In The Millionaire Fastlane, multimillionaire entrepreneur and investor MJ DeMarco challenges conventional wisdom about how to create wealth and offers a simple formula to shortcut your path to riches and early retirement. As we’ll explore in this guide, according to DeMarco, all financial strategies follow one of three formulas, each representing a distinct attitude and approach that determines both the amount of money you can accumulate and the speed at which you can achieve your financial goal. Each formula also reflects the control you have over your finances and how you use your time to make money:
DeMarco argues that each formula influences how you manage the various factors that impact your ability to create and enjoy wealth: your income, your spending habits and debts, the strategy you use to increase your earnings and savings, and your willingness to improve your chances of success.
In this guide, we’ll clarify DeMarco’s ideas as we delve into each of his three formulas. For the first two formulas—both common but largely unsuccessful—we’ll explain why common shortcuts to wealth don’t guarantee financial freedom. For the successful third formula, we’ll reveal how to leverage your time to generate unlimited passive income. We’ll conclude with actionable advice to help align your financial strategy with Formula #3 and fast-track your path to wealth.
How Conditioning Impacts the Formula You Choose
DeMarco argues that your finances are the result of the specific formula that you follow; how you spend your time and control your income; and the ripple effect all of this has on factors like your spending habits and motivation to earn. But why do you follow the formula that you do and behave in certain ways regarding money?
According to T. Harv Eker (Secrets of the Millionaire Mind), it’s because of how you were conditioned as a child. He explains that everything you heard and experienced regarding
money conditioned you to think, feel, and behave in specific ways when managing your finances—either moving you toward financial success or away from it. Eker suggests that you can overcome your conditioning to improve your finances by consciously replacing your unproductive thoughts and beliefs about money with the productive thoughts and beliefs that rich people have.
DeMarco defines the Insatiable Consumption formula for wealth as: job + debt = a lifetime of poverty. He argues that insatiable consumers are more motivated by the illusion of wealth than actual wealth. According to him, they spend more than they earn on luxury items and experiences because they feel like they deserve the best without having to work for it. They also crave the pride, admiration, and respect that rich people enjoy, and they believe that they can achieve the same positive feelings simply by looking rich.
(Shortform note: In the same way it creates an illusion of wealth, buying things to impress or outdo others creates an illusion of happiness. In The Happiness Hypothesis, Jonathan Haidt explains that the desire to project wealth limits your ability to feel intrinsically happy because it leads to an endless competitive cycle: You feel happy when you buy something that projects wealth. However, when someone else buys something more expensive, it devalues your purchase and leaves you dissatisfied. The only way you can maintain happiness is to continue purchasing increasingly expensive things so no one outdoes you.)
DeMarco explains that this attitude disregards the effort and persistence required to create wealth in favor of the quick fix of using credit to impersonate wealth. While credit (loans and repayment plans) allows you to spend far more than you earn, it destroys your chances of creating actual wealth and freedom. It forces you to work long hours and commit all future income towards debt repayment. This limits your ability to funnel money toward your financial security (pension and savings accounts), forcing you to live paycheck to paycheck. This lifestyle creates financial stress that negatively impacts your health, relationships, and your sense of freedom.
Further, DeMarco warns that when you don’t have money to spare, you lack control over your finances because you’re at the mercy of external factors: job losses, economic recessions, credit interest hikes, and mortgage inflations. Any one of these factors can destroy your credit rating, further negate your net worth, and bankrupt you.
(Shortform note: Financial advisors agree that debts coupled with a lack of savings put you at risk of unforeseen external factors, and they generally recommend that you clear your debts first and then allocate money into a savings account. However, large debts may take years to pay off, and without any savings to fall back on, you’ll still be at risk of financial struggle. In The Automatic Millionaire, David Bach suggests that you prioritize saving to best protect yourself from unforeseen circumstances—set aside at least one month’s worth of savings before focusing on clearing your debts. If the worst happens, you’ll avoid getting into further debt because you’ll have savings to rely on.)
Not All Credit-Users Are the Same
It’s well-known that relying on credit creates debt that restricts financial freedom and has negative consequences in many areas of life. However, DeMarco’s conclusion that people rely on credit because they’re either ignorant of its risks or too vain to care is arguably reductive—many people understand the risks but have no other options. A recent survey revealed that 37% of low-income and middle-income households rely on credit cards to cover basic living expenses such as groceries and utilities.
