"Cashflow Quadrant" by Robert Kiyosaki: Summary and Review

Cashflow Quadrant claims that the way you earn money matters more than how much you earn. Robert T. Kiyosaki published it in 1998 as the sequel to Rich Dad Poor Dad, with Sharon L. Lechter credited as co-author on early editions. Where the first book told a story, this one offers a model: a square divided into four parts, one for each way of earning money. The model became one of the best-known pictures in popular personal finance. This review explains it in Kiyosaki’s terms, shows what it is good for, and explains where the book’s advice needs care.

Four quadrants: E, S, B and I

The book’s central claim is that every income comes from one of four sources. Kiyosaki draws them as a square with four parts, the cashflow quadrant.

1. E, the employee. You work for someone else and receive a salary.
2. S, the self-employed or small business owner. You own your job. The business depends on your own skill and time.
3. B, the business owner. You own a system, such as a company, that runs without your daily work.
4. I, the investor. Your money earns money, for example through rent, dividends or interest.

The important point is that the quadrant depends on the source of the income, not on the profession. Take a hairdresser as an example. If she works in someone else’s salon, she is in E. If she rents a chair and has her own clients, she is in S. If she owns five salons managed by other people, she is in B. If she owns shares in a hair-care company, part of her income comes from I.

Most people earn from more than one quadrant. Kiyosaki asks you to notice which one provides most of your income, because that one shapes your life.

Each quadrant has its own values

Kiyosaki’s second claim is that people stay in a quadrant because of their values, not only because of their skills. He describes a typical way of thinking for each one.

People in E, he says, value security above all. They want a safe job, a regular salary and benefits. People in S value independence and control. They often believe that nobody can do the work as well as they can, so they find it hard to hand it over. People in B value systems and good people around them. They are happy to hire people who are smarter than they are. People in I value money that works for them.

This part of the book is the most psychological, and it explains a common experience. Many self-employed people earn well but feel trapped. The reason, in Kiyosaki’s terms, is that they own a job, not a business. If they stop working, the money stops.

Kiyosaki treats the wish for security with some scorn. He argues that job security is less real than it looks, because companies cut jobs and pensions change. The book’s most quoted line puts the point plainly.

The fact is, people who work the hardest do not wind up rich.

The left side sells time, the right side owns systems

The third claim divides the square into two halves. E and S are on the left. B and I are on the right. On the left side, Kiyosaki argues, people trade their own time for money. Their income has a natural limit, because a day has only so many hours. On the right side, people earn from what they own: a business system or capital. Their income can grow without more hours of their own work.

A simple example shows the difference. Imagine two people who each earn 5,000 a month. The first is a self-employed consultant who bills clients by the hour. The second owns a small chain of shops with managers and receives 5,000 a month in profit. Both incomes are the same size.

Now imagine that both fall ill for three months. The consultant earns nothing in that time. The shop owner’s income may fall a little, but it continues. For Kiyosaki, this difference matters more than the amount on the pay slip. It is also why he calls income from the right side “passive”: it does not need your presence every day.

Kiyosaki adds two more arguments for the right side. The first is tax. He claims that tax rules in the United States favour business owners and investors over employees and the self-employed. The second is leverage, which here means using other people’s time and other people’s money. A business owner gains from the work of employees. An investor can use borrowed money to buy more assets.

This is the clearest idea in the book. It also connects to Rich Dad Poor Dad, where Kiyosaki defines an asset as something that puts money in your pocket. In the quadrant, assets live on the right side.

A business owner owns a system, not a job

The fourth claim explains what makes a real B business. The test is whether the business keeps working when the owner is away for a long time. If the business needs the owner every day, it is still in the S quadrant.

Kiyosaki says there are several ways to get a system. You can build one yourself, which is slow and risky. You can buy a franchise, which gives you a tested system for a fee. Or you can join a network marketing business, also called multi-level marketing. In this model, people sell products and recruit other sellers, and they earn a share of what their recruits sell. Kiyosaki presents it as a cheap way to learn the skills of the B quadrant. He later wrote a whole book in praise of network marketing, The Business of the 21st Century (2010).

