6 Levels Of The Money Ladder And How They Effect Your Business | Ep 856

Summary

Podcast Summary: The Game with Alex Hormozi – Episode 856

Title: 6 Levels Of The Money Ladder And How They Affect Your Business
Host: Alex Hormozi
Release Date: March 24, 2025

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Introduction to the Money Ladder

In Episode 856 of The Game with Alex Hormozi, host Alex Hormozi delves into the concept of the "Money Ladder"—a framework consisting of six levels that describe how money flows within different roles and business structures. Hormozi explains that understanding these levels can revolutionize how entrepreneurs price their services, manage cash flow, and mitigate risk.

“This fundamentally changed how I saw how I priced my payment terms and fundamentally how I saw money flowing through a business.”
— Alex Hormozi [00:00]

Breakdown of the Six Levels

1. Employees

At the base of the Money Ladder are employees who bear significant personal risk by working upfront and receiving payment later. This traditional arrangement involves a promise of salary after labor is performed, making employees dependent on the employer's financial health.

“They front two weeks of work, sometimes a month of work. They'll work up front and then they'll get paid later.”
— Alex Hormozi [01:51]

2. Independent Contractors

Above employees are independent contractors who receive partial payment upfront and the remainder upon completion of their work. This arrangement offers a more balanced cash flow compared to standard employment.

“A common setup might be half now, half later.”
— Alex Hormozi [02:50]

3. In-Demand Professionals

In-demand professionals, such as specialized doctors or surgeons, are compensated upfront for their services, often receiving payment before the actual work is performed. This priority in payment reduces their financial risk and enhances cash flow stability.

“You pay first and then they do services. From a cash perspective, that business is advantageous.”
— Alex Hormozi [02:50]

4. Banks

Banks occupy a higher rung on the Money Ladder by receiving payments immediately through mechanisms like mortgages and loans. They secure their position with collateral and multiple avenues to recoup funds, minimizing their risk.

“Banks get paid immediately, and they always get paid first... they have collateral for lending.”
— Alex Hormozi [04:25]

5. Insurance Companies

Insurance companies are positioned above banks due to their ability to collect premiums upfront while mitigating risk through calculated payouts and tax advantages. Their long-standing presence in the economy underscores their robust financial structures.

“Insurance companies capitalize on the float they generate, which is tax-free... it's because they have a robust system for getting paid.”
— Alex Hormozi [05:19]

6. Government, God, and Franchisors

At the pinnacle of the Money Ladder are entities like governments, religious institutions, and franchisors. These organizations receive payments off the top, often regardless of the actual services rendered, ensuring a steady and prioritized cash flow.

“Government gets paid first by law, God gets paid first through tithes, and franchisors receive royalties upfront.”
— Alex Hormozi [05:27]

Insights on Money Flow and Business Models

Hormozi emphasizes that shifting up the Money Ladder allows businesses to minimize risk and enhance cash flow. By restructuring payment terms to receive funds upfront or reducing the waiting period for payments, entrepreneurs can increase the durability and profitability of their businesses.

“How can we alter how I ask for money within the business so that I can make my money flow more advantageous and ideally have more of that money stick to me within the economy.”
— Alex Hormozi [03:51]

Longevity in Business: US vs. Japan

A significant portion of the episode compares American and Japanese business philosophies. While the US market often prioritizes rapid growth and high-risk strategies, Japanese companies focus on endurance and risk mitigation, contributing to their longer-lasting enterprises.

“If I look at something like the S&P 500, there's only two companies that have been around a hundred years... In Japan, companies last for multiple generations because they prioritize endurance over rapid growth.”
— Alex Hormozi [06:00]

Conclusion and Key Takeaways

Hormozi concludes by encouraging entrepreneurs to model their businesses after the higher levels of the Money Ladder—aiming to receive payments upfront and minimize risk. By adopting strategies similar to those of banks or insurance companies, businesses can achieve greater stability and longevity.

