Published on May 24, 2021 | Last Updated on June 24, 2022 by Lookforzebras
“The Cashflow Quadrant” is one of the series of books written by Robert Kiyosaki that is a guide towards financial freedom. In his books, he explains the concept of the cash flow quadrant, various career paths, and how our tax system has been structured.
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What is Cash Flow Quadrant?
Cash flow is nothing but the extra cash revenues over cash outlays in a given time (excluding non-cash expenses). The concept of cash flow is represented using quadrants. It is divided into four quadrants – two quadrants on the left side, E and S, and the other two quadrants on the right side, B and I.
Each quadrant represents different ways to generate income. Anyone can be in all the four quadrants, but many are not, and the goal is to progress and move on to the right side of the table.
Let’s look into each of the four quadrants.
E – Employee
Most individuals fit in this category. An employee works for a company and earns remuneration and benefits in exchange for their time, energy, and skills. The income varies depending on their qualifications, skills, and experience.
In this quadrant, employees can earn extra money by working extra hours or switching to high-paying jobs. An employee’s financial destiny, security, and freedom are entirely dependent on the employer’s success.
Work is proportional to money in this quadrant. When an employee stops working or laid-off, the income stops.
S – Self-Employed
Here, people choose to be self-employed. They own their job and trade time for money. The positive benefit in this quadrant is more personal and financial freedom than an employee.
People in this category include dentists, realtors, insurance agents, small business owners, other trade workers, and many others. There is a potential for higher income, but once they stop working, their income stops as well.
Self-employed people have more responsibility than an employee. As a result, people work harder and longer towards success, leading to burnout and fatigue in the long run.
B – Business Owner
Owning a business implies there is a system in place. A business owner hires people and systems to work for their business to generate income. Here, the owner doesn’t trade their time for money but sells products or services.
A business can run successfully without the constant involvement of the business owner.
I – Investors
It is the quadrant where people have passive income; own assets that generate income.
Investments in bonds, stocks, royalties, and real estate owned by the B quadrant business owners generate significant cash flow.
Moving to the right-sided quadrant, B and I, will accomplish greater financial independence and freedom.
Why Does A Doctor Need To Know About Cashflow Quadrant?
Doctors that would like to have financial freedom should look into the fundamental concept of the “cashflow quadrant” and the idea of passive income.
Analyzing the quadrants, physicians may assess which part of the quadrant they live in and decide which quadrant they would like to move into.
The quadrants on the left side, E and S, are considered active income, actively trading time for money. It is evident that if you don’t work, you won’t get paid. A self-employed physician might have more control over time, but the income depends on time and effort.
The right-sided quadrants, B and I, are considered passive income that produces income without constant involvement. Hired employees and systems work hard to build their business, and unfortunately, very few doctors make it into this category. Investments can create additional passive income, which can contribute to financial independence and freedom. Investing in stocks, real estate, royalties, etc., may produce higher cash flow.
Our tax system is designed to favor the right-sided quadrant, Business Owners (B) and Investors (I). Typically, the tax rates are lower in these quadrants. Larger businesses can minimize taxes through various legal tax loopholes or waivers.
For example, you can incorporate an LLC, elect it as an S corporation, and the income generated can be classified as “Unearned Income.” With this classification, you can cut your tax liability by 50%, but this does not apply to ‘Earned Income’ as an employee, subjecting you to only Federal and State taxes.
Please contact your CPA or tax advisor for more information.
Doctors and high-income professionals can find true financial independence and freedom through passive income. You can achieve it by studying the cashflow quadrant and recognizing which quadrant you live in.
High-income professionals do have the opportunity to save along with strategic investments that can get them on the right side of the quadrant. Moving towards the right side doesn’t mean you have to quit medicine.
Building additional streams of income and smart alternative investments are more important than ever for financial freedom, security, and pursuing one’s dreams.