[Editor's Note: This is the second post of a two-part series on the cashflow quadrant from WCI Network partner Passive Income MD. The first explained what the cashflow quadrant is and this one is about how doctors can define goals, educate themselves, and take actions to get to the right side of the quadrant as business owners and investors. This post contains PIMD affiliate links.]
In my previous post, I explained the concept of the “cashflow quadrants” and where most doctors fit into it.
We also divided the quadrants into two sides: the “active income” side (left) and the “passive income side” (right).
If this doesn’t sound familiar to you, please go back and read the first post! Once you have, let’s dive right into part two.
From Left to Right
I’ve said it before and I’ll say it again: I believe that for most of us, the secret to a happy career in medicine is to make it a hobby. If you can achieve this, then you’ll be practicing medicine on your own terms, and for the pure love of treating and caring for patients.
But to accomplish this, we need to be able to rely on other, more passive forms of income. The right side of the quadrant is where financial freedom sits.
So now the all-important question. How do we move from the left side of the quadrant to the right side, where we want to be? Here are some practical steps to get there:
Step 1 – Understand the Cashflow Quadrant
It’s key to be very familiar with the concept of the cash flow quadrants and to understand it well. Make sure you’ve read my first post, and for even more info, read Robert Kiyosaki’s book.
Step 2 – Identify Where You’re At
Identify your position in these quadrants.
- Are you an employee?
- Self-employed?
- Or have you already begun your journey to the right side?
Additionally, you need to know what your net worth is, as well as your expenses. I suggest using Personal Capital if you don’t already.
Step 3 – Define Your Goals
Without your eyes on the finish line, it’s hard to know what direction to run in. In reality, the journey will never be a straight line, but in order to continually course correct, it helps to know where you’re trying to go.
So ask yourself these questions:
- Are you happy where you’re at, and do you desire financial freedom?
- Do you want to retire early? At what age?
- Do you want to be a business owner, investor, or both?
- How much time and effort do you want to put into this?
Write these things down and keep them always in your mind. Give yourself something to work toward.
Step 4 – Educate
Educate yourself–and understand the risks. I can’t stress enough how important it is to read every financial book you can get your hands on. And not only books–check out blogs, listen to podcasts, and find success stories of those that have reached the goals you want for yourself. The more informed you are, the smoother your journey will be.
Here is also a list of my favorite investing, business, and finance books to help you take this an all-important step.
Step 5 – Take Action
Go for it. Whether it’s starting your own business or investing in real estate, at some point, there’s only so much analysis you can do. As physicians, we’re trained to take all the information we can find and make an evidence-based decision.
Unfortunately, when it comes to investing and starting your own businesses, it’s not always so clear cut. There’s always too much noise out there from so many different sources that we don’t know what to believe or what the next steps are. We often get stuck in “analysis paralysis.”
The truth is, you’ll never find one definitive risk-free answer. You have to make the best-educated leap you can make and get your hands dirty. That might mean buying a rental property, getting into real estate crowdfunding, etc. Whatever you choose, follow up on those goals with action.
Wrap-up
I was introduced to the concept of cash flow quadrants after finishing my training, and once I read Kiyosaki’s book, I saw the importance of pursuing additional streams of income as early as possible. Yes, it would’ve been easier to simply go to work think about passive income later in life. My goal was to achieve financial independence about fifteen years after training. Thankfully, I was able to reach it in six.
Unfortunately, as physicians, we’re taught one path to the top and when we achieve career success… then what? At that point, will you have the time and resources to live your life how you want?
As mentioned in my previous post, as high-income professionals, we do have the opportunity to save, invest wisely, and more quickly move into the right quadrant–particularly as the investor. I’ve heard story after story of physicians doing that very thing. Some used the stock market to get there and some have used real estate.
Ultimately, once your research is done, the key is to make a plan and commit to it. You may reach financial freedom faster than you think.
What’s your plan to be on the right side of the cashflow quadrant?
I’m in all four quadrants. I’ve always been an employee and made 90%tile wages in that quadrant by taking tougher jobs with call, weekends, Medical Director duties, etc.
