Dec 2024
“In the long flow of time, living things know nothing of their ancestors, except for the genes they’ve inherited. Only mankind has history. Having a history differentiates mankind from all other living species. That’s why I wanted to be a historian.”
– Admiral Yang Wen Li, Legend of the Galactic Heroes
“If you talk to a man in a language he understands, that goes to his head. If you talk to him in his language, that goes to his heart.”
– Nelson Mandela
I’ve never been very good at working. And when I was younger I thought that would mean I’d be broke forever. I also used to think that making money was really complicated. That building wealth was hard and that the world was such a big place with practically infinite types of products and services and ways to work to earn that I’d never figure it out.
But then at some point it all clicked and something that helped my understanding of the way wealth works was to visualise it as the main task that is happening repeatedly to make the money. When you do that, you realise that really, there are only 4 ways to earn money and build wealth and you just had to pick the one that works best for you.
That’s when I realised that I was just trying to understand the world in the wrong way. It wasn’t that I wasn’t cut out for working, it’s that I was trying to build wealth in a way that didn’t suit me and so I didn’t understand it. But there were other ways that really did suit me and I’d just have to try them. Then when I did, it suddenly felt like I’d unlocked work on easy mode and working became easy for the first time.
My work which had always been a struggle up till that point suddenly fit like a glove on my hand and working and earning started to feel easy. Like I had been trying to speak a different language before and that mode of working I just wasn’t able to think in. But when I started thinking in a new mode, it felt like so much of what didn’t make sense before suddenly did make sense. That it was an explanation for so much of what had felt wrong in my work life before.
So that’s what this essay is, a way to unpack those modes of money. Those ways of wealth. Because what I realised is that when people are talking to each other about money and wealth, they are often literally speaking a different language. With existing ideas framed from the mode of wealth which best represents the way they think and what they’ve experienced.
1. Work for Salary
This is when you trade your time for money to work, usually for a business but also for other organisations like a government or charity. You go to work and then are paid a salary for your time spent working. The value you’re creating by working is valuable to the business and is why they pay you a salary to begin with. You generally know what your salary is and this way of working is extremely predictable and certain. There’s little to no risk involved. You do X tasks expending Y amount of time and you’ll get paid N dollars to do it.
2. Invest for Returns
This is when you take money you already have or have borrowed and invest it in an asset that either goes up in value over time or produces income via cashflow. You invest X dollars and then if the asset grows by Y%, you’ve earned Y% of X. Or if the asset generates N dollars of income, you’ve earned N dollars. Generally some component of both Y% of growth and N dollars of income is how you make the money and how much you earn is a function of the returns generated by investing X. You compete with other people to find the best assets that produce the best returns to earn you the most money. How much money you make is uncertain because how an asset will perform is unknown.
3. Run a Business
This is when you are running a business which offers or produces a product or services that it sells to customers. It has overheads like employees and offices as well as revenue from sales and costs associated with making the product or service. The profit is the amount left over from revenue less costs and is often what the owners of the business get to keep. They also own the equity within the business, which is what the whole business would be worth if it was sold. The business competes with all other businesses doing the same thing on price, convenience, quality, innovation. Customers buy from the business that produces the most amount of perceived value for them.
4. Create Something New
This is when you have made something or invented something or discovered something that either becomes popular or a lot of people use or becomes part of something important. Then every time someone is exposed to it or uses it or needs it, a small amount of money gets paid back to you for making or discovering it in the first place. These can be royalties or licensing or payments. What was created can be anything, it can be entertainment like music or books but can also be manufacturing or invention like a machine part or new drug that was researched.
Insights and Understandings
That’s it. The whole world of work is basically those 4 categories. But they’re different to each other and nuanced in their own ways. If you start to analyse each you can start to see how they begin to differ into their own languages and frameworks for how to think and understand the world.
The first one, Work for Salary, is probably the most common one in the world. But why is it the most common? It’s because it’s actually the least risky. It’s the safest path to success of all the options. It’s also why the reward is commensurately low compared to the risk. You’re never going to lose your life savings working a job but frequently would investing or running a business.
The fourth one, Create Something New, is probably the least common in the world. Why? Because it’s the hardest to do. Invention and discovery of things that are new and become popular by definition is difficult because it is literally bringing something into existence that doesn’t exist and then getting it into the hands of a lot of people. It’s why the rewards are commensurately high. Because there are secretly 2 parts, one is making the new thing, the other is making it widely known.
The third one, Run a Business, is probably the most time intensive because it involves effectively managing a ship with lots of moving parts to it that all need to be executed together in unison or sequentially. A business can practically scale infinitely and is why the wealthiest people in the world all seem to be business owners. Because they’re rewarded for growing the equity and have products or services that can grow indefinitely.
The second one, Invest for Returns, is probably the least time intensive because it involves effectively deploying capital and then waiting for the returns to materialise. Investments don’t magically make money overnight, they take time. But because the growth of an investment is detached from how much time is spent and can grow exponentially, they also are why it seems like the wealthiest people belong to that category.
There also appears to be a lot of overlap between them. For example someone that creates or discovers something new will frequently start a business to commercialise that discovery or creation. So suddenly a person who invented something might also be running a business. Someone that is working for a salary will frequently be investing their savings to try and amplify their earning power. To become really rich, you almost always have to do more than just one.
But when 2 different types of people start to meet is when a lot of the misunderstandings start to emerge. You start to see axis of miscommunication that are based on just thinking about the world and holding values based on different frameworks for how wealth works to them and how they are making money. But often they don’t realise that because of the same mistake I made, thinking the way of the people around me was the only way.
The one that I found the hardest to understand was the first one. The reason I had so many problems understanding it is because I thought the whole world was only the first one. Because everyone I knew was doing it. So when I wasn’t getting it, I thought something was wrong with me. But there wasn’t, it was that I had a brain and a talent for the second instead. It was like I was trying to think in the wrong language when I had a talent for a different language.
Someone who has worked a job their whole life might find the idea of a person who invests for a living to make no sense. What do you mean you make a few decisions per year and then don’t do anything else all year? Isn’t that just wasting their time? But that’s exactly what might make that investor so successful, deploying capital and then not touching it again for long periods of time. The worker would tell their children about the importance of hard work while the investor would tell their children about the importance of patience and restraint.
A person who has found their passion and specialisation for creating music or researching science and makes their money that way might not understand the micromanagement required of a business owner who needs to understand several fields and be a jack of all trades in each for the successful operation of their construction company. The former would tell their children of the importance of specialisation for success while the latter would tell their children the importance of generalisation for success.
An investor might think a business owner was too concentrated and not diversified enough by having so much of their wealth tied to their business. While that same business owner might think the investor too theoretical who isn’t on the ground actually operating and interacting with customers. The business owner would tell their kids about the importance of getting your hands dirty and being on the front lines while the investor would tell their kids about the importance of high level strategy.
The way each person views time, money, risk, reward all become heavily influenced by the category they belong to and how they are building their wealth. The entire way they think about wealth becomes influenced by the systems they are standing on. There’s no right or wrong way but just that these are effectively different lenses and languages upon which to think about and understand how wealth and money works. Much of the miscommunication and misunderstandings about this topic are people just speaking different languages without realising it.