Investors climb levels of knowledge

The fifth claim is about the I quadrant. Kiyosaki argues that investing is a skill with levels. At the bottom are people who have nothing to invest or who are deep in consumer debt. Next come savers and people who hand their money to a fund or adviser without understanding it. At the top are people he calls capitalists. They do not only buy investments but create them, for example by starting companies or developing property.

The number and names of the levels changed between editions of the book. The message stayed the same. Kiyosaki wants readers to move from passive saving to active, informed investing. He also separates risk from being risky. In his view, investing is not risky in itself. It becomes risky when the investor does not understand what they are doing.

The move to the right side changes who you are

The last part of the book is about the move from left to right. Kiyosaki says it is less about learning techniques and more about changing how you think. He gives a short list of practical steps. They include taking control of your spending and getting rid of consumer debt. They also include finding mentors and deciding what kind of investor you want to be.

He supports this part with his own story. He writes that in 1985 he and his wife Kim were homeless for a short time. They lived in an old car and later in a friend’s basement, because they refused to take jobs and wanted to build their own business. Kim Kiyosaki has told the same story in interviews. In the book, this period is the price they paid for moving to the right side of the quadrant.

How it differs from other books on earning and owning

Cashflow Quadrant is a model book: one picture, explained from many angles. Three neighbours show what it adds and what it lacks.

• Kiyosaki’s own Rich Dad Poor Dad gives the story and the definitions. Cashflow Quadrant gives the map. If you have read one, about half of the other will feel familiar. See our review of Rich Dad Poor Dad.
• Michael E. Gerber’s The E-Myth Revisited makes the same point about the S quadrant in much more practical detail. Gerber shows how to turn a business that depends on you into one that runs on documented systems.
• Morgan Housel’s The Psychology of Money takes a different view of the left side. Housel shows how ordinary earners can build wealth through saving, patience and time, without owning a business. See our review of The Psychology of Money.

What Kiyosaki adds is the simplicity of the picture. Once you have seen the square, it is hard to forget, and it lets you describe your situation in one sentence.

Where it falls short

The book has five weaknesses.

The first is its view of employees and the self-employed. Kiyosaki writes as if the left side were a trap. In fact, many people build real wealth there: they earn a salary, spend less than they earn and invest regularly over decades. The book gives this path little attention, perhaps because it is less exciting to write about.

The second weakness is risk. Many new businesses fail, and borrowed money increases losses as well as gains. The book mentions risk, but it spends far more pages on the rewards. A reader who moves to the right side without savings, skills or a plan for failure can lose a great deal.

The third weakness is network marketing. The book presents it as a training ground for business owners. But the US Federal Trade Commission warns about the results. Most people who join even legitimate multi-level marketing businesses make little or no money, and some lose money. The book does not give readers the tools to tell a good opportunity from a bad one.

The fourth weakness is that parts of the book are dated and very American. Kiyosaki’s warnings about pensions describe a change in the United States. Many companies replaced pensions with a fixed payout by savings plans that depend on the stock market. His tax arguments also describe American rules of the 1990s. Readers in other countries, or readers today, need to check whether these points still apply to them.

The fifth weakness is the evidence. The book uses the same “rich dad” as its main source of wisdom, and Kiyosaki has never shown that this man existed as described. Kiyosaki’s own business record is also mixed. His company Rich Global LLC filed for bankruptcy in 2012, after a court ordered it to pay almost 24 million dollars. The model may still be useful. But the author’s story cannot serve as proof that the advice works.

Which edition and format to choose

The current English edition is the Plata Publishing edition from 2011 and its reprints. It is easy to find used, and older Warner editions present the same model. The book is longer and more repetitive than Rich Dad Poor Dad. Many readers will get most of its value from the first half, which explains the quadrant and the values behind it.

Print or ebook works best, because the book uses diagrams of the quadrant and of financial statements. The audiobook is fine for the story parts but weaker for the diagrams. If you read only one Kiyosaki book, read Rich Dad Poor Dad first, since this one assumes you know it.