I got the idea from Robert Kyosaki’s book “Rich Dad Poor Dad” that if you want to become rich, invest in things which put money into your pocket rather than take money out. Practically this translates to stocks, real estate, and owning your own business (entrepreneurship).
In any case, I was wondering if anyone knew how many people statistically become rich in these areas?
By the way, in the book “The Millionaire Next Door,” they interview many wealthy people, and one of the points of that book is that most of these people own their own business.
Attaining a net worth of a million dollars through reasonable investing is very achievable, even for people who don’t have very high incomes.
Let’s say you make $50,000 a year, and you are budget conscious and frugal and manage to put away $5,000 each year to invest.
If you invest that in a S&P index fund, assuming a reasonable 11% average long-term rate of return, after 30 years you’ll have $1,104,565.87.
Of course, real-life calculations aren’t as simple. Most people don’t start off earning $50,000 a year, and most people will earn significantly more towards the end of their career than at the beginning. And the above calculation doesn’t factor in inflation.
Does millionaire mean a million in total assets, a million in liquid capital, or a million in income? Which would you consider to be the threshold of “rich”?
Most small businesses fail. Eight out of 10 fail within 18 months. These business failures take people’s savings, their homes, and their pride. Statistically speaking, “starting your own business” is the worst way to achieve even a modicum of financial stability. You need to start your own business that meets a market need, and does it at a profit, while offering a lifestyle where you can still maintain your marriage/family life… which is a standard most people can’t reach. When you look at a list of millionaires and you see most of them were entrepreneurs, you’re seeing what’s called “survivorship bias.” The book doesn’t cover the 80%+ who failed and lost everything, including their relationships.
The easiest way to be wealthy enough to not work, is to live way below your means and have an earning spouse that’s on the same page. I haven’t read it but I always thought that was the point of “Millionaire Next Door.” Not that entrepreneurship is the most obvious way to millionaire status. Again, I’ve only paged through it but I’m pretty sure it never makes that claim; its more about expenditure, attitude, and lifestyle – outflow not income.
Didn’t Kyosaki advocate house flipping in Arizona as his master plan to real estate riches? Holy housing bubble, batman! That guy is an idiot! His entire strawman of a father who encourages his son towards academia because “that’s where the money is” hasn’t existed for 50 years if it ever did. One of few books where I actually wanted my two hours back, because reading it made me stupider.
There was a book written that looked at the hard numbers behind owning a small business, generally they found that small business owners make about 15% less than people with the same experience do working for a company. Money in business is much more often made by people who already have a pretty decent amount of money. You will always hear lots of stories about someone started this or that business from nothing with little money etc. and became rich; these are the exceptions by far and not the rule. It would seem to be a lot more common than it is, but failed businessmen tell no tales.
Of course, if inflation over the next 30 years is what it was over the last, that’ll be worth less than half that in real terms.
So, the other question for defining millionaire is what year’s money you’re calculating it in. Being a millionaire in 1980 and being a millionaire in 2030 are very different. The former is considerably richer than the latter.
And most people will probably start shifting their allocation to investments with lower returns as they get closer to retirement. But reaching $1M is easy with this scheme; I was putting away $5k/yr in my Roth IRA back when I was only making $25k.
I certainly wouldn’t call $1M rich these days. I wouldn’t retire on that now in my 30s. That’s more around what a responsible, average-income adult would want to accumulate prior to retirement at 65.
But it’s easy to play around with numbers in a spreadsheet. Just pick an accumulation target, annual savings amount (which can change year to year), and an estimated return on investment (which can also change over time with expected investment allocation.)
Throw in inflation if you like. Average inflation-adjusted returns for the stock market are 6-7%. Obviously YMMV, and past returns being great says nothing about future returns.
I was thinking originally Liquid Capital, but a million in income I would prefer and like to know too. Either is fine
Thanks for providing this. Do you remember where you heard this?
You’re right, most of the book isn’t about this, and definitely isn’t their main point. I believe there is a chapter near the end which goes into this, though it may only be a few paragraphs. If memory serves, it is more of a sidenote and [most of] the meat of the book has to do with the other things as you say, but this did stick in my mind.
