Read my blog post How to measure success to understand why I think capital/money is the current best way to measure success.
The reason I’m writing this blog post is to make things very clear in the mind of my readers. The information below is known by everyone, displayed visually to be understood. Knowing and understanding are different.
There are mainly 4 ways to actually grow capital, Rich Dad Poor Dad actually explained it very well in its cash flow quadrant. Do read through, amazing book that changed my life when I was 15. The explanations below are simply Capital 101:
Employee: Sell time, focus, and service to your employer.
More than 95% of the population are employees. Working for a business is the easiest to execute. An employee requires the least current capital risk. However, investing in our own business can have potential Return on Investment that we lose when we are employees. The business you work for will convert your time, focus, and service into a products / services that it sells to customers.
Self-employed and Freelancer: Sell time, focus, and service directly to customers.
Freelancing or being a self-employed is actually a very good strategy to grow a decent capital. You are selling your service too, but directly to customers. You keep all your value that you deserve. Same with being an employee, very low current capital risk, because there is almost no fixed cost when you start. When you have served enough customers, grown competitive expertise, and built a reputation, you can actually hire juniors to help you serve your customers and convert it into a business. Doctors, dentists, consultants, freelance marketers, developers, and designers are good examples. I would love to emphasize that being self-employed or freelancer is a very good start for those without business expertise and startup capital. There are senior dentists hiring a lot of junior dentists, senior marketers hiring a lot of junior marketers (Marketing Agency), senior real estate agents hiring a lot of junior real estate agents (Real Estate Agency), and so on. Selling your service directly to customers means converting your time and expertise into capital without giving away your share to business owners (exception: freelancer.com and other platforms).
Business owner: Sell products / services to customers.
A business sells products or services to customers. These products and services are derived from other resources: human resources, raw materials, etc. A business adds value on top of an agreed value and takes a cut (profit) in return. For example, Sam is an owner of a bakery, Sam hires 5 bakers (human resources), buys ingredients (raw materials), buys ovens and other equipment (technology). By combining different resources and managing it well, the bakery produces great bread and cakes, then sells it to customers. It is fair to say that the bakery helps to resell the bakers’ service that has first been sold to the bakery, to resell the raw materials at a higher value after being processed by the bakers and equipment. This is one of the best ways to grow capital, the problem comes when you cannot sell the products or services. There are certain fixed costs and variable costs that actually increase your current capital risk, but you usually have potential capital higher than being an employee or a self-employed or a freelancer. In the process, a business owner also creates assets that he/she can sell partly or wholly to investors or asset buyers.
Assets owner: Buy assets to get cash flow and/or capital gain in return. Assets can be businesses, stocks, properties, patents, gold, and more.
I believe this is the nirvana of growing capital. This is the best way to lower down risks and increase gains. Asset owners can be anyone, it can be businessmen, self-employed, or employees. When you purchase a business, real estate, or other assets, you will be called investors (means you hope that your capital will grow whether to capital gain or cash flow). The tricky part is this, only businessmen can be great investors or asset owners, they have been through the purchase of creating an asset. Business is an asset. Non-business owners (non-founders & builders) can be average investors, but great investors are always shrewd businessmen.
All images above are for example purposes only, a lot of details are not included to simplify things.
Everybody pay to assets owners. When you pay rent, it goes to assets owners. When you purchase a product/service, it goes to assets owners. Diversified assets owners gain cash flow and capital gain from a lot of sources: businesses, stocks, properties, commodities, bonds, patents. It is the nirvana of capital growth. Acquiring assets are not easy, that’s the reason 10% of the population owns 90% of the total wealth, and 90% of the population owns 10% of the total wealth.
It’s all about the ability to gather and accumulate resources, to increase the value of the resources, and to sell it for a good profit to accumulate more resources.
If you have further thoughts, reach me: firstname.lastname@example.org