15 Feb Cashflow Quadrant
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There is an incredible book that was published back in the 90s called Rich Dad’s Cashflow Quadrant. It was the second book in the Rich Dad series (after Rich Dad, Poor Dad). It’s a great read for anyone who wants to understand the four types of people you’ll find in the business world.
The author, Robert Kiyosaki, has been a bit controversial over the years, but you can’t argue with is success. His Rich Dad brand has been responsible for millions of book sales, product sales and conferences.
When you read the Cashflow Quadrant, it has a pattern that looks like a backwards capital N. You don’t read it left to right like we read in English. The path is E -> S -> B -> I. Upper left, lower left, upper right, lower right. That’s because it’s the path most people take when they start as an employee and eventually make their way to being a full-time investor.
How do you know if you live in the employee section of the Cashflow Quadrant? It’s easy. You have a job.
That doesn’t mean you are ONLY in the employee section of the Cashflow Quadrant, but it means you make most of your money from an employer. You can ALSO have some self-employed work on the side, you could own a small business and you could have some investments in addition to your job. Many people do.
If your primary source of income is from a job, you live in the E quadrant. Your goal is to move into the S quadrant, then the B quadrant, then the I quadrant.
This one is easy to define as well. If you work for yourself, you live in the self-employed quadrant.
Where it can get a little tricky is when people confuse being self-employed with owning a business. There’s a BIG difference.
How do you know which is which?
One of them requires your presence and participation and the other does not.
If you are living in the S quadrant, your job is to move into the B quadrant, then the I quadrant.
That brings us to…
Many self-employed people like to SAY they “own a business,” but that is usually inaccurate. Sure, the idea of owning a business is great and telling others you own a business satisfies the ego. That doesn’t mean your self-employed work qualifies as a “business” in the Cashflow Quadrant.
Instead of arguing over unique scenarios or exceptions to the rule, ask yourself this question:
“If I left for vacation tomorrow and I had no phone or email access for the next six months, how much business will I do over those six months?”
If you snorted in response to that or your answer is “zero, or close to zero,” you are self-employed. You don’t have a business.
Just because you set up an LLC or C-Corp for you thing doesn’t qualify you as a “business owner.” Any yahoo with a credit card and a laptop can set up an LLC in a few minutes online. Setting up your self-employed job in a responsible way for tax purposes does NOT mean you have a true business.
Successful businesses require systems and people. A one-person operation is rarely a true business.
The best way to start creating real wealth is through business ownership. Even a mildly successful business can have a dramatic effect on your financial future.
Once you’ve made your way through the E, S and B quadrants, you’ve achieved I status: You’re an investor!
Being an investor is a nice place to be. You can put your money to work for you. Specifically, you can put your money to work by hiring people to work for you (they live in the E quadrant), by investing in new or existing businesses (run by people in the E and B quadrants) or by investing in “hands-off” things, like publicly traded stocks and bonds.
You can purchase your own copy of the Cashflow Quadrant here.
This is a great video from the man himself! See how Robert Kiyosaki explains the Cashflow Quadrant. It’s a little dated (read: video quality is meh), but you’ll get the idea. Enjoy.