Why the Rich Are Getting Richer

1. Financial Education is the Real Difference Between Rich and Poor

Simply put, the people following this fairytale are falling into the chasm between rich and poor.

The traditional fairytale is over. The old advice of "Go to school, get a job, save money, get out of debt, and invest for the long-term in the stock market" is obsolete in the Information Age. This advice, rooted in the Industrial Age, no longer guarantees financial security or wealth, and following it is a primary reason for the growing gap between the rich and everyone else. Traditional schooling teaches people to be employees (E quadrant) or self-employed specialists (S quadrant), focusing on working for money, which is the highest-taxed income.

Financial literacy is crucial. Unlike traditional education which focuses on academic or professional skills, financial education teaches the language and rules of money. It's not about economics or balancing a checkbook; it's about understanding income types, assets, liabilities, debt, and taxes. Without this knowledge, people remain financially illiterate, making poor decisions, living in fear, and often blaming others for their money problems.

The banker's report card. Your financial statement, not your school report card, is what matters in the real world of money. Financially educated individuals understand their financial statement and how to improve it by acquiring income-generating assets. This fundamental understanding is often missing in traditional education, leaving people unprepared for the complexities of the modern financial world.

2. Understand the Direction of Cash Flow: Assets vs. Liabilities

Assets put money in your pocket whether you work or not. Liabilities take money from your pocket even if they go up in value.

Cash flow is king. The most important concept in financial literacy is cash flow – the movement of money in and out of your pockets. Understanding the direction of cash flow is the key to distinguishing between an asset and a liability, regardless of what the item is called. This simple distinction is fundamental to building wealth.

The poor and middle class perspective. The poor often focus only on income and expenses, trying to cut costs. The middle class often mistakes liabilities for assets, believing their house or car is an asset because it might appreciate in value, even though it takes money out of their pocket monthly through mortgage payments, taxes, insurance, and maintenance. This misunderstanding keeps them trapped.

The rich focus on assets. The rich prioritize acquiring assets that generate passive income, putting money into their pockets whether they work or not. Examples include rental properties, businesses that operate without their direct labor, or investments that pay dividends. By focusing on building an asset column that generates cash flow, the rich increase their wealth and reduce their reliance on earned income.

3. Savers Are Losers in the Current Financial System

Today, savers are the biggest losers.

The end of the gold standard. The financial world fundamentally changed on August 15, 1971, when President Nixon took the U.S. dollar off the gold standard. This allowed governments to print fiat currency (valueless money backed only by government decree) without restraint. Since then, the value of printed money has steadily decreased due to inflation.

Interest rates punish savers. In an environment of rampant money printing, interest rates on savings accounts are kept low, often near or below zero in real terms (after accounting for inflation). This means the purchasing power of savings erodes over time. Saving money, once a path to security, now results in losing value.

Debt becomes attractive. While savers are penalized, low interest rates incentivize borrowing. For the financially educated, this means money (debt) is "on sale," making it cheaper to borrow and invest in assets that generate higher returns or cash flow. This dynamic further widens the gap between those who save and those who strategically use debt.

4. Debt Can Make You Richer, But It's Dangerous

Debt is money.

Good debt vs. bad debt. Debt is not inherently bad; its impact depends on how it is used. Bad debt is used to purchase liabilities that take money out of your pocket (like consumer goods or a personal residence). Good debt is used to acquire assets that put money into your pocket (like investment properties or businesses).

Using Other People's Money (OPM). The rich understand how to leverage debt (OPM) to acquire assets they couldn't afford with just their own money. This allows them to scale their investments faster. For example, borrowing to buy a rental property where tenants pay the mortgage and expenses is using good debt.

Debt is tax-free. Unlike income earned from a job, borrowed money is not taxed. This makes debt a more efficient source of capital for investment than using after-tax savings. However, debt is a "loaded gun" – it can amplify gains but also magnify losses if not managed wisely with financial education and experience.

5. Tax Laws Are Incentives That Favor the Rich

The tax code punishes those in the E and S quadrants. The tax code rewards those in the B and I quadrants.

Taxes are the biggest expense. For most people working for ordinary income (E and S quadrants), taxes are their largest outflow of money. The Current Tax Payment Act of 1943 made taxes mandatory deductions from employee paychecks, making it easy for the government to collect from workers.

Tax laws incentivize behavior. Tax laws are not just about collecting revenue; they are designed to incentivize citizens to do what the government wants, such as creating jobs, providing housing, or developing energy. These incentives are primarily directed towards those operating in the Business (B) and Investor (I) quadrants.

Legal tax avoidance. The rich pay less in taxes legally by operating in the B and I quadrants and utilizing the tax incentives provided for business and investment activities. This is tax avoidance (legal), not tax evasion (illegal). Understanding the tax code and having smart tax advisors is a key component of financial education for the rich.

6. Market Crashes Create Opportunities for the Prepared

If Wall Street has a 50%-off sale, the millionaire next door runs and hides.

Fear vs. opportunity. Most people, lacking financial education and operating from fear, panic and sell their investments during market crashes, locking in losses. They see crashes as disasters to be avoided or feared.

Shopping for bargains. The financially educated, particularly those in the I quadrant, view market crashes as opportunities to buy valuable assets at discounted prices. They prepare for crashes by having cash or access to capital ready to deploy when others are selling out of fear.

