The Choice I Made When I Was Homeless
When my wife Kim and I were homeless for almost three weeks in 1985, we could easily have found jobs as employees, but we had made a choice. We chose to be rich — rich but homeless.
That sounds contradictory, I know.
My point is, we chose to reside on the right side of the CASHFLOW Quadrant.
If you’re not familiar, employees (E) and self-employed workers (S), such as contractors, reside on the left side of the quadrant. They only make money while they’re working on the clock.
On the right side however, business owners (B) and investors (I) don’t depend on their active work for cash flow.
Our plan was financial freedom, and we knew it was only to be found through the B-I side of the quadrant. To become B’s, we knew we had to become financially literate and build businesses so we could become investors.
Kim and I knew that building a business was not the easy path, but we also knew that we could do it. We chose to build an education company which eventually generated the funds that allowed us to invest in real estate. It was the passive income generated from our real estate that allowed us to become financially free.
There is so much advice out there when you’re starting your business, below is my advice to you…
Mistakes Are Opportunities
Have you ever watched a baby learning to walk? The baby stands, wobbles then takes a step. Oftentimes the baby falls. And cries.
Soon the baby is at it again, getting up from the floor, standing, wobbling, falling again, and, quite likely, crying again, too. The baby repeats the process until one day he or she walks, then runs, rides a bicycle, drives a car, and leaves home.
This is the way God designed us to learn. Humans learn by making mistakes. If the baby were punished each time he or she fell, the baby would crawl for the rest of its life. The baby would never leave home.
In school, students learn by lecture, reading, and studying and then take a test. Let’s say there are 10 questions on the test and the student makes three mistakes. The teacher awards a grade of 70%, and the class moves on to the next lesson.
The school system discards the most important part of the test, the mistakes. Rather than learn from their mistakes, students are punished for making them. Many students leave school feeling stupid (certainly not smart!) and fearful of mistakes, less self-confident about their ability to learn.
I’ve learned that mistakes — if acknowledged and evaluated and used as a tool to make better decisions in the future — are invaluable. A little fear can be a healthy thing, but we shouldn’t live in fear of making mistakes. Mistakes are good things if we find the lesson in every failure.
Rich dad had tremendous respect for mistakes. He often said, “Mistakes are God’s way of talking to you.
Mistakes are saying, ‘Wake up. Pay attention. There’s something you need to know.’”
Learn How to Take Risks
Not too long ago, I did a radio interview where the host called me a risk-taker. I of course defended my reputation and replied, “In today’s rapidly changing world, the people who are not taking risks are the risk-takers. People who are not taking risks are falling behind.”
When Kim and I first started our path to financial freedom, we took a lot of risks. We left our stable, safe jobs to start a company that had no guarantee of success. We chose to pay ourselves and invest before paying our bills. We gave up the steady path and took a chance on a new one because we understood that it was the only way to achieve our goals.
Success doesn’t happen without some healthy risk. I’ve never met a financially independent person who says, “I regret taking that risk.”
Sure, we made some mistakes along the way that made our journey a lot harder. But I wouldn’t trade those mistakes for anything, because they taught us valuable lessons that helped us move forward.
Learn How Taxes Make You Rich
Whenever I say, “I make millions and pay very little taxes — legally,” most people’s hearts go into cardiac arrest and their minds slam shut.
Most people earn money, pay taxes through withholding, and spend what little is left over. They don’t understand that the rich do it differently. They earn money, spend it, and then pay taxes. The government gets less that way, and it’s legal.
As Tom Wheelwright, my advisor on taxes always says, “The tax rules are primarily incentives, government guidelines on how to be a partner with the government, doing what the government wants and needs done.”
That is why tax laws throughout the world favor entrepreneurs and big businesses.
Simply put, the tax code punishes employees and specialists like doctors, lawyers, and accountants but it rewards business owners and investors.
Which Entity Is Right for You?
Now that you know there are tax loopholes for businesses, you can take advantage of these by learning which business entities are available and what the advantages and disadvantages are of each.
Here are six ways you can organize your business:
#1 C Corporation – The C corporation, named for subchapter C of the federal tax code, is also known as a regular corporation. It offers all the legal protection just mentioned but is taxed as a separate entity. In general, income tax rates for a corporation are lower than rates for individuals. After the C corporation deducts business expenses from its income, tax is paid on the corporation’s profits. The owner/shareholder in turn pays tax on any money received from the corporation, usually in the form of a salary or bonus, and the corporation can deduct these payments as expenses on its tax return.
#2 S Corporation – S corporations offer the same legal protections as C corporations but don’t pay corporate taxes. Instead, shareholders report the company’s income and losses on their individual tax returns. The tax may be higher at the individual level than it would have been at the C corporate level, but because the S corporation itself pays no taxes, the income is only taxed once, not twice as it can be with the C corporation.
#3 Limited Liability Company (LLC) – An LLC gives its shareholders, or members, all the legal protection that a corporation offers, but an LLC may elect how it is to be taxed, whether as a corporation or as a partnership. This is called the “check the box” election. If the LLC elects to be taxed as a partnership, it means that profits earned by the LLC are passed through to the members, who report them on their individual tax returns.
#4 General Partnership – A partnership is two or more people co-owning a business for profit. The partners agree to establish and run the business, sharing in profits, assuming responsibility for all losses and liabilities, and paying all taxes, which are paid at the individual rate.
#5 Limited Partnership (LP) – A limited partnership has both general partners and limited (or silent) partners. When it comes to taxes, general partners and limited partners are treated the same way. Any profits from the business go directly to all the partners, who report their share of the partnership net income on their individual tax returns.
#6 Sole Proprietorship – In a Sole Proprietorship, the owner and the business are the same, enjoying all the benefits but assuming all the debts and tax responsibilities. Only one person is required to form a sole proprietorship, and since there is legally no difference between the owner and the business, all income generated by the business is regarded as personal income. The owner reports all business income and losses on a personal tax return (Schedule C) and is allowed to deduct business expenses.
Consult your legal and tax advisors about what entity may be most appropriate for you and your intended business, whether it is real estate, a purchased business, or a start-up.
Learn How to Sell
Rich dad often said, “sales equals income.” If you want more income, learn to sell. Entrepreneurs must be able to sell to their customers, their employees, and their investors. If the entrepreneur cannot sell, the business struggles financially.
The ability to sell is essential for entrepreneurs. The reason most businesses fail is that the entrepreneur lacks adequate sales skills. In 1974, IBM and Xerox had the best sales training. I was hired by Xerox and was sent to Leesburg, Virginia for intensive sales training. It took me four years of training to go from last place to first in sales.
I never did well in English in school because I couldn’t write. I still don’t write well. Yet, as stated in Rich Dad Poor Dad, I’m not a “best-writing” author. I am a best-selling author.
When entrepreneurs learn how to sell in the S quadrant, grow businesses in the B quadrant, and raise capital in the I quadrant, they enter a world few people will ever know. If you are serious about becoming an entrepreneur, then take sales training, and search for the systems that can expand your business.
Play it smart,
Editor, Rich Dad Poor Dad Daily