“The point of the business is to stay alive and fight another day. The more we can do that, the more we win.”
— Alex Hormozi [08:00]

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Notable Quotes

1. Understanding Payment Dynamics

   “This fundamentally changed how I saw how I priced my payment terms and fundamentally how I saw money flowing through a business.”
   — Alex Hormozi [00:00]

2. Employee Risk

   “They front two weeks of work, sometimes a month of work. They'll work up front and then they'll get paid later.”
   — Alex Hormozi [01:51]

3. Independent Contractor Balance

   “A common setup might be half now, half later.”
   — Alex Hormozi [02:50]

4. Valuing Endurance Over Growth

   “If I look at something like the S&P 500, there's only two companies that have been around a hundred years... In Japan, companies last for multiple generations because they prioritize endurance over rapid growth.”
   — Alex Hormozi [06:00]

5. Business Longevity Goal

   “The point of the business is to stay alive and fight another day. The more we can do that, the more we win.”
   — Alex Hormozi [08:00]

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Final Thoughts

Episode 856 of The Game with Alex Hormozi offers a profound exploration of how money flows within different business structures and the strategic importance of positioning a business higher on the Money Ladder. By understanding and applying these principles, entrepreneurs can enhance their financial stability, reduce risk, and build enduring businesses.

For listeners interested in scaling their businesses, Hormozi mentions a special resource developed alongside Layla—a comprehensive scaling roadmap available for free at acquisition.com/roadmap. This tool breaks down scaling into 10 stages across eight business functions, providing personalized guidance to navigate growth effectively.

“If you look at different countries, like Japan for example, their determination of what a valuable company is, is all about endurance... they have many companies that have been around for very, very, very long times.”
— Alex Hormozi [06:00]

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This summary aims to encapsulate the core discussions and insights from Episode 856, providing a comprehensive overview for those who have yet to listen.

Transcript

[A]

The wealth or money ladder. There's six levels to this and I'm going to break it down. This fundamentally changed how I saw how I priced my payment terms and fundamentally how I saw money flowing through a business. Welcome back to the game. I have an old concept that has reemerged. This is something that I thought a lot about in the year that Layla and I were selling gym launch. And it's basically just how the flow of money is prioritized. And so I think if there were like a wealth principle or like a woo woo idea that I have ever subscribed to, this would be it. I don't really know what would make it woo woo, but you know, wealth principle certainly has that ring. But it's actually that there is, there's some mechanics behind how money flows within the economy and the privileges of 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. And so I see this more as a continuum than I do, you know, 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. I have noticed that as I have become wealthier, I've moved up kind of the continuum here towards the ultimate extreme. Let me take this out of the theoretical and put it into the, the actual or real, real life. So at the lowest end of this continuum, you would have somebody who works now, takes on tremendous personal risk and gets paid later.

[B]

All right?

[A]

Now normally you'd think, oh wait, isn't that, you know, the results? Like, isn't that, you know, delayed, grat. Not when it comes to the flow of money within an economy. And so I'll kind of explain. And so what's the word for somebody who falls into this category of rules? Well, the answer is an employee, right? They will front, you know, two weeks of work, sometimes a month of work. They'll work up front and then they'll get paid later.

[B]

Right.

[A]

And that's a pretty standard agreement that's existed for a very long time. As I walk up this ladder, think about both of those variables, the payment and the work, and you'll see how they shift. And obviously the goal or the ideal is to go as high up the ladder as you can. And so 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, you know, a common setup might be half now, half later.

[B]

Right.

