Robert Kiyosaki’s best-selling book, Rich Dad, Poor Dad was the first book I read that completely changed my thinking on ideas about growing wealth and getting rich.
The ideas were revolutionary for me, as they were for so many others, because I didn’t come from that kind of financial background.
One of the key concepts in the book is what Kiyosaki calls the Cashflow Quadrant. It gave me an idea of what it takes to go from being poor to being rich.
It also made me realize I wasn’t doing any of it. Just the opposite, in fact, what I was doing was keeping me on the poor side of the quadrant
If you’re familiar with Rich Dad, Poor Dad – but especially if you’re not – I want to explain my own journey through all four quadrants.
Financially speaking, it was life-changing for me. And just as important, whatever affects your finances also touches every other area of your life.
The Cashflow Quadrant
As the name implies, the Cashflow Quadrant provides four ways to build wealth:
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- Employee
- Self-employed
- Business Owner
- Investor
The first two, Employee and Self-employed, are on the “poor side” of the Cashflow Quadrant. For the most part, that’s because each involves trading your time and effort for money. That has limitations we’ll cover in greater detail in a bit.
The second two, Business Owner and Investor, are on the “rich side” of the Quadrant. That’s because each enables you to leverage people and money to increase your wealth, even while you’re busy doing other things.
The Employee Quadrant
This is the typical 9-to-5 job. It’s what people are trained to do, and the course most follow. You go to college, get a degree, get a job, hopefully stash money in your retirement plan, then retire when you’re 65 or 70.
It’s the standard advice, but it’s far from the best path toward building wealth. But it’s where I was when I read Rich Dad, Poor Dad.
As an employee, you’re trading your time for money. The basic limitation is that you only have so much time. Translated, it means you can only make so much money. And if you’re not actively working, you’re not earning any income.
When I graduated from college, I got a job in a brokerage firm. On the positive side, I had regular hours, a steady paycheck, and important benefits, like health insurance.
All those advantages are why most people stay employed through their entire working lives. It’s easy to see why. After all, it’s safe and relatively predictable, and can even provide a comfortable living. Very few people ever get rich going this route.
I was still a W-2 employee. That meant my income potential was limited. And while I felt like I was building a business (it was a mostly commission-income situation), I still had a boss as well as the risk of being fired.
If I was ever going to move to the wealth-building side of the Cashflow Quadrant, I was going to have to shift to Quadrant #2.
The Self-employed Quadrant
This is an understandably scary step for people. You must decide exactly how you’re going to become self-employed. More specifically, you’ll have to determine what products or services you’re going to provide, and who you’ll offer them to. As well, you’ll have to figure out how you’re going to get paid for doing it.
There will also be questions about specific tactics. Will you need a building to operate out of, hire employees, or do you need vehicles or other specialized equipment? These hurdles are probably what keep more people from becoming self-employed.
It took me five years being an employee before I finally made the jump. And that largely happened because my employer had been bought out.
Taking the buyout as my cue to leave, I co-founded a financial planning firm with three other financial advisors. And with that step, I went from one quadrant – Employee – over to another – Self-employed.
The transition wasn’t painless
Where my previous employer maintained the office and paid all my business expenses, those concerns were suddenly squarely in my corner.
I had to get office space, office furniture, and make a choice as to the best computer equipment to buy. Then there was health insurance. Previously provided by my employer, it was now up to me to both get and pay for the coverage.
Unfortunately, becoming self-employed still involves a strong measure of trading time for money. That is, I had to put in the time and effort to generate revenue.
But there was one major difference: I was able to make more money. That happened because self-employment gave me greater control over both my income and expenses.
Now there are some important caveats when it comes to self-employment.
A lot of people only think they’re better off moving from employment to self-employment. The absence of a boss, and having greater control over income and expenses are certainly advantages. But once again, you’re still trading time for money. Not everyone is very good at that. And not many are good at steadily increasing revenue, while minimizing expenses.
Some research confirmed that reality. The average self-employed person in America earns only about $36,000 per year. According to the Bureau of Labor Statistics, the average weekly earnings for a full-time employee is $923 in 2019. That works out to be $47,996 on an annual basis.
