On July 1, I wrote about an idea I’m developing that I hope to make into a small book called something like Building Wealth in 7 Lessons. I suggested that, at base, there are only three ways to make money: by working for someone else, by being a merchant, and by acting as a banker.
I’ve thought about it since then. I was wrong. There are really four ways:
* You can make money by working – either as an employee or by working for yourself.
* You can make money by selling things – i.e., as a commissioned salesperson.
* You can make money by owning things – income-producing assets or a business.
* And you can make money by lending money – i.e., as a banker.
As a worker, you are trading your time and expertise for dollars. This is as true for a solo-practicing doctor or a lawyer as it is for an assembly-line worker. And as a worker, there are only two ways to increase the amount of money you can make: by working more hours or by developing more financially valued skills.
As a commissioned salesperson, the money you make does not depend so much on the time you put into it, What counts are three things: how good you are at selling, the size of your commission, and the price of the things you sell.
As an owner, you can make money in several ways. If you own an income-producing asset like rental real estate, you can make money from your profits (net rents) plus any increase in the value of the property over time. If you own and run an active business, you can make money through its profits and any increase in its value. Plus, you can pay yourself a salary as a worker for the business you own.
As a banker, you make money not by working harder or acquiring financially valued skills or even with profits or a salary. You make money on the money you lend – on the interest you charge for that money.
There are innumerable variations of the above, but these are the basic four. And if you look at wealth building from this perspective, the path will be pretty easy to follow.
So that’s the first part of my revised thesis.
The second part is this: The most efficient and effective way to build wealth – and this is especially true if you are starting from zero (with no net worth and no income) – is to move from worker to salesperson to owner to banker.
Okay, that’s enough for now. More to come…