Achieving financial independence is simple to understand with Robert Kiyosaki’s popular concept of the Cashflow Quadrant — which he explains in his book Rich Dad, Poor Dad. This concept demonstrates the different methods in which money and income can be generated.
What is the Cashflow Quadrant?
The Cashflow Quadrant explains four different quadrants in which money can be generated or earned. There are two sides to the Cashflow Quadrant — the Left Side and the Right Side.
Left Side of the Quadrant
Quadrant E (Employee): The employee makes money by working for someone else and collecting an hourly wage or salary. This type of person likes the security of knowing they will receive a regular paycheck. Although, this is one of the worst ways to build wealth, since the amount you can earn every period is usually capped at how much your salary is or how many hours you work.
If an employee gets hurt or sick and can no longer perform their job that person can easily lose their income, since their ability to earn money depends on their ability to work and do their job.
Quadrant S (Self-Employed): This is an individual who owns and runs their own small business. The disadvantage to being self-employed is that you’re still the one doing all the work, and just like in the E Quadrant your income is tied to your ability to work and perform the tasks of the job.
Also, if you want to make more money in this quadrant, you have to work more hours. Since your small business depends on you to do the work and generate income — if you ever get hurt or ill and can no longer perform the duties the business requires, you’ll lose your business and your income.
Individuals in the “E” and “S” Quadrant generally pay more in taxes than those on the Right Side of the Quadrant.
Right Side of the Quadrant
Quadrant B (Big Business): These types of individuals own business which they have developed with a system where they don’t have to physically be present to run the business. This type of business has system built around it where if the owner took a year long vacation and made no contact with the business during that time, when they returned the business would be better and more profitable than when they left.
Individuals in the “B” Quadrant make money off of the work others, from those in the “E” Quadrant. Essentially, those in the “B” Quadrant have created a business system that pays them a passive income. These businesses are generally built within corporations, giving the owner more tax incentives and limited liability if anything should ever go wrong.
Quadrant I (Investors): These type of people make their money work for them. You have probably heard of people such as Warren Buffett who are masters of investing and made fortunes from it.
This is one of the most difficult quadrants to jump into and should not be attempted until you educate yourself and understand all the aspects of investing.