Robert Kiyosaki: The Cash Flow Quadrant Interpreted
If you haven’t read ‘Rich Dad, Poor Dad’ by Robert Kiyosaki yet, then this book is a must and should be the next book you read. Why? Honestly this is the best book for getting a true understanding of financial independence and personal financial management that I have read.
One of the primary concepts that Robert introduces into the book is the cash flow quadrant and this is want I want to discuss and interpret for you today, because it gives you an enormous perspective about where your finances are at now and what you need to do to gain financial independence. Here is what the Quadrant looks like:
|
E Employee |
B Business Owner |
|
S Self Employed |
I Investor |
When you get out of school/university and you begin to earn money, there are generally two options for you, that is you become an employee (getting a job) or you become self employed (you buy yourself a job). So you begin your career on the left side of the quadrant, in other words you trade your time for money and therefore everything you are earning is active income.
If you think about it at any stage if you are unable to work for a long period of time or you simply choose not to work then your income stops completely. Financial independence is therefore gained through passive income with the two options there being to be a business owner or an investor, i.e. gaining cash flow through the right side of the quadrant. Therefore if you don’t work you still get paid. Sounds good doesn’t it? I bet I have your attention now : ).
The big question is how do you move yourself into the right side of the quadrant? Ok, first of all you have the option of becoming a business owner, ok so you have to start a business right? Well yes you can do that, but chances are you become a statistic, believe me I’m walking talking proof of this. There is a massive difference between being a business owner and being self employed. Being a business owner means your business runs COMPLETELY without you, if you go away from your business for 12 months then you business would still be going if you’re a business owner. If not you’re self employed.
You’ll have to excuse my bluntness in this post but I really want to demonstrate true financial independence. Unfortunately the fact of the matter is that 85% of small businesses close within 5 years, in other words well over 85% of small business owners are self employed, not business owners. If you want to become a business owner then realistically you are looking at years and years of hard work.
The other option is to become an investor and this is the way that Robert became financially independent. Ultimately this too takes quite a long time because you need to take a percentage of your active income and invest it into property, shares, businesses etc to the point that you can replace your active income. (By the way the house you own and you live in is not an investment because ultimately it’s not giving you any cash flow.)
Let me give you an example, if you consider a house/unit that you have rented or are renting at the moment, perhaps you are paying $300 per week for a unit that is worth $400,000 (this is not unrealistic at all in Australian property terms at the moment). Perhaps you are earning $52,000 per year, in other words in this scenario you would have to own (and own outright) $1,333,333 worth of real estate to replace your existing income. Ouch!
I certainly didn’t want to scare you with this post but rather to provoke you to really assess where you spend your money and where you spend your time and potentially give you some perspective into Kiyosaki’s Cashflow Quadrant. Additionally this is one reason why the home based business industry is a growing industry, because when you really think about it the Cashflow Quadrant makes sense and it is scary particularly when you take into account our ageing population, tight property markets and increasing cost of living.
If you do a research on both Robert Kiyosaki and Donald Trump, they are strong supporters of the home based business industry because it is the most realistically way a majority of people can become “Business Owners”. I don’t want this post to be about the home business industry (or personal franchising as Kiyosaki refers to it as) however to open your mind to opportunities when they do present themselves in relation to thinking in terms of the cashflow quadrant.
If you have any questions in relation to the Cashflow Quandrant or Rich Dad, Poor Dad, please feel free to leave them below, or to get some information about moving into the Right side of the Quadrant stop by Click Here.