I kept my starter home and rented it out these past 15 years and own a mountain top lot next to my retirement cabin on Due to the drop in prices across 2006-2012, the old house was “upside down” for years…
I have been a self employed business owner by virtue of moonlighting weekends and holidays which serves to leverage the hourly wage. On average, no one else wants this work, so it pays more.
The mixture has produced a pension that I can take at age 60, a maxed out 401K/457/SEP IRA portfolio, and an old house that I can’t wait to get rid of. The starter home has done little to aid me financially.
If I had a do over, I would have sold the starter home 15 years ago and redeployed this debt as a rentable cabin in a resort area.
You can certainly achieve success without having been in all four quadrants but just like diversification the more baskets/quadrants you have the quicker the path to wealth and the greater the ability to withstand a negative event affecting one of them.
My main money comes from being in the business owner quadrant as I am essentially part owner in a multi specialty medical practice even though I get a w2 wage from this.
My favorite quadrant is the investor one which even though is a smaller percentage (probably 5%) gives me the greatest satisfaction as I didn’t have to work for it (free money in my mind)
The quadrant concept is one of Kiyosaki’s best. It is especially important for doctors who are used to climbing into one little box and getting comfortable there. I have always worked on increasing cash from all four areas. I wouldn’t say that owning a business is passive though. Most businesses require a lot of work and due diligence to maintain or grow. Here’s how I’ve benefitted the most from each over the years:
E – Gives me a paycheck, routine, structured day, benefits, Social Security credit, identity in my role there, etc.
S – Gives me flexibility in hours, work, variety, and tax benefits (e.g. SEP-IRA)
B – Helps me to understand growth. Large upside potential. Opportunity to employ other people – which benefits them and me.
I – Cash flow that is mostly passive, tax-advantaged, residual, and growing at compounded rates.
Internet Grammar Police (IGP): For a more polished feel to the blog, “identifying where you’re at” and “knowing where you’re at” should simply end with “where you are.”
I didn’t know that, probably because I spent too much time with the urban dictionary and not enough with the real one:
https://www.urbandictionary.com/define.php?term=Where%20you%20at%21%3F
But this one isn’t my fault. The piece was written by PIMD and edited by my assistant editor so I’m blame free!
lol! I shoulda checked that urban dictionary, haha.
Great article from PIMD. Right now we (wife and I) are in the “employee” side of the quadrant with the normal investments for retirement (401K, 457b, and backdoor Roths) completely maxed out. However, we would soon like to be more on the investor side by investing additional monies in a taxable account and in real estate (residential properties). Our goal is to diversify through index funds, bonds, and RE. We are taking more of a conservative approach by paying off all our debt first, to include our primary residence (mortgage) and then begin investing with minimal living expenses. We are not big fans of debt but I feel we will be in a better position to use leverage to our advantage once we don’t have our primary residence mortgage hanging over our heads. So far we have paid off everything but our mortgage, and at the rate we are going we should have that paid off within the next 8 months.
What are your thoughts on this approach, WCI?
I would NOT invest more in a taxable account unless I had already maxed out my tax advantaged accounts. Otherwise, sounds good.
Oh, absolutely. That’s what I thought and have been doing. We max out each tax-advantaged account each year before anything else. Thank you!
I know the quadrant visual is nice, but I have always thought that Self-Employed and Business Owner were extremely similar (Unless you want to strip out stock ownership from investing and move it into business ownership) and that there were really only 3 legs of the income stool. Employee, Self-Employed, Investor.
As I am typing this now I realize that if you are self-employed you are also most likely an employee as well.
Maybe it really is simply active income (employee, self-employed, business owner) and passive income (investing).
Semantics aside, great post and great way to think about it. Personally I am currently an employee and investor, but my goal is to reach self-employed/business owner & investor in the next 3-5 years.
The model has flaws for sure. The idea behind Kiyosaki’s model was that only C corporations go into the B category but in reality the point of B is that you own something where someone else is working for you and producing income for you. Whether the business model is sole proprietor, partnership, S corp, or C corp doesn’t really matter.