The Cashflow Quadrant: Why You should Never Operate on the left Side
Why operating from the left side of the CASHFLOW Quadrant is the riskiest thing you can do
“Never before have companies (all over the world) tried so hard to employ so few people.”
So goes the opening shot for an article published recently in the “Wall Street Journal” called “The End of Employees.”
The article details how many of the major companies are doing their best to outsource their jobs to contractors rather than employees. The percentage of the workforce that is not directly tied to a company has risen by almost 100% by some estimates, and it shows no sign of stopping.
“Few companies, workplace consultants or economists expect the outsourcing trend to reverse. Moving noncore jobs out of a company allows it to devote more time and energy to the things it does best. When an outside firm is in charge of labor, it assumes the day-to-day grind of scheduling, hiring and firing. Workers are quickly replaced if needed, and the company worries only about the final product.”
A safe, secure job?
When I was a kid, my poor dad, my natural father, wanted nothing more for me than to go to a good school, get my degree, and get a good, safe, secure job. This is not unlike how most people were raised—and how most people have lived their life.
My rich dad, my best friend’s father, taught me how to think like an entrepreneur. He didn’t want me to grow up to be an employee. He wanted me to grow up and be a business owner and investor.
For my poor dad, a job was the ultimate sign of security. For my rich dad, being an employee was risky.
My rich dad was well-ahead of his time. To be an employee is an illusion of security. You have a steady paycheck, but you are not in control. You are at the mercy of the business owner and the economy. If either decide you are not needed, you lose your job—and if you’re really unlucky, lots of other things like your house, your car, and more. And today, it is riskier than ever to be an employee.
Threats from all sides
Whether it is from robots and automation, many jobs are being outsourced to technology. And if jobs are not taken by technology, they are now taken by contractors. Just look at how companies like Lyft and Uber are disrupting the taxi industry… how Airbnb is disrupting the hotel industry.
Many view the rise of contractors… the so-called gig economy… as a good thing, but it is not. The argument goes that we are finally creating entrepreneurial opportunities for the masses. Entrepreneurship has been democratized, so they say.
The reality is that most people participating in the gig economy are not entrepreneurs.
Rather, they simply own a job. They still operate on the left side of the CASHFLOW Quadrant, just as a self-employed person rather than an employee.
This owning of a job is a great advantage for companies who no longer have to pay payroll taxes, provide health insurance, or fund retirement plans. They get all the labor and none of the trappings. And it’s all packaged in the allure of freedom.
Unfortunately, gig workers are not free. They work long and hard hours to make less and have less benefits than employees did historically. If they cannot put in the hours, they do not make the money. That is not how an entrepreneur operates. And entrepreneur makes money even when he or she is not working.
Of course, anyone looking for a good job or doing all they can to hustle in the gig economy is really looking for one thing… financial security. Unfortunately, they will not find it in either sector.
Why job security does not equal financial security
The path to true security or freedom is found on the right-hand side of the CASHFLOW Quadrant—the Business (B) and Investor (I) side. Unfortunately, most people look to the left side of the CASHFLOW Quadrant for security—the Employee (E) and Self-Employed (S) side.
My natural father was highly educated. He was also fixated on job security. The most important thing to him was having a good job. It was a value most of his generation shared, and one that he instilled into his kids from a young age. He assumed that job security meant financial security—that is until he lost his job and couldn’t find another.
On the other hand, my rich dad never talked about job security. Instead, he always talked about financial freedom. He showed me the patterns for different kinds of security and freedom found in the CASHFLOW Quadrant.
The pattern for job security
People who follow this pattern are good at their jobs. They are highly educated and have a lot of experience. The problem is they know little-to-nothing about the B and I quadrants. They feel financially insecure because they have only trained for a job and rely on others for their living.
Often, people in this pattern will put money into a retirement account. But even then, they still feel insecure because they don’t actually know what is happening with their money. They hope the manager of the account will do a good job. But, for the most part, it’s money that just disappears from their paycheck each month. And when they get their retirement statement each quarter, they don’t know how to read it.
In order for those in the pattern of job security to feel financially secure, they must increase their financial education and learn how to invest.
The pattern for financial security
This is the pattern for financial security for an E:
Instead of putting money into a retirement account and hoping for the best, this loop is for people who feel confident in their education as both an investor and an employee. Just as you study at school to learn a job, I suggest you study to become a professional investor.
This image shows the pattern for financial security for an S:
The average American millionaire is self-employed, lives frugally, and invests for the long term. The pattern above reflects that financial life path.
Additionally, both E’s and S’s can move into the B side of the quadrant. For instance, great entrepreneurs like Steve Jobs took that route. It’s not the easiest but, in my mind, it’s one of the best.
The pattern for financial freedom
Most people are concerned with financial security, and there’s nothing wrong with that. Personally, however, I don’t want to be just secure, I also want to be financially free. Because of this, I operate entirely on the right-hand side of the CASHFLOW Quadrant.
The following is the pattern for financial freedom:
This is the pattern my rich dad recommended, but it is not for everyone. It is, however, the pattern for true financial freedom because in the B quadrant people are working for you and in the I quadrant your money is working for you. You are free to work, or not. If you look at the ultra-rich, this is their pattern.
Choose your path
Today, you can choose which financial path you want to take. Will it be job security? Financial security? Or Financial freedom?
Unfortunately, most people choose job security, especially in tough economic times. I’m of the opinion that’s actually the least secure of all the positions because you rely entirely on someone else for your livelihood. And in times of economic trouble and technological disruption, jobs come and go. As the “Wall Street Journal” points out, companies are doing their best to eliminate job security in the future.
At a minimum, I recommend becoming educated in financial security, which is feeling confident about your job and also confident about your ability to invest in both good and bad times.
But, if you have it in you, the best path, and one of the hardest, is choosing financial freedom. It takes a high level of financial education to succeed in the B and I quadrants. It also takes a lot of passion, commitment, and vision. But the payoff is worth it.
Written by Robert Kiyosaki