Cashflow Quadrant Explained: How to Build Wealth and Achieve Success
In his best-selling book, Rich Dad's Cashflow Quadrant: Rich Dad's Guide to Financial Independence, Robert Kiyosaki explains how individuals can move from one side of the Cashflow Quadrant, where they struggle to save any money after paying all the bills, to the other side where they succeed as a business owner or investor, achieving financial independence.
But what is the cashflow quadrant?
What is Cashflow Quadrant?
To understand Cashflow Quadrant, it's important to know that there are two types of people: those who look at the world from the left side of Rich Dad's CASHFLOW Quadrant, and those who look at it from the right side.
The Robert Kiyosaki’s CASHFLOW Quadrant is divided into four types of people based on their income, two in each category.
The quadrant shows the various mindsets and ways of working and making money that are present in each group. It also points out the distinctions between those who exchange time for money, like employees and self-employed people, and those who build assets that produce income, like business owners and investors.
The CASHFLOW Quadrant's Left Side
On the left side of the quadrant, you'll find employees and self-employed individuals. This group pays the most in taxes and trades their time for money. Each has a distinct mindset.
E is for Employee
At the end of the day, employees prioritize security. They tend to avoid risk and therefore may not see the value in learning about money and its workings. Education, for them, is about acquiring the necessary skills to secure a stable, high-paying job with excellent benefits. If employees need more money, they seek a job that pays better.
S is for Self-employed
Individuals in the self-employed quadrant are not suited for being employees and often possess a mentality that they are the best at what they do. Although they still value security, they are more willing to take risks and are content with working for themselves. In fact, they prefer entrepreneurship because it provides a sense of control over their future.
People in the S quadrant are professionals such as doctors, lawyers, dentists, accountants, and consultants who are based in service-oriented businesses. Consequently, they only earn an income when they are working, which means that they own a job, not a business.
When self-employed individuals require additional financial resources, they seek to increase the number of billable hours they work.
The CASHFLOW Quadrant’s right side
The right side of the quadrant includes B and I. They pay fewer taxes and invest in assets that generate consistent cash flow for them, even when they are not actively working.
B stands for Business Owner
Unlike those in the S Quadrant, business owners do not simply own a job. Instead, they own a system or a product that generates revenue even when they are not actively working. They recognize that success cannot be achieved alone, and therefore seek to hire individuals with specialized skills and greater talent than themselves. By delegating tasks to these individuals, rather than keeping all the work for themselves, they focus on other important matters. The most successful business owners understand that they could leave their company for an extended period and return to find it still profitable and operating even more efficiently than when they left.
Business owners are frequently viewed as risk takers. However, from the perspective of a business owner, being an employee is riskier because employees have no control. A business owner has the ability to make decisions such as layoffs or firing employees, while the business cannot be taken away from the owner by anyone.
I stands for Investor
Investors possess advanced financial knowledge compared to other individuals in the CASHFLOW Quadrant. They have a talent for discovering assets that generate stable income in the form of cash flow and frequently utilize other people's money (OPM) to obtain those assets. They subsequently use the income from these assets to acquire even more assets, expanding their wealth.
Investors benefit from the most tax breaks, have the option not to work at all, and don't need to deal with managing employees. The wealthiest individuals in the world are investors, with 70% of their income typically coming from investments, and the remaining 30% coming from wages.
If investors require additional funds, they seek out opportunities to acquire assets that produce more passive income.
Why is the Cashflow Quadrant important?
The Cashflow Quadrant is pretty important because it helps you understand the different ways people think and make money in the world. When you know where you stand in the quadrant, you can make better choices about your career, money goals, and investments. Plus, it shows you how to move from one side of the quadrant to the other and become a boss business owner or investor, achieving financial independence.
If you understand the cashflow quadrants, you can figure out how to make money and build wealth in different ways.
Once you know where you stand, you can decide what you want to do with your life. You'll make better choices about your career, money goals, and investments.
For example, let's say you want to be financially free. You might want to go from being an employee or self-employed person to being a business owner or investor. That way, you can make money without doing a ton of work all the time.
How to move from the left quadrant to right quadrant?
