The Cashflow Quadrant: The Path to Financial Freedom

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Meet Phil. Phil is pushing 40 and entirely dependent on his full-time accounting job for survival. He works for someone else, making their company money all day with his hard work, and consistently goes above and beyond for the organization.

Then there’s Amber. Amber is the same age as Phil, and they’re both middle class. But she has three sources of income, including two growing side hustles that could quickly turn into bona fide small businesses in the near future.

Right now, Amber is already making more money than Phil. And soon, thanks to her hard work, she’ll be in a position to let her side hustles start earning her a solid full-time income. 

For many reasons, Amber is in a much stronger position than Phil, who better get his act together if he hopes to retire within the next 30 years. 

What’s interesting is that most workers learn Phil’s approach to personal finance, going to school for four years, getting a job, and spending 40 years in the workforce working for other people’s companies. Most people think Phil’s way is the safe way.

Yet the traditional work model no longer provides as much stability as it once did, and it’s outdated. The world has changed drastically over the last decade, and the workforce is still catching up to the idea that it’s better to forge your own path and rely on yourself for making money. 

It’s time to reignite your career and realize your true potential. Unfortunately, this won’t happen overnight; you’ll need to take baby steps to make it happen. But one thing that may help you get there is the cashflow quadrant. 

Let’s take a closer look at this revolutionary idea. 

What is the cashflow quadrant?

The cashflow quadrant is a chart that describes the four main options for making money

The concept is the brainchild of author Robert Kiyosaki, who created the bestselling Rich Dad, Poor Dad series of books that are filled with financial advice. 

Kiyosaki’s book “Cashflow Quadrant” outlines why some people work less and earn more and, by doing so, are able to attain financial freedom.

Kiyosaki asserts there are four main areas of the quadrant you can fall into.

The left side: Active income

The left side of the quadrants is active income. In other words, you have to consistently work to cover your basic living expenses. 

As Kiyosaki points out, the left side pays the highest tax rates and trades their time for money.

Employee 

Employees work for companies and exchange their time and skills for a paycheck. The only way employees make money is through active work. Making more money typically involves switching jobs or getting a raise or promotion.

Self-employed

Self-employed individuals are business owners. However, your business actually owns you because you’re still working and therefore trading time for money. 

Think about a dentist with her own practice. Somebody’s got to clean teeth and fill cavities! So, in a sense, even if you own a business, you’re still employed. If you stop working, the business stops making money.

The right side: Passive income

The right side of the quadrant deals with passive income. On this side of the quadrant, your money works for you.

This side, Kiyosaki says in the Rich Dad’s guide, pays the least in taxes, maximizes the tax code, and creates assets that produce a continuous cash flow.

Business owner 

Business owners create a system that generates money and hire people to work for them. As the owner of your own business, you don’t have to be actively involved in the day-to-day operations to make money. The business does this for you; think about how rich Microsoft made Bill Gates.

There are many ways to excel at entrepreneurship. And the truth is it’s easier than ever today to launch a business and achieve financial success. You could launch a business through Amazon, start a dog-walking business, or even sell graphic design work or photos online and collect royalties as an art entrepreneur. 

In the digital age, starting a business doesn’t have to be a massive ordeal.

Investor 

The lower right portion of the cashflow quadrant is for investors. In this section, your investments generate recurring payments for you through vehicles like the stock market and real estate

You don’t have to work or manage anything in this group unless you want to because your money does all the work for you.

Learn more:

How to use the Rich Dad’s cashflow quadrant

1. Determine where you fall in the cashflow quadrant

This is the easy part. Identify your position in the quadrant. You’re either an employee, self-employed, a business owner, or an investor.

No matter where you wind up, understand that this situation is temporary. If you’re an employee, you can become self-employed. If you’re self-employed, you can become a business owner. And if you’re a business owner, you can become a full-time investor. 

At the same time, it goes in both directions. Full-time investors who don’t manage their money properly or run into a patch of bad luck can easily wind up having to go back and start from scratch again with a full-time job.

2. Assess your situation

Spend time thinking about your situation and how you got there. You should also think about why you’re still there and not in a more lucrative role. 

Challenge your way of thinking and assess whether you could improve your situation by making some small changes. 

For example, some employees may like their job and don’t care to climb any higher because of a sense of security and a nice income. 

However, it’s worth considering just how secure a full-time job really is. If you’re at the mercy of a boss or a big business, your role may not be all that secure after all. In fact, you could be a budget cut away from getting laid off or canned. 

At the same time, self-employed individuals could get sick or run into an operational issue that impacts their business, resulting in a loss of pay. Even a small business owner isn’t entirely secure. Companies go under all the time.

Yet each position is more secure than the previous one. So it’s a good idea to keep moving forward through the quadrant until you reach the most secure position as an investor. From there, it’s a matter of maintaining passive income, growing your net worth, and expanding your portfolio. 

3. Take action and move forward

Stop and think about where you really want to be in the quadrant. And remember, you don’t have to be exclusive to one category. It’s certainly possible to work a full-time job, have a side hustle, and invest all at the same time. 

According to Kiyosaki, it’s also more advisable to gain experience as a business owner before going straight into serious investing. By doing so, you can learn critical business skills while honing your investing strategy.

Consider starting a small business that can be self-sustaining at first and gradually expand, hiring and increasing your operation as your business grows and you need more support.

