money management

Understanding The Cash Flow Quadrant

cash flow quadrantIf you fol­low finances you may have heard about a man named Robert Kiyosa­ki who wrote a series of finan­cial edu­ca­tion books called rich dad poor dad in which he explains how to get finan­cial free­dom in life in the book Kiyosa­ki talks about the cash flow Quad­rant and how we all live in at least one of the Quad­rants. Under­stand­ing cash flow and how mon­ey oper­ates is an impor­tant skill to learn, the entire world is run by mon­ey.

What is the cash flow quadrant?

The Cash­flow quad­rant is made of four groups of peo­ple who earn mon­ey in a dif­fer­ent way First­ly you have the employ­ee who is paid a salary and who is paid based on the amount of time he spends work­ing, the self-employed who essen­tial­ly works for him­self and whose cash flow comes from work­ing in his busi­ness, the busi­ness own­er owns a sys­tem that he man­ages and that gen­er­ates income whether he works in the busi­ness or not and final­ly the investor who invests in com­pa­nies in order to get a return on invest­ment. Let’s talk about each in detail

Employ­ee

The employ­ee works at a job and his pri­ma­ry cash flow comes from his job, if doesn’t work he doesn’t get paid and his income is time-based, he essen­tial­ly exchanges time for mon­ey. There are only so many hours in a day, there­fore, there is a ceil­ing on his income. Peo­ple who work at a job tend to look for finan­cial secu­ri­ty they are averse to finan­cial risks and gen­er­al­ly rely on their month­ly pay­check to sus­tain them. Peo­ple in this Quad­rant can still be finan­cial­ly sta­ble if they man­age their mon­ey prop­er­ly.

Self employed
This cat­e­go­ry likes to do things on their own, their pri­ma­ry income is from their skills and their income is also time depen­dent, they gen­er­al­ly are the major cog in the busi­ness and if they fail the busi­ness fails, their income is made by sell­ing prod­ucts and ser­vices to their clients but because of their busi­ness struc­ture it hand­i­caps their growth because the more clients they take on gen­er­al­ly means the hard­er they work, they are truth­ful­ly employ­ees with­in their own busi­ness and tend to have the lease amount of time because they work in the busi­ness instead of on it. If he stops work­ing the cash flow from his busi­ness also stops.

Busi­ness own­er
A Busi­ness own­er has a sys­tem that he owns and that gen­er­ates income for him whether he works or not, he works on the busi­ness, not in it, he del­e­gates tasks to peo­ple who run var­i­ous aspects of the busi­ness and he has great poten­tial for growth because he doesn’t work in the busi­ness it frees him to start oth­er busi­ness­es and gen­er­ate more cash flow. The busi­ness own­er uses lever­age to get work done he looks for the best peo­ple who can help him run his busi­ness, he under­stands he is not the smartest man in the room and doesn’t need to be he just needs the smartest peo­ple to work for him this allows him to scale his busi­ness faster and gen­er­ate more prof­its.

Investor

The investor puts mon­ey for­ward in order to get a cer­tain return on invest­ment. He thinks in terms of invest­ing in assets that will gen­er­ate the desired cash flow over a peri­od of time. The investors income is not time depen­dent and there­fore, he has greater oppor­tu­ni­ties avail­able to him. He can gen­er­ate cash flow from stocks, bonds or any oth­er asset that will pay div­i­dends over the long term. An investor thinks in terms of risk and asset man­age­ment.

cashflow

All the above per­sons make up the above cash flow quad­rant. In truth peo­ple can be in more than one quad­rant at a time they are not mutu­al­ly exclu­sive, for exam­ple, an employ­ee can still become an investor by invest­ing a por­tion of wages into assets, the investor which I described is an ide­al investor who makes mon­ey sole­ly from invest­ing, but the world is more com­pli­cat­ed. A busi­ness own­er can become an investor and they gen­er­al­ly are by invest­ing in oth­er busi­ness­es or fran­chis­es there is no one way to look at things. A per­son can obtain finan­cial free­dom from any­one of the quad­rants but it is bet­ter to be a busi­ness own­er or investor both of which are on the right side of the cash flow quad­rant because they have more time free­dom to be able to build more busi­ness­es and gen­er­ate more prof­its. It is impor­tant to under­stand which quad­rant you are locat­ed in and to make a delib­er­ate move to be on the right side of the quad­rant in this way you be able to use lever­age to get results faster, if you notice employ­ment and self-employ­ment are self-cen­tered in nature, they don’t usu­al­ly work with oth­ers to gen­er­ate results, busi­ness own­ers and investors let their mon­ey work for them not the oth­er way around. The right side is where you want to be.

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