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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