The 6 Levels of the Money Ladder and Their Impact on Business

Money flows within the economy with inherent mechanics that privilege certain business structures.

There are underlying mechanics governing how money moves, and specific types of businesses or agreements are set in motion to disproportionately attract and retain money.

Why: These structures create privileges that cause a greater amount of money to stick to entities that follow them, indicating a fundamental advantage in their operational model.

"there's some mechanics behind how money flows within the economy. And the privileges that certain types of businesses or agreements set in motion cause a disproportionate amount of money to stick to those entities that follow this structure."

The relationship between payment and work exists on a continuum with varying degrees of advantage.

The money ladder is not a rigid rule but a continuum illustrating how the timing of payment relates to the performance of work, with six identified degrees.

Why: Understanding this continuum allows individuals and businesses to identify their current position and strategize to move towards more advantageous positions where money flows more favorably.

"I see this more as a continuum than I do a specific rule, and I'll break it down. But it's basically the relationship between payment and work. There are kind of six varying degrees along this continuum that I've kind of identified."

The lowest level involves working now, taking significant personal risk, and getting paid later.

Employees typically front two weeks to a month of work before receiving their compensation, bearing the initial risk of labor.

Why: This structure places the burden of upfront work and associated risk entirely on the individual, making it the least advantageous position in terms of money flow.

"At the lowest end of this continuum, you would have somebody who works now, takes on tremendous personal risk, and gets paid later"

A step above employees, independent contractors may alter payment timing to receive partial payment upfront.

Independent contractors often negotiate 'half now, half later' payment terms, which smooths out cash flow compared to an employee's situation.

Why: This arrangement reduces the contractor's upfront risk by providing some compensation before or during the work, making it slightly more advantageous than the employee model.

"The level above that would be an independent contractor. So this is somebody who functions like an employee, they do work and they get paid, but sometimes the nature of the payment and the timing of that payment can be altered. And so a common setup might be half now, half later."

In-demand professionals leverage their expertise to get paid first, then perform services.

Specialists like heart surgeons or doctors often require upfront payment for services, sometimes even for work scheduled months in the future.

Why: This payment structure provides a significant cash flow advantage to the business, as they receive money before incurring the costs or performing the work, shifting the financial risk to the client.

"You pay first, and then they do services. And sometimes, depending on the leverage, you pay now and get services later."

Banks get paid immediately and first, securing their position with multiple forms of collateral.

Banks finance assets, effectively owning them, and ensure repayment through personal guarantees, the asset itself, and often a third method, minimizing their risk.

Why: This model ensures banks are paid regardless of future events, as they have secured their investment in multiple ways, taking on minimal work and shifting risk to the borrower.

"a bank gets paid immediately, and they always get paid first"

Insurance companies get paid now for potential future services, benefiting from tax-free float and high margins.

Customers pay premiums for a service that may or may not be rendered, and insurance companies invest this 'float' tax-free, often predating tax codes.

Why: This structure allows insurance companies to collect money with high margins, invest it without immediate tax implications, and potentially never pay out, or pay out significantly less than collected, ensuring long-term profitability and endurance.

"I buy insurance, I pay today, and I may or may not receive something back in the future based on the agreed upon terms."

The highest level involves getting paid always, off the top, and first, with minimal or questionable work.

Entities like governments, religious establishments, and franchisers receive royalties or tithes, which are payments made without direct, immediate work or service.

Why: This represents the ultimate leverage, where payment is guaranteed, prioritized, and requires minimal direct effort or risk from the recipient, ensuring continuous income flow.

"They get, which is a term that is more commonly used, royalties."