The 4 cashflow quadrants is a concept introduced by Robert Kiyosaki in his book Rich Dad’s Cashflow quadrant (Rich Dad’s Guide To Financial Freedom).
In the book, Robert discusses how different people get income from different quadrants. These quadrants are:
- Business owner
The 4 cashflow quadrants look like this:
On the left side of the cashflow quadrant, we have employees and self-employed. On the right side, we have business owners and investors. The world’s richest people operate on the right side.
The 4 cashflow quadrants
These are people who work for a business system. Their major concern is security. They are not ready to take the risk of starting their ventures.
Employees are fascinated with the idea of having a paycheck at the end of every month. Financial freedom is the least of their concern.
According to Kiyosaki, employees pay the highest taxes. They work for around 5 months every year just to pay the government.
Also, employees rarely get financial freedom. This is because they do not take risks. Higher rewards will always be accompanied by high risks. Therefore, the more you avoid risk, the more you avoid the reward.
As employees cling to financial security, they fail to take any financial risks that could bring great financial rewards.
Employees are known by their words. They want a safe secure job with good pay and excellent benefits.
Unfortunately, this is the path that society advocate. You will always be told to work hard, get a degree, get a good job with benefits, and go up the corporate ladder. This path no longer works.
As jobs become scarce due to harsh economic conditions and mechanization, more and more people are finding it very hard to survive as employees. The bills are higher than the monthly pay.
These people own a job. They work for themselves. They do all the work in their businesses. Self-employed people rarely trust other people to do what they do.
They feel that no one else is smart enough to get the results they get. Such people rarely grow their businesses because they do not know how to get leverage by using other people’s time (OPT).
Self-employed people are also defined by their words. They speak in terms of their hourly rate, commission rate, or the hours they have put into a task. It is all about them.
These people can be doctors, lawyers, accountants, financial advisors, consultants, etc. If they want something done, they do it for themselves.
3. Business owners
These are people who own a business system. The system is self-sufficient. Their input is not needed any longer. Such people can leave the business for one year and still find it running or even more profitable.
Business owners trust other people. They love delegating responsibilities. They surround themselves with people who are smarter than they are.
Business owners end up making blue-chip companies. They are the millionaires of this age. These people love to see people working for them.
You will also know business owners by their words. They are always looking for smarter people to run their companies.
Investors are the billionaires of our time. These people have millions to put in investment deals. To them, money is working hard for them.
Investors can also be known by their words. They will always be mentioning words like Return on Investment (ROI), Internal Rate of Return (IRR), etc.
What are your financial goals?
Different people get their income from the 4 cashflow quadrants based on their financial goals. This is because different cashflow quadrants offer different financial rewards.
People who want to be billionaires quit operating in the E and S quadrants. They become Bs or Is. That is where the millions are.
People who do not have big financial goals will always get satisfied with what they get as Es or Ss. All they want is to pay their bill on time and have something small left to enjoy life.
Look at your financial goals and move to the relevant cashflow quadrant.
Operating in more than one cashflow quadrant
You do not necessarily have to operate in just 1 of the 4 cashflow quadrants. You can get your income from 2, 3, or even 4 cashflow quadrants.
If you are employed, you can have a side hustle. You can then employ other people to manage it for you. If you are a big business owner, you can start another small business to grow it.
As an employee, you can also become an investor. As a business owner, you can also become an investor or employee.
The left vs the right side of the quadrant
The left side is for people who work hard and get less income. The right side is for those who hate doing the work but love getting all the income.
Employees and small business owners have to work to get their income. When they go for a year, they cannot continue earning their income. It means that their income is dependent on them showing up to work.
Business owners and investors do not have to work to earn. They can go for a one year vacation and still make money. This is because other people and money work hard for them.
To earn from the left side is quite easy. You just need to have a skill. You do not need to bother about growth so much.
To operate on the right side takes financial intelligence and courage. You have to be committed to lifelong learning, take the risks, and strategize for growth every day. You have to learn how to build strong business systems and delegate responsibilities.
Due to the high demands of the right side, very few people earn from it. Many people opt to remain on the left side because they are not ready to pay the cost.
However, the right side is more rewarding than the left side. All billionaires earn from the right side.
People can change quadrants. However, the change will come when we have a change in our internal composition. Your thinking has to change. Your risk-preference also has to change. Most importantly, your knowledge has to advance.
When moving from an employee to a small business owner, you need to learn basic business management skills like bookkeeping, payroll, taxes, business finance, sales, marketing, business strategy, etc.
