The Cashflow Quadrant® – How the rich get richer


commodities

Who are you today? Are you the person exchanging time for money? Or are you the person whose money has little to do with how you spend your time? Do you spend your time working for that sub-10% promotion, or are you the guy living your independence and building a legacy at the same time?

More importantly, who do you want to be?

When you listen to the campaign speeches of politicians – especially those competing for the top job – there's a lot of negative talk about the rich getting richer while the poor remain poor. In South Africa, these sentiments are uttered frequently by those in the upper political echelons (who, ironically, almost exclusively belong to the 'investor' quadrant below).

The simple truth, however, is that wealth starts with a mindset – a mindset a privileged few are taught since a very young age, but one that everyone else can learn and adopt at any point during their life. It's a mindset that determines how life is lived and which decisions are taken. And it is a mindset that starts with the Cashflow Quadrant®.

The Basics of the Cashflow Quadrant®

The Cashflow Quadrant® is a simple diagram created by Robert Kiyosaki, author of Rich Dad Poor Dad, that shows the four different people, or mindsets, that make up the business world. The key to traversing the different quadrants is to know and acknowledge where you are, and where you want to be.


Here's the Cashflow Quadrant®:

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E – Employees: Employees are people who have a job and earn a salary and benefits. Security is one of their core values; a predictable routine provides them with the stability they require to pursue other goals and interests.

S – Self-employed / Small business owner: Self-employed individuals own a job. To them, time is money – more so than for employees. Where they differ from employees is that they can choose whom to work for, and when to work.

B – Business Owner: These are people who own big businesses with 500 or more employees. Unlike the self-employed, business owners hire the most capable people to run their businesses for them. Where employees and the self-employed sell their time and skills for money, this direct correlation between time and money ceases to exist with the business owner.

I – Investor: Finally, there's the investor – the person whose money works for them to deliver a passive income. There's almost no correlation between time and money – you're making money even while you're sleeping. Where you will be expending time and energy is managing your investments. If employees are averse to risk, the investor knows that there's a correlation between risk and financial gain.


It's worth noting that the Cashflow Quadrant® also makes an indirect distinction between two types  of income:

Active Income

On the left-hand side are those who earn an active income – employees and the self-employed. Time is traded for money, so every day starts at zero.

Passive Income  

On the right is passive income, where there's no direct correlation between time and money. The source of passive income can be investments of various kinds such as property investment, shares, stocks and bonds, or 'work from home' endeavours such as online forex trading, Bitcoin trading and mining, and just about any on-line business set up to make money from advertising.

Traversing the Cashflow Quadrant®

There are some who worship Robert Kiyosaki, and some who criticise him. But all of them – from business owners to investors – agree on at least one thing: if you're looking for financial independence, be on the right-hand side of the quadrant.

While in high school, Warren Buffett and a friend bought a pinball machine to put in a barber shop. With the money they made from that pinball machine, they bought another pinball machine. With the money they made from those two pinball machines, they bought more. After some time they had eight machines in different barber shops.

After some time Warren and his friend sold the venture. With his share Warren bought stocks and started another small business.

Times have changed since Mr Buffett was a young boy. Today it's easier than ever to invest in stocks and bonds, to trade currency, to buy or mine Bitcoin, or to invest in property – locally, and internationally.

Put differently, today it's easier to diversify your income than ever before; you don't need to be rich to start the journey to wealth.