When’s the last time you carefully analyzed the trajectory of your professional life? As a busy professional, it’s easy to get caught up in all of the complex daily activities and lose sight of your long-term goals. One of the best ways to evaluate and reposition your professional life is by using Robert Kiyosaki’s Cashflow Quadrant.
While in my opinion, Robert Kiyosaki’s books have a lot of fluff in them and have gotten less and less meaningful as time has progressed, one of his earlier concepts that has stood the test of time is the Cashflow Quadrant derived from a book of the same name. The Cashflow Quadrant is a simple concept but has enormous importance in the career of any professional. If you’re ready to learn about the Cashflow Quadrant and four quadrants of income and how it can help you transform your career, and most importantly, life, let’s get started.
What is the Cashflow Quadrant?
Using the Cashflow Quadrant concept, Kiyosaki created a distinction between various types of careers and how our current tax structure factors into each career choice. He goes on to talk about how people’s mindsets in each of the quadrants influence their career projections and paths (or lack thereof) to financial freedom.
No matter what your goals are or what level of career achievement may be, the Cashflow Quadrant helps you to think about the big picture and put your current and long-term goals into perspective. In a nutshell, it makes you evaluate your current quadrant and determine if you are satisfied with it or not.
Let’s take a closer look at each of the four quadrants of income and their associated meanings.
E Quadrant — Employee
“E” stands for “employee.” The E quadrant is where most of the working population resides — an employee earns a paycheck and benefits by exchanging their time, knowledge, and performance of their required job. Their finance or wage is directly tied to the amount of their traded time and their ability to perform efficiently and effectively at their job.
If you fall under the E quadrant, the only way to make more money is to put in more hours or switch to a higher-paying company. Within this quadrant, there is no passive income. If you don’t work, you most definitely do not earn any money. Additionally, people in this quadrant pay the most taxes of any other quadrant. As you may have gathered, the majority of highly paid professionals in the U.S. fall into this quadrant and this quadrant alone.
How many of you are a government employee or work for a company with a paycheck based on the number of hours you clock in weekly? Put another way, will you feel the heat if you don’t bill a certain number of hours this year?
S Quadrant — Self Employed
“S” stands for “self-employed.” A self-employed individual is his or her own boss. While an employee works under a management structure, the self-employed person owns their own business and dictates the daily activities without the input of a superior or senior partner. However, while self-employed people may think they are superior to the people under the E quadrant, they both share some similarities — both are exchanging their time for money and pay high taxes.
Kiyosaki describes individuals who fall under the S quadrant as individuals “owned by their business.” As a self-employed individual, you have greater control over your time (unlike employees), however, if you do not put in the work you will not get paid. You may have your own business, but you still have to take up new projects, make appearances, draft documents, and bill your time in order to earn money.
B Quadrant — Business Owner
“B” stands for “business owner.” Unlike the E quadrant and S quadrant, individuals in the B quadrant don’t just own their jobs; they own a system. Business owners are known to outsource their tasks to experts instead of taking it on themselves. If you are a business owner, you likely own a system that creates income inequivalent to the amount of time you put in.
You can stay out of your office for months or travel around the world for vacations without your b quadrant business suffering. Your income isn’t directly linked to your time. Due to the difficulty of breaking into this quadrant, only a select few professionals go on to become business owners. However, professionals that can make it into this quadrant are on the right path to attaining financial freedom.
I Quadrant — Investor
“I” stands for “investor.” According to Robert Kiyosaki, “this is the peak of all the quadrants, and only a few get to attain it.” While the self-employed guy down the road owns a business and the business owner living across the street owns a system, investors own assets that make money for them while they sleep (and while they’re awake, and while they eat, and while they…you get the picture). Uncle Sam also encourages people towards this quadrant with tax breaks, incentives, and loopholes.
The investor is an individual who may have made money from one or more of the other quadrants and has learned how to put that money to work for them passively. Investors often invest or purchase equities in real estate, stocks, royalties, and owning portions of businesses. This is the crème de la crème quadrant and where true passive income lives.
If you are a busy professional looking to achieve financial independence and time freedom, then the I quadrant is where you need to get to and therefore where you need to focus your goals. Once you are here, your job becomes more of a hobby than actual work. You can choose to work when you want to, not because you have to.
Active Income vs. Passive Income
Kiyosaki went further to divide the four quadrants of income into two parts — the left and right sides of the quadrant. Under this division, Kiyosaki analyzed the quadrants using each quadrant’s varying level of effort required to make money. The two quadrants on the left (E & S quadrants) are regarded as active income. As an employee or self-employed individual, you are actively exchanging your precious time for money. That is, the more active working hours, the more money.
The two quadrants on the right side (B & I) are considered passive income. If you fall under these two quadrants, your income is not proportional to the time you put in — you are earning income even when you are not actively working.
How Do You Change Quadrants?
I believe one of the questions running through your mind right now is, “How do I change from being a busy professional who trades his or her time for 4 money quadrants and resides in the E and S quadrants to a financially free individual who resides in the B and I quadrants? How do I make the switch from an employed or self-employed individual to an individual with multiple streams of passive income?” The answer is to start educating yourself on how to build and take advantage of passive income opportunities. Then, take action.
Do you have to abandon your career? Not at all. We have worked extremely hard for a long time and value our careers and the importance of what we do. We are well-compensated and good at what we do. Switching to the right side of the quadrant doesn’t require leaving your career, but it simply means taking your active income and diversifying into several smart passive investments. The good news is that diversifying your current active income into passive investments that will provide you with sustainable cash flow is a lot easier than you might think.
About the Author:
Seth Bradley is a real estate entrepreneur and expert at creating passive income while still working as a highly paid professional. He’s the managing partner of Law Capital Partners, a private equity firm focused on multifamily and opportunistic acquisitions and the host of the Passive Income Attorney Podcast. Get started building a future full of freedom by snagging The Billables to Abundance Bible at www.escapethebillable.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.