Book Review: Rich Dad’s Cashflow Quadrant

Ah, Robert Kiyosaki.  So many contradictory thoughts come to mind when I think of you and the books you’ve authored.  On one hand, you were the first personal finance writer who really caused me to stop and re-evaluate how I was using my money, and for that I thank you.  On the other hand, much of your advice, particularly in your first book Rich Dad, Poor Dad, seems highly inappropriate for me at best, and downright dangerous for most people at worst.

Given those two considerably different views, I had to make a serious effort to read your second book, Cashflow Quadrant, with an open mind.  I did my best to judge it not based on my opinion of you, your critics, and even your first book, but rather the merits and demerits of the book itself.  Is it a must read for all would be investors, or something that most everyone can skip?  Let’s read on:

Overview

Cashflow QuadrantThe book starts by introducing the Cashflow Quadrant(TM), an illustration of the four primary ways to earn money.  It’s shaped like a plus sign, with four letters in each corner, separated by the plus’s cross bars.  In the upper left, there’s an E (for employee), the lower left has an S (for self-employed), the upper right has a B (for business owner), and the lower right has an I (for investor).  (Look over at the cover of the book; you should be able to make it out.) Much of the rest of the book refers back to this diagram at one point or another, so having a good understanding of it is important.  In fact, before the introduction ends, Kiyosaki notes that his ‘Poor Dad’ (his biological father) always recommended he stick to the left side of the quadrant (the E and S side) while his ‘Rich Dad’ (his friend’s father, who gave him advice on how to become rich) suggested that he should focus on the right side (the B and I side).  The first chapter begins to introduce the idea of the four quadrants in more detail, as well as noting that it’s possible to be rich or poor in any one of them.

The second chapter starts to introduce the differences between the four groups.  According to Kiyosaki, E group employees desire security, the S group of self-employed people wants to do it themselves, B group business persons want to be surrounded by those who can help them build and grow their businesses, and investors in the I group use money to make money.  There’s a few side discussions in the chapter clarifying his definitions and expanding where he suggests people who wish to be wealthy should focus their attention (in the B and I quadrants).

The third chapter covers why people choose security over freedom.  Kiyosaki discusses how many people will, as they increase their salary at work or in their small business, spend more and start to borrow even more, leading to a cycle of ever increasing debt even as their income is rising.  He also covers some patterns of the rich (moving from the S quadrant to the I quadrant by investing their earnings, for example) and the not so rich (continually changing E quadrant jobs).  The fourth chapter covers the three types of business systems that Kiyosaki recommends; traditional C-corporations, franchises, and network marketing.  He goes into some detail about each type of system, giving particular recommendations to network marketing.

The fifth chapter covers the seven levels of investors, from level 0 (those who have nothing to invest) to level 4 (the long-term investor, who invests primarily in mutual funds) to level 5 (sophisticated investors who can make their own investments) and finally to level 6 (capitalists, who create investments like businesses and sell them to the market).  He ends with a note that you have to become good at being a level 4 investor before you can go on to level 5 or 6.  The first section of the book ends with a chapter advising you to see money with your mind, since it is just a concept.

The second part of the book is about ‘Bringing Out the Best in You’.  Kiyosaki starts with a chapter encouraging the reader to be who they want to be.  The eighth chapter covers how to become rich, focusing on changing your mental attitude toward money and becoming rich.  He spends quite a bit of time covering various emotional and mental hang ups many people have, attempting to dispel them.

The ninth chapter goes over some of the heroes and villains of past financial crises (and rather astutely notes that Alan Greenspan would become a villain in a financial downturn).  He covers some more advantages to using real estate to invest and starting corporations, mainly the tax advantages inherit in both.  The chapter ends with a sidebar, reminding readers to stay up to date on tax law and use the rules to their advantage.

The tenth chapter kicks off the last section of the book, on thinking like a B or I individual.  This chapter covers taking baby steps learning to think like a rich person, gradually re-educating yourself to think in terms of the possibilities for businesses or other investments that are out there.

The last seven chapters of the book are organized as seven steps to finding your financial fast track.  Step 1 is to mind your own business, learning about your financial situation and developing a plan to become wealthier.  Step 2 is taking control of your cash flow, determining where you money comes from and goes.  It ends with a pretty solid, if ambitious, plan for paying off your credit debt each month.  Step 3 is knowing the difference between risk and risky, the difference between make intelligent investments and never doing any investing.

Step 4 is to decide which type of investor to be, one who knows nothing, one who seeks ready solutions, or one who seeks problems to try to fix.  Step 5 is on seeking mentors, who could be anyone from good role models you want to follow to spiritual role models who can inspire you.  Step 6 is all about turning disappointment into strength, learning from the mistakes you’ll inevitably make.  Step 7 i about having faith; in this case, faith that you can accomplish your financial goals.  The book ends with a table comparing the Broke Masses, Successful Middle Class Investors, and the Rich on a number of features, from investment vehicles to the resources they use.

Pros

-Easy to Read: Kiyosaki is definitely good at creating a compelling narrative, and this book is no exception.  You should have no problem reading and following along with the points he makes, as well as the diagrams he shares.  The book is pretty easy for anyone to pick up and read.

-Actionable Advice: Particularly in the last set of seven chapters, Kiyosaki lays out a number of simple, easy to follow steps that make it possible to become wealthy using his methods.  Particularly compared to Rich Dad, Poor Dad, having real, workable advice is a good step in the right direction.

-More Inclusive Perspective: Again, compared to his first book, Cashflow Quadrant does much more to acknowledge alternate view points on wealth and money.  Kiyosaki notes that people in all four quadrants can become rich, for example, and also points out that most of the millionaires in the US would be considered level 4 investors on his scale.  All of this makes it much easier to get something out of the book, even if you don’t follow all his advice.

Cons

-…But Not Completely Unbiased: While not as bad as the first book, Kiyosaki still doesn’t show an excess of respect for those in E and S quadrants.  Some of his comments do have justification (the relatively high taxes paid on earned income, for example), but many of them are unfounded, attributing traits of fear or perfectionism onto those who are self-employed or work for someone else.

-Selective Emphasis of Risk: Kiyosaki is perfectly happy to discuss risk… the risk of not investing according to his principles.  What he mentions only in passing is that doing the high profit potential deals he emphasizes does have the risk that many, if not most, will fail.  Unfortunately, even when acknowledging such possible failures, there’s no mention of how to prevent or recover from them; the idea of insurance or an emergency fund never comes up.

-Denigration of Education: A continuing theme in Kiyosaki’s writing is the relative unimportance of education.  From calling his highly educated father ‘Poor Dad’ to maintaining that street smarts are much more important to success than book smarts to sharing a list of anti-education quotations in the middle of a chapter (sent to him by Poor Dad, no less), he has no fondness for education, and seems to delight in denigrating it.

Conclusions

Overall, I liked Cashflow Quadrant much better than Rich Dad, Poor Dad.  Yes, there are still flaws; it under-emphasizes risk and devalues formal education.  But it’s a much more practicable book, with specific suggestions for those trying to follow Kiyosaki’s advice, as well as including some advice for those who aren’t ready for his particular brand of investing.  It’s a decent beginning investing book; even if you didn’t really care for Rich Dad, Poor Dad, it might have some points worth knowing.

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