Popular personal finance author Robert Kiyosaki in 2014 gave away a free PDF copy of his world-renowned Cashflow Quadrant ebook. If you were lucky enough to download the book, congratulations! You now have a legal copy of one of the most popular books on personal finance.
The free download offer, unfortunately, was available for just a week but I was thrilled to have finally gotten my own ebook copy at no charge back then. The Cashflow Quadrant book has been my personal guide for several years now when it comes to goal setting and personal finance management. Ever since I learned the concept from Kiyosaki’s original Rich Dad, Poor Dad book, I have always planned on retiring early and to live on passive income for the rest of my life.
The Cashflow Quadrant book talks about four quadrants representing four (4) primary ways to make money. These quadrants are the following:
- E (Employee)
- S (Self-Employed)
- B (Business Owner)
- I (Investor)
Guided by the Cashflow Quadrant, my goal ever since has been to move from the left-side quadrants (E and S) to the right-side quadrants (B and I) in order to accumulate passive income and eventually become financially free. That, simply speaking, is how you can become rich!
Interested to learn more? Read our short and easy-to-understand summary of the Cashflow Quadrant book below. No need to go through hundreds of pages just to understand how you can eventually retire young and rich!
By the way, if you want your own copy of Robert Kiyosaki’s books, you can get them from Amazon below at discounted prices. Trust me, they’re a good starting point for your journey towards achieving financial freedom.
Let’s learn more about the “Cashflow Quadrant” — the core concept espoused by Robert Kiyosaki in his Rich Dad, Poor Dad series of books.
What are the 4 Cashflow Quadrants?
The “Rich Dad’s Cashflow Quadrant” simply talks about four ways to make money. These are the quadrants adopted and followed by the rich — which is why they become richer and richer — and something the poor does not understand or does not follow — which is why they continue to be poor. Where are you currently in the Cashflow Quadrant?
The left-hand side quadrants, “E (Employee)” and “S (Self-Employed)”, are the Active quadrants because people have to spend time and effort in order to earn. Therefore, to earn money, people in these quadrants must actively work, which is why these two quadrants require a lot of time and effort before one can become rich.
In contrast, the right-hand side quadrants, “B (Business Owner)” and “I (Investor)”, are called the Passive quadrants, wherein income is not directly proportional to the time and effort spent. A person who follows these two quadrants can passively make money, that is, even if they don’t spend a lot of time working on the quadrants — sometimes, even if they do not work at all — they can still make a lot of money.
Here’s a more detailed explanation of each quadrant.
“E” (Employee) Quadrant Explained
What does the E (Employee) quadrant in Robert Kiyosaki’s Cashflow Quadrant represent?
The E (“Employee”) quadrant is a classification for people who make money by “working for other people”. They usually go to the office everyday, work at least 40 hours in a week, and depend on monthly salary as their primary source of income.
Typical characteristics of “Employees” are:
- they desire financial security;
- they seek out work that will provide them with a stable source of regular income; and
- they shy away from risk and subsequently see no need to become educated in finance.
Do you currently consider yourself an Employee? Majority of people around the world are, without a doubt, employees. This is not necessarily your fault since, for centuries now, our society and educational system have trained us to become “workers”.
There are, of course, perks and benefits of being an employee. You receive a steady paycheck, subsidized or free healthcare or health insurance, a retirement plan paid for by your company, bonuses, among others.
Although becoming an employee is not bad per se, Employees solely rely on effort and time to make a lot of money. That is, to earn more, you need to work more and spend more time doing work. This means you have no control over your time and ultimately, your life. This is not what financial freedom is all about. Some might say they’re working to eventually be financially free when they reach retirement. But do you really want to start enjoying life when you’re almost at the end of it? Think about that.
If your goal is to retire early in order to enjoy life, this might be a difficult thing to achieve as an employee since you will have to work longer and harder in order to earn a lot of money.
There’s another big downside to becoming an employee. Did you know that, compared to the three other quadrants, Employees pay the highest tax rate? In the Philippines, based on the TRAIN Income Tax Tables for the years 2018 to 2022, the income tax rate ranges from 20% to 35% of taxable income. These taxes are also automatically withheld by your employer and remitted to the government, which means you do not even get to see this money.
Businesses in the Philippines do pay somewhat similar income tax rates, but they are allowed to deduct a lot of expenses that could bring down the amount of income taxes they pay to the government. Armed with intelligent lawyers and creative accountants, companies in the Philippines sometimes end up paying very low income tax rates.
“S” (Self-Employed) Quadrant Explained
What does the S (Self-Employed) quadrant in Robert Kiyosaki’s Cashflow Quadrant represent?