[A]

And so you can see how this works. So they get paid half now, they work and then they complete work, and then they get paid the other half. And so it's a little bit more smoothed out compared to the employee situation. Now that would be the second lowest on our rung of wealth. Ah, the plot thickens. And so what are these remaining, you know, tiles above this? So above that I would consider the in demand professional. And so what, what happens in this situation? So this would be a specialist of some sort. Or you go to a heart surgeon, or you just go to a doctor in general, whatever you pay first and then they do services. And sometimes depending on the leverage, you pay now and get services later. You know, if you have a surgery just to use that, to keep that example going, you might pay today and your surgery might be for three months, you know, from now. And so from a cash perspective, that business is advantage compared to one where they have to, you know, work first and get paid after.

[B]

Right.

[A]

So we're plodding along here now. Hopefully the goal isn't to really, like, think, oh, I need to. I need to, like, I need to jump to this next rung. It's more like, how can I alter how I ask for money within the business that I exist or the services that I sell so that I can make my money flow more advantageous and ideally have more of that money stick to me within the economy. So now we go what I call above the line. So those are kind of like the three levels, as I see it for an individual.

[B]

Right.

[A]

But as you go up the ladder, you have the leverage of organizations.

[B]

Right.

[A]

And so I would say the. The level above that is banks. So let me. Let's play it out. So bank gets paid immediately, and they always get paid first, meaning if there's something called a capital stack. But essentially, if you buy a house, you don't really buy a house. The bank buys it for you and they get the house. And if you're a good banker, typically the rule of banks, if you didn't know this, is that you should be able to recoup your money in at least three ways. And so that creates collateral for the bank to do lending. And that's typically how they do it. They'll be like, you have a personal guarantee. We also can. We also have the house, which is payment. And if they can, they'll get a third way right there. It's like they kind of COVID their downside and they will get paid no matter what and they take on some risk at a later date.

[B]

Right?

[A]

And so you can see how work shifts. It's like, how much work is there? Well, less than in some of the other the first three scenarios I gave.

[B]

Right.

[A]

