The Cashflow Quadrant — explained in simple terms
A few months ago, we announced that personal finance author Robert Kiyosaki was giving away his Cashflow Quadrant ebook for free (See Free Download: ‘Cashflow Quadrant’ ebook). Fortunately for those who were able to download the book, they now have a legal copy of one of the most popular books on personal finance.
For those who missed the opportunity, that’s OK. We’ll just give you a short and easy-to-understand summary of the book below.
Basically, the “Rich Dad’s Cashflow Quadrant” book is a detailed discussion about four types of people depending on their sources of income. These categories 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.
In contrast, the “B (Business Owner)” and “I (Investor)” quadrants are the Passive quadrants, wherein income is not directly proportional to one’s time and effort spent.
Here’s a more detailed explanation of each quadrant.
The E (Employee) Quadrant
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.
Typical characteristics of the “Employees” are:
- They desire security and they seek out a lifestyle that will provide them with this;
- They seek out benefits with their jobs; and
- They 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.
The S (Self-Employed) Quadrant
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:
- They do not like their income to be dependent upon other people;
- They often have a hard time finding good work because they have high standards;
- Independence is very important to them.
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.
The proposition of Robert Kiyosaki’s Cashflow Quadrant book is that those who are aspiring to achieve financial independence must work to move from the left-hand quadrants (E and S) to the right-hand quadrants (B and I). 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.
The B (Business Owner) Quadrant
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 characteristics of Business Owners are:
- They hire competent talent and delegate as much as possible;
- They recognize their own inability to perform all tasks well, so they hone their ability of finding and cultivating talented people to work for them;
- The Business people 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.
The I (Investor) Quadrant
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.
For now, just to see which quadrants most of our PinoyMoneyTalk readers are in, answer our poll below!
Image Credits: Robert Kiyosaki Network Marketing, Amazon
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