A lot of people love the lessons of Rich Dad, Poor Dad. But my favorite book in his series was Cash Flow Quadrant. This short thread is how I've applied it to my own life Read on 👇🏽
Thanks for the likes and RTs If you're interested in the Investor piece check out my book on dividend investing. It covers the strategy I use to invest a six figure portfolio.
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The cash flow quadrant asserts that there are effectively 4 categories to earning money: 1. Employed 2. Self-Employed 3. Business Owner 4. Investor They each have specific traits and vary in successfully building wealth.
Employed Like most people, I am currently employed. It's a predictable and safe way to earn a living. I have a hard time with it though since I'm rebellious. However, I've made upwards of $200k/year being employed, so it's not a bad way to go in the right profession.
If you're in a high paying professional field like Investment Banking, Medical, Legal, or Engineering, this is a very nice way to earn money and be able to sock away large chunks of money through a salary and bonuses. It's not all bad in employment land.
Self-Employed I'll be honest. Self-employment is hard. Everything revolves around you. You are the product or service and if you don't find ways to automate you'll be stuck doing all the things you didn't want to do when starting out. Most business owners start here...
If you figure out how to automate or systemize a business, you move over to the Business Owner quadrant. I've done the consultant route and dislike it. I like to create, so the sales part of things is frustrating and distracting. However, many thrive so don't count it out.
Business Owner This is where real wealth can be created. As an owner you own a system. Every business starts small and starts building layers of systems of checks and balances. These are the value-added chain. Each step of the value chain is worth money x quantity.
I've been a business owner and was able to help build a company into million dollar asset in a year. I've also been a partner in a later stage business where we had so many systems in place that we grew the company's value by $100M in a year. System value scales exponentially.
A business with cash flow is valued at multiples of that cash flow depending on the complexity of systems underlying. This is why equity is so important in a company. If offered, always take equity in a successful company for a lower salary. Equity is a wealth accelerator.
Investor This is where your money makes money passively. Everyone loves the idea of this and tries to start by being an investor. The truth is that this is very difficult to do because the impact is so small initially. I'd prefer to grow my income and build a business first.
Growing business helps you understand investing better too. As a business owner you are constantly evaluation where your best return on capital will be. The same goes for investing. There's so many ways to invest. But only you know the best investment for you.
Currently I'm blending all 4 of these quadrants. I'm employed at a startup and have equity options. I own a single member LLC where I sell my books and app through. And I invest for cash flow so I can take lower salary for more equity.
I'm likely going to go crazy into full startup mode soon. Ultimately, everything has been about automation and leveraging systems though. Think about systems and how they can work together to make things simple. This strategy works well in all of the quadrants.
E and S/E aren't bad places to be, but most-likely you'll never reach fulfillment or self-actualization if that's what you're seeking. Eventually you'll need to at least be in the investor quadrant, not thinking about cash flow for your living expenses.
That's it. Hope you enjoyed!
