Robert Kiyosaki of Rich Dad, Poor Dad fame developed the Cashflow Quadrant to show people how to achieve financial freedom. He even wrote a whole book about it. But what exactly is the Cashflow Quadrant?
The Cashflow Quadrant, in its most simple terms, is a chart showing how people can make money. On the left side of the chart are the more active ways of making money and on the right side are the more passive ways of making money. Clearly, we all want to try to get further and further into the passive side.
The first section of the cashflow quadrant is E for Employed. Most of us fall into this category. We have a job. When we go to work, we make money. We’re trading our time for an income. Someone else is in charge of our job. Now, Employed isn’t a bad category to be in. Clearly, everyone has to start somewhere, and there is a lot of financial security in employment. Yes, we can lose our jobs, but in general, this is a safe area to be in. On the downside, if we don’t work, we don’t get paid. We are also at the whims of someone else. And let’s be honest, there’s someone above us making more money thanks to our hard work.
Moving down to the second section of the quadrant, we find S for Self-Employed. This is one step above Employed. We’re still working, and if we don’t work, we don’t get paid, but we are in charge of our work. There is no one above us making more money because of our work. According to the Cashflow Quadrant, this is still a better situation than Employed because of the self-determination. You make more money based on how hard you work.
Next we move to the right side of the cashflow quadrant. According to Kiyosaki, this is the section we all want to be in. At the top, we have B for Business Owner. We own a company and other people work for us. We make money thanks to the work of others. I take issue with how Kiyosaki views this category, as he considers this a passive method of making money, and many of the business owners I know work incredibly hard. I will discuss that in a future article. Either way, the benefit here is that you don’t have to be working all the time to make money. You can go on a vacation and the business continues without you, which continues to generate income.
Finally, we have I for Investor. This is the section of the cashflow quadrant we want to be in. We invest our money in stocks, bonds, and real estate and we make money without any work at all. This income is completely passive. You don’t have to be doing anything at all to be making money. You can make money while you are on vacation or while you are sleeping.
Okay, great. But how does this apply to me? I’m not in any position to be a business owner. If I can’t get myself over to the passive side of the quadrant, what does this mean?
Well first, off you don’t have to be in only one section of the cashflow quadrant. In fact, it’s beneficial to be in multiple sections all at once. Many people also have full time jobs but also are self-employed on the side with an evening and weekend job to bring in additional cash. Many of us are still in the employed category, but that doesn’t mean we can’t also be investors. In fact, we should be investors in the form of our retirement funds. The goal is to make our money work for us.
It’s all too easy to look at the cashflow quadrant and say “Okay, but I don’t want to be a business owner,” or “I appreciate the security of a regular job. I don’t want to be self-employed.” There’s nothing wrong with that. From my point of view, aim towards that last quadrant. Work towards being able to invest more of your money. You will be able to take that money you work for at your full time job and put it to work for you.
Megan is a 30-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.