Although I always try to create and post original content, business has been happening for thousands of years or more, and the foundations of business have almost always remained the same. The Cashflow Quadrant is something that everyone living in America should be exposed to at least once, regardless of what your aspirations or goals are. Simply put: Everyone should watch this video, and then read the book. Here is one basic snapshot example of the ways employee's and entrepreneurs are treated differently.
Say each person is making $2,000/month as income, and are each going to pay 25% in taxes on their income.
Employee:
Income: $2,000
Tax (25%): - $500
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$1,500
Gas: - $200
Insurance: - $250
Phone: - $120
Internet: - $120
Misc: - $400
__________________________________________________________________________________
$410
Tax (25%): - $0
---------------
Left Over: $410
Entrepreneur:
Income: $2,000
Tax (25%): - $0
-----------------
$2,000
Gas: - $200
Insurance: - $250
Phone: - $120
Internet: -$120
Misc: - $400
__________________________________________________________________________________
$910
Tax (25%): $227.50
-----------------
Left Over: $682.50
You see, with the same income and the same expenses, the entrepreneur has over 50% more money left over at the end of the day. This is due to one reason:
As an employee, your taxes are taken out of your paycheck before you ever even receive it. You are then left to pay your expenses with whatever is left.
As an investors/business owner, you don't have any taxes taken out when you receive your payments. You pay all of your applicable expenses, and then you pay taxes on whatever money you have left. This is the difference between being taxed on your gross income, and your net income... and it equals MONEY.
One thing to note is that this chart is most applicable if you are an investor. Self Employed and business owners will have to pay a self employment tax, and if you have employees, you have to pay payroll taxes as well... but hopefully you'll have a higher income than your employee to compensate for the difference in taxes.
The Cashflow Quadrant breaks each working person into one of four categories, dependent on how you receive/produce the majority of your income.
Employee: You rent a job. As an employee, you generally go to work for someone else, be it an individual or a company. You're paid a salary or hourly wage in exchange for your time. An employee has generally more security, but less income potential and flexibility. Aspects of an Employee:
- Must exchange time for money. - Is not able to benefit from other people's time or money.
- Has a set schedule.
- Potential for provided benefits. PTO, Insurance, Colleagues, etc.
- Has significantly less risk. More stable.
- Does not have to make incredibly hard decisions.
- Taxed highly and taxed up front.
Self Employed/Small Business: You own a job. As a small business owner, or self employer (think lawyers, doctors, contractors, etc) you work for yourself. You're paid based on results, not an hourly rate. For example, you receive a payment when you finish a project, or help a client. You have somewhat lower security, but your income potential is significantly higher than an employee. You don't have benefits unless you opt to pay for them.
Aspects of a Self Employer/Small Business:
- Flexible schedule. Though you're often on call.
- Can benefit from other people's time.
- No provided benefits.
- Riskier. If you mess up, you go out of business.
- Significantly higher income potential.
- Taxed differently, but very HIGHLY.
- Has to make hard decisions, and pays the price for them.
- You're in charge.
Big Business: You own a system. As the owner of a big business, you run/oversee a system that utilizes other people's time, and money, to create profits. You're paid based on results, and your income potential is only limited by how large you can scale. A big business owner can step away from his position, and the system can continue to function without them. You have to make fewer, but increasingly difficult and complex decisions.
Aspects of a Big Business:
- Flexible Schedule. You're on call, but not often.
- Can benefit from other people's time and money.
- Company pays for benefits.
- Risk can be mitigated thanks to systems and operating procedures.
- Someone else can run your company.
- Lots of tax deductions to incentivize the creation of jobs and industry. (LOWER TAXES)
- Has to make the hardest decisions on a macro level.
- You have to work very, very hard to get here. Every day. - You're in charge.
Investor: Money works for you. As an investor, you wear many hats. Particularly, you wear the hat that makes you the most money. You invest your own money in either companies, real estate, or projects, that will provide an opportunity for your money to grow in volume. An investor gets paid for making good decisions, and generally has a very passive lifestyle, as their money is making additional money for them. Sophisticated investors can also use other people's time and money to make more money.
Aspects of an Investor: - Flexible Schedule. You're on call, but not often.
- Can benefit from other people's money more than any other class.
- No benefits unless you pay for them.
- Risk can be very mitigated depending on how your secure your investment.
- Simplified taxes. Pays capital gains, and still has access to deductions. (LOWEST TAXES)
- You're in charge. - You make incredibly difficult decisions on both a macro and micro level.
- You're income becomes passive. You don't need to exchange time for it. - You have to work for a very long time to amass the capital to do this effectively.
- Income potential is completely limitless.
In conclusion, while most of us are taught in school that we should obtain high paying jobs, and find security, the real money and freedom exist for those who strive towards the Big Business, and Investor classes, which truly can be achieved by anyone with enough determination and desire. If you learned anything cool, or enjoyed the article, please subscribe above or leave me a comment! Follow Us! Facebook: https://www.facebook.com/DWinvestors19
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