Cashflow Quadrant explained

As for many newbie investors Robert Kiyosaki was one of the stars and mentors. Undeniably his books make a profound impact. The world he describes in his book is much different that vast majority of us were taught in our childhood. In fact Kiyosaki also helped me understand the division between the real wealth and the rest of the world. Let’s get one of his concepts – Cashflow Quadrant explained.

too often, when it comes to the subject of money, common sense is uncommon.

One of the concepts I find really interesting is the one he describes in his book ‘Cashflow Quadrant’. This book explains where all people are on their career paths. It also shows how they earn money and how they pay taxes. As you might know I am an analytical person so I don’t believe in all I read easily. I always do my own study and stress test concepts I learn. And even though I do not follow everything Kiyosaki ‘by the book’ the concept of Cashflow quadrant simply makes sense. Actually, biographies of many people fit into this model too. Here is the cashflow quadrant:

Cashflow quadrant categories:

E — Employees. People who work and exchange their time for money. Very often good experts in their field. Employees seek development in their area of specialisation, climb up the corporation ladders. They also seek stable and well paid jobs, they like security.

S — Self Employed. People who started small businesses, consultants. Example: doctors who own their own practice. Those people still trade their time for money. Quite often they work more than employees, are paid better and have more time flexibility. They own their business but in reality — their business owns them. In short – they are the business.

B — Business Owners. Owners of business of 500 people or more. This size of business implies that they have all systems and people (employees) in place. In contrast to previous groups they seek people from E and S quadrants to create their products and services. Since they own the working business they can live of company profits and have the freedom (both in terms of time and finances)

I — Investors. Investors have enough money to make them focus on making sure that the money generate their income. They seek investments that will bring them the highest return on investment.

Typically people traverse through the quadrant like this:

To illustrate it even better Kiyosaki provides numbers related to each group in this model. Apparently 95% stays on the left side of this quadrant (E,S) and only 5% is on the right side (B,I). What is actually stunning is that in terms of wealth distribution and taxes, those numbers are reversed — 5% on the left side and 95% on the right side. On top of that, tax system gives more benefits people on the right side of the equation. To some extent this makes sense. After all it is this wealthy group that provides jobs and governments want to encourage them to create more jobs. Unfortunately this gives them an unfair advantage and the whole system is prone to exploitation. That puts people in left groups in the diagram in a bad position. Not only they don’t have the same benefits but also they don’t fully understand taxes.

Cashflow Quadrant explained

Ray Dalio, one of the people I value as an expert in economy said recently that the COVID-19 pandemic we are experiencing right now will cause the major recession and recessions always help redistribute wealth. According to him every recession leads to wealth redistribution. It will be interesting to observe what will happen and how will it affect the Cashflow quadrant split numbers.

To conclude I would like to encourage everyone to study wealth and economy. Even though this is not something we are taught at schools, that is something that heavily impacts our lives, from the holiday we can afford down to how much time we have to spend on activities we like with people we value. I hope that with the cashflow quadrant explained you will be able to drive your financial decision better.

Keep Growing!