The Cashflow Quadrant is essentially defining four types of income generation.
As a sequel to Robert Kiyosaki’s book ‘Rich Dad, Poor Dad’, he shows that we all have income coming in from one or more of four ways.
The first quadrant is ‘E’ for ‘Employee’. This is where most of us reside. We usually have income from this quadrant only. This is illustrated as a capital ‘E’ in the top left of a diagram of four quadrants.
There is nothing wrong with this quadrant, but time is exchanged for money linearly and you have a limit to the time you have and therefore the salary earned.
Bottom left is ‘S’ for ‘Self employed’. This is deemed to be the next step up from income coming from an employee. Here, you have more control over what you do, but the key point is that your time is basically exchanged for money, so there still is a limit to your income from being in this quadrant.
Top right is ‘B’ for ‘Business owner’. Here, you get other people to work for you and pay them to run your business.
Now your time is leveraged, because you get a good income from a good business without spending too much time there, so you can do something else as well. This is where some of the most wealthy people get their income from.The idea can be scaled up, so that you can start another business and repeat the same procedure adding to your portfolio of businesses.
Bottom right is ‘I’ for ‘Investor’. Here, you invest in shares or funds. Now very little time is used, because you are now making money slowly in the long run and spend very little time on it. You might also invest in real estate that you rent out, or have part shares in another business.
The time and money equation is very important to your wealth. You will never get wealthy as an employee as this is a linear ‘time for money’ equation. If you work twice as long, you will get twice the money. If you are in the ‘S’ part of the quadrant, you may be wealthier than an ’employee’, but you still have a limit to the time you work.
Rich Dad said that the best place for your income is on the right hand side of the Cashflow Quadrant. Building up assets in the form of businesses, or investing in equities or real estate, no matter how small you do it, is the way to go!
Remember that you can still go bankrupt in all four quadrants, so your wealth ultimately depends on the sort of person you are and how you go about things.