Jan 31, 2022 4 min read Education

Cashflow Quadrants

Financial literacy is one of the most important things to learn yet it isn't being taught at school. It's amazing how even learning a little bit about it can go a long way for your future financially. In Robert Kiyosaki's book "Rich Dad Poor Dad" he explains how critical it is to learn about financial literacy and throughout the book uses simple examples to help us learn about it. One of the concepts which I love from the book is called the "Cashflow Quadrants".

The cashflow quadrant is basically stating that there are 4 ways to produce income and that there is a difference between linear income vs. leveraged & residual income. It is important to understand which quadrant we are currently sitting in and to learn how to move from one to another.

E - Employee

Most of us are familiar with this quadrant as we have been trained or conditioned to be an employee. Basically as an employee, you have a J.O.B (Just Over Broke) with a single source of income. You're in a position with no leverage as almost everyone is replaceable and it is considered as an active income where the amount of work you put in determines your income. So you're basically trading time for money which is one of the worst things to do, yet the majority of us continue to do so.

It is important to understand that having a single source of income is not going to make you a millionaire or reach your financial goals any faster. So naturally, we start to look for "side hustles" where we can try to earn another source of income. This leads us to the next quadrant, also known as the "Self-Employed"

S - Self-Employed

This goes from having a job to now owning a job which nowadays is known as either being a freelancer or a consultant where you work for yourself and in your own time. This is a great first step to realising your financial goals and doing something that you enjoy, but the problem with this is that it is still considered as "active income". At the end of the day, you're still trading your time for money whereas the end goal should be, making your money work for you.

Being an employee or self-employed makes for about 95% of the population and it creates a huge dependency on ourselves. A way to move away from these two quadrants is learning how to take advantage of and leveraging people to work for you. When people start to realise this, they move into the next quadrant, where the become a "Business Owner"

B - Business Owner

I understand that owning a business is not for everyone and some of us enjoy the work that we do in our day jobs. But if you're really determined in making sure that you are able to be financially free, you are probably going to start thinking about owning your own business.

When you're a business owner, you now own a system where you leverage your money to earn money. This is also known as "partial active income" as you no longer trade in all of your time to earn money. Your income is no longer completely dependent on the time you put in as you hire people to work with you. You're still going to have to set the strategic vision and run the operations of your business, but through this method, you're able to delegate and get some time back for yourself.

Now most people get the misconception that owning a business is amazing because you're in control of when you work, etc but it's actually not as easy as it seems. You definitely escape the 9-5 working hours but when you're a business owner, you're working 24-7 and you're always thinking about your business. It can become mentally taxing which is why ideally if you were to become financially free and learn to make money work for you, what you really want to become is an "Investor"

I - Investor

Being an investor is the ideal quadrant and the end goal. You can start anytime and in actual fact, the earlier you start, the better off you will be in the future. As an investor, you're making money work for you where you purchase and own investments in return for more money. These investments include but are not limited too: Stocks/shares, ETFs, real estate, managed funds, etc.

The reason why you should start becoming an investor early on is because of the "compound effect". For example, when we invest in a managed fund and perform regular recurring payments, we are able to leverage the power of compound interest. Compound interest occurs when interest gets added to the principal amount invested or borrowed, and then the interest rate applies to the new (larger) principal. It's essentially interest on interest, which over time leads to exponential growth.

When an investment pays dividends, this then becomes something we all know now as "passive income" where we spend little to almost zero time on this and we get to reek in the benefits and rewards from it. This is the ideal quadrant to be in as we are able to now leverage the time we have saved from not being an employee, self-employed or business owner to do what we love and enjoy the time that we now have.

If you're new to financial literacy and wanting to learn how to make money work for you, then I highly recommending reading the book Rich Dad Poor Dad. The cashflow quadrant was one of the many great tips that was taken from this book and it has really changed my mindset when it comes to money. I hope you enjoyed reading it, and if you're keen to learn more about investing, finance or money tips in general, then make sure to subscribe to the blog as I'll be posting new content weekly.