The awful truth about getting rich that no one wants to hear
Of course, it depends on how you define ‘rich,’ but if you want to worth millions, there is only one realistic way to get there.
Many people want to be incredibly wealthy. (How you define “incredibly wealthy” is of course up to you. My “incredibly wealthy” may seem like pocket change to Floyd Mayweather, Jr.)
Many people don’t hope to achieve that goal…but many people do. And there’s certainly nothing wrong with that. But you will never become incredibly wealthy by working for someone else. And you will never become incredibly wealthy by living a “safe” (more on that in a moment), “positive work-life balance,” time-clock-punching professional life.
Say you want to have $10 million in the bank. (That would definitely make me feel incredibly wealthy.)
How do you get there? Obviously you need to save that much money, and saving money means generating more income than you spend–a lot more.
That will never happen if you work for someone else. According to the U.S. Census Bureau, in 2015, people with doctorate degrees earned an average income of approximately $81,000. People with advanced degrees earned an average of $72,000; men averaged $90,761 and women averaged $50,756. (Tell me how that disparity makes sense. You can’t. It doesn’t.)
And even if you’re lucky enough to earn double those amounts, or triple those amounts…still. Even if you can manage to save $100,000 per year and you average a 7 per cent return, it would take you just under 31 years to save $10 million dollars.
How much would you need to earn, after expenses and taxes, to be able to put away $100,000 a year?
Short answer: A lot.
That’s the problem with working for someone else. Unless you’re the CEO of a Fortune 500 company, you will only make so much money. And your upside will always be capped; generally speaking, your annual raises will come in the 3 to 4 percent variety.
And your downside will always be unlimited, since you’re always at risk of being laid off or fired.
When you work for someone else, you implicitly accept a limited upside and unlimited downside. Unless you somehow manage to be the employee version of a unicorn, you will never, ever become incredibly wealthy.
You can do well–possibly very well–but you won’t get rich, and if getting rich is your goal, you won’t achieve it.
Think I’m wrong?
Shoot. Even the government agrees.
The IRS Statistics of Income Division, a place where fun surely goes to die, publishes “The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2014,” or as it should be called, “The 400 People Who Earned a Whole Lot of (Freaking) Money.”
In 2014, it took $127 million in adjusted gross income to make the top 400. (That sounds like a lot, but it just barely got you in the door. The average income of everyone on the list was $317 million.)
Those are fun stats to whip out at parties, but what matters is how the top 400 made their money:
Wages and salaries: 4.4 per cent
Interest: 4.2 per cent
Dividends: 10.9 per cent
Sale of Capital Assets: 65.2 per cent
Partnership and S Corp Net Income: 16.2 per cent
What do those numbers mean?
Salaries account for a small percentage of a wealthy person’s earnings.
So do earning interest and stock dividends.
And while owning a business or multiple businesses does account for four times as much income as earning a salary…
Selling that business–or some of its assets–can generate a huge financial windfall.
Of course you might not trust the IRS. Fine. Check out the Forbes billionaires list. Go down the list of names.
Gates. Buffett. Bezos. Zuckerberg. Ellison. Bloomberg. Koch. Double Koch. Page. Brin.
All are entrepreneurs. All of them built incredibly successful businesses.
They also built businesses capable of scaling.
You can’t open a corner coffee shop and hope to become incredibly wealthy; you’ll need to scale that business, like branching out and owning a number of different locations. You can’t just open a small bicycle shop in your hometown; you’ll need to open a number of locations, or build bikes for the mainstream, or open an online store that becomes a major player in the industry….
The only way to become incredibly wealthy is to start your own business, one capable of scaling to a significant size.
That is, of course, if you want to get rich. There’s nothing wrong with opening a corner coffee shop and making a living doing something you enjoy. If that makes you happy, that’s awesome. There’s nothing wrong with opening a bike shop in your hometown and making a living serving a community of local riders. If that makes you happy, that’s awesome.
But if you want to become incredibly wealthy, however you choose to define it, then you’ll need to start a business that is capable of scaling. Otherwise your upside will always be capped, and your downside will always be unlimited.
Unless you’re an actor, or musician, or athlete–in which case you’re still an entrepreneur, because you’re in the business of you–starting a successful business is the only realistic way to become incredibly wealthy.
If that is your goal, you’ll need to start yours. Today.
Source: Inc.@jeff_haden
