The Cashflow Quadrant™
The Cashflow Quadrant™ is Robert Kiyosaki’s second book and I believe his most important. To me it is essential reading for anyone building a business. Big statement I know!
I have written about The Cashflow Quadrant before on this blog but it was way back when I first started blogging and did not have many visitors.
This diagram represents the Cashflow Quadrant
The letters in each quadrant represent:
E for employee – An employee has a job and often needs safety and security. It is what school prepares us for – study hard and get a good job.
S for self-employed – A self employed person wants to do their own thing and be their own boss.
B for business owner – B are true business owners who unlike the S surrounds themselves with smart people.
I for investor – I are the Investors who make money with money. They often do not work as their money works for them.
“The Cashflow Quadrant explains why some people work less, earn more, pay less in taxes and feel more financially secure than others. It is simply a matter of knowing which quadrant to work from and when.” Robert Kiyosaki.
Very often people can be in more than one quadrant at once. For example you do have a job and at the same time are building a business; or those that are moving to the I quadrant over time while working in one of the other quadrants. You may be working in a combination of quadrants.
Lets have look at each quadrant in more depth.
Most of us grew up hearing advice that we should study hard and get a good job. In The Cashflow Quadrant™ Robert Kiyosaki describes the E (employee) as someone who seeks security and benefits. He says for employees the idea of security is often more important than money. (Robert wrote this book in 1998 and clearly job security has changed since then).
It is common for people to work hard to try and increase their salaries. They often study to get some extra qualifications also with a goal of increased income. They count on their retirement fund as the nest egg that will provide them with a living when they no longer can pick up a paycheck.
Many people consider having a job as the only way to make money. The GFC seemed to come from nowhere for the majority of people. It shook the core belief of security for employees as jobs were lost around the globe. Retirement funds also plummeted putting in question the whole system.
The Cashflow Quadrant™ was written in 1998 and since that time I have heard Robert Kiyosaki predict the events that eventually did happen at the end of 2008.
The concept of a job for life has gone. Employees need to think of other ways to build their nest egg and have security.
S – Self –employed
Robert calls them the “do it yourselfers”. These people often do not like their income to be dependent on other people. They like to take control of their finances by doing it all on their own. This group of people is very wide and includes professionals such as accountants, doctors and lawyers as well as tradespeople, hairdressers and many others.
They often think no one can do things better than them. They usually work very hard and are often perfectionists.
In my experience, having been one and knowing many, I think it is perhaps the most difficult quadrant. Self employed people do not get sick pay, holiday pay or the other benefits that go with being an employee. They often work longer hours and take few holidays. It is a very difficult way to get ahead and they often kid themselves they are building a business.
Advice for E and S
It is possible for anyone working as an E or S to get ahead if they build a business or investments alongside their E or S income. They must be building a passive income.
If you are an employee now stay committed to building that business so that you can eventually quit your job and build your business full time.
As many of the readers of this blog fall into the S category like I currently do. I ask you to think about what you can outsource, how can you leverage your time?
B – Business owner
Robert describes a major characteristic of the “B” as someone who likes to delegate and has an attitude of “why do it yourself when you can hire someone to do it for you, and they can do it better?” (I love that thinking).
To be a “B” requires both the technical skills of business and the essence of leadership.
Many people who start a business end up with an “S” type business and not a “B”. The major difference between a true B and an S is that a B can leave their business for a year or more and return to find their business more profitable and running better than when they left it. In an S business this would not happen and most S’s cannot leave for very long at all. The main difference is because an S owns a job and a B owns a system and has hired competent people to operate the system.
In my years as an accountant and financial planner I worked with many “S” mentality business people. After I first studied with Robert Kiyosaki I learned to coach my clients in a different manner. This is mainly because I personally had learned so much. The financial planning practice I was an owner in was anything but a true Business and relied heavily on the owners skills. We transformed it to system driven business and were able to take long vacations for the first time.
I – Investor
Investors make money with money. They can choose not to work because their money is working for them. You can make your money in one (or more) of the other three quadrants, however, if you want to ultimately be wealthy you need to invest in the “I” quadrant.
People in the “I” quadrant focus on investments that generate income on an ongoing basis. Examples of this are:
• Rent from a property as long as the income is greater than the expenses
• Interest from savings (it still happens in Australia)
• Dividends from stocks and bonds
People in this quadrant focus on having their money work for them.
Advice for B and I
If you are in business ask yourself can your business operate without you? Can you leave your business for an extended time without detrimental effects on the bottom line? Is your business totally run by systems?
If you are not an experienced Investor it is critical to educate yourself before commencing. There are many advisors, courses and books available on every type of investing. Seek advice but never hand over responsibility.
I look forward to reading your comments on The Cashflow Quadrant™ . Which quadrant are you currently working in?
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PS : How to earn $1200 a day the easy way