Further, people who rely on credit tend to work longer hours or take on a second job just to cover their debts and survive—they’re not motivated by the illusion of wealth but by the need to survive. They work much harder than the type of person DeMarco describes in this section.
DeMarco argues that if you buy things you can’t afford without considering the impact this has on your financial security and lifestyle, you’ll never accumulate wealth. This applies even if you earn a high salary—spending more than you earn always leads to poverty.
Spending Mindfully Prevents Lifestyle Creep
Even high earners risk spending more than they earn—research shows that the more you earn, the more you’re likely to increase your spending. This is due to a phenomenon called lifestyle creep: As your income increases, the more entitled you feel to waste money on things you formerly viewed as unnecessary treats or luxuries. This increase in spending happens incrementally, so it’s often difficult for you to recognize that it’s happening.
Financial advisors suggest that you can break free of the urge to overspend by becoming conscious of your spending habits and sticking to a budget—common advice includes tracking your spending habits and eliminating all unnecessary expenses. In contrast, Ramit Sethi (I Will Teach You to Be Rich) suggests that if you focus on spending mindfully, you can quit overspending without eliminating expenses that are unnecessary, but bring you joy—for example, if you love indulging in fine wine. To spend mindfully, split your expenses into four areas, decide how much you want to spend in each area, then allocate a portion of your income to each:
Fixed costs (rent, living expenses)
Investments (savings and retirement)
Savings goals (vacations and large expenses)
Guilt-free spending (anything that makes you happy)
Sethi suggests setting up a system that won’t let you spend more than you’ve allocated to any of these areas. He argues that this process is more effective than budgeting or eliminating expenses because you don’t waste time tracking where each dollar goes. In addition, you give yourself permission to spend a portion of your income in any way you wish. While this goes against common financial advice, you’re more likely to stick to your financial goals if you don’t constantly deprive yourself of the things in life that bring you joy.
DeMarco defines the Hopeful Accumulation formula for wealth as: job + market investments = restricted income and a mediocre retirement. According to him, hopeful accumulators follow popular methods touted by financial advisors as a guaranteed path to a comfortable retirement: Get an expensive education, work hard for 40 to 50 years, sacrifice pleasures, budget every cent, buy a house, and funnel all surplus money toward pensions, safe investments, and savings accounts.
(Shortform note: It may be confusing that DeMarco opposes the methods outlined in this formula, only to later note that they’re excellent ways to promote financial discipline. To clarify, his argument is that relying solely on these methods won’t guarantee wealth—they should only be used as part of a plan to create wealth. We’ll explore his ideas about this in Formula #3.)
DeMarco argues that this formula severely limits your chances of creating wealth because it’s entirely dependent on a number of factors that you can’t control: the value of your education, the time you spend working, the economy, interest rates, and your health and well being. Let’s explore these factors in detail:
DeMarco claims that investing time and money in an expensive education limits your freedom in two distinct ways: First, it forces you to work so that you can pay off your debts—while your education may increase your salary by 20%, the debts you incur will take more than 20 years to pay off. Second, it shackles you to a specific type of work that “justifies” your education. This limits your financial freedom, as the value of your education depends on the opportunities in your field—if there are no opportunities, your education has no value.
(Shortform note: With the dramatic rising cost of education (200% in the past 20 years), DeMarco’s warning against taking on student debt is worth considering. Employment experts further complicate the issue: While they argue that not having a college degree lowers your chances of getting a well-paid job, they also assert that a degree doesn’t offer a competitive advantage—degrees are common, so yours doesn’t differentiate you from other job seekers. These experts suggest that supplementing your degree with practical skills that align with your intended career will give you a competitive edge.)
DeMarco explains that relying on an hourly wage or salary from your job or business puts a cap on how much you can earn because time is limited: For hourly wages, you can’t work more than 24 hours a day to increase your income. For annual salaries, you can’t work above your life expectancy to accumulate more money.
(Shortform note: In Secrets of the Millionaire Mind, Eker suggests that you surpass this limit by opting to receive commission for the value you produce. Robert Kiyosaki (Rich Dad Poor Dad) explains how this works: When you work for an employer, you’re only paid a fraction of your generated value. For example, you earn $20 an hour working 40 hours a week—$800 a week. However, your work generates $5,000 in sales for your employer per week. If you ask for a 25% commission, you’ll receive $1,250 a week (a $450 increase). Unlike standard wages, the more sales you generate, the more income you receive. Since you can theoretically generate infinite sales, your income is no longer capped.)