Transitioning from the left to right quadrant can be difficult, but it is possible. To make the jump, you need a plan that includes acquiring the necessary skills, knowledge, and experience in financial management, marketing, sales, and other areas related to running a business.
It is also important to surround yourself with a supportive community of like-minded individuals who can provide guidance and support.
You'll be on your way to financial freedom and success in no time if you are determined to take on the challenge!
So, here's a few ways to help you make the transition:
- Understanding the Quadrants: Start with understanding the four quadrants and their traits. This way, you can figure out which quadrant you're in and what mindset is necessary to transition to a more financially prosperous quadrant.
- Clarify your goals. Do you want to become wealthy, start your own business, or invest your money? Once you have a clear idea of what you desire, focus on the ideal quadrant that suits your needs.
- Understand the financial game called "Who Is Indebted to Whom?”: Robert's father taught him the difference between an asset and a liability, as well as how debt affects the economy. When incurring debt, make sure you can manage it, and if you take on a lot of debt, make sure someone else is covering it. It's important to distinguish between facts and opinions by doing research, but be careful not to get stuck in "analytical paralysis" by doing too much. The key is to sort through facts and opinions before making a decision.
- Develop a strategy to achieve your objectives after determining what they are. For instance, if becoming an investor is your goal, start learning about investing and look for opportunities to invest your money.
- Recognize the difference between financial freedom and financial security: Robert points out that some people refrain from investing because they equate financial security with job security. However, true financial security is obtained by having a stable position in both the CASHFLOW Quadrant and your job. Financial freedom is a long-term objective that requires years of financial security.
- Upgrade Your Skills: To move to a more financially abundant quadrant, you need to improve your skills. For instance, if you're an employee, you might have to acquire new skills to become self-employed or start your own business.
- Kiyosaki believes that playing Monopoly as a child helped him become rich. He suggests that the best way to win is to begin by obtaining four green houses and then trade them in for a large red hotel. This strategy worked for him in real life too. He and his wife bought as many small properties as they could afford when the housing market was down. They sold them and bought larger properties when the market improved. They now live on the income from their large red hotel, apartment complex, and mini-storage facilities.
- To be successful in the B quadrant, you must recognize good businesses. Invest in thriving businesses with reliable operating procedures. It's important to understand both systems and people to stay in the B quadrant. To achieve this, create an impenetrable system and hire the best personnel to manage it. There are three ways for someone from the left quadrant to move to the B side:
- Get a mentor, not an advisor
- Buy a franchise to operate the system the way it is
- Get involved in network marketing (also called multi-level marketing or direct distribution systems)
- The necessary systems have been established through technology. It is easy to attain financial success in the B quadrant. However, the most important aspect is to develop as a leader, increase your confidence, and commit to continuous learning.
- “Think of business systems as bridges that provide a path for you to cross safely from the left side to the right side of the CASHFLOW Quadrant.” (Robert Kiyosaki).
How can you manage your assets and liabilities to become a successful investor?
To become a great investor, it's important to develop risk management skills. To invest logically, without getting swayed by emotions, you need to have a solid financial education. For example, having good financial judgement means recognizing that a mortgage is a liability that needs to be paid back, rather than an asset that belongs to you. The bank actually owns your mortgage, not you. Even if you pay off your mortgage, you still have to maintain and pay property taxes on your home, so it is not considered an asset. Only properties that generate positive cash flow can be seen as assets.
Your savings are considered assets, while your debts are liabilities. Although many people view gold as the ultimate asset, it's important to remember that it is only an asset if you purchase it for less than you sell it for, as stated by Kiyosaki's mentor from Rich Dad.
How to avoid the common misconceptions about Robert Kiyosaki’s 4 Quadrants?
There are many myths floating around about the Cashflow Quadrant, but they are not accurate. Here's how to avoid falling for these common misconceptions:
- Many people believe that exceptional intelligence or genius is required to succeed in the "B" and "I" quadrants. However, success in these quadrants is not dependent on intelligence but rather on having the right mindset, a willingness to learn, and dedication. Some of the most successful people in these quadrants are not necessarily the smartest but rather those who have developed the right habits and attitudes towards money and investing. With the right approach, anyone can achieve success in these quadrants, regardless of their intelligence level. Don't let the misconception of needing extraordinary intelligence hold you back from pursuing success. To achieve your financial goals, focus on maintaining the right mindset and working hard to make progress.
