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The Cashflow Quadrant is a book written by Robert Kiyosaki. It’s basically a guide to breaking free from the “rat race” by achieving financial freedom. The basic idea behind the book is that in the business world, people are divided into four types: Employee, Self Employed, Business Owner and Investor.
In this book, Kiyosaki suggests that the road to financial independence is not by becoming an employee or by becoming self-employed, but rather to slowly build businesses and to start investing wisely. Take a look at the diagram below:
Those on the left side of the vertical divide (Employees and Self-employed) are still in what Kiyosaki calls the “rat race”. The rat race is the race to obtain more money and possessions (through work) that will eventually require more work, more stress, less time for the self and the things that really matter in life. Being in these quadrants mean that a person is paying bigger taxes (than those who are in the opposite side), get paid as they work and are dependent upon their work for their finances. Simply put, their cashflow depends on Active Income or the income that comes from doing something. Let’s take a look at the kind of people from the left side…
Employees Employees are people who rely on an organization for work. These are the people who HAVE JOBS. They make up 99% of the world’s population. The Employees work for the the Business Owner and self-employed quadrants, helping them become rich through their toiling. They work hard 5-7 days a week, rely on a regular pay check from a stable job (is there such a thing these days?).
Self-Employed The self-employed are people who OWN JOBS. They do not rely on organizations for work, they just work on their own and at their own terms. Most small businesses are owned and run by the self-employed. The problem with being self-employed is that their businesses are centered around them, meaning the business will stop earning money if they stop working.
The people on the opposite side of the fence are the wealthy (B an d I). Their main cash comes from Passive Income or regular income that comes from doing little to no effort at all.
Business Owners These are the people who owns businesses. They value creating systems that will make more money. Unlike the self-employed, they believe that profitability is the main target and not doing everything right by doing it yourself. Business Owners understand that they do not need be in an active role for their business to earn money.
Investors Investors are people who invest their money and let it work for them, even in their sleep! They are able to use their money and other people’s money to make more money with very little physical exertion. They are often the ones who give business owners capital to start and run their businesses.
Bear in mind that a person can be in any quadrant at a given time and can even be in a combination of two or more. The main idea is that there is one quadrant that you get most of your money from.
After understanding the kinds of people in the quadrants and you realize that you want to change and be financially free, try asking yourself these questions:
Where are you right now?
Look at where most of your income comes from. That will define what quadrant you are in at the moment. There is nothing wrong with not wanting to leave the comfort of your current state (if you are an Employee or is Self-Employed), but staying in these quadrants will make it hard for you to achieve Financial Freedom.
Where do you want to go?
Changing from one quadrant to another requires a great deal of change. Crossing the line from left to right most likely means that there is no changing your mind later on. Being financially independent is not for those who want a secure life. A person basically has to step outside of their comfort zone in order for it to happen. Be ready for a long, winding and bumpy road full risks and pitfalls.
Take that first step
Start gaining Financial Intelligence. Study and get the skills needed for you to succeed. Most of the knowledge we acquire from traditional schooling pertains to the E and S quadrants. To be successful owning a business and investing, you’ve got to get your hands dirty. Learn from mentors, read (a lot! regularly! ) attend training courses and seminars that will help you practice the knowledge and skills that you will be acquiring.
It’s not exactly an equivalent to a financial ‘field manual’ or a blueprint on how to become rich. It’s more of a guide on how to look at things from a different perspective. Most people have been indoctrinated with ideas of becoming successful Employees and Self-employed people. Reading this book will broaden your thinking with regards to money and real financial freedom.