Author Robert Kiyosaki published in 1998 a best-seller called The Cashflow Quadrant. In the book, he presented a concept that has endured the test of time since it can be applied to analyze the trajectory of your professional life and re-evaluate what your goals are.
The Cashflow Quadrant is a simple concept with enormous importance in the career of any professional. In the book, Kiyosaki describes how various types of careers are different regarding their potential to achieve financial freedom, and how people can reposition themselves to follow a more successful path.
To achieve this, he divided the process into quadrants, each with a distinct set of characteristics, limits, and potential. In this article, we’ll explain each quadrant, so you can evaluate where you are currently at, and determine if you’re really satisfied with what you have.
The Employee (E Quadrant)
Yes, “E” does stand for “employee.” The E quadrant is where most people are — people who basically trade their time, knowledge, and abilities to earn money. Their earnings depend on their ability to be effective and efficient at their job.
The only way to make more money on the E Quadrant is to work more hours or switch jobs to a higher-paying employer. Salary workers pay the most amount of taxes too, and there’s not another source of income if you don’t actively work for it.
The majority of highly paid professionals in the U.S. fall only into this quadrant.
The Self Employed (S Quadrant)
“S” stands for “self-employed.” This is the quadrant where individuals are their own bosses. Different from an employee, the self-employed person owns their own business and dictates the daily activities without having to depend on input from a superior or senior partner.
However, while self-employed people may view themselves better off than people under the E quadrant, they both are exchanging their time for money and paying high taxes.
How so? As Kiyosaki puts it in his book, most self-employed people are actually “owned by their business”. They still have to put in the work like everyone in the E quadrant to get paid, since they’re usually at a stage where they can’t properly outsource tasks, so they might end up doing almost everything by themselves.
They may have their own business, but they still have to work on new projects, make networking a priority, draft documents, and bill their time to earn money.
The Business Owner (B Quadrant)
Unlike the last two quadrants, individuals in the B quadrant don’t just own their jobs. Most business owners outsource their tasks to specialized professionals instead of doing everything themselves, allowing them to create a system that can work and produce more income for less investment of the most valuable asset in life: time.
Here is where passive income becomes a reality for many. If they manage their business properly they can enjoy staying out of the office for extended periods of time to travel or take vacations without the risk of their company falling apart.
In the B quadrant, income is not directly related to your time, but more to a system that each business owner would need to carefully design, implement and optimize over time. It is not easy to reach this quadrant, since it requires hard work, preparation, and a great deal of discipline, but if you can make it here, you will be on the right path to financial freedom.
The Investor (I Quadrant)
This is the peak of all the quadrants, and only a few get to attain it. People in this quadrant not only own their job or a system; they become investors by acquiring assets that can appreciate over time, which in turn yield higher returns. These are the people that “make money while they sleep”, which is a popular way to say that they’re always producing income. Being at the top it’s not without its benefits, since investors get more incentives and tax breaks to keep developing the economy.
To be an investor is to decide how to put a surplus of income into a good opportunity for profit; in other words, they have almost completely stopped trading their time for a paycheck and effectively putting their money to work for them.
The people in the I quadrant purchase equities in, stocks, royalties, and real estate (of course!). This is where true passive income lives, and the goal for every professional who really wants to achieve financial freedom and independence.
Once you are here, your job becomes more of a hobby than actual work. You can choose to work when you want to, not because you have to.
By now you must be asking yourself “How do I change quadrants?”. The answer is simple:
You need to start educating yourself. After that, just apply your knowledge, find a way to build multiple sources of income, and obtain enough capital to invest.
You don’t need to abandon your career, it is not a logical thing to do for many, especially when you have put so much time, effort, and dedication into it. Switching quadrants simply means taking your active income and diversifying into several smart passive investments. Real estate syndication is a good first step since you’ll probably be acquiring the role of a limited partner and position yourself in a privileged position to learn the ropes so one day you might start your path into the world of real estate investing.