As you move from a small business owner to a big business owner, you need to know how to lead people, create and manage complex business systems, PR, corporate culture and change management, etc.
As you become an investor, you now need to gain advanced investment knowledge. You need to know how to calculate the opportunity cost of different investment decisions and so on.
Therefore, to change the cashflow quadrants, you need to change yourself. Keep learning and changing your perspective in life. Without learning, changing quadrants is in vain. This is because you will fail.
The best path
The best path is to move smoothly across the 4 cashflow quadrants. First, get a good company to work for. Make sure you learn as much as possible about how to carry out the different business functions.
After learning, having a stream of passive income, and having capital for your new business, you can jump ship and start your own business.
After you start your business, find a way of getting leverage by using other people’s money (OPM) and other people’s time (OPT). This is the only way you can grow into a big business owner.
Focus on building strong business systems and hiring smart people to run the business. Make the business as independent from you as possible.
After the business has grown, you will have lots of cash to become an investor. This is the final goal; to have money working hard for you.
Advantages of the right side of the quadrant
The 4 cashflow quadrants have advantages and disadvantages. However, the right side of the quadrant has more advantages than disadvantages. They include:
- Having lots of time to raise kids.
- Having money to donate to charities and projects.
- Bringing jobs and financial stability to the community.
- Having time and money to take care of your health.
- Being able to travel the world with your family.
It is better to operate on the right side.
Qualities of a big business owner
Big business owners have two distinguishing qualities:
1. They know how to build business systems
Big businesses are sustained by systems, not people. Even if the CEO quits working for a big business, it will still open the following day.
These systems include:
- Proper production systems.
- A great distribution system.
- Magnificent sales systems.
- Global payment systems.
- Great customer service.
- Public relations systems.
- Proper leadership structures.
- Research and development.
- Proper financing.
If the business owner can build and sustain such systems, the business cannot remain small.
Business owners who cannot distinguish between a product and a business system will never grow their businesses. No matter how good a product is, it has to be supported by an amazing business system.
2. Ability to lead
Big businesses have many employees. A great business owner must be able to lead these teams and inspire them to achieve a predetermined goal.
Therefore, business owners need to have great leadership qualities to accomplish this task. If you cannot lead people, you will never know how to use their skills to your advantage.
Why become a B before an I?
The book recommends that people who want to be successful investors should first become successful business owners. This is because of two reasons:
1. Experience and education
Investors invest in the stocks of other businesses. Having become a big business owner, you are better placed to identify other potential businesses and business owners when you become an investor.
You will be able to assess the strength of business systems before you invest your money. This will save you from unnecessary losses.
Successful Bs have millions at their disposal in dividends. Such people can use that cash to fund investment projects.
Due to these two reasons, it is advisable to first grow a business before investing in businesses.
Three main types of business systems
There are three main types of business systems according to Robert Kiyosaki:
- Traditional C corporations. Where you develop your own system. This requires effort, skills, and hard work.
- Franchises. Where you buy an existing system. An established name will spare you the effort of building a brand.
- Network marketing. This is where you buy into and become part of an existing system.
Choose the business system you want to establish properly based on your resources.
What happens if you do not invest?
Investing is the key to financial freedom. If you do not invest, the following will be the consequences:
- You will have to work hard all your life.
- You will worry about money all your life.
- Depend on others to take care of you.
- You will define the boundaries of your life based on money.
- You will not know what true freedom is.
The five levels of investors
There are five levels of investors. They include:
1. The zero financial intelligence level
These are people who never invest. They care less about investment or do not know about it altogether.
2. The savers are losers level
These people do not invest, they just save. Such end up losing their investment to inflation.
3. The I am too busy level
These are people who are too busy to invest. They turn their money to other people and hope that they will make the best investment decisions on their behalf. Such people invest in 401(K)s, IRA, mutual funds, etc.
4. The I am a professional level
These people make their own investment decisions. They have some investment knowledge and prefer to do it themselves. They buy and sell stocks from a broker, buy real estate, etc.
5. The capitalist level
These are high-level investors. They invest even using other people’s money. They put in millions or billions into money-making deals.
Capitalists are big business owners who have turned into investors. They have all the knowledge and the money to make big deals.
Which level are you in? Desire to move up the levels and become a capitalist.
Final thoughts on the 4 cashflow quadrants
The 4 cashflow quadrants show us how people get their income. Some are employees, others are self-employed, others are business owners and few are investors.
Have a desire to move to the right side of the 4 cashflow quadrants because that is where financial freedom is.
I recommend that you read the book. It will open your financial eyes. That is the beginning of financial freedom.
Get the book on amazon