Most people have very predictable, linear income potential. The standard career path tells you to:
- Get an entry-level job
- Get promoted to associate, then manager, then VP, MD, etc.
- Collect stock options
Nothing bad about this as long as you’re fulfilling your potential. The big caveat is as long you’re fulfilling your potential.
My dad did this and he fulfilled himself both materially and immaterially. He worked a job he found fulfilling in a Fortune 50 company and climbed as high as he wanted. He had a big family. Everything he did, he set a path at an early age and followed it.
I don’t want the same path because I’m different. I would rather run a small business where I’m making key decisions than climb the ladder at a multinational corporation. If you want truly exponential income, you don’t want the traditional path, either. (Really though, I want to be the one to found the multinational. That sounds like the most fun of all.)
The Best Path Looks Tough (in The Beginning)
If you work for yourself, you make zero in the beginning. How many big companies like Tesla and Amazon didn’t make a profit for years? Some of them didn’t take profit by choice (Amazon) and others couldn’t because it wasn’t there (Tesla). Talk to any freelancer and they’ll talk about the dry periods in their work, especially when they were just getting started.
Starting out and committing is the hardest thing to do. You have the least amount of talent you’ll have, the smallest network, and the least amount of working capital. The odds look like they’re stacked against you.
The flip side: for every day you improve, it gets easier. This may not show up in your bank account for a while. Until one day it does.
Whether you’re starting a business, an investment fund, or trying to learn a new skill, the same pattern holds true. There is so much to do in the beginning. It looks overwhelming. But you decide not to think about the scope and just get to work.
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One year, two years, ten years later, you look up and see you’ve made progress. Pretty cool. You keep going.
In the meantime, you haven’t been profiting off the business, or you’re paying yourself just enough to stay alive and keep investing your energy into it.
Beware the Trap of Stability (at Cost of Growth)
A salaried career is largely linear. A 7% raise every 3 years is an exponent, technically. But it’s a boring one to me—especially if you start small.
An owner-investor’s career is exponential. You can start with a very small amount, and if you consistently and aggressively reinvest your dividends, you end up with a massive reserve of capital to redeploy.
Compound interest is not a new idea. Every article about retirement investing will mention it. But the real magic is when you don’t just do it with your passive 401k savings, but with your whole life. You reinvest all your savings two or three times and win big with it, and you’re set. Sure as hell ain’t easy, but if you want a full life, the challenge itself is what attracts you—not just being rich at the end of it.
How does exponential income potential practically work?
Let’s say you run an e-commerce business. You saved $10,000 to get this business started. You spent $1,000 on your first product run of 50 units. You’re selling the units for $40. You have $2,000 worth of inventory. In order to realize that $2,000 worth of value, you have to either have a killer marketing and sales funnel setup or spend time (and probably money) creating one.
Let’s say you spend $500 on ads and promotions to liquidate your inventory. Great, you’ve made $500! What do you do with it?
The Obvious Choice: Reinvest
- Pocket the money (minus taxes)
- Reinvest it into the business
You have $1,500 to do it again now instead of $1,000. Keeping on the same path, you generated $3,000 worth of inventory and you’re probably going to spend $750 on ads and promotions. You’re on track to bring in $2,250. Minus the initial capital of $1,500, that’s a profit of $750.
BUT WAIT, things are different now, because now you’ve built:
- A small customer base who will be cheaper to advertise to (I hope you collected their emails)
- A marketing funnel. You’ve learned what ads and promotions perform better and how customers are finding you.
- You may also start to experience economies of scale. It $1,000 to make $2,000 of inventory, but it only costs $1,400 to make $3,000 worth of inventory.
You’re going to make more than $2,250 and your profit will be higher than $750. You also avoid incurring any taxes yet (besides sales) because you haven’t taken any money off the table. You simply reinvested it.
Not only have you made more money, but the combination of the funnels, customer base, and everything else are themselves growing into an asset. Your business has value beyond what you’re holding in inventory.
When you reinvest and defer profit, you’ve begun the exponential curve. The graph of your income potential has just taken a new trajectory.
The Positive Cycle Has Begun
Repeat this process until you’re about to get evicted from your apartment (metaphorically speaking). Keep re-investing yourself and your money into your business until you’re making $10,000/month in pure profit—and then keep going.
This is the tried-and-true formula for running your business. So many fear this approach because it requires you to be all-in, you don’t see nice returns for a while, and you’re ultimately relying on yourself so you have no excuses if it all goes wrong.
But on the upside—your income potential is exponential.