CASHFLOW QUADRANT
Understanding The Pathway To Financial Success

Cashflow Quadrant as a concept for achieving success is the main concept behind Robert Kiyosaki’s book by the same name. And it’s a powerful one that has guided many people’s entrepreneurial paths in seeking financial freedom.

There are people who work excessively long hours with nothing to show for it, or struggle to have enough left to save after all the bills are paid.

Finance guru Robert Kiyosaki, author of the viral book Rich Dad Poor Dad, explains how anyone can move to the other side of the Cashflow Quadrant and flourish with financial independence as a business owner or investor.

What is the Cashflow Quadrant?

In the book divided into four parts, each quadrant represents a different way to generate income.

The majority of Kiyosaki’s book teaches the unique skills and mindsets required to succeed on this path.

Some people earn money in only one quadrant, while some people earn money in all four.

But the B & I quadrants you will read about shortly are the primary paths to financial freedom. The majority of Kiyosaki’s book teaches the unique skills and mindsets required to succeed on this path.

The 4 Cashflow Quadrants

The Cashflow Quadrant is a way to categorize people based on where their money comes from. It is divided into four parts: E,S B, or I:

• E stands for Employee, someone who earns money by holding a job.
• S is Self-employed, people earning money working for themselves.
• B stands for Businessman, meaning someone who owns a company or system that generates money for them.
• I is an Investor, someone who earns money from their various investments.

We all fall within at least one of these quadrants, and each quadrant’s members share common characteristics and have different strengths and weaknesses.

You can find financial freedom in any of the four quadrants - and you can be rich or poor in any of them - but the particular skills needed in quadrant B or I will help you reach financial freedom more quickly.

The Cashflow Quadrant provides insights as to what it takes to go from being poor to being rich. It explains how the four different ways of building wealth function.

The first two, which are employee (E) and self-employed (S), are on the left ("poor") side of the Cashflow Quadrant. This is because each involves trading one’s time and efforts for money.

Whereas the second two, which are businessman (B) and investor (I) are on the right (rich) side of the quadrant. B and I enable you to leverage people and money to increase your wealth, even while you are busy attending to unrelated concerns, or relaxing.

MORE IN-DEPTH EXPLANATION OF THE CASHFLOW QUADRANT

1. The Employee Quadrant (E)

This is the quadrant in which Kiyosaki believes that it is hard to get rich given that your income is derived from a salary.

No matter how hard you work, your income will always be capped. This quadrant is the typical 9 to 5 job, it is basically what people have been trained to do.

People function following a timeline that has been fixed for them: you grow up, go to college, earn a degree, get a job and hopefully save up some money in your retirement plan. This is often in the hopes that you'd get to retire by age 65.

In this case, the Employee values security above all else. Individuals in this category hate the feeling of fear that comes with economic uncertainty.

The Employee could be a janitor or a CEO. It is not what they do that’s the defining factor, but the fact that they seek the security of a long-term contractual agreement.

The Employee tends to focus on income, not on assets and works within someone else’s system to earn that income.

Most individuals live in this area. You work for a company and trade your time for money. If you want to earn more money, you must work more hours. Another option is to go work for another company that pays better.

With this position in the quadrant there is no passive income. If you don't work, you don't make any money.

2. The Self-employed Quadrant (S)

Many employees get tired of their lack of control and choose to work for themselves. The self-employed still swap time for pay, but they own their job.

The S quadrant includes dentists, barbers, lawyers, handymen and many other trade workers. Many self-employed people earn very large incomes, but like the employee, when they stop working, so does their income.

Self-employed people do have a lot more control than an employee, but that also means they have more responsibility. As a result, success usually means working harder and working longer. Over the long run this can lead to burnout and fatigue.

Only slightly better off than employees, the self-employed in an economic downturn may struggle to take on new projects and their time might be filled with trying to find new job leads, rather than with making money.

While they may have more time to devote to their own projects as they aren't under constant supervision from a company, the self-employed still pay high taxes, and they are at the mercy of their clientele.

3. The Businessman Quadrant (B)

Being a business owner is different than just being self-employed, at least in how Kiyosaki defines it for the cashflow quadrant.

A business owner earns leveraged income. The income does not come from the sole efforts of the owner but from people associated with the business center or unit.

