Cashflow Quadrant, by Robert Kiyosaki

Cashflow QuadrantRobert Toru Kiyosaki is a self-help author, motivational speaker and investor who is best known for his Rich Dad Poor Dad series of books and personal development resources. As a popular advocate of financial literacy in today’s children and youth, Robert Kiyosaki has campaigned for the teaching of finance, business and investing to children in schools around the world.

Robert Kiyosaki’s teachings emphasise on what he calls ‘financial education’. His books and resources talk about the idea of generating passive income through investment opportunities such as real estate (from which rental income can be earned), financial stocks and businesses (from which regular dividends can be earned) or fixed income and bonds (from which regular coupons can be earned). The idea is for one’s self to be financially independent through such investments alone without having the need to work for a monthly salary in a job.

Robert Kiyosaki defines the term ‘assets’ as things that generate cash inflow (e.g. dividends from stocks, rental income from real estate, etc). He defines the term ‘liabilities’ as things that consume cash (e.g. buying a house, driving a car, entertainment, etc). Robert Kiyosaki proclaims that leverage is important in becoming rich, although there are risks that come with it, which need to be managed very carefully.

The core concept of Robert Kiyosaki’s most popular book, Rich Dad Poor Dad is the comparison of his two fathers. His poor dad is his actual biological father, who is highly educated and is a superintendent, but is always struggling financially. His poor dad always believes that he is right, and that his journey in life is the same as everyone else around him, so it must be just fine. His rich dad, who is his best friend’s father, is a high school dropout, but a very successful businessman. He invests the earnings from his business into other income-producing investments such as real estate. Robert Kiyosaki uses the Rich Dad Poor Dad story to illustrate his view that majority of people in this world are stuck in the rat race, and rely solely on the monthly pay-check for their wellbeing. Yet, there are some people who are financially intelligent, and build a solid base of income-producing assets, which always provide a higher income than their traditional job. Robert Kiyosaki explains his concept and experiences through the Cashflow Quadrant.

What is Rich Dad’s Cashflow Quadrant?

Throughout his personal development resources, Robert Kiyosaki refers to the Cashflow Quadrant, a conceptual tool that he developed to categorise the four main methods in which income is earned. The Cashflow Quadrant involves four groupings, split with two lines, a vertical line and a horizontal line. In each of the four groups, there is a letter representing a way in which an individual may earn his or her income. The letters are as follows:

E – Employee (Top Left of the Cashflow Quadrant)

This refers to the idea of working for someone else. These are the school teachers, the office administration staff, the factory workers, the bus drivers, the supermarket staff, the hospital nurses, the restaurant waiters, etc. Majority of people in this world fall into this category. They rely on a monthly salary, which is generally calculated by multiplying the number of hours worked in the month, by the hourly wage rate. The reason why most people fall into this category is due to the perceived safety, security and stability in income that this category offers.

S – Self-Employed/Small Business Owner (Bottom Left of the Cashflow Quadrant)

This is where a person owns his/her own job and is his/her own boss. Examples of such persons are doctors, consultants, opticians, independent accountants, contractors, etc. They still earn a monthly salary or fee, which is similar to the salary of an employee. It is calculated by multiplying the number of hours worked/engaged on a task, by the hourly wage/fee rate.

B – Business Owner (Top Right of the Cashflow Quadrant)

This is where a person owns a business to make money. The business owner’s presence is not required in the business; responsibilities are delegated to other staff members who work as employees in the business, although the business owner may be required to oversee some aspects of the business. The business owner then earns a profit from the business (after all costs and salary payments are deducted from the revenues of the business). When a business is successful, the profit is much larger than the salary that would be earned by employees or self-employed individuals.

I – Investor (Bottom Right of the Cashflow Quadrant)

This is where a person is investing money in order to receive a larger income in the future. Being an investor means there is no time input required in the underlying investment, and the investor is often a dormant or sleeping partner. But the outcome for the investor is a lot of income. And over time, this income keeps growing and growing.

So, which quadrant are you in? For those on the left side of the Cashflow Quadrant (E and S), Robert Kiyosaki says that they may never obtain true wealth. Conversely, those on the right side of the Cashflow Quadrant (B and I) are following the road to true wealth. Robert Kiyosaki also classifies the four main ‘asset’ classes as means of gaining wealth:

  • Businesses – These generate monthly cash flow, and do not require the owner’s physical presence in them.
  • Real Estate – These generate monthly cash flow in the form of rent.
  • Paper Assets – These are investments such as stocks, bonds, hedge funds, etc.
  • Commodities – These are gold, silver, iron ore, or copper that are used to hedge from the government’s mismanagement or printing of the currency.

Cashflow Quadrant

Getting Things Done, by David Allen – Book Summary

Getting Things DoneGetting Things Done is a book that explains a well-formulated method for time management – the book partly provides tools and techniques, and partly explains the psychology behind it. Its author, David Allen says that mastering your time enables you to live in the present moment. The book is divided into 3 parts:

Part 1 (The Art of Getting Things Done) provides an outline for getting control of your life through the five stages of mastering workflow: collection, processing, organizing, reviewing and doing.

Part 2 (Practicing Stress-Free Productivity), which is well over half the book, repeats a lot of what is said in Part 1, but provides much more detail on the application of Allen’s methodology.

Part 3 (The Power of the Key Principles) explains why Allen’s methods work and the benefits to be gained from using his approach.

