Do you want to know how to increase your income? What kinds of businesses will make you rich?
In his book, The Millionaire Fastlane, entrepreneur and millionaire MJ DeMarco says that the fastest way to become rich is by creating a business that generates passive income—and then compounding that income. However, not all businesses will make you rich.
Here are DeMarco’s seven methods for dramatically increasing your income.
The Active Producers’ Checklist
Do you want to know how to increase your income? DeMarco claims that, unless you have a realistic chance of becoming a highly-paid celebrity or professional athlete, your fastest route to wealth is to become an active producer and start a business that has the potential to create millions of dollars in passive income. Then, invest that income so its compound interest can preserve and build your wealth. Throughout the rest of this section, we’ll cover DeMarco’s suggestions for finding the right type of business and investment opportunities to dramatically increase your income.
Create Passive Income
According to DeMarco, passive income comes from businesses that offer value to customers, have the potential for growth, and only require periodic support to survive. He explains that wealthy businesses generate passive income either by selling low-priced products and services (for example, books and apps) to millions of customers, or by selling high-priced products and services (for example, property and luxury vacations) to a few customers. He explains that a less common structure is selling high-priced products to millions of customers—the owners of these types of businesses have the potential to become billionaires.
Value-focused business approaches that generate passive income include leasing physical and intellectual property, creating internet-based systems, selling information, and distributing products.
DeMarco suggests seven methods to come up with your own business ideas and maximize your income:
1) Act on Your Knowledge to Create Opportunities
According to DeMarco, you don’t need an expensive education to come up with great business ideas and create wealth. He argues that it’s possible to become an expert in any field without creating debts thanks to numerous free or inexpensive resources that are available online and in libraries. However, don’t fall into the trap of only consuming information: DeMarco argues that education is only valuable if you act on what you learn. Taking action is the only way to create money-making opportunities.
|Set Actionable Goals to Focus Your Research|
In Ultralearning, Scott Young offers three steps to focus your research so that you can quickly transition from “consuming information” to “taking action.”
1. Determine a specific goal: What do you want to learn and why? For example, you want to learn about website design so you can create your e-commerce store.
2. Gather your resources: Research and collate all of the sources you intend to learn from such as books, podcasts, or software.
3. Create a schedule: Define how much time you’re willing to devote to your research each week and set actionable short-term goals that contribute directly to your long-term goal. For example, your first short-term goal might be to research and choose a website provider.
2) Switch Your Focus From Consuming to Producing
To get into the mindset of a producer, DeMarco suggests that you examine everything you purchase from a producer’s perspective rather than your usual consumer’s perspective. Ask yourself, “What value does this company provide and how does it market the product? What processes are involved in offering this product or service? How does this company make a profit?” These questions will focus your thoughts on the wealth of opportunities available to you and provide ideas for how you can take advantage of them.
|Nine Questions to Uncover How a Business Operates|
Osterwalder and Pigneur (Business Model Generation) offer a more in-depth way to analyze the strategies of successful businesses. According to them, every business strategy relies on not three, but nine elements. The following questions give you a complete picture of how a business operates and help you come up with your own business ideas:
1. Who are its customers? Define what group of consumers the business targets its product to. For example, if it sells children’s books, it’s probably targeting parents and preschools.
2. What channels does it use to communicate, sell, and distribute its products and services? For example, a business might rely on online advertising, an e-commerce store, and the postal system.
3. What sort of customer relationships does it establish? For example, it might offer a fully personalized one-on-one service to build customer loyalty. Or, it might offer automated services with no dedicated customer service representatives.
4. What value does it offer? How does its product or service benefit customers? For example, Smallpdf.com offers free and low-priced pdf services to individuals who don’t want to subscribe to traditional alternatives.
5. What resources does it rely on? A business needs one or more of the following resources to create and deliver its products to customers: material (for example, specific equipment), monetary, intellectual (for example, copyrights or patents), and human (for example, employees or specialists).
6. What partnerships does it rely on? There are four types of partnerships a business might rely on: between non-competitors (eBay and Paypal), between competitors (Apple and Microsoft’s patent-licensing agreement), joint alliances (Ford and Toyota develop hybrid trucks), and buyer-supplier alliances (Samsung supplies Apple).
7. What are its core activities? The main tasks that a business needs to focus on to operate successfully fall into at least one of the following three categories: production, troubleshooting, and infrastructure management.
8. How does it make a profit? Does it deal in single transactions or recurring transactions? Does it offer fixed prices or variable prices?
9. What are its costs? Does the business have one-off costs to produce and distribute a product or does it have ongoing costs such as salaries and office rentals?
3) Consider What Value You Can Offer
DeMarco explains that people are only willing to pay for products that solve problems or fulfill their needs—therefore, the wealth your business generates can only reflect the amount of value that you provide to others. He suggests that you examine your skills, knowledge, or assets and think about how they can benefit others. Ask yourself questions such as, “What problems or pain points can I resolve?” or, “How can I improve upon products or services that I already use?” Answering these questions will help you align your skills and abilities with money-making opportunities.
