Benefiting from Robert Kiyosaki’s Cashflow Quadrant

Until recently I thought there were two ways to see business: from the employee’s perspective or from the business owner’s perspective. Self-employed persons or small business owners were lumped in with big business owners. The investor breed was one I knew very little about, probably because there isn’t anyone I’ve bonded with that fits into that quadrant, as Kiyosaki puts it.

I was dead wrong. More accurately, half the picture was missing, preventing me from seeing where I really fit in the grand scheme of things.

For those who haven’t read the “Rich Dad, Poor Dad” series or need a refresher, here is how the cashflow quadrant works.

In the world of business there are four types of people that make up that world:

E for Employee: By far the largest quadrant. Anyone that works a 9-5 and counts on one business or institution to create their entire income fits here.

S for Self-Employed, Small Business: The second largest quadrant. This group includes professionals such as Doctors, Lawyers, Engineers and Accountants by default. It also includes a wide variety of services such as graphic design or freelance writing, and businesses that require upkeep and involvement, like restaurants.

B for Big Business: Corporation owners and large-scale entrepreneurs fall into this group. Famous examples include Colonel Sanders (KFC), Richard Branson (Virgin Records) and Henry Ford (Ford automobiles).

I for Investor: Individuals with minimum involvement in a company. This type knows how to make money work for them without having to put in hours of physical work.

Kiyosaki focuses much of his attention on the “S quadrant”, probably because most of his fans reside here. The team he surrounds himself with falls into this category, as people in this quadrant are highly competent specialists in their field. You can tell he has a lot of respect for “S people” and wouldn’t be able to function without them.

Besides “self-employed” and “small business”, he says “S” stands for a number of characteristics that apply to the group. One is “smart” since many of the brainiest kids in school find their way into the “S quadrant”. The next phrase shook me up because it resonated with me so much. Kiyosaki said “S” stands for “satisfied” because these folks do what they love, and rely on themselves to get almost everything done, to a fault.

The problem “S people” have is the will to want to do everything, to be a John Wayne or Rambo figure. Kiyosaki points out that one person can only do so much. After a while self-employed people reach a ceiling of earnings because income depends on hours worked. Also eye opening, he says they on average they make less than $24,000 per/year. Doing your own thing may cause plenty of “satisfaction”, however the high failure rate and lack of earnings make it clear that moving into the “b quadrant” is the next logical step.

The difference between an “S business” and a “B business” is the scale of the idea. If a self-employed person stops working, the income stops too. That is because they are hamster in the wheel solely responsible for making the business run. A “B business” is more like a system that can be applied to operations ad infinitum. A franchise like McDonalds is a perfect example. Head offices sell the idea of McDonalds while small business owners take care of day-to-day operations.

The big money is in ideas and systems that aren’t tied to any one geographical location. Kiyosaki started a nylon wallet business instead of say a restaurant because of the growth potential he saw in it. This idea wasn’t one he was especially fond of, in fact he and his partners expected to fail. When they came across unexpected success of course the only prudent action was to keep on going.

Regardless of whether you are an “E”, “S” or “B”, it is important to also be an “I”. Kiyosaki calls this the two-legged approach. Investments might include any number of things: stocks, property, current businesses, new businesses etc.

Employee types especially see investing as risky. In truth it’s risky not to invest. Every year two to five percent of your savings is lost due to inflation, so putting the money into an investment that gets returns above five percent is vital to even keeping your wealth.

As much as any one of us would like to jump into being in the “B quandrant”, it seems that many are destined to work their way up the ranks over time. Simply put, it takes serious capital to operate at that level and usually that capital comes from income from the “E”, “S” and/or “I quadrant”. Some of the lucky ones may be able to skip the “S” quadrant like Kiyosaki did. However as a person that currently resides in the “S quadrant” I can say that the term “satisfied” does indeed apply. Still, I know that the day will come when being an “S” will lose its luster just like being an “E” did.