People who typically have professions and “own a job” — instead of working for other people — belong to the S or “Self-Employed” quadrant. People who “work for themselves”, such as doctors, lawyers, consultants, even professional vloggers and YouTubers, are examples of the Self-employeds.
The common traits of Self-Employed individuals include:
- Not wanting their income to be dependent upon other people;
- Sometimes having a hard time finding good work because they have high standards;
- Considering “independence” as a very important criteria in work.
Most Self-employeds do make a lot of money but, like the Employees, their income is directly tied to how much they work. They do have some sense of freedom because they have some control over their time, but they’re still stuck with their “job”. The moment they take a vacation or stop working, for example, they practically earn nothing.
Unlike Employees who typically work 40 hours a week (in an 8-to-5 job), Self-employed individuals sometimes even work more than 40 hours a week. Lawyers, accountants, consultants, etc. who have very demanding clients sometimes would have 12-hour workdays just to get things done. YouTubers, although they work at their own pace and time, spend countless hours shooting and editing a video just to come up with one video upload.
In terms of taxes, most self-employed in the Philippines do pay lower taxes since it’s difficult to monitor their actual earnings. The Bureau of Internal Revenues (BIR), however, reminds professionals, freelancers, and self-employed to register and pay correct taxes. Here’s one of our articles talking about whether Online Sellers & YouTubers are Required to Pay Taxes to BIR?
The proposition of Robert Kiyosaki’s Cashflow Quadrant book is that those who aspire to achieve financial independence must work to move from the left-hand quadrants, the E and S quadrants, to the right-hand quadrants, the B and I quadrants.
What separates people in those quadrants is how they use “time”. For Kiyosaki, time is money so if you can multiply your time in order to make money, you’re on your way to becoming rich. People in the E and S quadrants solely rely on their time to make money, and since their time is limited, their earning potential is also limited.
In the B and I quadrants, income is not directly proportional to the time, effort, and money spent. Thus, one can make a lot of money in the B and I quadrants and, ultimately, achieve financial independence without having to work hard anymore. The B and I quadrants are explained below.
“B” (Business Owner) Quadrant Explained
What does the B (Business Owner) quadrant in Robert Kiyosaki’s Cashflow Quadrant mean?
Those belonging to the B (Business Owner) quadrant “own a system” instead of merely “owning a job”. They set up a way that makes money for them even if they do not spend a lot of time in the business. They achieve this by hiring Employees (who belong to the E quadrant).
Of course, when entrepreneurs start a business, the Business Owner will initially have to spend a lot of time and effort building it. In due time, though, when the system has been properly set up, the system is said to be “working”, which means the entrepreneur can now spend less time managing the business. Yet his income is not reduced. That’s because he’s using the time of his Employees to make him money.
Here are typical traits of Business Owners. They:
- hire competent talent and delegate as much as possible;
- recognize their own inability to perform all tasks well, so they hone their ability of finding and cultivating talented people to work for them;
- know that even if they left, they could come back to the business and find it more profitable and better running than before.
Another advantage of owning a business is that you can invite other people (investors) to invest in your business, which means you can choose not to risk your entire money, but share the risk (and rewards) with people who invest in your business. Some business owners also do not start their business from scratch. They just decide to franchise an existing business in order to leverage on systems already set up by these franchises. (See also: Top 100 Franchises in the Philippines Below P1 Million)
Being a successful Business Owner requires ownership or control of systems and the ability to lead and manage people. They know how to run a system that works by delegating tasks and responsibilities to competent employees. Thus, even if they do not spend a lot of time in the business anymore, they still make a lot of money from it.
“I” (Investor) Quadrant Explained
What does the I (Investor) quadrant in Robert Kiyosaki’s Cashflow Quadrant mean? Those belonging in the I quadrant are called Investors. They are usually:
- Most adept at making money work for them, instead of them working for money; and
- In some cases, they even use other people’s money to make more money.
The Investors mostly do not “work” at all. This means that they do not rely on personal time and effort to make money. They usually turn to stocks, mutual funds, UITF, real estate, and other investment assets that produce income through capital appreciation, dividends, rental income, etc. As you can see, they make money by receiving rental income or dividends or coupon interest without having to work at all.
In some cases, they merely entrust the management of these funds to competent fund managers who do the work for them. Sometimes the Investors even use leverage — or use other people’s money — in order to increase their investments which would further increase their wealth. This means they borrow money from other people, invest this money in income-producing assets, then just pay back those people after some time.
The idea is to invest in an asset that will produce yield or income without you, the investor, having to spend a lot of time managing the asset. As you can see, Investors make money work for them, not the other way around!
Now that you know what the Cashflow Quadrants are, we hope you’ve made a decision where you want to belong. Do you want to be an Employee, Self-Employed, Business Owner, or Investor? It’s your choice! Now let’s start working to get rich and financially free!