(Shortform note: What kinds of problems and pain points should you try to resolve? Sales experts recommend looking for inconveniences that customers face throughout both their experience with an existing business and their experience with specific products and services. Come up with as many ideas as you can to solve these problems. For example, one business noticed that consumers are reluctant to buy electric fryers because deep-fried food is unhealthy and the machines are difficult to clean. They transformed the problem into a solution by creating Actifry, a machine that creates tasty fries with only one tablespoon of oil. Actifry converted a problem into revenue totaling €1 billion by addressing customer concerns.)
4) Don’t Take the Easy Route
According to DeMarco, businesses that are more complicated to launch stave off competition and safeguard demand for your product or service. He explains that easy opportunities attract masses of copycat businesses that increase competition and reduce your chances of making a profit. On the other hand, businesses that provide unique products or services that aren’t easy to replicate dominate the market and receive the bulk of the profits.
(Shortform note: How can you come up with ideas for a unique product or service that dominates the market? In Blue Ocean Strategy, W. Chan Kim and Renée Mauborgne argue that you can bypass competition by creating demand in entirely new marketplaces. To do so, they suggest examining how you can pursue both differentiation (raising standards and creating new features) and low costs (eliminating unnecessary features and cutting costs). For example, Cirque du Soleil redefined circus entertainment and bypassed competition by adding elements of theater and cutting animal acts from their performances.)
5) Control Everything in Your Business
DeMarco suggests that you engage only in businesses that you can fully control to avoid becoming vulnerable to other entities. He suggests that you avoid relying on other companies or organizations for logistical support or infrastructure management—for example, hiring estate agents to manage your properties, or signing up to a sales platform to market and sell your products. He explains that if you don’t control every aspect of your business, from operational choices to distribution, your profits are at the mercy of others—because their future decisions may negatively impact you.
- For example, relying on the postal service to distribute your products puts you at risk: Increased tariffs cut your profits and postal delays undermine your company’s reputation.
(Shortform note: While following DeMarco’s suggestion to control everything in your business creates additional costs and responsibilities, the following example demonstrates why it’s essential: Many self-published authors depend solely on Amazon to make a living—they rely on Kindle Direct Publishing to publish, market, and distribute their books in exchange for a cut of the profits (Amazon makes 40-60% on each sale). Despite the money they make from authors, Amazon is notorious for terminating author accounts and withholding royalties without explanation or the chance to appeal. Author reliance gives Amazon the power to destroy livelihoods and creates a great deal of anxiety for authors without a backup plan.)
6) Look for Tax-Saving Opportunities
DeMarco explains that registering your business as a corporation allows you to deduct your expenses and only pay tax on your net profits. This allows you to keep more money for yourself while also increasing your contributions to your pension and investment accounts.
(Shortform note: While forming a corporation allows you to deduct business expenses and theoretically pay less tax, it could also cost you more time and money than it’s worth due to the following disadvantages: The process of forming and maintaining a corporation requires a great deal of time, money, and paperwork, you have to adhere to heavy regulations to maintain your corporation status, and you may face double taxation depending on your corporation structure.)
7) Use Compound Interest to Preserve and Grow Your Profits
DeMarco suggests that you invest your profits to generate additional passive income. We previously explained why you can’t rely on compound interest as your only plan to build your investments. However, DeMarco argues that compound interest is an effective tool when it’s used as part of a plan to preserve and build wealth. He explains that compound interest dramatically increases the value of large investments over a shorter period of time, even when the rates of return are low.
|Wealth Allows You to Invest More Aggressively|
Another way that wealth allows you to profit from compound interest is that you can afford to take risks with your investments. We previously explained how diversifying your investments ensures the overall safety of your portfolio—keeping your investments in cash, bonds, and low-risk stocks protects your money. However, these options only offer a low return and limit the income you can make on your investments. On the other hand, having money to spare allows you to allocate funds to aggressive investments that have the potential to dramatically increase your income.
The following list clarifies how different types of investments generate profits:
Safer investments (cash and bonds) make less money because they’re based on short-term investments with minimal risk. They’re less risky because the value of cash and bonds don’t change according to the whims of the stock market—their value remains stable.
Growth investments (stocks, or a share of ownership in a company) create more money but are also susceptible to income fluctuations that impact the value of your investment. A company’s value fluctuates according to how well it’s performing and the economy in general. Therefore, stocks are ranked by how safe they are, or in other words, how likely the company is to grow in value.
The riskier the investment, the more aggressive it is. For example, an investment in an established company such as Netflix is classed as a growth investment because the company is expected to continue to perform well. However, if you invest in an unknown start-up based on the assumption that it will eventually become as valuable as Google, this is classed as an aggressive growth investment: If your prediction is right, your shares in the company will be worth a lot more than what you initially invested. But if the company fails, your investment will lose value.
People with a limited income tend to focus on preserving their money in safe investments because they can’t afford to take risks. On the other hand, people with more money can take advantage of aggressive investments because they can afford potential losses.