PDF Summary:Rich Dad's Cashflow Quadrant, by Robert T. Kiyosaki

Robert Kiyosaki wants you to forget the traditional path from college to a good job to a stable retirement, because it doesn’t exist anymore. In his first follow-up to the international bestseller Rich Dad, Poor Dad, Kiyosaki implores you to make your money the way the rich do: by developing assets. Using the simple concept of “Cashflow Quadrants,” Kiyosaki teaches you which types of income lead to financial freedom, and which don’t.

Combining contrarian financial advice and the blunt persona that built his brand, Kiyosaki puts both your wallet and your mind on the path to wealth. In our guide, we compare Kiyosaki’s advice with conventional wisdom and expand on his tips for succeeding in business and investing.

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• When your pay jumps, so does your tax bracket, and there are fewer tax benefits in the E and S categories, and far more in the B and I categories.

(Shortform note: While the rich do use everyman investment tools like Roth IRAs, they also have access to stock deals and assets that are inaccessible to most.)

Reason #5: Inflation Will Dilute Your Savings

Kiyosaki is adamant that parking your money is one of the worst things you can do with it. He says when you save money, you’re really just letting it lose value due to inflation.

(Shortform note: In I Will Teach You To Be Rich, personal finance author Ramit Sethi agrees with Kiyosaki that saving your money means you’ll lose some to inflation. However, Sethi does not have the same doomsday outlook about the impact of inflation on the economy as a whole as Kiyosaki has. Like most economists, Sethi sees some inflation as a part of a healthy economy.)

The B and I Categories: The Way to Wealth

Kiyosaki says that while lower-, middle-, and even upper-middle-class parents teach their kids the out-of-date financial path we just outlined, rich parents teach their kids the income generation strategy of the Business owner (B) and Investor (I) categories.

While in the E and S categories you generate income in exchange for the work you do, in the B and I categories income comes primarily from assets you own. According to Kiyosaki, this is the surer path to financial freedom.

People in the B category control not only a business, but a business system. If they leave, the work still gets done. People in the B category own their business and generate income by its profit, though they no longer do the day-to-day labor of making it function. A B’s income is the profit from their business, and their business is considered an asset. B’s need to be skilled in delegation and leadership, as well as have a high degree of financial literacy.

The B Category vs. the S Category

The distinction between S’s (small business owners) and B’s (big business owners) is subtle, in part because B’s often start off as S’s. For example, when a tutor sells her expertise and teaching abilities, she is her own product and her own business, which puts her in the S category. However, when the tutor becomes the owner of a tutoring company, she owns the system that finds and trains tutors, connects students to tutors, markets the service, and takes care of logistics. The tutoring company owner profits from the work and time of the E category tutors she hires. She’s now in the B category.

In the I category, investors commit money (called capital) to something and expect to make a profit. Beyond the initial investment, they don’t have to work day to day like those in the other categories do. Instead, their livelihood comes in the form of assets that generate passive income. Examples of passive income include dividends from stocks, interest on bonds, and rental income. I’s need to be comfortable with risk, since managing risk is the foundation of investing.

Kiyosaki says the best path to wealth is to make a significant amount of money in the B category and then use that capital as an investor in the I category. The kind of wealth that provides financial freedom is almost always generated in the I category, where it compounds without your labor.

(Shortform note: You only need to generate B category-level capital in order to invest if you’re aiming to be a capitalist. While Kiyosaki devotes a lot of space to advocating readers set their sight on that kind of wealth, you don’t need to own a B-category business to invest at a smaller scale, even if you’re aiming to “cross over” to living on passive income. The central function of investing remains the same whether you’re a high-flying B or a worker in the E or S categories investing for retirement.)

The reason B and I income is a much surer bet for generating wealth than E and S income is, as we previewed, the fact that assets are the way to compound your money without your labor. The income you generate from assets is called passive income. While in the E and S categories, your income minus your expenses and liabilities equals the money you have to live on, in the B and I categories, your income equals passive income from your ever-compounding assets minus your expenses and liabilities.