Buying low, selling high (eventually). While traders aim to buy low and sell high quickly (portfolio income), professional investors often buy assets low during a crash with the intention of holding them for cash flow (passive income) and long-term appreciation. The 2008 real estate crash, for example, allowed prepared investors to acquire properties at pennies on the dollar.

7. Phantom Income is the Invisible Wealth of the Rich

Phantom cash flow is the real income of the rich.

Income beyond the obvious. Real financial education reveals sources of "invisible" income that are not immediately apparent to the financially illiterate. This phantom income is a key reason the rich get richer, often without working harder or even selling assets.

Sources of phantom income:

• Tax-free debt: Borrowing money is tax-free, saving the time and taxes that would be required to earn and save the same amount.
• Appreciation: The increase in value of an asset is phantom income until it's realized, but it can often be accessed tax-free through refinancing (using debt).
• Amortization: When tenants or a business pay off the debt on an asset you own, the reduction in your liability is a form of phantom income.
• Depreciation: The tax deduction for the theoretical wear and tear on investment property is a significant source of phantom income, offsetting taxable income even if the property is increasing in value.

The power of leverage. Phantom income is often generated through the strategic use of debt and tax laws, allowing the rich to increase their net worth and cash flow in ways unavailable to those who only work for ordinary income. The Porsche example illustrates how an asset generating cash flow and phantom income can pay for a liability.

8. The CASHFLOW Quadrant Defines Different Financial Realities

The quadrant also tells the story of who pays the most—and least—in taxes.

Four ways to earn income. The CASHFLOW Quadrant categorizes people based on where their income comes from: E (Employee), S (Self-employed/Specialist), B (Big Business owner), and I (Investor). Each quadrant requires a different mindset, skillset, and set of rules, particularly regarding taxes.

Left side vs. Right side. The left side (E and S) primarily earns ordinary income, trading time for money, and pays the highest percentage of taxes. The right side (B and I) earns portfolio and passive income, leveraging systems, people, and capital, and pays the lowest percentage of taxes, often legally paying zero through incentives.

Transitioning quadrants. Moving from the left side to the right side requires more than just a job change; it demands a fundamental shift in mindset, skills, and financial education. While there are rich people in all quadrants, the wealthiest individuals typically reside in the I quadrant, mastering the rules of money and leveraging debt and taxes to their advantage.

9. Mistakes Are How You Learn and Get Smarter

Mistakes are god’s way of talking to you.

Learning by doing. Unlike traditional schooling where mistakes are often punished, the real world, especially in entrepreneurship and investing, teaches through trial and error. Mistakes provide invaluable feedback, highlighting what you don't know and where you need to improve.

Overcoming fear of failure. A major barrier to financial success is the fear of making mistakes, failing, or losing money. This fear, often ingrained by the traditional education system, keeps people from taking necessary risks and learning the practical lessons required to succeed in the B and I quadrants.

The entrepreneurial spirit. Entrepreneurs and successful investors embrace mistakes as part of the learning process. They understand that failure is not the opposite of success, but a stepping stone on the path to it. This resilience and willingness to learn from setbacks are crucial for navigating the challenges of building businesses and acquiring assets.

10. Job Security is Obsolete; You Need a Plan B

That fairytale is over.

The changing economy. Globalization, automation (robots and AI), and financialization are fundamentally changing the job market. High-paying jobs are moving overseas or being replaced by technology, making the concept of a secure job for life increasingly rare.

Risks to traditional retirement. Relying solely on traditional retirement plans like 401(k)s, pensions, or Social Security is risky in the current economic climate. These plans are vulnerable to market crashes, inflation, and government insolvency. The student loan crisis is another example of a failed Plan A, leaving millions burdened by inescapable debt with limited job prospects.

Develop entrepreneurial and investing skills. A Plan B is essential, and for Kiyosaki, this means developing the skills and mindset to operate in the B and I quadrants. This involves gaining financial education, learning to use debt and taxes, and acquiring income-generating assets, rather than solely depending on a job or traditional savings.

11. Real Education is Experiential and Requires Practice

Your education begins when you leave the class.

The Cone of Learning. Educational research shows that passive learning methods like reading and lectures result in low retention rates. The most effective learning occurs through active participation, simulation, and doing the real thing.

Learning by playing and doing. Kiyosaki's rich dad taught him financial lessons through games like Monopoly (simulation) and visiting real properties (doing the real thing). This hands-on, experiential approach made the concepts of assets, liabilities, cash flow, and investing tangible and memorable.

Practice is paramount. Becoming proficient in the B and I quadrants requires consistent practice, just like becoming a skilled athlete or musician. This involves analyzing deals, making offers, managing assets, and learning from real-world experiences and mistakes. Financial education is not just about acquiring knowledge; it's about applying it through deliberate practice.

12. Building a Strong Team of Advisors is Essential

The rich have smarter advisors than the poor and middle class.

Complexity requires expertise. Navigating the complexities of business, investing, tax laws, and legal structures in the B and I quadrants requires specialized knowledge. No single person can be an expert in everything.

Leveraging professional help. The rich surround themselves with a team of competent advisors, such as tax strategists (CPAs), attorneys, and experienced investors. These advisors help them make informed decisions, structure deals legally and efficiently, minimize taxes, and protect their assets.

Investing in advisors. While the poor and middle class may see advisors as an unnecessary expense or rely on salespeople for advice, the rich view their advisors as essential partners and investments that provide significant returns through expertise and strategic guidance. Choosing the right advisors, who operate and succeed in the B and I quadrants themselves, is critical.

Last updated: May 3, 2025