by Eddie Patin
(from the Financial Freedom and Achieving Business Success article series)
In the quest for financial freedom, the Cashflow Quadrant, created by Robert Kiyosaki (“Rich Dad, Poor Dad”), is a powerful illustration that anyone trying to improve their financial situation should seek to understand. Kiyosaki wrote exclusively about this in his second book, “The Cashflow Quadrant”, which I consider one of the best of his books. Even though I’ll be describing the Quadrant here, you should definitely read the book. There is only so much I can cover in one article.
The Cashflow Quadrant is, as I said, an illustration. It is an organization of the mindsets involved in the acquiring of income, the beliefs in finances, the beliefs in investing, and the attitudes, fears, and ideals in the world of money and business.
There are four quadrants.
The left side consists of:
E – for “Employee”
S – for “Self-employed” or “Specialist” or “Small business”
The right side consists of:
B – for “Business owner” or “Big business”
I – for “Investor”
E. “Employee”.
The Employee is the majority of us. Our modern culture and our schools raise us to be of the ‘employee’ mindset. Even our parents guide us in that direction, because they’re usually ‘employees’ themselves and don’t know any better. An employee looks for a safe, secure job with benefits. They’ve been pounded with fear and economic uncertainty all their lives, and are looking for an employer to take care of them. They have been taught to invest in ‘safe’ investments for retirement, like 401k’s and Mutual Funds. And their days are numbered, because as they get older, if they need to go from job to job, or suddenly need a new job after being laid off, they’re completely vulnerable to the whims of employers and may have trouble getting a new job when they’re up against younger competition. When they finally retire, if they can, they’ll be hoping their investments did okay (because they paid someone else to take care of them), or they’ll be relying upon their kids or the government to support them. Or they may have to work for the rest of their lives. ‘E’ people limit themselves with emotion and fear. They might think investing is too risky. Or even running their own business is too risky. Maybe if they aren’t hurting for money, they’ll put everything away into their savings account and think it’s an investment. They might think that their biggest investment is their home. They might even think of a car as an investment. ‘E’ people are largely ignorant to financial literacy, and will work their lives away.
S. The S stands for “Self-employed”.
This is the type of person that runs their own show. This can be a salesman, or a construction contractor, a personal trainer, a project manager, a lawyer, a doctor, or any number of freelancers and independent contractors. They charge for their services, by the hour or by the job, and have control over what they do, where they do it, how they do it, and so on. They can be fiercely independent, and deal with their clients/customers on their own terms. When times are slow, they just work harder and harder. ‘S’ people can also be called ‘Specialists’. They invest in themselves, their education, certifications, etc.—whatever they need to do the job better and stand out among their competitors. The hardcore heroes from Ayn Rand’s novels (“Atlas Shrugged” and “The Fountainhead”) are prime examples of ‘S’ people. S might also stand for “Small Business”, which includes most small businesses around the country where the owner is the center of the company. The problem earning your income from the ‘S’ quadrant is that if you stop working, the income also stops. You can makes lots and lots of money by working hard, working smart, and working long, but that cashflow needs you to be there. It's just like that with the ‘S’ small business. If your business can’t run without you present, it’s an ‘S’ business. If the owner has to leave for a while, the business stops.
B. “Business Owner” or “Big Business”.
‘B’ people create businesses, especially corporations, or business systems, that do not require their constant presence to bring in cashflow. There is a distinct difference between the ‘B’ business and the ‘S’ business. The ‘B’ person designs their business so that it can run on its own without them. The ‘S’ business would not be able to survive without the owner. If a ‘B’ business owner leaves for a few months, being as his business is designed on a self-sufficient system and he’s selected the right people to run it, he should be able to come back to find it running better than when he left. The ‘B’ quadrant is not just limited to actual businesses, however. It’s anything that can be automated (run without you). If you write and sell a book or create and sell an invention, and leave it in the right hands for publication / marketing, the royalties are considered a ‘B’ business. Because you created it, and it sells itself on its own. A ‘B’ business could even be something so small as owning and operating a bunch of vending machines (automated). Buying a ‘Franchise’ (McDonalds, Carl’s Junior, Hollywood Video, etc.) is also a ‘B’ business, because you’re buying into a pre-existing system that should run on its own without your required presence. Network Marketing companies are also ‘B’ businesses, because you’re buying into a system (like a franchise) that’s been proven to work, and, after a little work, you can get the system running for you, by people under you, without having to do any further work. More on Network Marketing later.
