9 Financial Freedom Lessons From “Rich Dad’s Cashflow Quadrant”

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Rich Dad’s Cashflow Quadrant Lessons

1️⃣ Understand the 4 Cashflow Quadrants

Imagine drawing a simple ‘plus’ sign on a piece of paper. You’ve got two lines, one going horizontally and one going vertically, creating four spaces.

These spaces are what we call quadrants.

Now, the important message here is that the different ways we earn money can be put into these four quadrants, each labeled with a letter: E, S, B, and I.

On the left side (E and S), we have E for “employee” and S for “small business or self-employed.” On the right side (B and I), we’ve got B for “big business owner” and I for “investor.”

Your way of earning a living puts you in one of these quadrants.

For example, think of a doctor. She might choose to be an E, working a regular job at a hospital or government.

Alternatively, she could go for the S quadrant, setting up her own private practice for more control.

Now, if she wants to be a big business owner (B), she could own a clinic and hire other doctors to run it. This way, she owns the business but doesn’t have to work in it day-to-day.

Meanwhile, she could also become an I (investor) by putting money into shares or property while still practicing medicine or managing her business.

So far, it’s pretty straightforward, right? These quadrants are the basic structure of how our society works. People find their place in one of these quadrants based on their skills and preferences.

But, here’s the kicker: if you aim for financial freedom, to escape the daily grind, you need to move from the E and S quadrants to the B and I quadrants – from working to owning.

We’ll explore why in the next part.

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2️⃣ Working Hard Is Not Enough

Here’s a thought: just hitting the books and putting in long hours won’t automatically lead you to financial freedom. Let me explain through Robert Kiyosaki’s experiences.

When Kiyosaki was growing up in Hawaii, he had two father figures – his own dad, who worked for the government, and his friend Mike’s dad, a self-made businessman and investor. Kiyosaki called them his “poor dad” and “rich dad” based on their financial situations.

Now, the important message here is that studying and working hard won’t get you to financial freedom.

Now, on the surface, Kiyosaki’s biological father seemed successful – educated, respected, and holding a top government position.

However, despite his achievements, he was always busy with work, had a hectic schedule, and little time for family or personal interests like reading books. Surprisingly, despite his impressive role, he had little money.

Here’s the catch: Kiyosaki’s “poor dad” believed in the common belief that working hard without investing can bring financial security.

This was because, despite his academic excellence, he lacked financial education and even scoffed at the idea of learning about investing or real estate.

On the flip side, Mike’s dad, the businessman and investor, seemed to have both time and money.

He didn’t have a formal education but knew a lot about practical money matters like “dividends” and “land valuation.” Instead of sticking to the 9-to-5 grind, he chose a different path.

Starting early, he gradually invested in properties and eventually built a hotel empire. Despite facing criticism from educated folks, he began earning passive income from his hotels.

While others might mock him, he now had all the time in the world to do what he loved, including reading all the books his critics wished they had time for.

The takeaway? It’s not just about working hard; it’s about understanding how money works and making smart investments.

3️⃣ Work Smart, Not Hard.

One day, while the author was at Mike’s house, his “rich dad” sat him down and told him a story. In many ways, it was the beginning of his financial education.

Kiyosaki didn’t know it then, but this story would explain the essential difference between those in the E and S quadrants, and those in the B and I quadrants.

Now, the important message here is that working hard and working smart are two different things.

The story went like this: Once upon a time, there was a quaint little village. The only problem was, it didn’t have a water supply.

To remedy this, the village elders decided to contract two men, Ed and Bill.

The first contractor, Ed, set to work immediately. He decided to carry two steel buckets to a nearby lake, fill them up, and carry them back himself.

It took him hours to fill up the village’s water tank on his own. By the end of the day, he was completely beat. But at least he was making money from his labor.

The other contractor, Bill, vanished for a while, which pleased Ed because now he had no competition.

But Bill didn’t stay idle. Instead of buying two steel buckets to carry the water, Bill had written a business plan, created a corporation, found investors, employed a president, and gathered a construction crew.

Within a year, Bill’s team had built a stainless steel pipeline which connected the village to the lake. Then, in no time at all, Bill expanded his pipeline to other villages.

The water he provided was cleaner, cheaper, and more readily available than Ed’s. Before long, he was making money from a whole system that he’d created.

Soon, he no longer had to work at all. Poor Ed, on the other hand, was working himself into an early grave just to break even.

In the end, Bill went on to sell his pipeline business and retired into great wealth.

Ed, however, could only look on sadly as his children decided not to take over his water-bucket venture and moved away to the city.

The simple story of Ed and Bill is the fundamental difference between the left and right-hand quadrants: working hard and working smart.

