TGCI 9: The book that changed my life

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Episode 9 – The Book That Changed My Life.

Show #9 - Solo - Episode Art

Summary

In today’s show, Pancham reveals how Robert Kiyosaki’s classic, “Rich Dad, Poor Dad” and “Cashflow Quadrant” changed the course of his life.  

This show starts with Pancham sharing how he was a high-paid professional paying large amount of taxes who was “hauling buckets” instead of “building pipelines”. However, Robert’s book made Pancham realize the importance of working smart rather than simply working hard. 

Pancham explains Roberts “Cash-Flow” Quadrant which segments everyone into four distinct quadrants – Employee (E), Self Employed (S), Business (B) and Investor (I). Unwillingness to take risks mean that most of us fall in either E or S quadrant. How can you make the transition from the left-side of the Cash Flow quadrant to the right side? In today’s show, listeners will learn how they can develop the mental fortitude to make this difficult transition.

There are not many books that change the course of your life. If Pancham has to pick one book that completely changed his life, it will be Cashflow Quadrant.

Tune In to find out!

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Pancham Gupta
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Timestamped Shownotes:

  • 01:04 – Which financial book changed the trajectory of Pancham’s life?
  • 01:51 – Understanding the Cash Flow Quadrant – which quadrant do you fall in?
  • 03:15 – What does being “wealthy” mean to Pancham?
  • 04:58 – Understanding the psyche of a risk-averse “employee”
  • 05:50 – What is the main disadvantage of remaining “Self-Employed”?
  • 06:33 – Do business owners end up paying lower taxes than high paid professionals and self-employed people?
  • 07:20 – Pancham shares an interesting anecdote about Henry Ford which highlights the importance of delegation 
  • 08:25 – Are investors dependent on their job to grow their wealth?
  • 09:18 – Pancham explains the stark difference between Robert’s “Rich Dad” and “Poor Dad” 
  • 10:28 – Why don’t more people prefer to be investors?
  • 11:25 – What is the core difference between an investor and a gambler?
  • 12:08 – Can employees and self-employed people expect to become truly wealthy over time?
  • 12:57 – One core value that is commonly found in business owners and investors
  • 13:31 – How can you change your cash flow quadrant?
  • 14:22 – Was it difficult for Pancham to transition from “Employee” quadrant to “Business” quadrant?
  • 14:53 – Should you take on debt to grow your wealth? Pancham explains the difference good debt and bad debt
  • 16:28 – Typically, how do most people fall into the debt trap?
  • 19:25 – What does it truly mean to be “Financially Free”?
  • 21:02 – Are you building pipelines or hauling buckets?
  • 26:29 – We are giving a $200 financial report for FREE! If you want nuanced financial information, check out this report now

4 Key Points:

  1. Understanding the “Cash Flow Quadrant”
  2. Why you CANNOT generate substantial wealth as an employee or a self-employed person
  3. How to transition one quadrant to another
  4. Should you take on debt to grow your wealth?

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Read Full Transcript

Welcome to the gold collar investor podcast show #8. This is Pancham. If this is your first time listening, then thanks for coming. The gold collar investor podcast is produced every week for your learning and enjoyment. Show notes can be found at thegoldcollarinvestor.com/show9. All links are in the show notes. Now, let’s get into the show. 

Today I am going to talk about the book that changed my life. I am a lifetime student. I read a lot of books regarding personal finance and mindset. However, there are only few books that have changed the trajectory of my life. The two books that have been instrumental in my life are written by the best financial author in the history, Robert Kiyosaki. The books are “Rich dad, poor dad” and “Cashflow Quadrant”.

“Rich Dad, Poor Dad” changed my perspective on how to earn money and “Cashflow Quadrant” helped to solidify it and made a permanent long lasting impact. “Rich Dad Poor Dad” helped me to unlearn everything I learned from traditional education which trained me how to be an employee. I learned that the only way to really become wealthy is by having my money work for me rather than trading time for money. 

In “Cashflow Quadrant” Kiyosaki teaches the four ways people make money: Employee or E, Self-employed or S, Business Owner or B, and a professional Investor or I. To help you visualize it, imagine a quadrant with E and S on the left side and B and I on the right side. Each of us resides in at least one of the four sections of the cashflow quadrant. Where we are is determined by where our cash comes from. Many of us are employees who rely on paychecks, while others are self-employed. Employees and self-employed individuals reside on the left side and the right side is for individuals who receive their cash from businesses they own or investments they own.

