The 4 Ways People Make Money
You may have already heard of the book “Rich Dad Poor Dad” which presents a concept known as the “Cashflow Quadrant” where there are four categories in which people make their income; the employee, small business owner, big business owner, and the investor.
Whilst each has pros and cons, if you want to generate financial wealth then you need to be in control of how much money you make, and you can’t do that as an employee. Essentially you need to make your own paystub, rather than be handed a paycheck from someone else that determines what you earn and the only way to do that is to have your own business.
In taking a quick look at the four ways in which people make money, it will hopefully open your eyes up to where you’re currently at with regard to these categories and where you would like to be.
EMPLOYEE
To be an employee is the most common, yet often the most ineffective way to go about making money, because employees trade their time for money and someone else is pulling the strings.
There are a number of tax disadvantages for employees, compared to business owners, who can write off some of their tax liability too.
The lack of control that comes from being an employee is detrimental to your financial and career growth, however, there are some perks in the sense that being employed is a much more stable, safe and secure way to earn money that it is to run your own business or be self-employed.
SMALL BUSINESS OWNER
The financial rewards of having a small business can be substantial, but for many people they end up simply trading a job for a job they own, that doesn’t offer a regular paycheck or any type of security.
The main problem with being an employee or self-employed is that you are directly swapping time for money, and when you aren’t swapping your time, you aren’t making any money – in this sense, your financial stability is inherently insecure because what if you were to become too unwell to work, for instance, or just wanted to take a few months off to travel.
BIG BUSINESS OWNER
The intrinsic limitation with a small business owner, is that they can be a great massage therapist, for instance, charging £100 an hour, yet there are only so many hours in each day they can realistically work; and there is a ceiling to their earning ability on the basis of the amount they can charge per unit, and the number of hours they can work.
The big business owner, however, leverages systems to create their income. For instance, rather than selling ice creams, they will invest in five ice cream trucks and employ five people to sell ice cream. This way, there is leverage, in that there’s now a system and network that is scalable.
The downside, of course, is that not everyone can afford to invest in the infrastructure and facilities required to build a big business, yet that’s where start-up capital comes in.
INVESTOR
The investor has true leverage; as rather than working for his or her money, in the sense of trading time for money – they are putting their money to work for them. For instance, if you have £500,000 in a savings account that is earning interest of 10% each year – then, by doing nothing, that savings account is making £50,000 a year.
In summary, there are a number of differences between the categories, and there are pros and cons with each. Many people knock being an employee, but there are some serious advantages when it comes to financial stability and security – yet, this route rarely leads to financial freedom.