the_cashflow_quadrant

7he CASHFLOW Quadrant

are the most powerful tools available to humans. What a person says and

word became flesh and dwelt amongst us."

Rich dad firmly believed that what we said to ourselves, at our core, became our reality. That is why I suspect that for people who struggle

overcome those emotionally driven thoughts, their words do become flesh.

If they are emotionally based thoughts, they are powerful. The good news is that they can be changed with support of new friends, new ideas and a

little time.

People who are not able to control their fear of losing should never invest

on

their own. They are best served by turning that job over to a professional and not

interfering with them.

As an interesting note, I have met many professional people who are fearless when investing other people's money and able to make lots of money. But

when it

comes to investing or risking their own money, their fear of losing becomes too

strong and they ultimately lose. Their emotions do the thinking rather than their

logic.

I have also met people who can invest their money and win constantly, but lose their calm when someone asks them to invest money for them.

The making and losing of money is an emotional subject. So my rich dad gave me the secret to handling these emotions. Rich dad always said, "To be

successful

as an investor or a business owner, you have to be emotionally neutral to winning

and losing. Winning and losing are just part of the game."

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In 1978, 1 resigned from my full-time secure job with Xerox, and took the T1 step forward with no safety net. The noise in my head was loud from my fear and dad's

doubt. I was nearly paralyzed with fear as I signed my letter of resignation, can al

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remind

QUITTING MY SECUREJOB

My friend Mike had a system that belonged to him. His father had built it.

I did

not have that good fortune. I knew that someday I was going to have to leave the

comfort and security of the nest, and begin to build my own.

collected my last paycheck, and walked out the door. I had an orchestra of self-damaging thoughts and feelings playing inside me. I was "bad-mouthing"

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The CASHFLOWQuadran

myself so loudly and with such conviction that I could not hear anything

else. It's

good thing, because so many of the people I worked with were saying, "He'll be

back. He'll never make it."

The problem was, I was saying the same thing to myself. Those emotional words of self-doubt haunted me for years until my wife and I were

successful in

both the "B" and "I" quadrants. Today, I still hear those words; they just have less

authority. In the process of putting up with my own self-doubt, I learned to create

other words, words of personal encouragement, statements such as:

"Keep calm, think clearly, keep an open mind, keep going, ask someone

who

has gone before you for some guidance, trust, and keep the faith in a higher power wanting the best for you."

I learned to create these words of encouragement internally, even though there was a part of me that was frightened and afraid."

I knew that I had little chance of success my first time out. Yet, the

positive

human emotions, emotions such as trust, faith, courage and good friends moved

me forward. I knew that I had to take risks. I knew that risk led to mistakes, and

Mistakes led to wisdom and knowledge, both of which I lacked. For me, failure

would have been to let fear win, so I was willing to move forward with little in

guarantees. My rich dad had instilled in me the idea that "failure is part of the

process of success."

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INTERNALJOURNEY

The journey from one quadrant to the next is an internal journey. It is a Journey from one set of core beliefs and technical skills to a new set of

core beliefs

and a new set of technical skills. The process is much like learning to ride a

bicycle. At first you fall down many times. Often times it's frustrating and embar-

rassing, especially if your friends are watching. But after a while, the falling stops

d riding becomes automatic. If you fall down again, it's not that big of a deal

,kcause, internally, you now know that you can get up and ride again. The

ss is the same when going from an emotional mind-set of job security to the tional rnind-set of financial freedom.~6nce my wife and I made the crossing,

were less afraid-o~we were confident in our ability to stand

back up.

There are two statements that kept me going personally. One was my rich

Is words of advice, when I was on the brink of quitting and turning back:

"You

can always quit... so why quit now?"

That statement kept my spirits higher and emotions calm. That statement minded me that I was halfway across... so why turn back because the distance

The C4SHFLOW Quadrant

going home was just as far as going for the quadrant on the other side. It would be

like Columbus quitting and turning back halfway across the Atlantic. Either way,

the distance was the same.

