Robert Kiyosaki was one of the first finance authors I read when I began amassing a wealth of understanding. His book Rich Dad Poor Dad really shifted how I thought about riches, wealth, freedom, and my current circumstances. His follow up book Cashflow Quadrant took a lot of the theoretical concepts in Rich Dad Poor Dad, and gave them some really practical implementation.
The biggest takeaway:
There are 4 areas that we receive income from (this is the quadrant):
We receive money as:
1. Employee (working for a company)
2. Self-Employed (side-hustle or second-job on our terms)
3. Business Owner (different than a side-hustle)
4. Investor (owning shares in other companies or assets)
The biggest goal for those interested in creating wealth is to move from the left side of the quadrant to the right side; moving from “Active” income to “Passive” income.
The arrows laid out in the graphic represent the typical path, but lots of successful people have done it in a different order; so don’t get too hung up on that. Instead, focus on the fact that we are shifting from the left column (where we exchange hours for dollars) to the right column (where we exchange assets for dollars independent of our time).
Identifying where your money comes from, and working to re-direct that flow of money is the biggest takeaway from this book.
The difference between being self-employed and owning a business.
often, the line between being self-employed and owning a business gets blurred; Kiyosaki makes the distinction between the two as a function of how tied to the income our hours are.
Think of it like this: I’m a self-employed freelance graphic designer. I bill $80/hr and make decent money. But when I go on vacation, or am out sick, and I don’t do any work, my income takes a hit. My paycheck is directly related to the number of billable hours I work. In this scenario I am not a business owner (despite having an LLC in Delaware), I am self-employed.
On the other hand. If I can take an 8 week vacation and (either through systems or staff) my business can continue to makes sales, increase profit, and see growth; that is a true business.
One quadrant or more?
As we build our wealth of understanding, we realize that our goal is to get to the right side of the quadrant, but making money in the left side isn’t bad at all. In fact, the more quadrants you have money coming in from the more diversified you are.
Business (Quadrant 3) sales plummet because of a pandemic? No problem, we have income from our Investments (Quadrant 4). You investments (Quadrant 4) lose 40% because a global financial crisis? No sweat, our side hustle (Quadrant 2) is booming.
The “B” (Business) & “I” (Investments) quadrants are the only place you find freedom–financial and otherwise. But the Active Income side of the quadrant can help you get to freedom if you continue to spend less than you earn and invest along the way.
-Wealth of Understanding