The Biggest Flaw
Of all the flaws of pension reform, rich dad felt the biggest flaw of all was that it forced people who were not investors to invest.
To rich dad, the assumption that a change in the law would suddenly turn people into overnight expert investors was an oversight of epic proportions.
He said, “How can you take someone who has been programmed from birth to be a job-seeking employee to suddenly become a risk-taking investor? A security-seeking person is not the same person as a risk-taking investor.”
To rich dad, this assumption was the biggest flaw of all and would ultimately lead to the biggest stock-market crash in history.
Those of you who have followed my letters are, by now, very familiar with the following diagram of the CASHFLOW® Quadrant.
For those not familiar with the CASHFLOW Quadrant, I will briefly explain what the four letters stand for.
E is for Employee
S is for Self-Employed or Specialist
B is for Big Business
I is for Investor
These are the four ways you earn money, or the four types of people. Each quadrant represents a different way of thinking about money and financial security.
Knowing the Flaws
Rich dad said, “The biggest flaw with ERISA is that the law assumes that people on the left side of the CASHFLOW® Quadrant can easily switch to becoming people on the right side. People in each quadrant are different—very, very different. It’s absurd to assume that someone in the E quadrant can become an investor in the I quadrant just because a law mandates the change. You can change laws with the stroke of a pen, but you cannot change people with the stroke of a pen.”
Simply put, ERISA and subsequent amendments to ERISA mandated the following:
They required millions of employees to become professional investors and, as we have seen, did so without developing an educational system to support this small but monumental change.
Our public-school system trains people primarily for the E or S quadrants, which is why most people are either E’s or S’s.
My poor dad, the head of education, constantly said, “Go to school and get good grades so you can get a safe, secure job.” In other words, my poor dad was advising me to find safe sanctuary in the E quadrant.
My mom, knowing that I wanted to become rich, often said, “I know you want to become rich, so go to medical school and become a doctor.” She was advising me to find sanctuary in the S or self-employed quadrant.
My response to her was, “There is only one problem with that idea, Mom. I’d have to be smart to be a doctor, and you know what my grades are.”
The E and S Quadrants
The S quadrant could stand for the smart quadrant since that is where professionals like doctors, lawyers, accountants, and engineers often reside, although any profession or intelligence level could reside in any of the four quadrants.
S can also stand for specialists, people with some unique trade or skill, and it also stands for the millions of small independent business owners.
My rich dad trained his son, Mike, and me to be people who operate in the B and I quadrants. For those of you who read my previous books, you may recall that rich dad had his son and me do almost every job possible inside his businesses.
He was training us to know how many different types of jobs it takes to keep a business running. He also played Monopoly® with us by the hour, teaching us to think like investors. One of the primary reasons I have had a normal job for only four years is simply because rich dad trained me to operate on the right side of the CASHFLOW Quadrant, not the left.
When I was still a boy, rich dad said, “People gravitate to the different quadrants because people are different. A person who seeks the E quadrant wants security.
That is why most people in the E quadrant, regardless if they are the president or the janitor of the company, will often say the same thing, which is, ‘I’m looking for a safe, secure job, a steady paycheck, and excellent benefits.’
Safety and security are paramount to people in the E quadrant. The world of the I quadrant, the investor quadrant, is not a world perceived as a world of safety and security. It can be, but not without proper training.”
Again, there is a vast difference between the word’s security and freedom. Rich dad pointed out that people in the E and S quadrants often want security—security from a job for people in the E quadrant, and security of doing it on your own and not depending upon other people for those in the S quadrant.
People in the B and I quadrants want freedom, so they focus on assets that work for them. I can hear the howls of protest from the people in the S quadrant, generally people who want to do their own thing. But before you protest, consider that while most people in the S quadrant are free to be doing their own thing, the problem is they still have to be doing it, even if they love doing it.
A person who is truly in the B or I quadrants is free to do nothing and still get paid, and that is the difference in freedoms.
The Biggest Flaw of All
So why did rich dad feel that forcing people from the E quadrant into the I quadrant was the biggest flaw of all? The answer again is because they have completely different personalities.
People in the E and S quadrants work for money.
People in the B and I quadrants work to build or acquire assets.
This may seem like a small difference on paper, but after a person retires, the differences are substantial. As a professional investor with years of training, learning to “show the money” on a monthly basis from my investments is not the easiest thing to do, but that is what ERISA has asked everybody to do.
Once a person with a DC plan retires, they will be shoved out of the safe sanctuary of their job. For many, they will have to face the real world for the first time in their lives—the real-world rich dad faced at 13, that I faced at 32, that my dad faced at 53, and that the Enron employee on the front page of USA TODAY years ago, faced at 58.
Editor, Rich Dad Poor Dad Daily