The Cashflow Quadrant – Why the Rich Get Richer

Daniel Penzing
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Active Income

Vs. Passive Income

Passive income is money you earn on a regular basis with little to no effort from your side. This can be in the form of Rent, Dividends or Interest on a Bank Account.

Active income on the other hand is money you earn for services provided.

Passive Income

What is it?

First, let’s review what income is. Income is money we get in exchange for the value we provide to ourselves, the company we work for, or others. Someone in business to make money … .the objective is to do work that earns income.

There are two ways to make money. You can either get paid for your time and effort, or you can create value and charge for it.

So if someone is serving you a beer, you tip them. They’re being paid for doing a service.

You go to the bank – someone serves you valuable services – you pay them money for it.

A doctor is performing a service … .one day you’ll pay them for their service.

A stock broker is supposedly earning money for you … one day you will pay him/her for the advice.

Income is the exchange of value.

In the traditional income earning process, you do some work, someone pays you money and you walk away with an income.

Now, click here to learn more about Passives Income.

Cashflow Quadrants

Rich Dad had a saying – “Rich people always look for ways to get more. Poor people always look for ways to get more money.”

He also said “The rich understand that money is a plentiful resource, it’s always there. The poor and the middle class believe that money is scarce, that there is never enough.”

For most people, money is scarce – it’s always a little too tight – and far too much time and energy is spent trying to get more of it.

Rich people have certain characteristics in common that can be applied to growing money as easily as growing a plant.

Rich people are investors – not just in money, but in education, skills, and time.

Rich people are always actively working to increase their cash flow.

The majority of us perceive cashflow in terms of incoming money – the opposite side of the equation is outgoing money. We don’t realize that by raising our cashflow, we can keep more of the money that comes in.

Here’s how it works:

E – Employee

You live in a world in which the majority of people are living paycheck to paycheck and struggling just to pay their bills.

When you live from paycheck to paycheck, you are an employee of The economy. You need The Economy to pay you to do your job that generates enough money for you to go out and buy the goods and services you need.

But not everyone in the economy is treated fairly. People who own the tools of The Economy, like real estate agents, factory owners, etc. have a special ability to influence The Economy so that they’re on the receiving end of more of The Economy’s bounty.

If you’re on the receiving end of The Economy’s bounty, you live closer to the edge and are more likely to fall off.

If you’ve ever had a stock broker, doctor, or lawyer help you with your money, you’ve witnessed firsthand how easy it is for them to make more money. You’ve also probably felt a little intimidated and overwhelmed when trying to make your own financial decisions.

You envy the special edge they have.

The truth is that this special edge is not a result of some special talent they were born with. Actually, it comes down to the simple fact that they are living within their means.

S – Self Employed

In the first classification, labeled “S,” we have the self-employed, experienced entrepreneurs. Here we have what is commonly known as business owners and investors.

These are the people who know how to think for themselves and generate their own income. Starting their own businesses or investing in ventures is the main way they make money. Great examples are authors, artists, or sports legends who understand how to leverage their experience and fame into other streams of revenue.

There are also people who manage their own investments and generate revenue via capital gains and investing. They’re more likely to have a more diversified approach to financial security, since they have to rely on themselves more regularly.

B – Business Owner

For the business owner to borrow means that the assets they’ve used to generate their income are no longer enough to sustain their current lifestyle. In this instance, it is no surprise that the lender wants to be repaid with interest. The business owner will be expected to pay back the loan with interest and will have to once again turn to banks or investors to raise money.

The business owner can also borrow in order to expand their business. If the business manages to generate positive cash flows, the lender will be repaid with interest combined with a stake in the business.

A successful business is usually the by-product of years of hard work. But regardless of how passionate you are about your business, if you are not generating positive cash flows, you cannot afford to borrow. The lender is only interested in your ability to repay the money you’ve borrowed.

Remember, if you need to borrow money for your business, your first thought must be to pay for it with your own money. If you’re not able to do this, you’re not ready for the risk of borrowing.

I – Investor

The second quadrant is the Investor quadrant. In this quadrant we have business owners, investors, and entrepreneurs. If you are like most of the wealthy people with money, you will fall into one of these two categories.

An Investor is someone who has capital, and invested capital … there’s a difference. It also means that you are the employer.


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