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Ever wonder how the rich get rich? I’m not talking about trust fund kiddos where they inherit their millions but those who build their wealth through hard work to join the millionaire club.
Over the past couple years an average of 675,000-700,000 US households passed the $1 million net worth threshold each year. A lot of those were due to cooperative bull markets but many were not.
Below is a list of the 5 most common ways I’ve seen ordinary households become millionaires.
1. Start a business
My day job consists of working exclusively with commercial owners on their personal financial needs.
These aren’t just small mom and pop shops but what I’ll call small to middle market commercial businesses. The average revenue for these businesses is around $10-20 million.
These are companies that have ‘made it’ for the most part. They didn’t fail like 20% do in the first year. Or like 50% do in the first 5 years.
Did you know that only 33% of companies stay in business after 10 years? And that doesn’t mean they are killing it, just that they are at least surviving.
The average small business owner makes $71,813 per year and 86.3% make less than $100k. Roughly 2% of sole owner business have revenues in excess of $1 million.
It’s estimated that 11.76% of households have a net worth of over $1 million. That’s roughly 15 million households (there are 128.58 million households).
I’ve shared a lot of numbers.
What I’m trying to get at is it’s not easy becoming a millionaire but if you’re able to create a successful business, it’s one of the most common ways a person can become wealthy.
I switched my wording to wealthy because there are a lot of $1 million net worth folks out there. If you create a successful business then you’ll not only hit your first million but possibly much more.
Great examples of business owners success stories include Steve Jobs, Elon Musk, and Sir Richard Branson.
What do most financial blogs/websites/financial advisors suggest you do when trying to manage your money?
START A BUDGET!
You know why? Because saving money is the easiest way for you to become a millionaire.
Easiest = simplest = it’s still fucking hard to do.
Here’s the math.
The average household income is $63,575. Save 20% which is $12,715 annually or $1,060 each month. Do that for 79 years and you’ll have $1 million dollars.
Holy shit that’s a long time.
You’re right. Maybe you could invest the money each month? Yes, that’s a good idea. The S&P has had an average return of 8% from 1957 – 2018. If you date it back to 1926 the average return is 10-11%.
Let’s be conservative and assume an average annual return of 6% (closer to a fixed income/equity return). Saving 20% or $12,715 of your $63,575 each year would make you a millionaire in 30 years.
Way better than 79 years! Compounding interest at work.
Let’s say you’re an amazing saver and can stock away 30.67% of your $63,575 each year into a 401k plan. That would mean you’re funding $19,500 into that 401k plan, which is your limit (more if you’re over 50 years old). If you and your spouse are contributing double this.
Now let’s also assume your employer matches 100% of your contribution up to 5% of your income. That would mean they add $3,178 to your 401k each year.
In 23 years you would be a millionaire. 30 years you would have roughly $1.79 million. And in 40 years you would have $3.5 million!
The earlier you start saving the more time your money has to compound. Here are some tips to help increase your savings.
3. Earn a High Income
So simple, right?! Make more money to save more money.
It’s no surprise that if you make more you have a better shot at becoming a millionaire.
30.9% of working American households make over $100k per year. That’s 39.7 million households. If they save 20% of their income and get a $5k match in their 401k each year, they’ll be millionaire’s in 20 years.
Yet, only about 12% of US households have a net worth of $1 million and higher.
There are hurdles to achieving that millionaire status even for high income earners. Those hurdles may be increased taxes, student loans, spending pay increases instead of saving them and possible stress that results in job loss.
Hurdles or not, if you work hard, do well at work and earn more money you’re on the way to becoming a millionaire.
4. Work for a Private Company – Earn Stock
Successful business owners aren’t the only people that benefit from their company’s success. Often, owners will offer shares in their company in order to attract great employees.
Facebook is a great example of this.
The most common way these shares are offered is through restricted stock units or stock options. These options are offered to the employee as an alternative to paying a higher salary, which helps keep cash available to the company.
The option gives the employee the right to purchase a number of shares at a set price. There is usually a period of time that the employee has to hold the shares, called the vesting period. They cannot sell during this time and if they leave or are fired, will most likely lose all shares.
The goal is for the shares to be worth more in the future. It is a way to incentivize the employee to work hard, help grow the company, not leave and eventually sell at a premium.
I have seen many employees get 6 and 7 figure payouts when they eventually sell their shares.
It’s important to note that shares in private companies are illiquid. That means that there is typically not a ‘market’ to sell your shares. The stockholder agreement will outline the rules for selling. The company usually is the buyer of choice but if they don’t have the cash to purchase, you may have to wait.
5. Rental Property Millionaire
This might be one of the best opportunities for a person to become a millionaire.
I have heard countless property millionaire stories, many of which are current clients of mine today.
The idea is to save money for a down payment, purchase a property, make necessary improvements then rent it out.
There’s a lot more to it and regardless of what others say, there are major risks. Especially if you’re leveraging each property to the max.
Let’s say that you keep your rentals consistently rented, property values increase steadily, there are no major repairs needed that you weren’t prepared for and you’re able to rent at a good rate. If all that goes to plan…you have an ok return on investment for one property.
Here’s where the daring part comes in but also how these investors become wealthy.
You continue to save your money. Then purchase another property. You continue to save. You continue to buy additional investment properties. THEN you realize that your properties have appreciated in value and there’s untapped equity just sitting there.
You do a cash out refinance on those properties. You take that cash and invest in more properties.
It’s risky but if you can stay dedicated, find good investment properties, ensure those properties are in good markets, keep the properties updated and keep cash reserves for unexpected repairs, you can eventually amass a large portfolio of investment properties that are paying for themselves.
I’ve worked with many of these investors. Some have become multi-millionaires. Others have gone bankrupt. It’s a risk but the reward can be great.
Some of the top millionaire property makers are Donald Bren, Stephen Ross, and Leonard Stern.
Is it easy to get to the millionaire club? No. Can it be done? Absolutely. Are these 5 ways the only options? Of course not.
These are the most common ways I’ve seen the wealth clients I work with make it to a one million net worth.
The earlier you can make it to this milestone the more your money can snowball and create real wealth.