The Cashflow Quadrant shows where our cash comes from.

The left side (E and S) is for people who receives a paycheck for work they do.  If you don’t work, you don’t get paid.  On this side, you are selling your own time and effort. The more successful you become, the harder you will work and the less time you will have available to spend with family, friends and everything else.  This side is a good place to start.  But don’t get stuck here forever.

The right side (B and I) is for people who want to earn a passive income.  On this side you earn cash from businesses or Investments you own.  There are more tax benefits available in these quadrants than on the left side.  The right side create jobs and bring stability to the community and the economy.

You don’t need to choose only one quadrant.  In fact, ideally you should spread to other quadrants.  For example, a successful employee should also become a successful investor to build wealth rather than spend your whole paycheck.

According to Robert Kiyosaki, different types of people tend to favor different quadrants and the skills needed also differ for each quadrants.  Each quadrant has its own upsides and downsides.  And we all have to gain some knowledge and conquer some fears/insecurities to spread to a new quadrant.

Employee

Employees earn an income by working for someone else.  I believe this is a very good place to start.  You can build up some experience on someone else’s expense.

According to Robert Kiyosaki, employees tend to value financial security more than they value money.   They rather work for someone who offers a safe secure job with good pay and excellent benefits than to deal with uncertainty.  They tend to seek security when things get tough.  This could prevent them from spreading to other quadrants.  If this is the case, my suggestion is to lower your financial risk (See Personal finance basics) and gain as much knowledge as possible about the quadrant you are planning to conquer.

Self employed

Self-employed people generate an income by working for themselves.

According to Robert Kiyosaki, Self employed people tend to be perfectionists who want to do it themselves.  They do not want to hire and train other people and they don’t want their income to depend on others.  They want to work independently and don’t want to be micro-managed.  They take control in difficult situations.

Business owners

Business owners earns their cash by using the skills, time and effort of others.  They want to hire people to work for them, and they like to delegate.  They need to put things together to build a system.  Business owners owns the system and leads the people to operate the system (the self-employed is the system).  In this quadrant you need to learn the art and science of business and leadership.

Investors

Investors earn an income from investments.  There are many ways in which this can be done.  For example you can earn money by renting out property, lending money, earning interest on savings, receiving dividends on shares (stock).

In this quadrant, you need to learn to distinguish a good investment from a bad one.  Do the maths.  An investment is only an investment if the income generated exceeds the operating expenses.  The longer you keep your money and the harder it works for you, the better off you will be.

References

Robert T. Kiyosaki, Sharon L. Lechter, Rich Dad’s Cashflow Quadrant, Warner Books, May 2000, Part 1