Cashflow Quadrant

date Aug 27, 2007
authors Robert Kiyosaki
reading time 4 mins
  • Book Title: Cashflow Quadrant-Rich dad’s guide to financial freedom
  • Author: Robert Kiyosaki with Sharon Lechter
  • Year written/published: 2000
  • My Comments: Excellent Book! Cashflow talks about the 4 types : Employee, Self-Employed on the left side and how to transfer to the right side - Business Owners and Investors.

  • Some extracts: Real education…

Many successful people have left school without receiving a college degree. People such as Thomas Edison, founder of General Electric; Henry Ford, founder of Ford Motors o.; Bill Gates founder of Microsoft, Ted Turner, founder of CNN; Michael Dell, founder of Dell Computers; Steve Jobs, founder of Apple Computers; Ralph Lauren founder of Polo. A College education in important for traditional professions, but not for how these people found great wealth. They developed their own successful businesses …

Some words…

  • E quadrant words: “I’m looking for a safe, secure job with good pay and excellent benefits”
  • S quadrant words: “My rate is 20 dollars per hour”
  • B quadrant words: I’m looking for a new president to run the company”
  • I quadrant words: “Is my cash flow based on an internal rate of return or net rate of return?”

The fear of losing money seems to divide investors into 4 broad

  1. people who are risk-adverse and do nothing but play it safe, keeping their money in the bank
  2. people who turn the job of investing over to someone else, such as the financial advisor or the mutual fund manager
  3. gamblers
  4. investors

Because so many people on the left side of the quadrant come looking for security, the stock market responds in kind. That is why you often hear the following words:

  1. Diversification
  2. Blue Chip Stocks
  3. Mutual Funds

7 levels of investors:

  • Level 0 Those with nothing to invest: These people have no money to invest. They either spend everything they make o r spend more than they make. There are many ‘rich; people who would fall into this category because they spend as much, or more, than they make.
  • Level 1 Borrowers: These people solve financial problems by borrowing money. … … While they have a few assets, the reality is that their level of debt is simply too high. For the most part, they are not conscious about money and their spending habits
  • Level 2 Savers: These people put aside a ‘small’ amount of money on a regular basis. The money is in a low-risk vehicle such as a money-market checking account, savings account or a CD. … They often save to consume rather than to invest. They believe in paying in cash. They are afraid of credit card and debt, they like the ‘security’ of money in the bank.
  • Level 3 Smart Investors: This level is aware of the need to invest.
  • Level 4 Long Term Investors: These investors are clearly aware of the need to invest. They are actively involved in their own investment decisions. They have a clearly laid out long-term plan that will allow them to reach their financial objectives They invest in their education before actually buying an investment…. … It is doubtful that they are investing in real estate, businesses, commodities, or any other exciting investments vehicles. Rather, they take the conservative long-term approach recommended by investors such as Peter Lynch or Warren Buffet.
  • Level 5 Sophisticated investors: These investors can afford to seek more aggressive or risky investment strategies. Why? Because they have good money habits, a solid foundation of money and also investment savvy. They are not new to the game. They are focused, not usually diversified. They have a long track record of winning in consistent basis….
  • Level 6 Capitalists: Few people in the world reach this level of investment excellence…. These are the Kennedy, Rockefeller, Fords… It is the capitalists that provide the money that create the jobs, businesses and the goods… Level 5 investors generally create investments only for their own portfolio using their own money. True capitalists create investments for themselves and others by using the talents and finances of other people.

When the fear of losing money comes up, most people’s minds automatically start chanting…

  • ‘Security’ rather than ‘freedom’
  • ‘Avoid Risk’ rather than ‘learn to manage risk’
  • ‘Play it safe’ rather than ‘play it smart’
  • ‘I cannot afford it’ rather than ‘how can I afford it?’
  • ‘Diversify’ rather than ‘focus’

People born into poverty, becoming wealthy…

  1. They maintained a long term vision and plan
  2. They believed in delayed gratification
  3. They used the power of compounding to their advantage

It’s time to mind your own business… > It begins innocently enough with words of advice such as these…

  1. Go to school, get good grades so you can find a safe secure job with good pay and excellent benefits
  2. Work hard so you can buy the home of your dreams…. Home is after all the most important investment
  3. Having a large mortgage is good because the government gives you a tax deduction
  4. Buy now, pay later

People who blindly follow these words of advice often become

  1. Employees making their bosses rich
  2. Debtors making the banks rich
  3. Taxpayers making the government rich
  4. Consumers making other businesses rich