Popular personal finance author Robert Kiyosaki previously gave away a free PDF copy of his world-renowned Cashflow Quadrant ebook (See Free Download: ‘Cashflow Quadrant’ ebook).
If you were lucky enough to download the ebook, congratulations! You now have a legal copy of one of the most popular books on personal finance.
For those who missed the opportunity, it’s OK. In this article below, we’ll give you a short and easy-to-understand summary of the book. No need to go through hundreds of pages of the book. Here’s a simple explanation of the “Cashflow Quadrant”, which is the core concept espoused by Robert Kiyosaki.
What is the Cashflow Quadrant?
Basically, the “Rich Dad’s Cashflow Quadrant” talks about four ways to make money. The quadrant represents four mutually-exclusive sources of income. These income sources are the E, S, B and I quadrants.
The “E (Employee)” and “S (Self-Employed)” quadrants are the Active quadrants, meaning people have to spend time and effort in order to earn. Therefore, to earn money, people have to actively work, which is why these two quadrants require a lot of time and effort before one can be rich.
In contrast, the “B (Business Owner)” and “I (Investor)” quadrants are called the Passive quadrants, wherein income is not directly proportional to one’s time and effort spent. A person who follows these two quadrants can passively make money, that is, even if they don’t spend too much time working on the quadrants — sometimes, even if they don’t work at all — they can still make a lot of money.
Here’s a more detailed explanation of each quadrant.
How to Make Money #1: The “E” Quadrant (Employee)
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 primary source of income.
- desire security and they seek out a lifestyle that will provide them with this;
- seek out benefits with their jobs; and
- shy away from risk and subsequently see no need to become educated in the tools of finance.
Although this is not bad per se, Employees rely on effort and time to make a lot of money. That is, to earn more, they need to work more and spend more time on work. If your goal is to retire early, this might be difficult to achieve since you will have to work longer and harder in order to make a lot of money.
How to Make Money #2: The “S” Quadrant (Self-Employed)
People who typically have professions and “own a job”, instead of working for other people, belong to the S or “Self-Employed” quadrant. Doctors, lawyers, and other professionals who “work for themselves” are examples of the Self-employeds.
Their common traits 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” 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, so the moment they take a vacation or stop working, they practically earn nothing.
How to Make a Lot of Money
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 — that is, the E and S quadrants — to the right-hand quadrants, the B and I quadrants.
In the B and I quadrants, income is not directly proportional to the time, effort, and money they spend. Thus, one can make a lot of money and, ultimately, achieve financial independence without having to work hard anymore.
The B and I quadrants are explained below.
How to Make Money #3: The “B” Quadrant (Business Owner)
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, a lot of time and effort is spent building it. In due time, though, when the system has been properly set up, the system is said to be “working”. The entrepreneur can now spend less time managing the business and yet his income is not reduced.
Typical Business Owners:
- 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.
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 get to earn from it.
How to Make Money #4: The “I” Quadrant (Investor)
Finally, those belonging the I quadrant are called the Investors. They are usually:
- Most adept at making money work for them; and
- In some cases, they even use other people’s money to make more money.
The Investors mostly do not “work” at all, that is, they do not rely on personal time and effort to make money. They usually turn to stocks, fixed income securities, real estate, and other investment assets that produce income through capital appreciation, dividends, rental income, etc. 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.
Now that you know what the Cashflow Quadrants are, we hope you’ve made a decision where you want to belong.
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