And you continue to pay for that thing, you know, every single month. And they get more than the money they put in. Now what level is above banks? Ah, I think there's two. And so I will break them down. The next highest up or second highest, if you will, on our money ladder or continuum is insurance. So the reason I think this is interesting is because banks, insurance, and the final example that I'll give you are establishments that are hundreds of years old. And when I see something that's lasted for a very long time, I think that they must have some superior setup or agreement implied or explicit for how money should flow to them. And like, this is just stuff that I think about on Sunday afternoons. But insurance, if you think about what it is, it's like, let's say I buy insurance, right? So I buy insurance, I pay today and I may or may not receive something back in the future based on the agreed upon terms. To use the simplest example for insurance is like, if I buy life insurance today, I'm literally just going to give money for a 100% margin box of air that may or may not be redeemed at some point in the future. If I do this for 20 years and then I stop, they literally just got out of the money for nothing, like wild. And in the unfortunate circumstance where something does occur and some of the terms of the agreement for some reason were broken, they still get all that money for nothing. And all of the compounding and growth that occurred as a result of that. And not to mention insurance, the float that they generate is tax free, which means that all the money that they have to keep, which insurance companies basically act like, you know, investing accounts, except they don't pay taxes because they predate the tax code. This is why I look at very, very old businesses because like, they have survived wars, they have survived different, you know, leadership, you know, within the world. And when I see that, I'm like, they must have a robust system for, for getting paid, right? Otherwise these things wouldn't exist. And so you're like, okay, well what's even better than getting paid now and getting paid for a long time and maybe, or maybe not even have to pay anything back? Well, I think the final is, I would say three categories Government, God and franchisors. And what do these companies get? What do these establishments get? They get, which is a term that is more commonly used, royalties. And the reason I think they're called royalties, I'm gonna make a bet here, is that they were given to royalty. They were given to the kings of the kingdom, right? The nature of a royalty is kind of interesting because you get paid always and you get paid off the top and your work is questionable. So what does the government do for us right now? This is not intended to be some sort of political point, but I just like to see how money works, right? What do we get for what we give? To the same degree, religious establishments, right? You tithe off the top, right? God gets paid first. Again, not a statement for or against religion, just noticing how the money flows. And then you have setups like franchisors, where they set up some sort of royalty agreement and they get paid off the top, right? And so when we're looking through this lens of this money ladder, this wealth ladder, whatever you want to call it, right, at the very lowest levels, you work now, get paid later. A level above that is you work now and you get half now and then you work later and get the other half later. You've got the in demand professionals who get paid now and then they work later. You've got banks who get paid now and then maybe they take some risk later. You've got insurance that gets paid now and maybe pays money later or doesn't. And then finally you've got government and royalties that get paid always off the top and first and maybe never work at all. And so when we think about how we set up our agreements for services, for products, for how we do business, the goal is obviously to keep these two things in mind. And the work really, you know, functions as the vehicle for risk, right? So when you have, when you have time, you risk time in the, in the, you know, in the, in the vehicle of work in order to get paid later. But it's fundamentally just money versus risk and how that gets shifted over time to the ultimate expression, which is you take no risk and you get paid up front versus you take lots of risk and get paid later. And everything in between is just little mile markers that I like to use as examples. But for us as entrepreneurs, I would love to see how can we model the companies and establishments that have been here for millennia, for hundreds of years or thousands of years, and how can we apply that to our businesses because they've clearly been able to stay around for a significantly longer time than the vast majority of businesses do. Like as crazy as this is, if you look at the S&P 500, I think there's two companies that have been around a hundred years. I think it's GE and Ford. Right? That's it. That's it. Everything else booms and then busts, it disappears. And what's fascinating about the US is that we always, we look at fastest growth, we look at biggest as metrics. But if you look at different countries, like Japan for example, their determination of what a valuable company is, is all about endurance. It's about outlasting. They brag about companies that have been around for 50 years, for 100 years, et cetera. And they do have many companies that have been around for very, very, very long times. Third, fourth, sixth, eighth generation type businesses. And it's because they think about business differently. And I think that. And typically they have a significantly different view on growth and risk, which is if there's the possibility of going to zero, they will not do it right. Whereas in an American company we tend to value kind of rapid growth significantly at a, at a higher premium than other places. Now notwithstanding, our economy grows faster than theirs does and they also have population dropping issues. So I won't even get into that. But the takeaway for me is that I want to at all times position myself like the royalty of old, like the insurance companies, like the government, whenever I can so that I can take as little risk as possible, get, get paid upfront, off the top and do that as fast as I can and ideally do it as many times as possible. And if there's a way to guarantee those things, all the better, AKA collateral. The collateral for government is that they throw you in jail because they have a monopoly on violence. The collateral for banks is they take your stuff. The collateral for insurance, really interesting on this one is actually the money you already gave them and the risk that they're able to calculate. So kind of fascinating there. But anyways, this was just, just a Sunday thinking chain that I thought to me was, was worthy of sharing with y'all because I think every, every business could improve by simply saying how can I shift from where I'm at to the other side a little bit more? Even just a nudge could have a dramatic shift on how durable the business is. And at the end of the day, I think the point of the business is to stay alive and fight another day. And so the more we can do that, the more we win. Appreciate you all and I'll see you guys in the next one. Bye. Real quick, guys, I have a special special gift for you for being loyal listeners of the podcast. Layla and I spent probably an entire quarter putting together our scaling roadmap. It's breaking scaling into 10 stages and across all eight functions of the business. So you've got marketing, you've got sales, you've got product, you've got customer success, you've got it, you've got recruiting, hr, you've got finance. And we show the problems that emerge at every level of scale and how to graduate to the next level. It's all free and you can get it personalized to you. So it's about 30ish pages for each of the stages. Once you enter the questions, it will tell you exactly where you're at and what you need to do to grow. It's about 14 hours of stuff, but it's narrowed down so that you, you only have to watch the part that's relevant to you, which will probably be about 90 minutes. And so if that's at all interesting, you can go to acquisition.com roadmap R O A D map roadmap.