Cashflow Quadrant, by Robert Kiyosaki

Cashflow QuadrantRobert Toru Kiyosaki is a self-help author, motivational speaker and investor who is best known for his Rich Dad Poor Dad series of books and personal development resources. As a popular advocate of financial literacy in today’s children and youth, Robert Kiyosaki has campaigned for the teaching of finance, business and investing to children in schools around the world.

Robert Kiyosaki’s teachings emphasise on what he calls ‘financial education’. His books and resources talk about the idea of generating passive income through investment opportunities such as real estate (from which rental income can be earned), financial stocks and businesses (from which regular dividends can be earned) or fixed income and bonds (from which regular coupons can be earned). The idea is for one’s self to be financially independent through such investments alone without having the need to work for a monthly salary in a job.

Robert Kiyosaki defines the term ‘assets’ as things that generate cash inflow (e.g. dividends from stocks, rental income from real estate, etc). He defines the term ‘liabilities’ as things that consume cash (e.g. buying a house, driving a car, entertainment, etc). Robert Kiyosaki proclaims that leverage is important in becoming rich, although there are risks that come with it, which need to be managed very carefully.

The core concept of Robert Kiyosaki’s most popular book, Rich Dad Poor Dad is the comparison of his two fathers. His poor dad is his actual biological father, who is highly educated and is a superintendent, but is always struggling financially. His poor dad always believes that he is right, and that his journey in life is the same as everyone else around him, so it must be just fine. His rich dad, who is his best friend’s father, is a high school dropout, but a very successful businessman. He invests the earnings from his business into other income-producing investments such as real estate. Robert Kiyosaki uses the Rich Dad Poor Dad story to illustrate his view that majority of people in this world are stuck in the rat race, and rely solely on the monthly pay-check for their wellbeing. Yet, there are some people who are financially intelligent, and build a solid base of income-producing assets, which always provide a higher income than their traditional job. Robert Kiyosaki explains his concept and experiences through the Cashflow Quadrant.

What is Rich Dad’s Cashflow Quadrant?

Throughout his personal development resources, Robert Kiyosaki refers to the Cashflow Quadrant, a conceptual tool that he developed to categorise the four main methods in which income is earned. The Cashflow Quadrant involves four groupings, split with two lines, a vertical line and a horizontal line. In each of the four groups, there is a letter representing a way in which an individual may earn his or her income. The letters are as follows:

E – Employee (Top Left of the Cashflow Quadrant)

This refers to the idea of working for someone else. These are the school teachers, the office administration staff, the factory workers, the bus drivers, the supermarket staff, the hospital nurses, the restaurant waiters, etc. Majority of people in this world fall into this category. They rely on a monthly salary, which is generally calculated by multiplying the number of hours worked in the month, by the hourly wage rate. The reason why most people fall into this category is due to the perceived safety, security and stability in income that this category offers.

S – Self-Employed/Small Business Owner (Bottom Left of the Cashflow Quadrant)

This is where a person owns his/her own job and is his/her own boss. Examples of such persons are doctors, consultants, opticians, independent accountants, contractors, etc. They still earn a monthly salary or fee, which is similar to the salary of an employee. It is calculated by multiplying the number of hours worked/engaged on a task, by the hourly wage/fee rate.

B – Business Owner (Top Right of the Cashflow Quadrant)

This is where a person owns a business to make money. The business owner’s presence is not required in the business; responsibilities are delegated to other staff members who work as employees in the business, although the business owner may be required to oversee some aspects of the business. The business owner then earns a profit from the business (after all costs and salary payments are deducted from the revenues of the business). When a business is successful, the profit is much larger than the salary that would be earned by employees or self-employed individuals.

I – Investor (Bottom Right of the Cashflow Quadrant)

This is where a person is investing money in order to receive a larger income in the future. Being an investor means there is no time input required in the underlying investment, and the investor is often a dormant or sleeping partner. But the outcome for the investor is a lot of income. And over time, this income keeps growing and growing.

So, which quadrant are you in? For those on the left side of the Cashflow Quadrant (E and S), Robert Kiyosaki says that they may never obtain true wealth. Conversely, those on the right side of the Cashflow Quadrant (B and I) are following the road to true wealth. Robert Kiyosaki also classifies the four main ‘asset’ classes as means of gaining wealth:

  • Businesses – These generate monthly cash flow, and do not require the owner’s physical presence in them.
  • Real Estate – These generate monthly cash flow in the form of rent.
  • Paper Assets – These are investments such as stocks, bonds, hedge funds, etc.
  • Commodities – These are gold, silver, iron ore, or copper that are used to hedge from the government’s mismanagement or printing of the currency.

Cashflow Quadrant