The biggest take away that I had from this book was that I needed to move from the left side of the quadrant to the right side of the quadrant as fast as possible if I want to become financially free and wealthy. My definition of wealthy is not having billions of dollars but doing what I want, from where I want, when I want, on my terms and still live comfortably. Living comfortably is a relative term and it will be different for different people. For me that means, having lots of time to raise kids, having money to donate to charities, having time and money to take care of health, being able to travel the world, etc. We need mental, physical, emotional and spiritual education. Robert mentions that to make a permanent change in life, you have to go through emotional and spiritual development. Going from a cushy high paying job to become an entrepreneur is no easy task. Rob mentioned in the book, saying to yourself that “I’m going to become an entrepreneur in the B quadrant is as futile as a chain smoker saying “Tomorrow I am going to quit smoking”. Smoking is a physical addiction caused by emotional and spiritual challenges. Without emotional and spiritual support, the smoker will always be a smoker. 

Robert mentions that while financial freedom can be found in all four of the quadrants, the skills of a B or I will help you reach your financial goals more quickly. Successful E’s need to become successful I’s to ensure their financial security during retirement. He also mentions that you can be rich or poor in all four quadrants. There are people who earn millions and people who go bankrupt in each of the quadrant. Being in one quadrant or another does not necessarily guarantee financial success. 

As per Robert, the characteristics of people and their core values are different for each quadrant. Lets talk about the characteristics of each quadrant. Starting with the left side. 

Employee – employees desires job security, a steady paycheck, cannot take financial risk, and desire the benefits provided by their jobs (retirement, insurance, time off, sick days, etc.). When it comes to money and job, they hate the feeling of economic uncertainty. They are accurate when they say, “I’m not that interested in money”. For them, the idea of security is often more important than money. Sense of entitlement is high with the employees and they trade hours for dollars. They also pay the high tax rate. For the high paid professionals it’s usually in the high thirties or even 40%. 

Self-employed – Is their own boss and not be dependent upon other people for their financial security. These include doctors, lawyers, and anyone who is self-employed. They desire independence and tend to be controlling, not trusting others to do the work as good as they can. Their income is tied directly to how much they work and if they do not work, they don’t get paid. They basically “own” a job. They pay one of the highest tax rate. It depends on the practice but it’s usually 50 to 60%.

Right side of the Cashflow Quadrant: B’s and I’s

Business Owner – Starts businesses and hires employees to delegate as much as possible. They work “on” the business and find competent people to work “in” the business. They desire to create a business that can run on its own without them. They focus on creating systems for the business to make money without them. The true motto of a B is, “Why do it yourself when you can hire someone to do it for you, and they can do it better?”. They pay corporate tax rate and their effective tax rate is around 20%. Henry ford fits this mold. As one popular story goes, a group of so-called intellectuals came by to condemn Ford for being ignorant. They claimed he really didn’t know much. So Ford invited them into his office and challenged them to ask him any question, and he would answer it. So this panel assembled around America’s most powerful industrialist and began to ask him questions. Ford listened to their questions and , when they were through, he simply reached for several phones on his desk and called in some of his bright assistants and asked them to give the panel the answers they sought. 

He ended by informing the panel that he would rather hire smart people who went to school to come up with answers so he could leave his mind clear to do more important tasks, tasks like thinking. 

One of the quotes credited to Ford goes: “Thinking is the hardest work there is. That is why so few people engage in it.”.

 

Investor –Looks for ways to make their money, as well as the money of others work for them. They desire to work less so they can spend their time however they want while not being tied down to a job. Escapes high taxes by deferring their taxes to a future date or utilizes the IRS rules to pay the lowest tax rate of all the other groups. They receive 70% of their income from investments and less than 30% from a job. Their tax rate can be 0%. The I quadrant is the playground of the rich. Regardless of which quadrant people make their money in, if they hope someday to be rich, they ultimately must come to the I quadrant. Its in the I quadrant that money gets converted to wealth.

 

Robert gives an example of his real dad who was highly educated Phd and whose money came from the employee quadrant. And his mentor, who he calls his rich dad who was in a B and I quadrant. 

 

For his highly educated real dad, the more and more money he made, he found himself further into debt. He would work harder and suddenly find himself in the higher income-tax bracket. His banker and accountant would then tell him to buy a bigger house for the so-called “tax break”. His dad would follow the advice and buy a bigger house and soon he was working harder than ever so he could make more money to pay for it. Ultimately, this just took him even further away from the family. On the other hand, his rich dad was different. He made more and more money but paid less in taxes and had more and more time for his family.

The I quadrant is the quadrant for working less, earning more, and paying less in taxes. So, the big question is why aren’t more people investors? The reason is the same reason many people don’t start their own businesses. It can be summed up in one work: risk. Many people don’t like the idea of handing over their hard-earned money and, possibly, not having it come back. Many people are so afraid of losing that they choose not to invest, no matter how much money they could make in return. 

