This article constructs a rural livelihood strategy using the Nepal Living Standard Survey Measurement from 1996 and 2004 and explores the determinants of rural livelihood strategies. This study finds that education, ethnicity, and location play an important role in livelihood diversification outside agriculture, and suggests the importance of keeping children in school for non-farm livelihood diversification and poverty reduction. Important policy implications of the current study include the need for investment in education, as the current literacy rate in Nepal is quite low. Investing in education will help households to diversify their livelihood outside of the farm and pave a way out of poverty.