The entire process, including inputs, processing/thinking, and outputs (actions and action lists), is conveniently summarised in a flowchart provided in Getting Things Done. Allen’s philosophy is that to be one’s most productive self, one must be able to think clearly. In order to think clearly, one must have completely downloaded from one’s short-term memory or RAM (like computer RAM) all the ‘open loops’ – unfulfilled commitments one has made to oneself. This frees the mind to do naturally what it does best – think about things rather than of things. Allen gives pointers for using one’s critical thinking skills, including three methods for making decisions about what actions to take.

Once one has everything off his mind and written down, in paper or electronically, one has to decide, “What’s the next action?” This is the critical question! Once this is decided, the action must be completed or tracked in a trusted system, such as a Personal Digital Assistant (PDA).

Allen also has a two-minute rule, which states that as one goes through their inbox and determines next actions, any next action that can be completed in two minutes or less should be completed immediately. In this way, a lot of items are touched only once and are forever cleared from their ‘psychic RAM’.

Allen outlines a process for getting RAM cleared in the first place and then for keeping it clear on a daily basis, as new things come into one’s inbox. The “What’s the next action?” question must be asked on the front-end, when the item from the inbox is first reviewed.

Applying Allen’s system is put forth as a way for today’s knowledge worker to have a competitive edge in the new millennium. Allen’s system is as applicable to one’s home environment and projects as it is to one’s work. He also claims it can help procrastinators.

Below is the management process described in Getting Things Done. Click anywhere on the image to expand it, and implement this simple-yet-effective system to develop your time management and organisational skills.

Getting Things Done Process

More information can be found on the Official Website of David Allen and Getting Things Done and Wikisummaries.

Seed Enterprise Investment Scheme (SEIS) & Enterprise Investment Scheme (EIS)

Seed Enterprise Investment Scheme & Enterprise Investment SchemeIntroduction to SEIS

The Seed Enterprise Investment Scheme, also known as SEIS, offers great tax efficient benefits to individuals while also encouraging investing in small and early stage start-up businesses in the UK. The SEIS was designed to boost economic growth in the UK by promoting new enterprise and entrepreneurship.

Important Points about SEIS

  • SEIS investors can input £100,000 in a single tax year, which can be spread over a number of companies. Any one company can raise no more than £150,000 in total via SEIS investment.
  • Investors cannot control the company receiving their capital and cannot have more than a 30% stake in the company in which they invest.
  • Investors can receive up to 50% tax relief in the tax year the investment is made, regardless of their marginal rate of income tax.
  • The business company must be a UK company and have a permanent establishment in the UK.
  • In the 2014-15 tax year, tax payers can roll a chargeable gain on the disposal of assets in the tax year in to shares qualifying for SEIS income tax relief, with a full capital gains tax exemption.
  • The company must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group.
  • The company’s trade must be no more than two years old.
  • The company must have assets of less than £200,000.
  • The company has to trade in an approved sector – generally not in finance or investment, for example, a property company cannot raise capital as SEIS.

Introduction to EIS

The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs designed to encourage investments in small companies carrying on a qualifying trade in the United Kingdom. This scheme follows on from the SEIS (when a business is looking to raise further capital once the seed investment has been utilized already). Investment in companies that are not listed on a stock exchange often carries a high risk. The tax relief is intended to offer some compensation for that risk. The EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies.

Important Points about EIS

  • An investor with no more than a 30% interest in the company can reduce his/her income tax liability by an amount equal to 30% of the share subscription. The maximum subscription per investor is currently £1,000,000 per annum, yielding a potential reduction in tax liability of £300,000 per annum (assuming the investor has sufficient income tax liability).
  • Investors cannot control the company receiving their capital and cannot have more than a 30% stake in the company in which they invest.
  • The company must not have assets greater than £15 million.
  • Deferral of gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it. This relief is limited to the amount being invested into the EIS and can be claimed by investors whose interest in the company exceeds 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available. Note that deferral of gains is no longer available by investing in VCTs.
  • No capital gains tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
  • If EIS shares are disposed of at any time at a loss, such loss can be set against the investor’s capital gains or his income in the year of disposal.
  • EIS Investments are exempt from inheritance tax after two years of holding such investment subject to the Company being allowable under Business Property Relief (BPR).
  • All capital employed must be actively engaged in the company within 24 months.

Useful Links

You can find more important information about SEIS and EIS on the HM Revenues & Customs – Investment Schemes page.

What is Diversification?

DiversificationDiversification is the strategy of investing in assets that are uncorrelated to one another. This simply means choosing assets whose values do not move in the same direction – up or down. Diversification allows investors to minimise their potential losses by not putting all their eggs into one basket. However, does diversification mean that investors should put each egg into a different basket and have hundreds of baskets to look after? Do you believe that you are over-diversified? There are three signs of over-diversification:

  1. Expenses – Regardless of whether an investor is diversified across various assets, such as real estate, stocks, bonds or alternative investments (such as art), expenses will likely rise simply based on the actual number of investments. Have you calculated your fees, charges and costs?
  2. Balancing – Having a diversified portfolio may mean that you have to be more involved in and/or knowledgeable about your investment choices. Are you aware of your investments to an in-depth level?
  3. Underperformance – Great investment returns require choosing the right investments at the correct time and having the courage to put a large portion of your investable funds toward them. Are you confident about being able to do this?

At the end of the day, having a diversified portfolio, perhaps one managed by a professional, may make sense for many people. However, beware, this approach is not without specific risks, such as higher overall costs, more accounting for and tracking of investments, and most importantly, potential risk of significant underperformance.