, and other benefits. This quadrant also has the most advantage when it comes to taxes. There are certain laws available only to corporate entities that business owners take advantage off.
The Cons for being a business owner is that you are responsible for all your employees. You have to pay half of your employees’ benefits such as social security, health benefits, etch.

The last quadrant is the INVESTOR
This quadrant is where the rich, smart people are. They are people that shell out money to fuel an idea and hope that the idea booms to the public and make big profits out of the investments. This people make their money work for them. These people are big asset buyers that in return make more money for them. There are many advantages in this quadrant. They have all the time in the world to play and enjoy life using other people’s money. They usually make use of the word "LEVERAGE" meaning they use other people’s time, effort and money to create more money for them.  They always get the best investments because the opportunities are usually given to them first and then the rest goes to the other quadrants. They are the Ultra Rich People.
Disadvantaged from this quadrant is minimal. They are usually taxed the least and they are not working unlike the other quadrants. The only risk they have is when they loose their money from one bad investment (which only happen once is a blue moon).

What is the impact of knowing all of this?
·         If one knows where exactly where he is, he would know where he intend to go.
·         Knowing the cashflow quadrant can actually make you decide where you want to be. Whether you want to jump from one quadrant to another or to be in a combination or all the quadrants at the same time.
·         The quadrant can actually give us an idea on where we can be most advantageous and where we can be wealthy depending on our passion.
·         The quadrant relates the connection with our lives and the world. It gives us the meaning of what we do and what we need to do.

What quadrant are you in right now? Are you contented with where you are? If you are, I am very happy for you but if you are not; how can you jump from your quadrant right now to another in the future? I'm a learner myself and already in the process of jumping from one quadrant to another. We all have our passion and responsibilities to our selves to make us happy. Search your self and begin to search for the answers to these questions. But before jumping from one quadrant to another, be sure to have a financial foundation/education, the right mind set and the right financial plan to do so. This is an opportunity to everyone and I intend to share my thoughts and vision to every one reading this. To be financially free and to begin to do what makes us ultimately happy is the main point of this writing. Let's spread the word through financial literacy and you can start by sharing this blog to your friends. I hope this can help you and I give my thanks to you for reading.