We are each given 24 hours a day yet how we all utilise these hours varies dramatically. In many ways, this is the core difference between the rich and the poor – the wealthy tend to invest their time into building long-term assets (delayed gratification) whereas the poor trade their time for instant benefit (immediate gratification).
The Stanford marshmallow experiment demonstrates the long-term earnings difference between those that are motivated by delaying their gratification in order to reap more reward in the long term; yet today with our mobile lifestyles we are increasingly wanting everything instantaneously – meaning we’re often disproportionately focused on the here and now rather than the future.
Further to this, we are living in an increasingly litigious society where people that need help with personal injury are focused more on the speed of a settlement rather than the amount; we all seem to be in such a rush, yet this is one of the biggest differences between the rich and the poor – the rich are much more focused on profiting from the long game by building assets that mature over time, rather than reaping instant rewards.
The book “Rich Dad Poor Dad” posits four archetypes in which people make an income; each with benefits and disadvantages.
1. The Employee
2. The Small Business Owner
3. The Big Business Owner
4. The Investor
Being an employee is the most common way to go about making money but it is also one of the least efficient as employees are trading their most valuable commodity (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 due to the expense of doing business.
The lack of control that comes from being an employee can be detrimental to your financial and career growth, as you are always having to jump through someone else’s hoops, and at any time the rug could be pulled from under you, in the sense the company could make you redundant.
At the higher level, there are some decent perks such as expense accounts and company cars, but but being an employee is in many ways like renting a house rather than owning it; you’re not building an asset that is maturing – you are simply trading time for money and when you stop trading time you stop receiving the money. This is an intrinsic limit that prevents employees from becoming wealthy, as in order to become rich, you need to build assets that appreciate over time.
THE SMALL BUSINESS OWNER (SELF EMPLOYED)
The financial rewards of having a small business can be substantial, but for most people they find themselves trading a reliable job for a more taxing position, doing a similar task, with very high risk. Whilst this is a positive leap it can be negative for your wallet and lifestyle as there is a high risk of failure plus for the majority of small business owner’s, their business takes over their life.
In terms of earning potential, as a self employed person, you are still stuck in the trap of trading time for money which means your earning potential is capped… unless you branch out and migrate to running a business rather than working in the business.
THE BIG BUSINESS OWNER
Small Business owners, in this context, relate to people that ‘own their job’ such as a consultancy practice, a florist, a massage therapist or personal trainer – the key point is they are all trading their time for money. The limitation being that you can be a great massage therapist, charging $100 an hour, yet there are only so many hours in each day that you can realistically work; therefore, you are subject to a ceiling with regard to your earning ability using this ‘small business’ model.
The big business, however, leverages systems and other people to create their income. Let’s imagine an ice cream van. This ice cream man generates $200 profit from selling ice creams. He is a small business owner. The big business owner, goes out and buys five ice cream trucks and employs five people to serve ice cream. Each ice cream truck generates $200 ($1,000 per day) and each ice cream man makes $100 in salary. This results in a gross profit of $500 per day – yet the business owner himself, isn’t trading his time for money, in the same way as the ice cream man. He now has leverage. He has created a system and a network that is scalable. There’s nothing stopping him expanding the number of ice cream vans to 100 – meaning he would be making $50,000 per day. That’s the most important difference – there is leverage and scalability.
The investor has true leverage; rather than trade their time for money they trade their money or other assets to work for them.
Think of it this way, 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. Now, the challenge is getting that initial $500k in the first place, but the concept remains – investors create assets that generate income automatically.
The best example, that is accessible for most people is to purchase a house at auction, renovate it, split the home into four smaller self-contained units, and then rent each one out. If your mortgage is $600 a month, but you are renting each of the four units at $400, you are making $1,000 each month in passive income; and there’s nothing to stop you owning a heap of houses. The point, with being an investor, is to put your money in assets that are going to appreciate; and have your money work for you rather than you trading your time for money.
In summary, the biggest difference between the rich and the poor is how they utilise their time; the poor tend to be on a perpetual treadmill that is commonly referred to as the rat race, whilst the rich are busy building long term assets.
There is a lot of focus on saving money within this blog, which is incredibly important, but an additional factor to take into account is that of increasing your ability to make money… and in particular, how to utilise your time in order to step off the money making treadmill and start building assets that secure your financial future.