The problem is that while a lot of self-employed people may be good at what they do, they’re not particularly adept when it comes to managing a business. Beyond the basic skills required in your business, you also need to be able to market yourself, hire the right people, and manage a budget.
Developing those abilities is absolutely essential. “I left a large firm working as a Financial Advisor to become an independent advisor,” reports Tom Diem, CFP, at Diem Wealth Management in Fort Wayne, Indiana. “I thought I was moving up the quadrants from an employee to investor, but that notion was far from the truth. All I accomplished was making the move from being an employee with a job to the self-employed quadrant where I owned a job. I was just selling and selling every month. I knew that had to change, and eventually it did.”
The Business Owner Quadrant
That’s where Quadrant #3 – Business Owner – comes into the Cashflow Quadrant picture. It was a transition I needed to make after becoming self-employed. And it’s one every self-employed person needs to make, if they’re serious about growing their income and their wealth.
For me, that meant breaking off from my firm and my three partners, and starting my own company, Alliance Wealth Management.
To make this happen, I joined a business coaching program. Why was that important?
It’s where I came to appreciate the need to build a team, to embrace the concept that I didn’t have to do everything myself.
“Business coaching is an educational process that significantly enhances the economic achievement of individuals,” reports Forbes contributor, Russ Alan Prince. “It concentrates on helping people – especially entrepreneurs – substantially grow their businesses.”
As a new business owner, I was handling everything. Not only was I working with the clients, which was my core business, but I was handling all the administrative functions as well. That included answering phones, responding to emails, scheduling appointments, managing finances, marketing, and a host of other responsibilities.
You can probably appreciate how all the additional functions got in the way of my core business. It’s you don’t get control over it, your income earning ability will be limited. This is exactly where many business owners get stuck.
The business coaching program helped me understand that being a jack-of-all-trades was not what I was in business to do. That required creating a team of other people who would handle the secondary responsibilities of my business. It would free me to concentrate on my core business, which was where my revenue was coming from.
You need to develop your Unique Ability
Turning administrative functions over to others enabled me to concentrate on developing my unique ability.
Your unique ability is that thing you do best, and the primary source of your income.
Not coincidentally, it’s also what you’re most passionate about. Not only do you need to determine exactly what that is, but you also need to create the freedom that will enable you to pursue it. That’s why it’s mission-critical to surround yourself with a team of trusted people who will handle any responsibilities apart from your unique ability.
Putting together financial proposals for clients, and meeting with them, was my unique ability. It wasn’t scheduling appointments or handling paperwork. Eventually, I realized I could hire people to prepare financial proposals, giving me even more time to meet with clients. In my business, that’s where the money comes from.
The more of it I can do, the more I can earn.
But to successfully transfer those secondary responsibilities to other people, I needed to create processes and systems.
This was one of the most complicated aspects of transitioning to a true business owner. It took a lot of time thinking about everything I do in running my business, then documenting it. With a written workflow in place, I was able to hire an office manager and a junior advisor. Even more important, I had to train them to be able to run the business when I wasn’t there.
This was an even more critical step for me because when I transitioned to self-employment, I also launched my blog, Good Financial Cents. The blog involved as much time as my financial planning business. With the blog, my unique abilities were creating content, coming up with ideas for the site, and networking with others to help grow it.
The only way to successfully manage both was to outsource as many responsibilities as possible. The more tasks I was able to move off my plate, the more I was able to concentrate on the work that brought in the most revenue.
Examples of hitting outsourcing pay dirt
One example of how concentrating on my unique ability really paid off was when I launched a second site, LifeInsurancebyJeff.com. Taking the lessons I learned from outsourcing tasks in my business and my blog, I was able to outsource about 85% of the work on the life insurance site. With me concentrating on doing what I do best, that site was earning $100,000 after just one year.
Once you master the art of outsourcing most of your tasks to others, your income is no longer dependent on the number of hours you work.
That’s because the ability to leverage workflows enables you to earn money even when you’re not working directly.
One of the best examples of how the Business Owner concept works is my recent experience at a weeklong retreat. For the entire seven days I was completely unplugged. No cell phone, no email, no contact with my business at all.
If I was an employee or self-employed, I would’ve lost money during my time at the retreat. But as a business owner, my income wasn’t disrupted. That’s because my businesses were set up to work without me. And just as important, when I got back from the retreat, there were no crises to deal with. As they were trained to do, my employees handled everything that needed attention while I was gone.