- Many people think that only the wealthy can achieve financial success in the "I" quadrant, but this is not true. While having more resources can be helpful, there are still many strategies that anyone can use to achieve financial freedom. For instance, developing a strong work ethic, constantly educating oneself about personal finance, and seeking out opportunities for passive income can all contribute to long-term financial success. Keep in mind that financial freedom is not a destination, but rather a journey that requires hard work and dedication.
- Although the "E" quadrant is a safe and stable option for generating income, it is not the only way to achieve financial security. In fact, diversifying your income streams and building passive income sources can be a key strategy for achieving financial stability and freedom. Exploring other quadrants such as the "S" and "B" quadrants can help you create additional streams of income and reduce your reliance on any one source of income. To achieve your financial goals, focus on having the right mindset and putting in the necessary work.. Ultimately, the key to financial security is to build a diversified portfolio of income streams that can weather economic ups and downs and provide a stable foundation for your financial future.
- To be successful, many people believe they need to be in the Business Owner or Investor quadrant. While these quadrants are known for generating passive income, being an employee or self-employed person can also lead to financial success. To succeed financially, it is important to have a clear understanding of your goals and take action to achieve them.
- Being in the Investor quadrant means you are investing in stocks and other financial instruments.
- The Investor quadrant in the Cashflow Quadrant refers to people who generate passive income through investments. While investing in stocks is one way to do this, there are many other investment opportunities, such as real estate, business partnerships, and intellectual property. It's important to have a variety of different investments in your portfolio and to seek advice from a professional before making any decisions about it.
How can the Cashflow Quadrant help with your real estate investments, and how can you make the most of it for your REI?
Alright, so if you want to get the most out of your real estate investments, knowing which quadrant you're in will help you make smarter investment choices that match your financial goals. For example, if you're in the "E" quadrant, rental properties might be a sweet way to make some passive income and move on up to the "B" or "I" quadrant.
There are five investor types that are classified according to their financial know-how and risk tolerance. Successful investors usually study market trends, research investment opportunities, and continue learning. These investors are willing to take calculated risks to achieve their goals. The five types of investors are:
- The Zero-Financial-Intelligence Investor – little knowledge of investing or saving.
- The Savers-Are-Losers Investor – tend to save money for later, but invest in unprofitable assets or securities.
- The I’m-Too-Busy Investor – entrusts their money to a financial consultant, who may not be qualified.
- The I’m-A-Professional Investor – takes time to analyze opportunities, study markets, and continues to learn.
- The Capitalist Investor – becomes a business owner, invests profits, and generates more profits. Warren Buffett, Bill Gates, and famous artists belong to this category.
Ultimately, the key to success in real estate investing is to develop a solid understanding of the Cashflow Quadrant, educate yourself about different investment opportunities, and be willing to take calculated risks to achieve your goals. By doing so, you can build a diversified portfolio of income streams that provides a stable foundation for your financial future.
The Rich Dad Poor Dad quadrant is all about finding your own path and having the right mindset. Changing your mindset is crucial in achieving your goals. Even someone from quadrant E can achieve their financial independence goals if they know how to make the most of their situation.
One example of a person who successfully transitioned from the left to the right quadrant is Sara Blakely, founder of the shapewear brand Spanx. Blakely started out as an E, working in sales for a company selling fax machines. She then moved on to become an S, creating her own product and selling it online. Eventually, she transitioned to the B quadrant by building a team and growing her company into a multimillion-dollar business.
Another example is Elon Musk, who started out as an E, working as an intern and then an employee for a software startup. He then moved on to become an S, creating his own company and selling it to Compaq for millions of dollars. Musk then went on to become a B by co-founding PayPal and investing in several successful companies, including SpaceX and Tesla.
These two examples show that it is possible to transition from the left to the right quadrant with hard work, dedication, and a willingness to learn and take risks.