Interesting. Do you happen to remember the name of the book?
No, one day when I have time I hope to find it by doing an extensive google search. I read about a quarter of it one day while at the UPenn B&N bookstore(I wasn’t a student, I just lived in W. philly at the time and had a couple hours to kill). I wish I could find it again; I feel that it had a better approach to the study of small business success and failure than most of the writing on the subject I have seen.
Let’s assume that you work for a living, and through some windfall, you have $100,000 to invest in your 401k, stocks, bonds, whatever.
So you could put it away in T-Bills, and in practical terms, be completely assured that you wouldn’t lose any value. You wouldn’t make any appreciable interest either.
You could put it in stocks and/or bonds- riskier, in that the companies can fail or fail to be profitable. Historically, the stock market rate of return is around 8% annually, but individual stocks are much more volatile than that.
You could sink it into some kind of business of your own- more risk, potentially more reward. The common pitfall here is that a lot of people sink all their capital into the business, and then fail to pay themselves a reasonable salary- so basically they underpay themselves and overwork themselves, and would often make more money for working less at a regular job.
Or you could get really risky and do some sort of day trading or currency trading.
Or you could get riskiest of all, and take it to Vegas.
The smart play is to invest that 100k in a diversified manner- mutual funds, t-bills and the like. That way, any one failure isn’t going to hit you overly much. You’ll probably make around that 8% per year, but you’re not going to get “rich” on that in a speedy fashion.
Kiyosaki is an idiot, as is every other personal-finance self-help author out there, including Dave Ramsey, Jim Cramer, Suze Orman, and whoever the current flavor of the month. Their advice is generic, simplistic, and useless for most people.
It is possible to get rich through investing in stocks, real estate, and entrepreneurship, but to assume that it’s a can’t-miss proposition is foolhardy at best, since none of these things are without risk. Market bubbles, natural and man-made disasters, and other problems can happen to market-based investments, and self-employment comes with its own set of problems, mainly that you’re assuming all of the risk, not just some of it. It’s also possible to invest to the point where you have no liquid assets (i.e. cash or money market) available to you if something bad should happen, such as significant medical expenses, a tree falling through your roof, or something similar; you may lose a lot of money if you have to sell equities at a loss, and you may not be able to borrow against real estate or a business or sell out quickly.
The best way to invest wisely and responsibly is to throw the books away and meet with a financial advisor who can find out where you are, where you want to be, and how to get there. It’s still not without risk, but you’re more likely to not get completely hosed.
Very few professions pay that in salary, and in terms of investment income, it would imply something like 12.5 million in investments making you 8% annually. Probably more than that, assuming you’re re-investing some percentage to keep up with inflation. Still, increased stock value isn’t spendable unless you sell your shares and realize that income.
Just having a million dollars in assets doesn’t necessarily make one “rich” like it used to however. Assuming 8% annually, you only make 80k per year in whatever combination of dividends and increased value, and not all of that is going to be spendable(can’t spend increased stock value until you sell). Plus, you’re going to want to reinvest part of that, so your take home pay isn’t going to be 80k.
That’s not to say that you won’t make a decent amount of takehome cash, but it may or may not be enough to live on without working, unlike back in the day… say 1985, where a 50k salary was pretty significant (closer to 100k these days).
The original source was a study done by Bloomberg, reported widely, for example:
Business Insider, June 5, 2013, Small Business Owners Don’t Fear The Devastatingly High Failure Rate.
Forbes, sept 13 2013, Five Reasons 8 of 10 Businesses fail
Entrepreneur, July 11, 2014, The Parallels Between Entrepreneurship and Bipolar Disorder
I’ve seen plenty of stories about “financial advisors” whose principal goal was to get rich themselves by excessive trading in their customers’ account (churning, in other words), choosing investments based on the commissions they offer, or putting their customers in investments unsuitable for their goals. I’m much happier making my own decisions about where and how to invest myself (and that’s mostly in low-cost index funds).