Understanding the Cash Flow Quadrant

Co-author of the New York Times Best Seller Rich Dad Poor Dad Robert T. Kiyosaki has conceptualized the value system and channels through which money flows in return to active service rendered, in an easy-to-understand quadrant. He calls it the “Cash Flow Quadrant“.

Achieving financial freedom and economic independence is not that hard once we understand the dynamics of money. As it turns most of it is common sense, which is why I believe most of the billionaires though don’t have formal education make strides in their financial world on a daily basis. Knowledge really is power.

The single most powerful asset we have is our mind. If trained well, it can create enormous wealth.
Robert Kiyosaki

One of the key concepts of Kiyosaki’s book is the cash flow quadrant, which breaks all people into one of four categories based on their financial intelligence. The four types are :

  • E Employee (E) – Otherwise known as a job
  • Self-Employed (S) – Small business owners or self employed (Doctors, and lawyers)
  • Business Owner (B) – Big businesses (500 and more employees). Businesses that are selling products and predefined services.
  • Investor (I) – People like Warren Buffett

cash-flow-quadrant-robert-kiyosaki

E and S quadrants are on the left side, and B and I quadrants on the right side. The diagram above better explains it. You can be in all quadrants, but most people are not. The goal is to progress through the arrows and become more on the right side of the table.

Cashflow Quadrants

E – Employee

Most individuals only 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 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.

S – Self Employed

This is one step better than an employee, but in reality you still are trading time for money. You own your own business, but in reality the business owns you. The positive benefit you have more personal and financial freedom than an employee.

B – Business Owner

A business implies you have a system in place. You have others working for you as employees. You aren’t selling your time for money, but rather selling a product or service. In other words, you don’t have to be working for the business to generate income.

I – Investor

This is where you truly have passive income. Investments like stocks, bonds, and real estate generate an annual cashflow. These are the investments that will allow you to retire. It can also be things like trademarks, copyrights, and royalties. Things you build once and have a long (5-10 year+) timespan in payouts.

It doesn’t matter where you are now. What matters is the direction you are headed. Be wise and use your time, energy and focus toward bringing more and more of your talent to life. And achieve financial freedom.