Do you know the biggest difference between people who are financially successful and those who are not? I’ll give you a hint, it is not talent, education, or family background.
The biggest difference between the rich and the poor is how they earn income, and what they do with the money they make. Generally, the rich recognize the importance of creating multiple streams of income. They invest income into assets such as real estate, stocks, or businesses that use the powers of leverage and duplication to create more income.
By contrast, the poor generally get their income by working for someone else. They earn an hourly wage or salary, which they use to buy things that they need. Most (if not all) of the income they earn is converted into expenses.
The middle class in this country are caught in a powerful squeeze. They may earn a good income, either as a corporate employee or in professional self-employment…as doctors, lawyers and the like. But most of the income that they receive goes out the door to liabilities: a home mortgage, car payments, tuition for private schools, credit card bills for trips and luxury goods.
How We Learned the Key to Financial Independence
We know a lot about the middle-class squeeze, because we found out the hard way. Laurie is a law professor with a good income. And Denise makes a good salary as CEO of Capitol Hill Bikes. But we invested every penny we made back into our businesses…and when the economic crisis hit in 2009, all of our assets were tied up in retail inventory and real estate. Not only that, we had accumulated credit card debt to finance our businesses, and had no source of liquidity to pay them back when the credit market tightened.
This was a pretty scary position to be in. We were looking forward to an early retirement, but our retirement funds had lost more than 40% of their value. It looked like we would be working until our 70′s just to pay the bills.
That’s when we got smart, and started reading everything we could about financial independence. We read all of Suze Orman’s books, David Bach’s Start Late Finish Rich, Dan Kennedy’s No BS Guide to Becoming a Millionaire, and many others. But the book that really turned on the lightbulb was Robert Kiyosaki’s Cash Flow Quadrant. That’s when we learned that as hard as we were working, we were still trading time for dollars. And we would never get where we wanted to go until we diversified our income stream by becoming true business owners or investors.
The Cash Flow Quadrant
Here is how Robert Kiyosaki breaks it down:
The left side of the diagram is for people who earn money through employment or self-employment. The right side of the diagram depicts people who earn their money through leveraged assets. They are business owners, who own a system that leverages the efforts of others to make money…or investors, who earn income from stocks, real estate and other assets.
To become financially independent, you have to earn at least part of your income from the right side of the quadrant chart.
If you’re not sure you see the difference between self-employment and owning a business, think of it this way. You are self-employed if you earn an income in exchange for hours worked. It may be a high hourly rate, but if you don’t work, you don’t get paid. You own a business if you get paid through the efforts of others. You can take a vacation, even take a year off from work. If the system is in place, you will keep getting paid.
The bottom line: to build real wealth and financial freedom…you have to stop trading time for dollars!
Next: The Millionaire Mindset