Success in the B and I categories requires understanding a different kind of logic and adopting a different value system than the logic and value system of the E and S categories. In the B and I categories, you:

• Make yourself, not other people, rich. If you are not the person most upstream from your labor, someone else is profiting off you.
• Profit from other people’s money and labor. By owning a system that runs on labor that’s not your own, or by investing with other people’s or a bank’s money, you can eventually gain income that you don’t have to work for every day.
• Know that society rewards wealth. Beyond the fact that a bigger investment can yield bigger returns, society rewards wealth in the form of tax advantages.

Should B’s and I’s Make Money for Everyone Else?

Many people, usually on the political left, believe people in the B and I categories should make the government rich, so the government can help those who need it.

Between 2008 and 2015, about 30 Fortune 500 companies paid nothing in U.S. taxes. While the Obama Administration lowered the corporate tax rate slightly during his presidency, the Trump Administration's 2017 tax cut lowered the corporate tax rate from 35% to 21%, roughly doubling the number of major companies that paid nothing or less in taxes.

As of fall 2021, Republicans and Democrats in the U.S. Congress are debating the size of a post-Covid-19 spending bill that Democrats, who want to spend a larger sum than Republicans, say will be paid for primarily by increasing the tax burden on the rich.

Success in the B and I Cashflow Quadrants

Kiyosaki argues that succeeding in the B and I categories is as much a matter of skill in business and investing as it is about cultivating the mental fortitude to stick with a long-term and challenging task: generating wealth.

Key to Success #1: Be Financially Literate

According to Kiyosaki, there are two groups of people: people who understand how money flows and grows, and people who don’t. Those who don’t usually remain solely in E and S categories, without assets or the possibility of growing their income into wealth and destined to make money for other people.

On the other hand, people who are fluent in money know that the best way to wealth is to be in the B and I categories, and they end up making money for themselves. An understanding of money, finance, business and investing is crucial in generating wealth, whether you’re looking to work in business and investing full time, or supplement your E and S income with passive income from investing.

(Shortform note: It’s harder, and more important, to be financially literate today than it was in the past. Financialization of the U.S. economy has meant saving, investment, and retirement options are now more complicated than they’ve ever been. Between 1950 and 2019, the financial sector’s share of the U.S. GDP rose from about 3% to over 20%.)

• Be an active learner. Because we don’t receive an adequate financial education from our parents, from secondary schools, or in college, you’ll need to be purposeful about developing your financial education. Learn by doing, consider furthering your formal education, and commit yourself to independent research.

(Shortform note: When Kiyosaki wrote Rich Dad’s Cashflow Quadrant, the internet was nowhere near as ubiquitous as it is now. Email newsletters can be a great way to learn about investing or a particular industry, or develop your financial knowledge in general. They can also help you cut through the seemingly endless advice on the internet.)

Become a Big Business Owner

Kiyosaki offers five strategies for breaking into the B category, all of which are also ways to increase your financial knowledge:

Strategy #1: Find a mentor in the kind of business you want to enter.

A mentor will help you sift through the noise and will teach you what’s really important, and they can also be a sounding board and a guide as you learn by doing. Be sure your mentor is successful in the field you want to enter, not a professional advisor you’re paying.

(Shortform note: Research shows that having a mentor makes you better at your work, happier doing your work, and more likely to move up in your career. Three-quarters of people say having a mentor would help them, but more than half of people don’t have one.)

Strategy #2: Work for a company in the field you want to own a business in for 10-15 years.

After that amount of time, Kiyosaki says you’ll understand all the elements of that kind of business system and be ready to strike out on your own.

(Shortform note: The company you work for today could be your competition in the future. Even if your employer won’t be a primary competitor, you can learn a lot from studying competitors that sell to a slightly different audience, or that offer a different but related product.)

Strategy #3: Buy a franchise.

In the above two strategies, you’re learning to build a business system. When you own a franchise, the system already exists. Your job is to make sure the people who work for you are running the system as best as possible.