This fear of losing money seems to divide investors into four broad categories:

  1. People who are risk-averse and do nothing but play it safe, keeping their money in the bank.
  2. People who turn the job of investing over to someone else, such as financial advisor or a mutual fund manager.
  3. Gamblers.
  4. Investors.

 

The difference between a gambler and an investor is simple. For a gambler, investing is a game of chance. For an investor, investing is a game of skill. And for people who turn their money over to someone else to invest, investing is often a game they don’t want to learn. The important thing for these individuals is to choose a financial advisor carefully.

 

Which side of Cashflow Quadrant should you be?

Now that you have understood the core values of people from each of the quadrants, here is a quick difference between the people on the right side and the left side of the quadrant.

Left side of quadrant

Right side of Quadrant

Employees (E), Self-employed (S)

Business owners (B), Investors (I)

Difficult to get rich

Easy to get rich

Their core value is Security. They hate the feeling of economic uncertainty

Their core value is FREEDOM. 

This side consists of 95% of the population with less than 5% of total wealth.

This side consists of 5% of the population with more than 95% of total wealth.

They trade time with money.

Their money is not dependent on time. They make their money work.

Will Pay to Take Risks (ex: 401k, etfs, etc)

Will get paid to take risks

Will pay very high taxes

Will pay low to no taxes

  

 

Robert mentions that changing quadrants isn’t like changing jobs or changing professions. Changing quadrants is often a change at the core of who you are – how you think and how you look at the world. The change is easier for some people than for others simply because some people welcome change and others fight it. And changing quadrants is most often a life-changing experience. Its a change as profound as the age-old story of the caterpillar becoming a butterfly. Not only will you change, but so will your friends. While you will be still be friends with your old friends, its just harder for caterpillars to do the same things butterflies do. So the changes are big changes, and not too many choose to make them. 

 

I can totally attest to this. I have changed quadrants but the process was very difficult emotionally.

 

My second biggest take away from the two books was that you need to be in I column regardless of where your money comes from. You need to invest money in buying assets and use debt to make money. There is a big difference between a good debt and a bad debt. Good debt puts money in your pocket and a bad debt takes money from your pocket. All the rich people in the world are measured based on their Net Worth and not how much they earn yearly. What is the reason for that? Your annual earnings do not count towards your net-worth. Its measured by the total net assets you have. You will need to understand Balance sheet and Cashflow statements clearly for it to become part of your daily thinking. 

 

You personal home is a liability, you car is a liability, you clothes, your watch, etc. A lot of people think that they are buying assets but they are actually buying liabilities. For example: if you buy a condo in Bay area or NYC, hoping that it will go up in value someday but are paying out of pocket even after renting it out, its a bad debt. Its taking money away from you. This may work well if you were to sell it and make profit but till then its taking money away from you. 

 

I am done with the takeaways from the book. However, to get you guys thinking a bit more and motivate you, I would like to go into the life of an average educated person who is an employee. His story goes something like this:

The child goes to school, graduates, finds a job and soon has some money to spend. They young adult now can afford to rent an apartment, buy electronics, new clothes, some furniture and of course a car. Soon the bills begin to come in.

 

One day, he or she gets married. For a while, life is blissful because two can live as cheaply as one. With only one rent to pay, they can afford to set a few dollars aside to buy a dream home. They find a house, pull their money out of savings and use it for a down payment. Now they have a mortgage. Because they have a new house, they need new furnishings, so they find a furniture store that advertises those magic words, “No money down. Easy monthly payments”. Life is wonderful, and they throw a party to have all their friends over to see their new house, new car, new furniture, and new toys. They are already deeply in debt. Then the first child is born. 

 

After dropping the child off at nursery school, this average couple must now put their to the grindstone and go to work. They become trapped by the need for job security simply because, on average, they are simply three months away from financial bankruptcy. These people will often say, “I can’t afford to quit. I have bills to pay”. This story is very similar for the high paid professional except the fact that instead of 3 months, they can last for 1 to 2 years. Robert talks about his highly educated dad who worked hard on the left side of the quadrant. By working hard, getting promoted, and taking on more responsibility, he had less and less free time to spend with his kids. He would leave for work at 7am, and many times he wouldn’t even see his dad because the kids would go bed before the dad got home. That’s what happens when you work hard and become successful in the E and S quadrants. Success brings you less and less time, even if it does bring more money. On the other hand, Robert’s rich dad i.e. his mentor, had the free time to teach him. As he grew more successful, he had more free time and money. His business got better, but he didn’t have to work harder. He simply had his president expand the system and hire more people to do the work. If his investments did well, he reinvested the more money and made more money. Instead of working, he spent hours working with his son and Robert educating them about business and investing.

 

Success on the B and I side requires a particular kind of knowledge about money called “financial intelligence”. Rich dad said that financial intelligence determined, not so much how much money you make, but how much money you keep, how that money works for you, and how many generations can keep it.

