This article is an excerpt from the Shortform book guide to "The Millionaire Fastlane" by MJ DeMarco. Shortform has the world's best summaries and analyses of books you should be reading.
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What’s the quickest way to become wealthy? How can you create passive income?
MJ DeMarco, multimillionaire entrepreneur and investor, argues that the traditional path to wealth—working for a salary and investing in stocks—is too slow and unreliable. Instead, he says that the fastest way to become wealthy is to create passive income and increase your net worth.
Here’s how to become wealthy by leveraging time.
The Active Production Formula
DeMarco defines the Active Production formula for wealth as: unrestricted profits + investments and assets = massive wealth and early retirement. He argues that active producers are motivated by the goal to create and enjoy wealth. However, unlike insatiable consumers, they don’t confuse “get rich quick” with “get rich easy.” DeMarco explains that they’re willing to practice discipline and forfeit short-term comfort while they work on creating passive income and increasing net worth. As a result, they achieve extraordinary wealth in a short period of time and can buy what they want without fear of incurring debts.
(Shortform note: DeMarco characterizes active producers as individuals willing to make strict financial sacrifices and de-prioritize their present happiness and comfort in service of becoming extraordinarily wealthy in the future. But, is this sacrifice really worth it—and will having enough wealth to buy whatever you want really make you happy? Arguably not. Research shows that, instead of making you happier, excess wealth and materialism encourage narcissistic tendencies and diminish your overall well-being: The desire to acquire more money and possessions promotes negative feelings, such as low self-esteem and anxiety, and discourages positive feelings, such as happiness and satisfaction.)
Leveraging Time Creates Passive Income and Freedom
According to DeMarco, the key reason active producers get rich fast is that they leverage their time—this means they use their time to create passive income, or something that generates recurrent income without their direct involvement. Leveraging your time removes your need to work for an income and dramatically improves your chances of creating wealth.
DeMarco argues that you can’t leverage your time at a conventional job because your income directly relies on how many hours you work or how much you produce.
- For example, you work in a salon and either get paid $20 an hour or $20 for each client you serve. So you must work five hours or serve five clients to generate $100—both methods restrict your income to how much time you contribute.
On the other hand, investing time in work that generates passive income—by creating a product or system that’s capable of earning an income long after your original time investment—expands your income potential.
- For example, you invest your time into creating a $20 haircare product that sells in global markets—the ongoing sales of this product generate an income far beyond the hourly wage you would’ve received for your original time investment.
Consequently, DeMarco insists that investing your time and money in assets that appreciate over time—such as physical or intellectual property that you can lease or sell—is the fastest way to grow your net worth and earn millions.
|The Disadvantages of Relying on Passive Income|
According to DeMarco, assets that generate an ongoing income without your “direct involvement” create unlimited passive income and remove your need to work. While this may seem like an ideal way to create financial freedom, there are a number of factors to consider before foregoing your job to take this route:
Time investment: Creating a reliable and consistent source of passive income is a slow process—it takes a great deal of research, trial, and error. For example, researching relevant content for a blog and learning SEO practices to develop a stable following could take weeks, if not months.
Financial investment: Many passive income projects require significant upfront costs—for example, buying a property so that you can rent it out, or paying manufacturing costs so that you can get a product into the market.
Delayed (or no) income: Your product or service can’t generate an income until it’s ready to enter the market—it could take months or years to build up awareness and build traction. Despite your time and effort, your project may never generate an income. For example, there are thousands of books on Amazon that haven’t made a single sale.
Relying on a single source of income is a gamble: It takes several diverse income streams to reliably sustain a comfortable lifestyle—each requiring an initial investment of time and money to establish. For example, relying solely on rental income puts you at risk if your tenant can’t pay the rent.
Ongoing management: Many passive income streams don’t last without your direct involvement due to a number of variables. For example, properties require maintenance and apps rely on constant updates to stay ahead of the competition.
Financial Outcome: A Lifetime of Luxury and Freedom
DeMarco argues that allocating money toward businesses and investments that create passive income explodes your earnings and positively impacts the things that matter: your health, relationships, and sense of freedom. While this formula does initially require a heavy investment of time, effort, and persistence to come up with viable opportunities for passive income, the rewards are far greater than anything you could hope to receive from the other two formulas.
(Shortform note: While passive income has the potential to dramatically increase your income, it’s also at the mercy of various uncontrollable factors that may impede your plans to retire early—especially if you fail to consider how your lifestyle will change. For example, one entrepreneur retired at 34 with a net worth of $3 million and an annual passive income of $80,000. However, by the age of 42, he was again seeking the security of a job due to declining interest rates, rising health insurance premiums, and unexpected childcare costs. Factoring in lifestyle changes and market fluctuations before you retire ensures that you’ll have enough to live comfortably throughout your retirement.)
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Here's what you'll find in our full The Millionaire Fastlane summary :
- The three formulas that all conventional financial strategies follow
- Why these formulas represent shortcuts that don’t guarantee financial freedom
- How to generate a massive income in a short time