The Cash Flow Quadrant, by Robert Kiyosaki
Figure 1: Diagram of the Cash Flow Quadrant
With over 40 million books sold, Robert Kiyosaki’s Rich Dad Poor Dad is the most popular book on Personal Finance ever published. While Robert’s first book has several merits, it is only with his second book – The Cash Flow Quadrant: Guide to Financial Freedom – that the author introduces the homonym model, graphically represented in the diagram in Figure 1.
Kyosaki’s simple and intuitive Cash Flow Quadrant model provides the following:
– 4 unique financial paths: the employee, the self-employed, the business owner and the Investor
– a self-assessment method to categorise yourself in one or more quadrants based on how your income is generated
– a guide on how to graduate into new quadrants based on your personal and financial aspirations
While you can achieve a certain level of financial security in any of the four quadrants, the model invites you to study and develop the most entrepreneurial skills, mindset, and systems typical of the right side of the model: Quadrant B (business owner) and Quadrant I (Investor).
The Right Side of the Cash Flow Quadrant
For the author, the right side of the Cash Flow Quadrant is where you can leverage OPT (Other People’s Time) and OPM (Other People’s Money). These are the quadrants that provide:
– more opportunities for leverage, scale and optimisation
– more personal growth and fulfilment
– wealth and financial freedom
Being Rich vs Being Wealthy
Robert lays out a key difference between being “rich” and being “wealthy”. For him, wealth is measured in time, not in money. It is not how much money your make but how much money you keep (save) and how long that money works for you that counts. If you are rich, your income provides you with more than enough, but you still need to work to maintain your lifestyle; you have limited free time; you are not free. On the other hand, you are wealthy when the cash flow from your assets (investments) is greater than your living expenses.
This same approach can still be recognised as the FI-RE movement’s financial strategy (Financial Independence-Retire Early): spend much less than you earn, and invest the difference until you can live off your passive income (4% rule).
For Robert, the limited number of people on the right side of the Cash Flow Quadrant is due to the level of risk and uncertainty involved and the absence of mitigation measures that only good financial literacy and personal growth would provide. Instead of avoiding risk by staying in the left quadrants, the author suggests learning to manage and mitigate risk.
The 4 areas of the Cash Flow Quadrant
Let’s now look at the characteristics of each quadrant. You will soon realise which Quadrant you are currently at and which Quadrant you would like to be. Each quadrant requires a specific set of skills and mindset to be acquired and developed.
On the left side of the Diagram, there are (E) employees and (S) self-employed. If you are in one of these categories, your income comes from your work, not from the assets you own. These quadrants look for security. These quadrants focus on income.
On the right side of the Diagram, there are (B) business owners and (I) Investors. If you are in one of these categories, your income comes from your assets. You also access tax advantages because governments incentivise business owners and investors as engines to a thriving economy. These quadrants look for freedom. These quadrants focus on assets that work for you.
(E) Employe: the keyword is security and benefits.
(S) Self-employed: the keyword is “control”. You want to do your own thing, be your own boss.
(B) Business owner: he plans to run a system and delegate tasks. The focus is on ownership and leadership.
(I) Investor: regardless of which quadrant people make their money in, this quadrant is where money grows and multiplies, building lasting wealth. As long as you can invest savings from Income (in the case of an employee) or Profits (in the case of a self-employed or business owner), you will be in a position to grow your Assets.
Rather intuitively, you can operate in one or more Cash Flow Quadrants. Ideally, you can be an E, S or B, and ultimately be an I (Investor). Depending on your combination of quadrants, you will have a different cash flow and a different degree of optimisation due to tax advantages, leverage (debt), and compounding effects.
Entrepreneurs’ pitfalls based on the Cash Flow Quadrant
1) It is common to see individuals in the E Quadrant looking to make the big step and become business owners. Quite often, they ultimately end up in the S quadrant. While S owns the jobs, B owns the system and hires people to do the job. To be in the B quadrant, it is necessary to develop a system and delegate it to others (Ss or Es).
2) With E and S, there is the tendency to be perfectionists, to think no one does a better job than them. However, to run a business, it is necessary to build a system and ensure that the system is competitive, not only the product. The author points out that McDonald’s competitive advantage is the system (business model), not the product (burger).
Final notes on the Cash Flow Quadrant
I like to state that all models are wrong, but some are useful. I believe Kiyosaki’s model is not different: it provides a rather synthetic representation of 4 unique and, to some extent, complementary income strategies. While the diagram provides a compelling chart to map and track your career development, the book itself shares anecdotes to inspire emotional paradigm shifts and guidelines to fast-track your journey towards financial freedom.
Until next time, Sweat Your Assets!
Related article: How to use Kiyosaki’s Fast Track | Control your Cash Flow