DeMarco notes that the economy is volatile—an unexpected downturn can significantly impact your ability to receive a consistent income. If you lose your job or business, you won’t be able to make regular contributions to your pension and investment accounts, clear your debts, or pay your mortgage.
(Shortform note: While you can’t control the economy, there are a number of practical ways to prepare for unexpected downturns and secure your financial future: Cut unnecessary expenses, clear your debts (including your student loan and your mortgage), create and grow an emergency fund by investing in high-interest savings accounts, and look for additional ways to diversify your income instead of depending on a single source.)
DeMarco argues that the compound interest you earn on investments relies on three factors to effectively increase your net worth: time, regular contributions to your account, and a high rate of return. He explains that in theory, investments create wealth by providing a predictable and healthy rate of return over the course of decades.
In reality, however, the rates are too low to make a significant impact on the small, capped sums of money the government allows you to contribute to your investment accounts. You also can’t guarantee that financial managers won’t make poor decisions that lose you money or that the rate of inflation won’t reduce the value of your hard-earned money by the time you retire.
Further, DeMarco argues that you can’t rely on your home equity to increase your net worth because real estate values don’t always rise.
(Shortform note: Ramit Sethi (I Will Teach You to Be Rich) provides additional insight on why you shouldn’t think of your home as an investment: Owning property incurs additional expenses such as insurance, property taxes, and maintenance fees. These costs make it difficult for you to profit from your home equity.)
You Can Control the Health of Your Investments
Financial advisor David Bach (The Automatic Millionaire) offers a contrasting perspective on the markets DeMarco discusses here. Bach first explains that you’ll earn far more from investing small amounts of money than from not investing at all—the impact isn’t insignificant, as DeMarco suggests. Then, he suggests that diversifying your investments (by putting money into a combination of cash, bonds, and stocks) ensures the overall health of your investment portfolio, even when faced with unstable interest and inflation rates.
Further, Bach claims that anyone can learn how to automate and manage their own investments, so you don’t even need a financial advisor to manage your money. This means you won’t risk someone making bad decisions on your behalf.
Bach also insists that buying a home increases your financial security because, over the long term, the value of real estate investments always increases (the average annual return since 1968 is 5.3%) and outweighs your costs.
DeMarco warns that working long hours for the hope of a prosperous future negatively impacts your health, relationships, and feelings of freedom. Even if you’re happy to make these sacrifices for now, you can’t guarantee that they’ll pay off. You may not be healthy enough to work for your income until retirement, or, by the time you retire, you may feel too old or have too many health problems to enjoy your money.
(Shortform note: While it’s sometimes difficult to find the perfect work-life balance, DeMarco’s formula assumes that hopeful accumulators neglect their health, personal lives, and gratification in favor of an uncertain financial future. However, this assumption glosses over the very feasible practices of choosing a well-paid job that satisfies you and setting boundaries around your work hours. Both methods help you make time for your overall well-being and your loved ones while also earning a comfortable living—ensuring that you enjoy good health and happiness both in the present and once you retire.)
DeMarco argues that committing to lifetime employment, delaying gratification, and waiting decades for compound interest to accumulate won’t guarantee a wealthy retirement—the plan relies on numerous factors that are out of your control. Further, he asserts that sacrificing your time, freedom, and pleasures isn’t worth the effort since you’ll be too old to enjoy your wealth, and inflation will reduce the value of any money you do manage to accumulate.
(Shortform note: DeMarco’s conclusion about this financial formula has two limitations. First, perhaps this formula can’t guarantee a healthy and wealthy retirement—but that’s the case no matter what route you take. Even if you choose another formula, you simply can’t predict the future. Second, DeMarco’s warning against this formula doesn’t acknowledge how it can improve the quality of your life here and now. A recent study revealed that people who delay gratification in favor of saving for the future tend to enjoy more happiness and satisfaction than those who don’t—taking proactive steps to secure your financial security increases your peace of mind and decreases feelings of anxiety about what may happen in the future.)
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 maximizing their income and 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.)
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.
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.
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.
DeMarco argues that allocating money toward businesses and investments that provide 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.)
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.
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.
How You Sell Depends on What You’re Selling and Who You’re Selling To
Alexander Osterwalder and Yves Pigneur (Business Model Generation) expand upon DeMarco’s three barebones passive income structures by explaining that all business ideas fit into one of five different markets—each requiring a specific marketing and sales approach to achieve successful sales.
