A cashflow quadrant refers to different methods through which income or money is generated. All of these different methods require different levels of education, different technical skills, and are for different types of people.
In the famous book “Rich Dad Poor Dad“, the author, Robert Kiyosaki, advocates for financial independence. He also encourages and motivates the people who come across this book to build their wealth mainly through businesses, investments, and real estate.
In the cashflow quadrant, there are four types of people. They are the
- Business owners
In the first two quadrants, which fall on the left side, we have the employees and the self-employed. These are a group of people who depend on their jobs for survival. Without their jobs, they cannot survive. In the third and the fourth quadrant, these individuals survive on means other than employment. Let’s look at the four quadrants in detail.
Employees are people who work for a given organization or company. They depend on their jobs for survival. In addition to that, employees work for a given number of hours as specified by the company, upon which at the end of the month, they are paid for the hours or days that they have worked.
This is the riskiest quadrant that you can be in. for instance, when the company an employee is working for closes, the employee will be in financial trouble since she or he will not have a source of income. Employees are considered risk-averse. This means that they fear spending much time learning about how to get out of this quadrant; instead, they value their jobs and always work towards getting a job that pays higher and has greater benefits.
People who fall in this quadrant are slightly better off than those in the first quadrant. This is mainly because they know how to make their own money.
People who fall in this category are traders, freelancers, lawyers, dentists, and any other person who is a highly paid professional. The good thing about people in this Cashflow quadrant is that they are not bound by any contracts like the employees but are free to choose when and how frequently to work.
However, the disadvantage comes in that these individuals struggle to take some new projects to work on, and as a result, they will be wasting more time struggling to find something to work on rather than making money.
In addition to that, they do not like hiring other people to work for them since they believe that no one does it better than them. The only way that they can make money is through working. They need to be active and to do active jobs so that they can get money. The moment they stop working, money stops flowing. When these people need more money, they work for more hours so that they can pay their bills.
This quadrant consists of people who are aware of the different skills that they have, and since they are also self-employed, they have turned these skills into running their businesses. Unlike the people in the first two quadrants, business owners do not own any job. What they have is a system that makes money for them even when they are not working.
Business owners also know that they cannot be successful on their own, and for that reason, they hire people who have the skills and the talent that they need for their business, to help them in making money.
A business owner is usually an employee and the advantage that they have over the people in the first two of the cashflow quadrant is that they can fire or do layoffs without worrying about anybody taking the business from them. When a business owner wants to make more money, they will mainly focus on expanding their business and employees with skills.
Remember, even when they do not work, the people they have employed are working to bring money to them. What business owners basically do is that they create something sort of a machine that is used to magnify your efforts and can eventually stand on its own without any of your efforts.
According to Kiyosaki, investors are at the highest level of being financially secure. As an investor, all you have to do is to make your money work for you. This is to say that you do not need to be involved in any work for you to get money. All you have to do is to invest your earnings into real estate, shares, or bonds, as long as it is an asset that will produce good dividends.
The main reason why investors choose to invest what they earn into dividend-producing assets is so that they can stop working altogether and keep earning from what they have invested in. Most of the time, people tend to confuse investors with business owners. These two are different in that unlike a business owner who puts up initial work for the business to run, an investor does not put in any initial work for him to earn.
What investors mainly do is that they look for firms or businesses with the potential of making more profits, and then they make their investments in that particular business and get their dividend at the end of the day. The more the number of investments that an investor has the more money they make. Investors never go broke because they are good at finding assets that provide steady income. The trick is that they use other people’s money to get those assets.
In summary, everyone has been in either one of the quadrants in the Cashflow. Employees rely on working for companies to get money. Self-employed people do not depend on any company, but they have to work to get money. When they stop working, money stops flowing. But in this case, they can make a passive income to make money while they are working on their jobs.
Business owners on the other hand have to put in initial work in their businesses for them to keep earning and employing others. Investors are regarded as the most financially stable people in the cash flow quadrant. This is because they do not have to put in any initial work to get money. Therefore, everyone should strive to transition from the first three quadrants to being an investor for a lifetime of financial security.