Author Robert Kiyosaki has written extensively about The Cashflow Quadrant—the four ways to earn income. Typically, people who are able to move from one quadrant to the next are able to earn more income and experience more freedom. Very simply, the Cashflow Quadrant describes the benefits and pitfalls of each of these four ways to earn income.
- Employee — In the top left quadrant are employees—individuals who have a job. They trade hours for dollars (or euros, renminbi, dinar, etc.), and their income is mostly limited to their salary. They very little control over whether their income will continue. Trusting that their employer will decide to maintain their employment from day to day, they live with the real possibility that they could be laid off and lose 100% of their income at any time.
- Self-employed — The bottom left quadrant shows individuals who are self employed. They own their job. Not only do they have to do the work, but they also have to find the work to do. They wake up every day back at zero. They’re responsible for sales and delivery, not to mention legal and accounting and perhaps a number of other responsibilities. Many in this quadrant end up being owned by their job, and there’s a fine line between between self-employed and being unemployed.
- Business Owner — At the top right, we have business owners. These are the clever individuals who own a system. The system runs the business, and people run the system. They hire employees to keep things running. They are on the other side of the employee equation, trading dollars for other people’s hours. This creates leverage, and when they leverage others’ time to create value, it frees up the entrepreneur for other pursuits—like playing backgammon with his kids or starting another business. However, a business also comes with the headaches and expenses of managing people and ensuring that management is keeping things running smoothly. Some people thrive on this. I say more power to ‘em. But there is yet another way to make money that is equally entrepreneurial, if not more so, than starting a business, and that is to become an investor.
- Investor — And that’s our final quadrant, on the bottom right: investor. Investors can enjoy many of the benefits of business ownership—such as recurring income—without the headaches of employees and paperwork. It’s as if each dollar is a little employee that works 24/7 for them, never calls in sick and always does exactly as it’s told without making any costly mistakes.
If you’re on the left side of the quadrant, you work for money, trading your time for paper. If you’re on the right side, money and people work for you. The left side is for paycheckaholics, while the right side is for those who have broken free from their paycheck addiction.
Your goal is to move from the left side to the right side—at least, if you want more freedom in your life.
So, how can you move from the left to the right? Simply, the idea is to make enough to begin investing, but either option on the right side is a good place to be.
- First and foremost, it will likely require the difficult shift in your mindset from employee to entrepreneur. It takes guts to admit that you’re addicted to a paycheck—and even more to do something about it.
- Next, come up with an idea for something that people want and that solves a problem. Paul Graham has a great post on how to get startup ideas. Don’t underestimate the value of having a co-founder to help keep you going and share the startup burden.
- Create the most basic prototype of your product or product-as-a-service and see whether people are interested in it. Employ the Lean Startup methodology.
- As soon as you can, outsource the parts of running your fledgling business that are not directly tied to your value proposition. For example, bookkeeping is a good first candidate for outsourcing. As long as you must work in and for your business, it’s wise to invest your time doing the things that create the most revenue.
- If you build your venture yourself and run it yourself, it’s not a business; you’re self-employed. You’ve made it to the second quadrant! This isn’t a business yet, but you’re making progress.
- Realize that you are both your cheapest and most expensive employee. This is a two-edged sword. On the one hand, no money leaves your pocket when you do the work. On the other hand, you’re potentially losing money when you’re not doing the work that generates the most revenue for your business. There’s a tipping point in every successful business where the founder needs to step out and let others take over certain tasks to allow him to focus on the most important items.
- Typically, the next step on your entrepreneurial journey through the Cashflow Quadrant after becoming your own sole employee is to create a system to accomplish what you do. Create a division of labor in your mind, with different people doing the various activities that must be done to keep the business running.
- Employ others and plug them into the system you’ve created. This is a difficult transition, but it’s worth it. This is business ownership. As you insert people into your system, move out of their position. Manage, but don’t micro-manage. Let go. This is key to your freedom. And don’t be afraid to tell them how much you’re depending on them and let them know they’re a critical part of company’s success. People tend to perform better when they’re fully entrusted with responsibility and empowered to their job well. Remember, your job is now to create and refine the system to run the business and to plug other competent people into the system to keep it running and growing. This creates leverage and frees you up to work on your business instead of in it.
- As your business begins to generate positive cash flow, you can begin putting this income into investment vehicles. Obviously, this needs to come with some financial acumen, and ideally you will seek out some professional guidance as well.
- Obviously, you need to assess, along with your financial advisor, your risk appetite for investing, but continue to be entrepreneurial even in your portfolio. For greater potential ROI, consider alternative and self-guided investments such as foreign real estate, foreign stocks, private equity in startups (angel investing) or even cryptocurrencies like Bitcoin.
As your business and investments continue to generate positive cash flow, you can reinvest your profits, or you can choose to start a new business and repeat the process.
Finally, once you’ve made it to the right side of the Cashflow Quadrant, reach back and help mentor others who want to make the leap from employee to self-employed to business owner to investor. Teach what you’ve learned and pass on the gift of freedom from a paycheck addiction.
Where are you in your journey? Have you broken out of the employee quadrant? How did you do it? What worked, and what didn’t work? Share in the comments below.