Robert Kiyosaki’s best-selling book explains that there are two categories of people in the world, those who see the world through the left side of the CASHFLOW Quadrant and those who see it through the right side. As many as 90% or more of the population are wired to live on the left side.
The CASHFLOW Quadrant is divided into four types of people, two in each category.
The left side of the CASHFLOW Quadrant
On the left side of the quadrant are Es and Ss. They pay the most in taxes and trade their time for money. And each has a different mindset. More than 90% of people are wired for this side.
E is for employee
At the end of the day, the most important thing for employees is security. Because Employees shy away from risk, their focus is on the skills needed to get a steady, high-paying job with great benefits. When Employees need more money, they look for a higher-paying job.
S is for self-employed
People in the Self-employed quadrant still like the idea of security, but they have a larger tolerance for risk, and they like that they feel in control of their future. People in the S quadrant are doctors, lawyers, dentists, accountants, and other service-based businesses and consultants. They have very high standards for their work and because of this they have a hard time delegating to others. They don’t own a business, they own a job. When Self-employed people need more money, they look for more hours they can bill.
The right side of the CASHFLOW Quadrant
On the right side of the quadrant are Bs and Is. They pay the least in taxes and create or invest in assets that produce cash flow for them even when they’re sleeping.
B stands for Business Owner
Unlike those in the S Quadrant, Business Owners don’t own a job. They own a business that makes money even when they aren’t working. Because they know they can’t be successful on their own, business owners look to hire people with skills needed for the business and hire those who have more talent and skill than themselves. They look to delegate as much as possible, and not keep all the work for themselves. The best business owners know they could leave their company for a year and come back to find it profitable and running better than they left it. When business owners need more money, they create a new asset or create or acquire a new system that produces money.
I stands for Investor
Investors have the highest financial education of anyone in the CASHFLOW Quadrant. They are adept at finding assets that provide steady income in the form of cash flow and at attaining more assets. They then use income from those assets to acquire even more assets, growing their wealth through this velocity of money. When investors need more money, they look for an opportunity to acquire an asset that produces more passive income.
The cost of choosing security over freedom
The dividing line between those who are struggling in today’s economy and those who are prospering is the line between the two sides of the CASHFLOW Quadrant.
Wages class have either held steady or shrunk over the last couple decades, while taxes increase. Yet, those on the left side of the quadrant continue to think they are living in security while looking at those who own businesses and invest as risk takers.
The sad reality is that those who operate on the left side of the quadrant pay more in taxes and pay more in interest on debt for liabilities, the more they make.
To understand why Es and Ss don’t get rich, you have to understand the difference in financial intelligence between the two.
What really makes you rich
When I ask most people, “What is it that makes someone rich?”, the answer I usually get is, “They make a lot of money.” How much money you make does not make you rich. Rather, how much money you keep is what makes you rich.
Those on the right side of the CASHFLOW Quadrant pay the least in taxes, know how to use debt to make money, and hedge against inflation through their assets. They not only make more money than employees and self-employed, but they also definitely keep more money.
Those on the left side of the quadrant work for what is called earned income. It is the highest taxed income. They have little-to-no tax shelters. Those on the right side work for passive income, the least taxed income. They have many tax breaks in the tax code they can use to their advantage.
Moving from the left quadrant to the right quadrant
If you want to move to the right side of Rich Dad’s CASHFLOW Quadrant, I encourage you to begin changing your mindset.
A while back a study was conducted that showed the mindset of those who moved from poverty into wealth. Three things were seen to be a determining factor:
- They maintained a long-term vision and plan
- They believed in delayed gratification
- They used the power of compounding in their favor
Very simply, the path to the right side of the quadrant starts with thinking in terms of acquiring assets that produce passive income rather than living in a pattern of paycheck to paycheck. Start small, have patience, and watch as your wealth grows over time.