4️⃣ Don’t Rely on Government Alone

Here’s the deal: In today’s world, we can’t just expect the government to take care of us financially. We need to take control of our own financial security.

We’re currently living in what’s known as the “Information Age,” starting around 1991, which changed how money moves globally with new technologies.

This shift also marked the decline of secure, unionized jobs and reliable government pensions. Unfortunately, many of us are still stuck in old ways of thinking.

The main message here is simple: In today’s economy, relying on the government for support isn’t practical. We need to handle our financial security ourselves.

A lot of us tend to think like our grandparents did – work hard, pay taxes, and expect the government to look out for us later in life.

But here’s the reality check: In 2020, over 100 million Americans expected some form of government support, including federal employees, veterans, teachers, and retirees counting on Social Security and Medicare.

They paid into the system and were promised something in return.

However, it’s doubtful these promises will be fully kept due to the high costs. If the government raises taxes to cover these promises, the super-rich might just move to countries with lower taxes.

So, the old idea that you work hard, and the government takes care of you is outdated.

What’s the solution? To secure your financial future, consider moving into the right-hand quadrants, B or I: Big business ownership or Investment.

Robert Kiyosaki’s experience with his two father figures illustrates this lesson. His biological father, a hardworking government official, expected security until a political disagreement cost him his job.

Without experience in the B and I quadrants, he tried businesses that failed, sinking into debt.

On the flip side, Kiyosaki’s “rich dad” set up a system of passive income early in life, entering the I quadrant. This continuous cash flow shielded him throughout his days.

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5️⃣ Each Quadrant Caters to Different People

First up, we’ve got the E quadrant – the employee zone. Folks here seek “security” and “benefits.” They thrive on certainty, like having a contract, a regular paycheck, and job perks.

Fear of risk and financial struggles often drives them. Whether they’re janitors or company presidents, what defines them is the comfort of contractual security.

The main message here is that the four quadrants attract different kinds of people, and understanding these differences is key.

Next, there’s the S quadrant – the self-employed and small business owners. These individuals love being “their own boss.”

They value independence over money and believe in being well-paid for hard work. They’re often perfectionists, thinking no one can do a better job than themselves.

Their fear? Losing their independence.

Now, the B quadrant – big business owners. These folks are the opposite of those in the S quadrant. They surround themselves with talented people and excel at delegating.

Think Henry Ford – not the best financial analyst or engineer, but brilliant at hiring others. They can step back while their system keeps making money.

Last but not least, the I quadrant – the investors, often occupied by the ultra-rich. What sets them apart is their knack for taking calculated risks.

Unlike gamblers, they research their risks, making it less dangerous.

Top-notch investors like Warren Buffet embrace the financial world’s volatility, understanding the risks better than anyone else. This trait is crucial for achieving financial freedom.

6️⃣ Owning Businesses Can Get You to Success

So, you’re interested in financial freedom – who isn’t? It’s about having the time to do what you love, whether it’s traveling, collecting art, or scuba diving with manta rays.

The main message here is that the surefire way to achieve financial freedom is by diving into business ownership to pave the way for smart investments.

Take a look at the super-wealthy like Bill Gates, Rupert Murdoch, and Warren Buffet. They started in the B quadrant (business ownership) and then moved to the I quadrant (investing).

The reason is simple: to get rich, you need to accumulate capital, and the best way is through investing in shares, funds, or property.

Now, effective investing requires both capital and time. The smart move is to set up a business that can make money even while you’re catching some Zs.

Think of Kiyosaki’s “rich dad” and his hotel empire – a system that operates whether he’s there or not.

Without a steady flow of cash, your investment options are limited.

But when you have substantial funds, you can transition from the security of business ownership to the true financial freedom of large-scale investing.

Here’s the kicker: If you succeed in business, you’ll be well-prepared to be a great investor.

Your business savvy will help you instinctively understand which business models lead to better, long-lasting investment returns.

Without this business know-how, attempting to jump from E or S quadrant to the I quadrant might lead to investment disasters.

Lack of experience in creating a successful business system can result in terrible investment choices.

And without a sizable organization, your funds for investment will be limited, making your investments riskier.

Now, if running a large business isn’t your thing but you still want to invest, no worries. In the next part, we’ll explore different types of investors. Stay tuned!

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7️⃣ Improve Your Financial Literacy to Be a Better Investor

Becoming an investor might seem like surfing with tiger sharks nearby, but with a bit of education, anyone can transform into a confident investor.

The key message here is that there are five different classes of investors:

Zero-Financial-Intelligence Level

Sadly, many fall into this category. These folks have nothing to invest, often due to accumulating more debt than their income allows. The first step for them is to balance their basic finances.

Savers-Are-Losers Level

Despite the name, this level is also financially illiterate.

