Wealth and Freedom are ultimately the most important goals most Kiwis aspire to achieve. Whether you’re looking to retire early, have more income and time to spend travelling, or leave a legacy for your kids, property investment is great way to make your dreams a reality. Aside from being a tangible investment, property is a great way of building a passive source of extra income.
Robert Kiyosaki’s Cashflow Quadrant does a great job at providing those who are aspiring to achieve financial independence with a framework for success. Your goal must be to move from the left hand side to the right-hand side of the diagram below. The desired outcome is for your income to grow independently from the time and effort you spend at work.
Which quadrant describes you best, and where do you aspire to be?
The E (Employee) Quadrant
The E (“Employee”) makes money by “working for other people”. They usually go to the office every day, and depend on monthly salary as primary source of income. Employees rely on effort and time to make a lot of money. That is, to earn more, they need to work more and spend more time on work.
The S (Self-Employed) Quadrant
People who typically have professions and “own a job”, instead of working for other people, belong to the S or “Self-Employed” quadrant. Doctors, lawyers, and other professionals who “work for themselves” are examples of the Self-employeds. Most Self-employeds do make a lot of money but, like the Employees, their income is directly tied to how much they work, so the moment they take a vacation or stop working, they practically earn nothing.
The B (Business Owner) Quadrant
Those belonging to the B (Business Owner) quadrant “own a system” instead of merely “owning a job”. They set up a way that makes money for them even if they do not spend a lot of time in the business. They achieve this by hiring Employees (who belong to the E quadrant).
Of course, when entrepreneurs start a business, a lot of time and effort is spent building it. In due time, though, when the system has been properly set up, the system is said to be “working”. The entrepreneur can now spend less time managing the business and yet his income is not reduced.
The I (Investor) Quadrant
Finally, those belonging in the I quadrant are called the Investors. They are usually:
- Most adept at making money work for them; and
- In some cases, they even use other people’s money to make more money.
The Investors mostly do not “work” at all, that is, they do not rely on personal time and effort to make money. They usually turn to stocks, fixed income securities, real estate, and other investment assets that produce income through capital appreciation, dividends, rental income, etc. In some cases, they merely entrust the management of these funds to competent fund managers who do the work for them. There’s one thing they all agree on, and that’s the magic of compounding, which drives the creation of wealth over long periods of time.