To succeed as a business owner, you will need to sharpen your organization, improve your budgeting, and develop more leadership skills. 

Why use the cashflow quadrant?

Keep more money

Kiyosaki says that it’s not the amount of money you make that makes you rich. Instead, it’s how much you keep.

Get to the right side of the quadrant to generate tax beaks, give less money to the government, use debt to make money, and hedge against inflation. 

By doing so, Kiyosaki continues, you’ll keep more of your hard-earned money.

Realize your value

This is also a good way to take a fresh look at your career and revisit your priorities. Maybe you have been idling in one position too long and have lost track of your goals or your vision. 

By visualizing your situation with the cashflow quadrant, you can get your priorities straight and realize your true value. 

Why remain someone else’s employee and pay more in taxes when you can start a new endeavor for yourself, pay less in taxes, and bring in more money at the same time?

The trick, Kiyosaki explains, is to stop viewing the right side of the quadrant—owning a business and investing—as taking a risk. Rather, you’re building security for yourself, increasing your financial education, and strengthening your situation.

The real risk lies in remaining on the left side of the quadrant, being beholden to someone for a paycheck, and relying on your own hard work to survive. 

Develop financial freedom

The cashflow quadrant isn’t a chart: it’s a blueprint to financial freedom. 

It’s a way out of the rat race, Kiyosaki says. You can use the cashflow quadrant to pursue your own dreams instead of staying in an endless cycle of dependency and debt. 

Each stage of the quadrant can teach you valuable lessons, and your goal should be to learn and grow until you reach a point where your investments are supporting you.

The trick is not to escape and retire but to keep expanding and launching new endeavors. 

Once you start getting serious about investing, it may be a good idea to backtrack and launch another business to generate a stronger cash flow and feed your income.

Frequently Asked Questions

Who is Robert T. Kiyosaki?

Robert Kiyosaki is a famous businessman and founder of Rich Global and the Rich Dad Company. He is mostly known for writing the Rich Dad, Poor Dad series, including Rich Dad’s “Cashflow Quadrant.”

What is financial independence?

Financial independence is a state in which you can work solely because you want to and not because you have to. Through the lens of the cashflow quadrant, you’ve achieved financial independence when you wind up on the right side of the quadrant for business owners and investors. 

One of the core elements of financial independence is to acquire income-producing assets. That way, you can enjoy an easier life and do more of what you love instead of trading the majority of your workweek for money. 

Can you make a lot of money with the cashflow quadrant?

It all depends on your personal situation, including your line of work, your experience, your financial education, and your skillset.

The thing to keep in mind about the cashflow quadrant is that you shouldn’t rush into the process of advancing without a clear plan. 

If you quit your job to become self-employed or launch a business before you’re ready, you could wind up losing a lot of money upfront and delay your chances of becoming an investor. 

For the best results, take your time, form a solid business plan, and move forward at a pace that works for you. Remember, the cashflow quadrant is not a race.

How can you save money as an employee?

Saving money isn’t easy when you’re classified as a full-time employee in the cashflow quadrant. It typically requires sticking to a very strict budget and taking on at least a side hustle or two to bring in extra cash.

Saving money is actually easier when you get to the right side of the quadrant as a business owner or investor. Once you’re there, you can maximize tax savings. 

How do you build a retirement plan when owning a business?

One question that potential business owners often wonder about is whether it’s possible to retire when you work for yourself. 

And yes, it’s absolutely possible. In fact, in many ways, it’s much easier to retire when you work for yourself.

That’s because you can put much more money away into tax-friendly retirement vehicles like a solo 401(k) and SEP IRA. You’ll also potentially make a lot more money as a business owner, putting yourself in a position to possibly retire rich.

Learn more:

Does employment provide job security?

The trick is to stop correlating a full-time job with job security. 

If you think about it, there is nothing really secure about being completely dependent on one company for survival. 

Sure, there is some surface-level stability and security in a paycheck. But security can also make you lazy and reduce your value. Once that job is taken away from you, it can leave you in a very dangerous situation of having to find work quickly or rely on debt to make ends meet.

The real security comes when you take responsibility for your finances and forge your own path as an entrepreneur and eventually an investor. 

It’s not as hard as it looks. In fact, the hardest part is breaking the mindset that being an entrepreneur is a risky thing. 

How do I achieve financial intelligence?

The best way to learn financial independence is to stop relying on others for income—unless they’re making your company money as employees.

Financial independence is all about having total control over your revenue streams instead of working for someone else and selling your time for a paycheck.

Almost anyone can achieve financial independence. You just need the right mindset and the ability to find the right opportunities at the right times.

The Bottom Line

At first, the cashflow quadrant may seem a bit jarring to you. In fact, you may hate the idea, close out this window, and run away because it’s a scary concept. 

Nobody likes hearing that their cushy job and 9-5 lifestyle may not provide the security that they thought it did.

Whatever you do, the idea of financial freedom is going to gnaw at you over time. It will be there during your morning commute or the next time you have to miss one of your kids’ sporting events or birthday parties to go work for someone else. It will be there when you clock out at the end of the day, wondering why you work so hard but can’t seem to get ahead. 

Only you can decide what financial freedom means for you. And the cashflow quadrant can help you visualize and come to terms with that decision. 

Think about your financial situation and what you want out of life and put your vision in motion. You’ll end up on the right side of the quadrant before you know it, as you eventually evolve into a serious investor, completely financially independent.

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