A better understanding of the cashflow quadrant can help you achieve financial success. As you are working to build a solid financial foundation, the cashflow quadrant can help you set up your income in the most productive ways.
Here’s what you need to know about the cashflow quadrant.
What is the cashflow quadrant?
The cashflow quadrant is a concept that Robert Kiyosaki shared in his book Cashflow Quadrant: Guide to Financial Freedom. The quadrant is a table divided into four corners. Let’s take a look below:
|Employee (E)||Business Owner (B)|
A concept of the cashflow quadrant is a guide to maximize your cashflow success. The cashflow quadrant is a concept to help you visualize where your income is coming from. Different types of income result in different forms of financial stability.
Most of us start on the left side of the quadrant. But the goal is to move towards the right side of the quadrant. The reasoning behind the shift is that you want to move from an active income source to a passive income source. With more passive income, you can start to enjoy more financial freedom.
What are the four quadrants of cashflow?
Let’s take a closer look at the quadrants.
As you are working to build a solid financial foundation, the cashflow quadrant can help you set up your income in the most productive ways.
As an employee, you are in the upper left corner of the quadrant. Many people are employees at some point in their careers, and many stay in that upper left corner for their entire career.
When you are an employee, your job is owned by the company you work for. You spend time and energy helping your employer accomplish tasks that further their business goals. In exchange, you receive a paycheck and possibly additional perks.
In this quadrant, you may earn a high or low income. But if you stop working for your employer, then your paycheck will stop as well. With that, you are at the whim of your employer to continue working and earning an income. With that, your financial freedom and security are dependent on the job that employs you.
Below the employee quadrant, you’ll find the self-employed quadrant. As someone who is self-employed, you are not working in a traditional job. Instead, you own the job that you are doing.
A few examples of a self-employed individual include a freelancer, handyman, insurance agent, and more. In this quadrant, you are in charge of your own job. With that comes more freedom and flexibility. Plus, many self-employed individuals earn a very good living.
With self-employment, many feel the pressure to continue pushing themselves harder. Although this can lead to a higher income in the present, it may lead to burn out in the long run. When a self-employed individual stops working, they no longer have an income.
On the top right side of the quadrant, you’ll find business owners. As a business owner, you own a system and hire employees to work for you. A successful business is one that can run without the business owner’s continual presence in the process.
Many of the wealthiest people in the world are business owners. When a business owner stops working, the business can continue to run without them. That means that they are still receiving an income even if they stop working.
Investors can be found on the lower right side of the quadrant. As an investor, you own assets that can produce an income for you. Within this quadrant, the income is completely passive.
Typically, an investor will build income streams in the other quadrants. Once they have enough capital, they can start making their money work for them within the investor quadrant. At this point, the income will continue to roll in through sound investment strategies whether or not the investor works. With that, it is the ultimate passive income quadrant.
What is the meaning of the cashflow quadrant?
In each of the quadrants, there are benefits to be found. After all, each is a way of producing an income to support your life.
However, the most favorable quadrants are the B and I quadrants. As a business owner or investor, you have more control over your income. With more control, you can make your financial plans confidently. Additionally, you can continue to build passive revenue streams that allow you to work less and still have an income.
As you consider the meanings behind the quadrants, you might realize that you are unhappy with the way things stand now. For example, you might realize that being an employee puts you in a vulnerable position. With better understanding of the different possible income streams, you can make a decision about where you want to be in the future.
How the cashflow quadrant affects your life
Each of the quadrants is an income opportunity with more or less active work involved. You should take some time to decide how much time you want to spend working. In most cases, you’ll want to find ways to reduce your active income requirements and increase the passive income streams in your life.
You might decide to transition into the Self-employed quadrant first along the way toward the B and I quadrants. As a self-employed individual, you will have more power over your income and flexibility in your schedule. You might start to dabble in the S quadrant through trying your hand at a side hustle like freelancing.
With more passive income, you can enjoy more financial freedom now. But you’ll need to move to the right side of the quadrant to achieve that goal. One way to start moving towards the right side of the quadrant is to consider building a real estate investment strategy. Although you may need to start in the Employee quadrant, you can execute a real estate investment strategy with a long term vision to move entirely into the Investor quadrant.
The bottom line
The cashflow quadrant can help you visualize the forms of income in your life. If you want to be less dependent on active work, then consider building passive forms of income in the Business owner and Investor quadrants.
As you build towards your long term income goals, consider how this will affect your financial independence journey. You may feel real to take a real leap into early retirement with solid holdings in the investor quadrant. Take some time to set up your financial foundation as you start the process of moving through the quadrants towards your end goal.