The Cash Flow Quadrant essentially defines four types of income generation.
As a sequel to Robert by Kiyosaki The book ‘Rich Dad Poor Dad’ shows that we all have income that comes from one or more of four ways.
The first quadrant is ‘E’ for ‘Employee’. This is where most of us reside. We typically only have income from this quadrant. This is illustrated as a capital ‘E’ at the top left of a four quadrant diagram.
There is nothing wrong with this quadrant, but time is exchanged for money in a linear fashion and you have a limit on the time you have and therefore the salary you earn.
Bottom left is the ‘S’ for ‘Self-Employment’. This is considered to be the next step of income from an employee. Here, you have more control over what you do, but the key point is that your time is basically being exchanged for money, so there is still a limit to your income from being in this quadrant.
On the top right is the ‘B’ for ‘Business Owner’. Here, you make other people work for you and pay them to run your business.
Now your time is spent, because you get a good income from a good business without spending too much time there, so you can also do something else. This is where some of the richest people earn their income. The idea can be scaled so that you can start another business and repeat the same process adding to your portfolio of businesses.
Bottom right is ‘I’ for ‘Inverter’. Here, you invest in stocks or funds. Now very little time is used, because now you are slowly making money in the long run and you spend very little time on it. You can also invest in real estate that you rent or have partial shares in another business.
The equation of time and money is very important to your wealth. You will never get rich as an employee as this is a linear ‘time for money’ equation. If you work twice as long, you will earn twice as much money. If you are in the ‘S’ part of the quadrant, you can be wealthier than an ’employee’, but you still have a limit on how long you work.
Rich Dad said that the best place for your income is on the right side of the Cash Flow Quadrant. Building assets in the form of businesses, or investing in stocks or real estate, no matter how small, is the way to go!
Remember that you can still file for bankruptcy in all four quadrants, so your wealth ultimately depends on the type of person you are and how you do things.
