It is so true. How can you ever know how to get somewhere if you don’t know where you are. This holds true not only in location, but also in money. In his book, The Cashflow Quadrants, author Robert Kiyosaki identified different categories/quadrants where people earn money. These quadrants identify how people make money in the quadrant and the benefits and disadvantages of each. Knowing which quadrant you are in is key to understanding the pros and cons of how you make money and can help you decide if a change is necessary. Here is an image identifying the quadrants:
Let’s look at the four quadrants now and talk about some advantages and disadvantages of each.
This is the quadrant that most people fit in. They have a job. They work for someone else. They are an employee. This is where they exchange their time for money. And the amount of money they are given for their time is usually equivalent to the value they are providing. For example, if you work at McDonalds, you are probably paid a minimum wage (unless you are a manager) because the value you are providing could be provided by just about anyone. So, it is not worth a lot of money. But if you have a high income skill like software programming, pharmacy management, or physician’s assistant, you are likely paid a higher rate because of the huge value those jobs offer and the skills required to provide that value.
Working as an employee has some advantages. You don’t have to worry about doing payroll, finding your own insurance, or establishing your own 401k. You pretty much have your role identified to you and it is pretty straight forward. For many jobs, you know when you start work and when you end. Sure, there are some jobs that will work you like crazy, but many have a typical schedule.
A big disadvantage of being an employee is that you don’t have control over your income. You have to bust your butt for that raise or bonus, that is never guaranteed. You could also be laid off or fired at any time. Besides sick or vacation time, if you don’t work, you don’t get paid. You are also dependent on your employer’s success for you to be successful. As an employee, you are at the mercy of your employer.
After working as an employee for some time, some people decide they want to work for themselves, so they become self-employed. They offer their skills directly to the public through their own business entity. They are still working, but now they are the boss and they are in charge. People in this quadrant include restaurant owners, doctors, dentists, lawyers, or anyone else with a specific higher income skill.
This can be great because you can charge the rates you want to earn, work when you want to work, and control how you earn your money. Lots of self-employed people earn a very high-income, which can help them live pretty lavishly and be part of the middle to upper class when it comes to money. The down side is that when they are not working, they are not making money. These people also have a lot more responsibility. They tend to work harder and longer hours to keep their customers. This can be the fast route to burn out.
This is a person who has a system in place to make money and then hires people to run and work in those systems. The business owner does not have to be involved to make money. The business can run without them there because they have created a system and hired the right people to run that system.
You may note that a Self-Employed person has a business too. The difference is that the Business Owner has people running their business for them, where the Self-Employed person is doing all the work themselves and hasn’t established a system. A Self-Employed person could become a Business Owner with the right system development.
Business Owners can make a lot of money, are among the wealthiest of people, and make money while they are sipping Pina Coladas in Mexico. This is a great form of passive income, but is not fully passive. The down side is that it takes a lot of work to set the business up, establish the right system, and find the people to run it. You also have to keep an eye on it, otherwise things could go bad.
We have talked before about assets (things that put money in your pocket) and liabilities (things that take money out of your pocket). Investors specialize in owning assets that produce them money. Income made in this quadrant is truly passive income. People in this quadrant have made their money in the other quadrants and have used that money to buy assets that can make them even more money, while not doing any work.
Investors can purchase real estate, shares in companies, or any other worthy investment that provides them a return on their money. Investing money in the right business and systems can make more money for everyone involved.
Advantages here are that people in this quadrant truly experience passive income. Any work they do is in researching investments and putting their money where they want to put it. People in this quadrant are among the wealthiest and have no one to answer to except themselves. The main disadvantage here is that if they put their money in the wrong investments, they can lose money very quickly. There is no guarantee of money here and you have to do your homework to find the right investments.
Everyone fits into one of these four quadrants. Depending on where you fit can make a significant difference in the money you make and even the taxes you pay (we will talk about this next Money Monday). People who fit in the Business Owner and Investors quadrant often pay less taxes than the people in the other two quadrants. I believe all of these quadrants require a bunch of work, but the Business Owner and Investors quadrants are the best ones to be in if you want to reach financial independence and earn truly passive income. In these quadrants, your money works for you rather than you working for your money. And isn’t that what we all want???
If you want to read Robert Kiyosaki’s book, you can pick it up via my affiliate link here:
[…] Monday I shared a post discussing the four cashflow quadrants titled, If You Don’t Know Where You Are, How Do You Know Where You Are Going? Knowing which quadrant you fit in is key to understanding how to reduce your tax liability and get […]