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What types of income are there? Which income categories provide more job security? Which ones require more risk yet yield higher rewards?
According to financial educator Robert Kiyosaki, there are four different types of income which he calls “cashflow quadrants”: 1) employees, 2) the self-employed and small business owners, 3) big business owners, and 4) investors. People who choose to be in the first two categories value security above freedom, but generating income by being an employee or a small business owner are dead ends on the road to wealth.
Keep reading to learn about Kiyosaki’s four types of income or “cashflow quadrants.” We’ll also look at the traits that generally attract people to these income types.
Different Types of Income Yield Different Results
In Rich Dad’s Cashflow Quadrant, Robert Kiyosaki argues that to generate wealth, what kind of income you generate is more important than how much income you generate, or what kind of work you do. Kiyosaki uses the stories of his now-famous “Rich Dad” (his friend’s father) and “Poor Dad” (his own father) to illustrate how different types of income lead to different results.
He divides income into four categories, which he calls “cashflow quadrants”:
- Employees (E)
- The self-employed and small business owners (S)
- Big business owners (B)
- Investors (I)
1. Employees
In the E category, employees generate income by agreeing to do work in exchange for a salary. They have a boss and a paycheck. Kiyosaki says employees choose the E category because they value security and certainty. Traditional thinking says E category jobs are stable because they offer steady income and a clear job description. But there are downsides—Kiyosaki says the biggest disadvantage of an E category job is lack of control over your own work.
2. The Self-Employed and Small Business Owners
In the S category, small business owners and the self-employed are their business. They are their own boss, and they can also be the boss of other people, but without their labor, expertise, and management, their businesses can’t run. Their income is the profit from their business. Kiyosaki says people choose the S category because they value security and excellence in their work. According to Kiyosaki, people in the S category see it as the most stable way to generate income because they have the most control. The biggest disadvantage to trying to make a living in the S category is that most small businesses fail.
The biggest negative in the S category, according to Kiyosaki, is that most small businesses fail. S’s are at particular risk for burnout because they have to perform all the functions of their business, not just their core competency. A self-employed stylist has to be her own marketing team, do all her own invoices and expenses, and plan all her own travel. Like E’s, if an S business does succeed, Kiyosaki warns that success means long hours and a lot of hard work.
3. Big Business Owners
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.
Examples: Mark Zuckerberg (who founded and owns Facebook), Bill Gates (who founded and owns Microsoft), and the owner of your region’s pizza chain are all in the B category because they own business systems.
4. Investors
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.
Final Words:
According to Kiyosaki, the first two income categories, employees (E) and the self-employed and small business owners (S), are usually dead-ends on the road to wealth. The other two categories, big business owners (B) and investors (I), are the most conducive to accumulating wealth because those are the categories in which you can develop income-generating assets.
The 4 Different Types of Income—Explained
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- Why the traditional path of college to career doesn't work
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- An in-depth look at Robert Kiyosaki's four cashflow quadrants
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