This is most easily seen in network marketing but in certain cases can also be accomplished in operations such as an insurance agency or even some real estate brokerages - basically, anything that allows you to earn off the efforts of others.

This is where you can develop “cashflow” or passive income that is not tied to your individual daily efforts but from yours and the efforts of associates.

People in this section of the cashflow quadrant typically develop passive income streams and have options in how they spend their life.

This third quadrant is also comprised of those who have taken their skills as self-employed people and transitioned into running their own enterprises.

Business owners have distinct advantages. They can control production, hire employees, and find creative ways to pay taxes, such as writing off business expenses and taking advantage of changes in the economy.

A key difference between an S and a B is that a successful B can leave the business for a year and find it still running profitably. Thus, the B owns or controls a system that makes money.

4. The Investor Quadrant (I)

The investor quadrant is the status that people most closely associate with wealth.

This is where you no longer have to rely on your efforts or even the efforts of others. Your money is working for you, and you are just living off the interest or payouts. Most people cannot start in this quadrant but can work their way into it.

The Investor makes money with money. The I quadrant is the playground of the rich, where money is converted into wealth. In the I quadrant, you don't work for money, money works for you.

While the I quadrant is about investments that generate income on an ongoing basis during your working years and beyond, some forms of investment, such as getting an education or saving money in a retirement plan, do not really belong in this category.

Ideally, this is about putting some money in a structure, where one can make even more money quickly and put it to work again - typically refraining from "parking it safely" too early.

ASSETS AND LIABILITIES REVISITED

Financial education as seen by Robert Kiyosaki defies convention.

For example, being financially intelligent means recognizing that a mortgage is not an asset; it’s a liability, a debt that has to be serviced. Until you've paid it in full, your mortgage is an asset for the bank, not for you.

Even if you pay off your mortgage, your house is still not an asset free and clear. It requires costly maintenance, property taxes that can be exorbitant, etc. Contrary to generally accepted accounting principles, Kiyosaki professes that property is only an asset if it generates income through positive cash flow.

Your savings are an asset, but any debt is a liability. Most people believe that gold is the ultimate asset, but as Kiyosaki’s Rich Dad mentor put it, even gold is only an asset as long as you can buy it for less than you sell it (i.e, not lose money on it), thereby generating positive cashflow.

The ideal path to financial independence is to move from quadrant E (employee) or S (self-employed) into quadrant B (businessman), and from there into quadrant I (investor).

A financially successful B will have the skills, time, and money to support the ups and downs of settling into I.

SEVEN STEPS TO FINANCIAL SUCCESS

Kiyosaki emphasizes the importance of starting your transition to financial success with baby steps while educating yourself as much as you can: “You’ve got to walk before you can run.”

STEP 1: Take Care of Your Business

Start by figuring out your personal financial statement. Write down realistic goals of where you want to be, financially, in five years, and a smaller short-term goal of where you want to be in one year.

STEP 2: Control Your Income Flow

Look at your Step 1 financial statement. Which part of the Cashflow Quadrant does your income come from today?

Which part of the Cashflow Quadrant do you want most of it to come from in five years? Develop your cash-flow management plan accordingly.

STEP 3: Continue Learning

Regularly (or even obsessively) do one or more of these things:

• Read about business (articles, books, etc.)
• Listen to and/or watch financial info (podcasts, TV, YouTube videos, etc.)
• Subscribe to financial websites, magazines, and newsletters (join us)
• Attend seminars on investing and financial education

STEP 4: Learn to Handle Problems

Financially uneducated investors look for “experts” to tell them what to invest in, whereas educated investors become experts at solving one particular type of problem.

In fact, there is a saying that a successful business consists in one that solves problems for people.

STEP 5: Seek Mentorship

Kiyosaki’s Rich Dad mentor taught him to focus on passive income and spend his time acquiring assets that provide passive or long-term residual income.

Remember, most of the people giving financial advice are themselves stuck in the E or S Cashflow Quadrants, so choose your mentors carefully. Look for people in the Business and Investment quadrants.

STEP 6: Accept Disappointment

Expect to be disappointed and have a mentor standing by to help when you have a financial emergency.

Be kind to yourself—you won’t learn anything new if you punish yourself for every disappointment.

STEP 7: Have Faith in Yourself

Conquer your doubts and fears, and keep learning.

Every time you learn something new, your faith is renewed, and you continue to make progress in your financial journey.

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