I. The final quadrant is the “Investor”.
Investors make their money work for them. They invest in stocks, other businesses, limited partnerships, real estate, and anything else that (after due research) is found to grow the money they put into it. They look for ways to create “passive income” (cashflow that comes in without you having to work for it or be actively involved in it), by buying rental properties (think Monopoly: the green houses and the red hotels), or trading stocks in certain ways to obtain a monthly income from their money growing. This (and the ‘B’ quadrant) is the best place to obtain lasting financial freedom because, ultimately, the multiple streams of income that last through old age will be here.
There’s a pretty big difference between the left side of the quadrant and the right side. Most of everyone is on the left side. This is where we are trained to think. We grow up told to ‘go to school, get good grades, and get a good job’ (‘E’ quadrant), or sometimes to ‘go to school, get good grades, and become a doctor or a lawyer’ (‘S’ quadrant). I was told to ‘become a highly-paid computer programmer’ (‘E’). But what happens when Hewlett-Packard lays off hundreds (thousands?-don't remember) of people like they just did here in Colorado Springs? Or when IBM goes under? Sometimes, when people get experienced in the ‘E’ category, they end up moving to the ‘S’ to use their experience and run an ‘S’ small business. Like a construction worker eventually running his own construction company. Or a dog groomer eventually opening her own shop. But, then, they still have to work to keep it going. Like Kiyosaki says, an ‘S’ business owner simply ‘owns a job’.
The right side, both the ‘B’s and the ‘I’s, focus exclusively on creating/running/investing in something that they can turn loose and let it run on its own. Then, this entity, whether a business or an investment, will bring in cashflow with minimal attention from the creator/investor, leaving the ‘B’ / ‘I’ the time to create another stream of income elsewhere. That’s why there’s an 80/20 split among the left and right side:
The left side (employees and self-employed) consist of 80% of the population, and controls only 20% of the country’s wealth.
The right side (business owners and investors) consist of only 20% of the population, and controls 80% of the country’s wealth.
It is possible to be involved in more than one quadrant at once. Some employees invest for their retirement in Mutual Funds, IRA’s, etc. (even if they’re just paying a broker to do it for them), so they may be ‘E’s with a little bit of ‘I’. Personal trainers, in another example, will usually work for their gym (as an ‘E’) and, in their off-time, do more profitable training sessions with personal clients as an ‘S’. Or, a person trying to get out of the rat race might be an ‘E’, or an ‘S’, and might spend their spare time working on a ‘B’ (like Network Marketing). It is, of course, possible to move around in and enter new quadrants, with the right education and dedication. If you’re stuck in the left side, you can learn about the right side and get there if you want it. (Of course, a lot of ‘E’s, deep down, don’t really want to move to the right side. When security is more important than freedom, fear will keep them in the hole.)
A word on Network Marketing, which I’ll get into much more in the next article. Network Marketing is a ‘B’ business. That’s because, whether you’re doing direct sales, or selling herbal supplements, or whatever, there is a system set in place for the people you recruit under you or the people you sell to. After you’ve put some work into a (good) network marketing program, the sky’s the limit. You can continue trying to sell your product and make money directly for yourself, or you can sit back and do nothing after you’ve made some sales and have people under you (your team), because the system will pay you for the efforts of your team. If you set up a good team, you can count on some passive income (cashflow rolling in without your participation) coming in indefinitely. This is the easiest way to get your feet wet in the ‘B’ quadrant, because it’s cheap, will teach you a lot about business, and will give you what may be your first stream of income above and beyond your day-job. And that’s passive income. Growing your cashflow (bigger cashflow) and sending you further down the road to financial freedom.
By the way, I make a lot of references to the materials written by Robert Kiyosaki and his business. I believe in the sanctity of intellectual property, so I’ll quote where I need quoting, and I won’t try to pretend I created any concepts I didn’t. In fact, if you go to my links / suggested reading page, you can find direct links to his website, and links to purchase his books and board-game, “Cashflow 101”. His books are excellent, if you take the parables with a grain of salt. There is a lot of knowledge to be gleaned from them.