Mass Market: You’re selling to one large customer base with similar needs—you need to appeal to and engage as many people as possible. For example, Colgate benefits from advertising in the mainstream media because toothpaste is an essential, widely-used personal care product that everyone needs.
Niche Market: You’re selling to a small customer base with unique requirements—you need to target these specialized needs. For example, Lush targets customers who care about vegetarian products and eco-friendly practices, so its social media strategy focuses on engaging “green” consumers.
Subdivided Market: You offer slightly different products and services, so you need to employ different approaches to meet customer needs. For example, an estate agent’s customers each have different budgets. The estate agent may spend more time and resources attracting and developing relationships with wealthy clients looking to buy and delegate management of lower-income renters to employees.
Diversified Market: You offer distinctly different products and services to unrelated customer groups, so you have to employ separate customer targeting strategies. For example, Johnson & Johnson provides healthcare products to consumers as well as medical devices and equipment for hospitals—both groups have unique needs.
Multi-Sided Market: You serve interdependent customer groups so your approach needs to appeal equally to both parties. For example, online marketplaces need to appeal to and accommodate both buyers and sellers to operate efficiently—they can’t serve one group without the other group’s active participation.
If you already have a product or service that you intend to sell, consider which of these five markets your offer falls into and how you can align your marketing and sales strategy to reach as many people as possible. Or, if you’re looking for a business idea, choose a market based on which strategy most appeals to you. Then, focus your research on products and services that fall into your chosen market.
How Will You Make a Profit?
While DeMarco discusses types of passive-income-generating businesses, he doesn’t detail the different ways that you can profit from each type of business. In Business Model Generation, Osterwalder and Pigneur explain that there are two ways to make a profit: single transactions (selling a house) and subscriptions (leasing a house). You can apply both profit sources in the same business—for example, earning an income from renting and selling properties.
Further, you can set either fixed or variable prices for your products and services—for example, setting a universal rental rate or charging extra for tenants with additional demands such as pets or extra storage space.
Once you know the profit structure that makes the most sense for your business, determine the appropriate price for your product or service. Experts recommend considering how much value customers attach to your products and services before you determine your prices. In other words, customers perceive the value of your products and services in different ways depending on their specific requirements. If you build these variations into your pricing structure, you’ll receive higher profits than you would with a single pricing policy.
For example, a family with young children and pets might value a property with a large garden more than a single person who only spends time at home in the evenings—marketing this property to families at a higher price will generate more profit than marketing to everyone at a set price.
DeMarco suggests seven methods to come up with your own business ideas and maximize your income:
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.”
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.
Gather your resources: Research and collate all of the sources you intend to learn from such as books, podcasts, or software.
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.
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:
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.
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.
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.
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.
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).
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).
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.
How does it make a profit? Does it deal in single transactions or recurring transactions? Does it offer fixed prices or variable prices?
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?
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.)
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.)
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.
(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.)
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.)
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.
DeMarco argues that all financial strategies fall into one of three formulas—Insatiable Consumption, Hopeful Accumulation, and Active Production. This exercise will help you clarify what formula you’re currently using.
According to DeMarco, there are two possible motivations that explain why you want money: the desire to look rich and the determination to create and enjoy wealth. What motivates you to earn money and why?
Consider your spending habits, any debts you owe, and any savings or investment accounts you hold. Are you spending more than you earn, saving most of your income, or investing money into businesses and assets to generate an income? Why do you choose to manage your finances in this way?
DeMarco argues that how you use your time to earn income impacts your ability to achieve your financial goals. What's the current relationship between time and your income? For instance, do you earn a set wage based on the number of hours you work, or do you spend just a small amount of time working on projects that create commission or passive income? Detail all of the ways in which you earn an income and the role of time in each.
Consider your answers to the previous questions—what financial formula are you following? Write down any thoughts or feelings you have about DeMarco’s assessment of this formula.
DeMarco suggests that you can get into the mindset of an active producer by considering ways to improve the value of products and services that you use.
Think of one product or service that you spend your money on. What value does it offer? What problem does it solve? (For example, you might spend your money on software that helps you to manage your taxes.)
Why do you choose this product or service over what other competitors offer? (For example, you might choose it because it’s the cheapest or most accessible option.)
What additional features would this product benefit from? What would make it more convenient to use? (For example, your tax software might benefit from an auto-save feature so that you don’t have to manually input your personal details every time you use it.)
What skills, knowledge, or assets could you apply to create an improved version of this product or service? (For example, you may have the funds to hire a software designer to help create your own version of this software.)