Rich Dad's Cashflow Quadrant (by Robert Kiyosaki)
Have you ever been told the classic advice growing up:
Just go to school, get good grades, and land a secure, well-paying job?
It's likely that around 95% of us were raised with this belief as the road to financial success.
I certainly was.
While this path may be suitable for some people, it's not necessarily the best fit for everyone.
In Robert Kiyosaki's book "Rich Dad's Cashflow Quadrant," he breaks down four distinct paths to wealth, suggesting that some are more effective than others.
Now before we start, this is Ivan here from the Vanilla Investor, a former investment analyst and with over $100k invested in the markets.
My goal is to bring you simple finance at your fingertips.
Today, we will talk about 5 key lessons from Rich Dad’s Cashflow Quadrant:
- Number 1: What is the cashflow quadrant?
- Number 2: Using Other People’s Time (OPT) & Other People’s Money (OPM)
- Number 3: The Pros and cons of Each of the 4 Quadrants
- Number 4: How you can move to the right side of the quadrant, namely the B & I quadrants
- And number 5: The 5 Levels of Investors
Okay, so let's delve into the first lesson: what is the cashflow quadrant?
#1: What Is The Cashflow Quadrant?
The cashflow quadrant is a straightforward model that outlines four primary sources of wealth.
Which quadrant you fall into depends on where the majority of your income originates.
The four quadrants are:
E - the employee
S - the small business owner or self-employed
B - the big business owner
and I - the investor.
The employee seeks security and achieves financial success by advancing within a corporate structure, also known as climbing the corporate ladder.
You might hear them express a desire for a stable and secure job with supportive colleagues and attractive benefits.
In contrast, the small business owner or self-employed individual seeks control.
They attain financial success by heavily specializing in a high-demand field, often emphasizing how much they are compensated for their expertise and time.
Most importantly, they want to be in charge of everything.
The big business owner prioritizes freedom.
Their financial success stems from establishing a profitable business system, often delegating operational tasks to capable individuals.
They would prefer hiring talented professionals (often people smarter than them) to manage their business for them.
Similarly, the investor also seeks freedom, but achieves it by strategically allocating money where they anticipate the highest returns.
They would want their money to work hard for them in the most profitable way possible with minimal effort.
#2: Using Other People’s Time (OPT) & Other People’s Money (OPM)
The primary distinction between the left side and the right side of the cashflow quadrant lies in OPT and OPM.
OPT represents other people's time, while OPM represents other people's money.
Individuals in the B quadrant leverage OPT and OPM when constructing a business system, employing individuals from the E and S quadrants while sourcing funds from those in the I quadrant.
Initially, they may invest a huge amount of their personal time and money to launch the business, but ultimately, transitioning to a more passive ownership role becomes feasible.
Conversely, individuals in the I quadrant utilize OPT to generate income solely from their invested capital.
With sufficient expertise, they can also employ OPM to amplify their investment returns.
This distinction is crucial, as individuals in the E and S quadrants cannot use OPT or OPM.
So, as they achieve success in their respective quadrants, they make more and more money, but their workload increases in tandem.
#3: The Good and Bad of Each Quadrant
E - the employee
The good: They enjoy reduced financial uncertainty, receive benefits like paid vacation and health insurance, and interaction with colleagues.
The bad: Success often translates to increased workload and less leisure time. Your performance may be higher than your salary, particularly if you're diligent. Dealing with colleagues, especially your boss, can also be challenging.
S - the small business owner or self-employed
The good: You become your own boss and are compensated based on your performance.
The bad: Success entails more responsibilities and less free time. Additionally, there's financial uncertainty, as there's a risk of losing money.
B - the big business owner
The good: They get access to OPT and OPM, allowing for quicker financial freedom. Enjoy a larger share of profits, as you can use your corporation to reduce tax obligations.
The bad: There's financial uncertainty and a risk of losses. Running a business requires skills beyond what you learned in schools, and managing people can be a headache.
I - the investor
The good: They can use OPT and OPM to achieve financial freedom rapidly. Benefit from a larger share of profits and potential tax advantages. Investment can be passive in nature.
The bad: They face financial uncertainty and the possibility of losing money.
#4: The Right Side of The Equation
While every quadrant has its own pros and cons, the right side offers the fastest route to financial independence.
This prompts the question:
How can we move to this side?
Money, similar to other addictive substances like sex or drugs, has a powerful allure.
Earning money from a specific quadrant ingrains an addiction to that quadrant's method of generating income.
For example, if you earn as an employee in a corporate setting, your brain associates that type of work with earning money.
Consequently, transitioning to a different quadrant becomes challenging due to this ingrained association.
Moreover, if you come from a background where:
- academic degrees,
- job security,
- paid leave,
- and government pensions
are highly valued, transitioning may be even more difficult.
Several mental hurdles may hinder this transition, including fear of taking risks, fear of failure, and the belief that money cannot buy happiness.
Furthermore, our educational system tends to reward those who make fewer mistakes and penalize those who make more.
However, in the B and I quadrants, success often requires taking risks and learning from mistakes.
Individuals who take action may make more mistakes initially, but over time, they learn and achieve more as business owners or investors.
Thomas Edison's experience illustrates this point; despite facing criticism for failing 1014 times before inventing the lightbulb, he persisted until he succeeded.
To facilitate the transition, surrounding oneself with individuals who have successfully navigated the journey to the B and I quadrants can provide valuable insights and guidance.
#5: The 5 Levels of Investors
Lesson number 5: The five levels of investors, as outlined by Robert Kiyosaki, depict varying levels of financial intelligence and investment proficiency.
Beginning with the lowest level:
1. The zero-financial intelligence level:
Individuals at this level have no surplus funds to invest.
Their monthly expenses exceed their income, often because they neglect the fundamental principle of paying themselves first, as advocated in the classic book, "The Richest Man in Babylon."
2. The savers-are-losers level:
This level comprises individuals who stash their hard-earned money in low-yield savings accounts or under mattresses.
While this may position them among the top 50% financially, it's not a sound long-term financial strategy due to inflation eroding the value of their savings over time.
3. The I'm-too-busy level:
Many people in this level are preoccupied with their:
- careers,
- family,
- social life,
- and vacations,
leaving them with little time to dedicate to investing.
Consequently, they delegate investment decisions to others, missing out on the opportunity to learn and grow their financial literacy.
4. The I'm-a-professional level:
This level encompasses do-it-yourself investors who manage their own investments and make their own decisions.
While they are actively educating themselves in the realm of investing, they have yet to reach the highest level of investment proficiency.
5. The capitalist level:
Investors at this pinnacle level hail from the B quadrant and leverage the principles and strategies inherent to that quadrant in their investment endeavors.
They collaborate with advisors to gather market insights, utilizing other people's time (OPT) and other people's money (OPM) alongside their own capital.
Additionally, they employ corporate structures to minimize tax liabilities on their investment gains.
Level 5 investors are poised to achieve financial freedom ahead of their peers.
What level of investors do you currently identify with?
If you feel you are a level 1, 2 or 3 investor, and you would like to move to level 4, or even level 5.
Then you should totally watch my YouTube video on why your net worth will skyrocket after the first $100k.
Thanks for reading and cheers!
- Ivan
P.s. if you like this book summary, then get the book here!