(Shortform note: Watch out for hidden costs, misleading success statistics, and noncompete clauses when shopping for a franchise.)

Strategy #4: Become a network marketer.

Network marketing is another way to join a pre-existing business system. You also don’t need nearly as much start-up capital or business acumen as you do when you buy a franchise, and the organization you work with can offer you valuable business education.

(Shortform note: Some network marketing schemes are scams and can be classified as pyramid schemes. Single-tier systems are safer than multi-tier systems, where top-tier salespeople make money off lower-tier salespeople and which can be pyramid schemes.)

Become an Investor

Kiyosaki offers three steps to begin generating passive income through asset ownership:

1. Get out of debt. You need capital to invest, and it’s hard to have enough to spare when you’re in significant debt.

(Shortform note: Kiyosaki differentiates between good debt and bad debt; sometimes going into debt is a necessary part of investing.)

2. Decide what kind of investor you want to be. Kiyosaki emphasizes how important it is to know how you’re going to use the I category to achieve wealth. You can use a financial advisor or learn to invest yourself as a serious side practice to generate retirement or supplemental income, or you can dedicate yourself to investing as a full-time job to “crossover” into financial freedom, where you live off your investment income.

Practicing Crossover Investing Through Retirement and Supplemental Investing

Kiyosaki categorizes retirement investing, supplemental investing, and crossover investing as three separate investing types, but both retirement investing and supplemental investing can turn into crossover investing:

Many new investors start with retirement investing primarily because it’s easy and accessible—many employers will take contributions directly from your paycheck, before you can spend it. If you consistently invest between 25% and 50% of your paycheck, in 20 years, you may find that you’ve “crossed over” and no longer need to work. Instead, you can live off the income from your investments.

Supplemental investing also has the potential to get you to the “crossover point.” The bottom line is, the more of your E and S income you save and invest, the likelier you are to achieve crossover investing.

3. Get started by investing in the stock market and in real estate. Call stockbrokers and ask for their guidance, then open a small trading account. In real estate, buy, sell, and manage your own properties. No matter what you decide to invest in, learning and research are key to mitigating the risk that comes with investing.

(Shortform note: Kiyosaki is shorter on specifics for investing than Sethi. Sethi recommends starting with stock market investing, beginning with mutual and index funds, or, if you’re willing to sacrifice some profit for ease, investing in target-date funds.)

Key to Success #2: Become Mentally Prepared to Succeed

In both the B and I categories, you need to develop mental and emotional fortitude. Both starting out in the B and I categories, and especially transitioning from the E and S categories to the B and I categories, are long, tough challenges.

• Get over your fear of money. Kiyosaki says fear of money—fear that you don’t understand it, fear that you won’t have enough, fear of taking financial risks or a thousand other worries related to money—makes sense. But before you can make any change to your financial situation, Kiyosaki emphasizes that you need to have a healthy relationship with money.

(Shortform note: In Your Money or Your Life, Vicki Robin agrees that a core part of financial freedom is freedom from fear and worry about money. She argues that by consciously connecting money to your values, purpose, and dreams, you can diffuse some of your financial anxiety.)

• Get started ASAP. Undertaking a goal as big as succeeding as the owner of a large business or learning to invest can be paralyzing. Take baby steps because they’re much easier to start, and build your wealth as you build your skills.

(Shortform note: Kiyosaki emphasizes that the journey to financial security and freedom is a marathon, not a sprint. James Clear’s concept of “atomic habits” from his book of the same name is useful for breaking down a big undertaking into smaller parts. Atomic habits are small adjustments that are easier to start and will eventually compound into changed behavior.)

• Believe in yourself and have determination. Set yourself up for success by expecting to be successful in the long run. Your ability to succeed depends on your ability to respond to challenges without being knocked off your path; grittiness is essential.

(Shortform note: In her book Grit, Angela Duckworth argues that between two people with equal ability, the grittier person will achieve more success, and that grit is a skill that can be honed with practice.)