 

The path of freedom is found on the right side of the CASHFLOW quadrant. You need to go beyond job security and know the difference between financial security and financial freedom.  Robert’s highly educated dada was fixated on job security. He assumed that job security meant financial security – until, he lost his job and couldn’t find another. However, his rich dad always talked about financial freedom. 

 

I believe that the high paid professionals are so well positioned to become investors while working on what they love the most. They have much higher savings then average working professional. If they learn the skill of either active or passive investing during their working years, they can become financially free much sooner.

 

Regardless of what you decide, please remember this: Financial freedom does not come cheap. Freedom has a price, and to me its worth that price. It does not have to be risky but you will have put time and effort to become financially educated. Freedom’s price is measured in dreams, desire, and the ability to overcome disappointments that occur along the way. Are you willing to pay the price?

 

I will finish this podcast with the story that is mentioned in the book. This story resonated so much with me that I have read it multiple times. Here is the story:

 

“Once upon a time there was this little village. It was a great place to live except for one problem. The village had no water unless it rained. To solve this problem once and for all, the village elders asked contractors to submit bids to deliver water to the village on a daily basis. Two people volunteered to take on that task, and the elders awarded the contract to both of them. They felt that a little competition would keep prices low and ensure a backup supply of water. 

 

The first person who won the contract, Ed, immediately ran out, bought two galvanized steel buckets and began running back and forth to the lake which was a mile away. He immediately began making money as he labored morning to dusk, hauling water from the lake with his two buckets. He would empty them into the large concrete holding tank the village had built. Each morning he had to get up before the rest of the village awoke to make sure there was enough water for the people. It was hard work, but he was very happy to be making money and for having one of the two exclusive contracts for his business. 

 

The second winning contractor, Bill, disappeared for a while. He wasn’t seen for months, which made Ed very happy, since he had no competition. 

 

Instead of buying two buckets to compete with Ed, Bill wrote a business plan, create a corporation, found four investors, employed a president to do the work, and returned six months later with a construction crew. Within a year, his team had built a large-volume stainless-steel pipeline which connected the village to the lake. 

 

At the grand opening celebration, Bill announced that his water was cleaner than Ed’s water. Bill knew that the villagers had complained about the water’s lack of cleanliness. Bill also announced that he could supply the village with water 24 hours a day, 7 days a week. Ed could only deliver water on weekdays because he didn’t want to work on the weekends. Then Bill announced that he would charge 75% less than Ed  did for this higher-quality, more-reliable water. The villagers cheered and immediately ran for the faucet at the of Bill’s pipeline. 

 

In order to compete, Ed immediately lowered his rates by 75%, bought two more buckets, added covers to his buckets and began hauling four buckets each trip. In order to provide better service, he hired his two sons to give him a hand on the night shift and on weekends. When his boys went off to college, he said to them, Hurry back because someday this business will belong to you. 

 

For some reason, his two sons never returned. Eventually, Ed had employees and union problems. The union demanded higher wages and better benefits and wanted its members to only haul one bucket at a time.

 

Meanwhile, Bill realized that if this village needed water, then other villages must need water too. He rewrote his business plan and went off to sell his high-speed, high-volume, low-cost, clean-water delivery system to villages throughout the world. He only makes penny per bucket of water delivered, but he delivers billions of buckets of water every day. Whether he works or not, billions of people consume billions of buckets of water, and all that money pours into his bank account. Bill developed a pipeline to deliver money to himself, as well as water to the villages.

 

Bill lived happily ever after. Ed worked hard for the rest of his life and had financial problems forever after. The end.”

 

This story is very simple but can be applied to many aspects of our lives. Financial life, work life, personal life. I often ask myself in the decision making process:

Am I building a pipeline or hauling buckets? Am I working hard, or working smart? 

 

I think I can go on and on with the stories in the book but I will stop here. I would highly recommend reading the book even if you are 100% satisfied with your current situation and feel that its going in the right direction. Its for people who are tired of hauling buckets and are ready to build pipelines for cash to flow into their pockets. You can find the link to the book by going to thegoldcollarinvestor.com/bestbook. I repeat, thegoldcollarinvestor.com/bestbook i.e. b e s t b o o k one word. Its a shortcut to take you to amazon.com

 

With that, I want to leave you guys with this quote from the podcast, “It is not so much how much money you make, but how much money you keep, how that money works for you, and how many generations can keep it.” 

 

Thanks for listening. If you have questions? Email me at p@thegoldcollarinvestor.com. That’s p as in paul @ thegoldcollarinvestor.com. This is Pancham… Signing off… until next time.. Take care!

Show #9 - Solo - Episode Art

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