And a word of caution: Intelligence is also knowing when to quit. Too

often I

meet people who are so stubborn, they keep going forward on a project that has

no chance of success. The problem of knowing when to quit or when to keep going is an age-old problem with anyone who takes risks. One way to manage this

problem of "to keep going or quit" is to find mentors who have already successfidly

made the crossing before, and seek their advice. Such a person, who is already on

the other side, can best guide you'. But be careful of advice from someone who has

only read books about the crossing and gets paid to lecture on the subject. The other statement that often kept me going was:

"Giants often trip and fall. But worms don't, because All they do is dig and crawl."

The main reason so many people struggle financially is not because they

lack

a good education, or are not hard working. It's because they're afraid of losing. If

the fear of losing stops them, they've already lost.

LOSERS CUT THEIR WYNNERS AND

RIDE THEIR LOSERS

Fear of "being" a loser affects what people "do" in strange ways. I have

see

people who bought a stock at $20, sell their shares when they reached $30 because they're so afraid of losing what they've gained, only to have the stock go

to $100, split and go up to $100 again.

That same person, having bought a stock at $20, will watch it go down to, $3 and still hang on, hoping the price will come back up... and they may

hang on

to that $3 stock for 20 years. This is an example of a person "being" so afraid of

losing, or admitting they lost, that they wind up losing.

W7NNERS CIT THEIR LOSERS AND

RIDE THEIR WINNERS

Winners "do" things almost exactly the opposite. often, the moment they know they took a losing position, i.e. their stock price starts to go down

instead of

up, they will sell immediately and take their losses. Most are not ashamed to sly

they took a loss, for a winner knows that losing is part of the process of winning,

When they find a winner, they will ride it up as far as it can go. The

moment

they know the free ride is over and the price has peaked, they cut and sell. The C4SHFLOW Quadrant

The key to being a great investor is to be neutral to winning and losing.

Then,

you don't have emotionally driven thoughts such as fear and greed doing your thinking for you.

LOSERS DO THE SAME THINGS IN LIFE

People who are afraid of losing do the same things in real life. We all know of-

1.People who stay in marriages where there is no longer any love.

2.People who stay at dead-end jobs.

3.People who hang on to old clothes and "stuff' they will never use.

.4. People who stay in towns where they have no future.

5.People who stay friends with people who hold them back.

EMOTIONAL INTELLIGENCE CAN BE CONTROLLED

Financial intelligence is closely linked to emotional intelligence. In my

opinion,

most people suffer financially because their emotions are in control of their

,thoughts. We as human BE-ings, all have the same emotions. What determines the

ffferences in what we "DO" and what we "HAVE" in life is primarily how we handle those emotions.

For example, the emotion of fear can cause some of us to be cowards. The same emotion of fear can cause others to become courageous. Unfortunately,

when it comes to the subject of money, most people in our society are conditioned

to be financial cowards. When the fear of losing money comes up, most people's

rninds automatically start chanting these words:

1."Security," rather than "freedom."

2."Avoid risk," rather than "learn to manage risk."

3."Play it safe," rather than "play it art.))

4. "1 can't afford it," rathei w1an I afford it?"

5."It's too expensive," rather than "what is it worth, long term?"

6."Diversify," rather than "focus."

There is a science to taking risks, especially financial risks. one of the

best

books I have read on the subject of money and risk management is Tradingfor a

Wng, by Dr. Alexander Elder.

~ Although it was written for people who trade stocks and options professionally,

the wisdom of risk and risk management applies to all areas of money, money gement, personal psychology and investing. One of the reasons many

say,

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ad of say ning. f

nt

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7-be CASHFLOW Quadrant

successful "B's" are not always as successful as "I's" is because they do not fully

understand the psychology behind purely risking money. While "B's" understand

risk when it involves business systems and people, that knowledge does not always

translat~ into the systems of money making money.

IrS EMOTIONAL MORE THAN TECHNIC4L

in summary, moving from quadrants on the left to quadrants on the right is more emotional than technical. If people are not able to control their

emotional

thoughts, I would not recommend the journey.

The reason things look so risky on the right side of the Quadrant to people on the left side is because the emotion of fear is often affecting their

thinking.

People on the left si

emotional thought. quadrant or the other.

What people "DO" on the right side of the equation is not that hard. I am ce

sincere when I say that it is as easy as buying four green houses for low

pn es,

waiting until the market improves, selling them and then buying a big red hotel.

Life really is a game of Monopoly for people on the right side of the

quadrant.

