I’m not sure when or why, but years ago, Robert Kiyosaki’s Rich Dad Poor Dad became the financial bible for a lot of people. And so, he went on to introduce the idea of the cashflow quadrant in his book of the same name – as you do when you’ve got people hooked. What is the cashflow quadrant? That’s exactly what I’ll be talking to you about today.
I must admit, though, I don’t think Robert Kiyosaki’s books are gospel-level financial education. BUT, I do love the cashflow quadrant and the general ideas in them, and Cashflow Quadrant has a good one that I have a twist on!
General ideas of Cashflow Quadrant
I’m just going to assume that you know what a quadrant is and jump straight to the important stuff. The cashflow quadrant basically paints a picture of how working as an employee of a large company is the worst. Why? Well, because you have no way to leverage yourself, people just pay you.
That probably doesn’t sound too bad for a lot of people, but if you consider the extreme end of the picture – when you’re an investor – you’ll soon realize that that’s what you should aspire to. The ultimate is when your investments work for you, and honestly speaking, only a few people can confidently say they’ve reached that stage.
Then of course, there are some places in between these two that you’ll probably have to stop at along the way, namely self-employed and business owner.
Sections of the cashflow quadrant
To paint a clearer picture for you, I’m going to have a look at each of the sections of the cashflow quadrant in detail. In a way, it’s a visual depiction of where we all start and the journey to where we should all end up – in an ideal world of course.
Each section shows the different ways of generating money, which is actually heavily dependent on your personality type. Risk-averse people and those who enjoy job stability will probably just stick to being an employee – but you’ll probably never achieve early retirement in that way.
Now, my type of people either generate money in all four quadrants or at least in the investor quadrant. Enough talking, let’s get to the good stuff.
Employee
For generations and generations, people only ever knew of this way to make money. In fact, a lot of individuals only ever end up here – now that’s a trap I worked really hard to avoid.
This section of the cashflow quadrant is essentially where you sell your time and expertise for money.
Self-employed
If you take it further and are looking for more control over your time, flexibility, all those good things, then being self-employed is a step in the right direction. This one can be a bit tricky because you carry double the burden – you’re both the employee and the boss. You have to deal with the legalities of running a business and still do the work yourself too!
I guess the downside is that if you’re off sick or can’t work, well guess what, your income takes a bit of a break too.
Business owner
If you’ve made it to this section of the cashflow quadrant, congratulations! You’re only a few steps away from the coveted investor section – if you play your cards right. Unlike being self-employed, here you employ people to get the job done. By no means does this suggest that you can just lounge around and do nothing though.
You’ve successfully developed a product or service and some sort of system to keep things going, now you have to make sure it runs like a well-oiled machine.
Investor
This is like the pot of gold at the end of the rainbow – where your money works for you and you make money even while you sleep. Stocks and real estate are some of the most popular forms of passive income, I strongly believe in the latter.
Now, when you have a look at the cashflow quadrant, you’ll probably notice that the left side – (employee and self-employed) – represents active income streams. The right side (which is where you want to be) shows the passive income streams – business owner and investor.
The FiveYearFIREescape twist
It probably seems like you have to move from one quadrant to the next to reach the pot of gold, but that’s not true. It’s VERY possible to power straight through to the final goal, which is the investment-supported lifestyle. I’ve tried it and guess what, it’s true! So we should all try to do that.
You’ve probably heard it being said that “the rich get richer,” you know why? Because once you figure out how to do something and then just repeat those steps over and over again, voila! You’ve got the magic recipe. That’s why making your first million is probably the most difficult climb, but then thereafter, it becomes easier.
You don’t need some complicated qualifications to become a millionaire, in fact, I wrote this neat little piece about how to become a millionaire in 5 years. It comes with a fun worksheet and you should check it out right here. 🙂
Once you master that, you’ll find that all your other work plans are really just for fun. Personally, I recommend working in some way (could be a part-time job) because of the benefits OR starting your own company because it’s fun! No, trust me, it really is.
TL;DR
- I take what Robert Kiyosaki says in his books with a pinch of salt, but I’m all for the cashflow quadrant and how to make your money work for you.
- The cashflow quadrant is a visual representative of four income-generating options, which are highly influenced by the type of person you are.
- You can either be an employee for the rest of your life, move to being self-employed, start your own business or… (drum roll please)… invest!
- Ideally, you should strive to operate in more than one of the cashflow quadrant sections, if not, let the investor section be the one that you prioritize.
- You don’t have to take the long route, you can move from being an employee straight to investor status and make money even while you sleep – provided that you actually know what you’re doing.
You can check out the Cashflow Quadrant book by Robert Kiyosaki for yourself too 🙂