That’s probably the biggest difference between being self-employed and being a business owner. The self-employed person leverages his own time. The business owner leverages other people’s time.
Summing up the Business Owner Quadrant
Simply put, you need to focus on what you do well, and hire the right people to take care of the rest for you.
This is exactly why Business Owner is on the rich side of the Cashflow Quadrant. It’s how wealthy people make money while their chilling on the beach.
Now, I have to disclose that it took three to five years for me to move from Self-employed to Business Owner. If you plan to make the transition, you’ll need to make the effort and allow the time required for it to happen. In most cases, the transition will be gradual, with plenty of tweaking along the way.
The Investor Quadrant
Quadrant #4 – Investor – is the status people most closely associated with wealth. This is where you hear that phrase “make your money work for you”. As an investor, you earn the best kind of income possible: passive income.
Why is it the best? Because you don’t have to lift a finger to make it happen. And if you can generate enough passive income, you may never need to work again in your life.
This is the newest quadrant for me, since I had to spend many years in the first three. But in a real way, becoming an investor is the pinnacle of wealth. Under ideal circ*mstances, you’ll be generating enough income from your investments to completely fund your lifestyle.
I’m not at that point yet, but it’s a direction I’m moving toward. But what’s slowing me down is that me and my family like to live well. We enjoy the finer things in life. But maybe more important, my main goal in life is to create new things, like new business ventures and revenue sources. It’s my passion and what I enjoy doing.
My own unique approach to investing
As an Investor, the most traditional investments are stocks, bonds, real estate, commodities, and even cryptocurrencies.
But I’m more interested in investing in other websites. I like partnering in these ventures. I can bring experience and know-how to the table, while a partner handles the day-to-day details.
It’s an opportunity to invest in other people who represent younger versions of myself. Though this is not a traditional way of investing, it follows the same principle that all investments do, which is using money to make more money.
This is a common practice by a lot of successful young entrepreneurs. An example is Elon Musk. After selling his interest in PayPal, he used the money to build SpaceX and Tesla.
In my own way, I’m investing in other people’s businesses. As those businesses grow – with the benefit of my expertise – they generate additional revenue for me.
Making the Transition from the Poor Side to the Rich Side of the Cashflow Quadrant
According to Robert Kiyosaki, only about 5% of the population fall into the Investor quadrant. Personally, I think that may be a bit of an exaggeration. Most people get stuck in the Employment and Self-employment quadrants. But I know a lot more people who are in the Business Owner quadrant than the Investor quadrant.
The main take away I want to emphasize is that you don’t need to stay in the Employment and Self-employment quadrants. You can transition over to the Business Owner and Investor quadrants, which is what Kiyosaki identifies as the rich side of the Cashflow Quadrant.
If you think you’re trapped in the Employment and Self-employed quadrants, I challenge you to start thinking about moving over to the Business Owner and Investor quadrants. It’s all about taking the necessary steps to make it happen.
One of the best ways to do this, and one that I frequently recommend to others, is to start a side hustle. It’s a lower risk way to go forward, because you’re essentially working to make money outside your regular job.
You can keep it simple. Create a product or service that will enable you to make an extra $100. That may not seem like a lot of money, but the amount is not the issue.
Instead, the ability to generate an additional $100 outside your job will create motivation. From that seemingly small beginning, you can continue to explore and to grow your business idea to make even more money.
Final Thoughts on Navigating the Cashflow Quadrant
A lot of people are afraid to take that simple step. But if you’re serious about moving from the poor side of the Cashflow Quadrant to the rich side, you’ll have to take some risks. If you don’t, you’ll never get rich.
The Cashflow Quadrant was a huge mindset shift for me – and a life changing one at that. I strongly recommend reading Rich Dad, Poor Dad. But even more important is to take action on it. That’ll take a change of mindset, a willingness to accept risk, then stepping out of your comfort zone.
You don’t have to charge out either. Start with a side hustle, then increase your pace after each success. And after you’ve experienced a few successes, you may find yourself picking up the pace to a full-on gallop.
And once you do, you’ll wonder why you never did it before. Give it a try and see what happens.