Traditional wisdom suggested saving money for financial security, but with low interest rates, just parking money in a bank account won’t yield much return.

Saving alone is not sufficient.

I’m-Too-Busy-Investor

These individuals entrust their money to financial advisors. While often more successful than the first two groups, they still face risks.

Many discovered after the 2008 crash that their “trusted experts” weren’t as reliable as they thought.

I’m-A-Professional Level

This is the first real kind of investor. They educate themselves on investing, delve into stocks or real estate, and conduct in-depth research.

Their focused investments and financial education serve them well throughout their lives.

Capitalist Level

The Warren Buffet level. It involves two steps – first becoming a successful business owner (B) and then channeling capital into riskier investments.

It’s the best path to immense wealth but also the most challenging. If building a business empire isn’t your goal, reaching the “I’m-A-Professional” investor level is more attainable.

Remember, a financial education is an investment in itself, offering valuable knowledge in our uncertain world.

8️⃣ Learn to Overcome Your Emotions

Think about it – we’re not always rational. While irrationality adds a human touch, when it comes to money, it can pose a real challenge.

The main message here is that money provokes irrational feelings which we must overcome.

For instance, consider a story from Kiyosaki’s time in the Air Force. In a survival class, a macho pilot freaked out when confronted with a harmless garden snake.

His irrational fear of snakes took over, and no matter how hard he tried to control it, he couldn’t.

Similarly, money can evoke deep-seated fears. Investing has the power to turn typically rational folks into nervous wrecks, driven by fear and greed.

Financial markets, as observed, don’t move in a “rational” manner; they’re influenced by emotions.

However, with money, it’s crucial to let logic prevail over these feelings. Investing in property or the stock market doesn’t have to be as scary as it seems.

Think of it like Monopoly – the rules are simple. When fear of loss creeps in, remember the key to winning: secure as many profitable “houses” as you can.

In the real world, these “houses” could be anything from rental properties to stocks, but the same logic applies.

Being able to look at money rationally is a valuable gift. Kiyosaki learned this firsthand.

Despite facing homelessness and living in their car while striving for financial success, he and his wife didn’t succumb to fear.

They stuck to their path, built a lucrative business deliberately, and four years later, they became millionaires.

9️⃣ Start Small. And Think Long Term.

Sure, we’ve all heard “A journey of a thousand miles begins with a single step,” but when it comes to money, it’s wiser to say, “A journey of a thousand miles begins with a baby step.”

Striving for financial freedom is a long-haul adventure.

Beware of the allure of getting rich quickly – those flashy Get Rich Quick schemes might sound tempting, but in reality, they often only make the person selling them rich.

The road to true and lasting wealth rarely involves shortcuts.

The main message here is that achieving financial success is like taking a journey of a thousand miles, and the key is to start with baby steps while keeping the long-term in mind.

In our instant-gratification-driven world, the temptation is for immediate results. However, remember that Rome wasn’t built in a day.

Even the likes of Warren Buffet started small – he began by selling chewing gum door-to-door. So, start small, set achievable goals, and resist the urge to overextend yourself in the rush to get rich.

Thinking long-term means being pragmatic about the future.

Job security is less certain in the Information Age, making it crucial not to get too attached to a single source of income, no matter how wonderful it may be at present.

For a shot at financial freedom, embrace long-term, compound investments. What does that mean? Start investing now, no matter how modest, and reinvest your dividends or profits.

As your investment grows, so do your profits. It’s like Albert Einstein said: “Compound interest is the eighth wonder of the world.”

Investing in your financial education is another key element. Understanding the stock market or real estate can be more valuable than a risky investment portfolio.

With a solid financial education, even if the future gets rocky, you’ll have the tools to navigate your way back to financial freedom!

Rich Dad’s Cashflow Quadrant Review

In essence, the key takeaway from these insights is that there exist four primary avenues for earning money: through employment, self-employment or small business ownership, big business ownership, or investing.

While there isn’t a singular “right way” to navigate life, achieving financial freedom is more attainable by transitioning into big business ownership and embracing investing.

Even if the prospect of becoming a business owner isn’t appealing, recognizing the importance of investing remains crucial, offering a passive income stream throughout one’s life.

The emotional weight attached to money often makes it a sensitive topic, but once we can objectively approach financial risks, we gain the ability to take charge of our lives.

Practical advice that stems from these insights is to engage in judicious investing today. Regardless of your age, initiating investments is a wise move.

While investing carries risks, it’s essential to acknowledge that job security and pension certainty also come with inherent risks.

By conducting well-researched investments, whether in stocks or property, you’re likely to establish a foundation for financial security in the later stages of life.

Rich Dad’s Cashflow Quadrant Quotes

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 What, then, shall we say in response to these things? If God is for us, who can be against us?

— Romans 8:31