Alright! Here's a more detailed explanation of the cash flow quadrant. So, I'm holding you to this. There's no excuse. Where are you at in the flow, right now? And, where do you want to get to inside the cash flow? Think about all of that while you're reading, and if you have questions, don't know where to start, or just feel like it's too much - don't worry. That's why I do what I do.
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The E (“Employee”) quadrant is a classification for people who make money by “working for other people”. They usually go to the office everyday, work at least 40 hours in a week, and depend on monthly salary as primary source of income.
Typical characteristics of the “Employees” are:
Although this is not bad per se, Employees rely on effort and time to make a lot of money. That is, to earn more, they need to work more and spend more time on work. If your goal is to retire early, this might be difficult to achieve since you will have to work longer and harder in order to make a lot of money.
People who typically have professions and “own a job”, instead of working for other people, belong to the S or “Self-Employed” quadrant. Doctors, lawyers, and other professionals who “work for themselves” are examples of the Self-employeds.
Their common traits include:
Most Self-employeds do make a lot of money but, like the Employees, their income is directly tied to how much they work, so the moment they take a vacation or stop working, they practically earn nothing.
The proposition of Robert Kiyosaki’s Cashflow Quadrant book is that those who are aspiring to achieve financial independence must work to move from the left-hand quadrants (E and S) to the right-hand quadrants (B and I). In the B and I quadrants, income is not directly proportional to the time, effort, and money they spend. Thus, one can make a lot of money and, ultimately, achieve financial independence without having to work hard anymore.
The B and I quadrants are explained below.
Those belonging to the B (Business Owner) quadrant “own a system” instead of merely “owning a job”. They set up a way that makes money for them even if they do not spend a lot of time in the business. They achieve this by hiring Employees (who belong to the E quadrant).
Of course, when entrepreneurs start a business, a lot of time and effort is spent building it. In due time, though, when the system has been properly set up, the system is said to be “working”. The entrepreneur can now spend less time managing the business and yet his income is not reduced.
Typical characteristics of Business Owners are:
Being a successful Business Owner requires ownership or control of systems and the ability to lead and manage people. They know how to run a system that works by delegating tasks and responsibilities to competent employees. Thus, even if they do not spend a lot of time in the business anymore, they still get to earn from it.
Finally, those belonging the I quadrant are called the Investors. They are usually:
The Investors mostly do not “work” at all, that is, they do not rely on personal time and effort to make money. They usually turn to stocks, fixed income securities, real estate, and other investment assets that produce income through capital appreciation, dividends, rental income, etc. In some cases, they merely entrust the management of these funds to competent fund managers who do the work for them.
Sometimes the Investors even use leverage — or use other people’s money — in order to increase their investments which would further increase their wealth.
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