Cashflow Quadrant explained

“too often, when it comes to the subject of money, common sense is uncommon.”
― Robert T. Kiyosaki

As for many newbie investors Robert Kiyosaki was one of the stars and mentors. The reason why concepts he describes in his books makes such a profound impact is that the world he describes is much different that vast majority of us were taught in our childhood.

When I look back at his books now from a perspective I can see that there is a lot of fluff in them. Nevertheless I have to admit thought that Kiyosaki helped me understand the division between the real wealth and the rest of the world.

One of the concepts I find really interesting is the one he describes in his book ‘Cashflow Quadrant’. Cashflow quadrant explains where all people are on their career paths, how they earn money and how they pay taxes. As you probably know I am analytical so I don’t believe in all I read easily. I do my own study and stress test concepts. And even though I do not follow everything Kiyosaki is preaching the concept of Cashflow quadrant simply makes sense. I love reading biographies and many of their views started to fit into this model. Here is the cashflow quadrant:

Cashflow quadrant divides people in for categories:

E — Employees. People who work and exchange their time for money. Very often good experts in their field. Employees seek development in their area of specialisation, climb up the corporation ladders. They seek stable and well paid jobs, they like security.

S — Self Employed. People started small businesses, consultants. Example: doctors who own their own practice. Those people still trade their time for money. Quite often they work more than employees, are paid better and have more time flexibility. They own their business but in reality — their business owns them.

B — Business Owners. Owners of business of 500 people or more. This size of business implies that they have all systems and people (employees) in place. They seek people from E and S quadrants to create their products and services. Since they own the working business they can live of company profits and have the freedom (both in terms of time and finances)

I — Investors. Investors have enough money to make them focus on making sure that the money generate their income. They seek investments that will bring them the highest return on investment.

Typically people traverse through the quadrant like this:

Very interesting are numbers Kiyosaki provides in relation to this model. Apparently 95% stays on the left side of this quadrant (E,S) and only 5% is on the right side (B,I). What is actually stunning is that in terms of wealth distribution and taxes, those numbers are reversed — 5% on the left side and 95% on the right side. Like it or not, tax system gives more benefits people on the right side of the equation (among other things this is supposed to encourage them to create more jobs). The sad things that vast majority of people don’t fully understand taxes.

Ray Dalio, one of the people I value as an expert in economy said recently that the COVID-19 pandemy we are experiencing right now will cause the major recession and recessions always help redistribute wealth. It will be interesting to observe what will happen.

To conclude I would like to encourage everyone to study wealth and economy because, even though this is not something we are taught at schools, that is something that heavily impacts our lives, from the holiday we can afford down to how much time we have to spend on activities we like with people we value.

Keep Growing!

Lukasz Brzyski

Co-Founder of Momentum Property Education