Sure, there is winning and losing, but that is part of the game. Winning and losing

is a part of life. To be successful on the right side of the Quadrant is to "BE" a

person who loves the game. Tiger Woods loses more than he wins, yet he still loves the game. Donald Trump went broke and battled back. He didn't quit because he lost. Losing only made him smarter and more determined. Many wealthy people went broke before they became rich. It's a part of the game.

If a person's emotions are thinking for them, those emotional thoughts

often

blind that person from seeing anything else. It is because of those knee-jerk

emotional thoughts that people react, rather than think. It is those emotions that

cause people from different quadrants to argue. The arguments are caused by

de think "play it safe" is a logical thought. It isn't. It's an And it's the emotional thoughts that keep people stuck to one

people not having the same emotional points of view. It is that emotional reaction

that blinds a person from seeing how easy, and often risk free, things are on the

right side of the Quadrant. If a person cannot control their emotional thoughts,

and many cannot, then they should not attempt to make the crossing.

I encourage all of you wanting to make the crossing to make sure you have

a

long-term positive support group with you and a mentor on the other side guiding

you. To me, the struggle my wife and I went through was worth it. For us, the

most important thing about crossing from the left side to the right side of the

Quadrant is not what we had to "do," but who we became in the process. To me that is priceless.

.Am

~r,

The CASHFLOW Quadrant

PARTH

CHAPTER 9

prio

Be., ne Bank...

Not The Banker

have focused on the "BE" portion of the formula "BE-DO-HAVE" because without the proper mind-set and attitude, you cannot be

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prepared for the great economic changes that are facing us today. By 'being" someone with the skills and mind-set of the right side of the Quadrant, you will be prepared to recognize opportunities that arise from these changes and be prepare q "DO" what will result in your "HAVING" financial success.

I remember a phone call I receive from my rich dad in late 1986: "Are you in the real estate market or the stock market?" he asked.

"Neither," I replied. "Everything have is invested in building my business." "Good," he said. "Stay out o 11 markets. Keep building your business.

Something big is about to happen."

That year, the U.S. Congress passed the Tax Reform Act of 1986. In a swift

43

Congress took away many of the tax loopholes that people counted on to ~helter their income. For people who were using those "passive losses" from

their

income property as tax deductions, they suddenly still had their losses, but the

0

.-~eive

government had taken away the tax deduction. All across America, real estate p6ces began to plunge. Property prices began to slide, in some cases as

much as a

70percent. Suddenly, properties were worth far less than the amount of their

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Tbe CASHFLOW Quadrant

mortgages. Panic swept the entire property market. Banks and savings and loans

began to shake, many began to fail. People could not get their money out of the

banks and then Wall Street crashed in October 1987. The world went into financial crisis.

Fundamentally, the Tax Reform Act of 1986 took away many of the tax loopholes that, on the left side of the Quadrant, high-income "E's" and

"S's"

depended on. Many of them had invested in real estate properties or limited partnerships in order to utilize these losses to offset their earnings from

the "E"

and/or "S" quadrants. And while the crash and recession did affect the people on

the right side of the Quadrant, the "B" and "I" quadrants, many of their tax-

avoidance mechanisms were left in tack.

During this period, "E's" learned a new word. That word was "downsizing."

They soon realized that when a major layoff was announced, the share price of

stock of the company announcing the lay off went up. Sadly, most did not understand why. There were many "S's" who were also. struggling to cope with recession, due to a decrease in business, higher insurance rates, as well

as losses

from the real estate and share markets. As a result, I feel that individuals primadly

focused in the left side of the Quadrant were hurt and suffered the most financially as a direct result of the Tax Reform Act of 1986.

TRANSFER OF WEALTH

While people on the left side were suffering, many people who operated

on.;

the "B" and "I" side of the Quadrant were getting rich, thanks to the government

taking away from some people to give to others.

By changing the tax code, all the "tax trick" reasons for investing were

taken

away from people who were simply buying real estate to lose money. Many Wei high-income employees, or professional people such as doctors, attorneys, accountants and small-business owners. Prior to this period, they had so

much

taxable income that their advisers told them to buy real estate to lose money, a

then 'wi h

00; any extra money, invest in the stock market. When the government t

p

& oop ole away with the Tax Reform Act... one of the most massive transf