Brenda P. Wenning
The term “millionaire” has lost much of its luster. In the 1950s and 1960s, being a millionaire implied a level of wealth and exclusivity that few could hope to achieve.
But due to economic growth and inflation, becoming a millionaire has gradually become more achievable. By the time “The Millionaire Next Door” was published — 25 years ago — achieving a net worth of $1 million was a realistic aspiration.
Today, according to The Global Wealth Report, the United States is home to 18.6 million millionaires, which is 3% of the population and 7.6% of the adult population. The U.S. represents just 4.25% of the world’s population, but it’s home to about 40% of all millionaires.
The good news is that American innovation and a capitalist economy have made the United States the wealthiest country in history. The bad news is that, thanks to inflation, $1 million is a modest amount of wealth. Depending on your lifestyle, it may not be enough to support your retirement.
Becoming a millionaire
Achieving millionaire status is a worthy financial goal for the 97% of Americans who aren’t there yet. So how do you get there?
Only about 20% of millionaires are lucky enough to inherit wealth. Investment bankers, CEOs, doctors and lawyers earn enough money to become millionaires. Others, such as athletes and celebrities, have special talents that enable them to earn large incomes. Most of us lack those abilities.
Others become wealthy by investing wisely. A very small number get rich through luck. They may win the lottery or hit the jackpot at a casino. Or their wealth may come from a legal settlement.
Thomas Corley, who spent five years studying how people become wealthy, found that wealthy people generally fall into four categories: the Saver-Investor, the Big Company Senior Executive, the Virtuoso and the Dreamer-Entrepreneur.
Big Company Senior Executives and Virtuosos make up a minority of millionaires. Most millionaires are Saver-Investors, Dreamer-Entrepreneurs or both. Saver-Investors are ordinary people who typically save 20% or more of their income and invest their savings prudently over a period averaging 32 years.
A small majority of those interviewed by Corley (51%) are Dreamer-Entrepreneurs. Owning a small business requires a big commitment, as well as significant risk. Among interviewed, 27% had a business they started fail.
If you want your business to generate enough income to make you wealthy, expect to work long hours. You will also need to be good at making decisions and managing money. But if your small business generates enough income, it can eventually make you wealthy.
Of course, it’s not just what you earn that’s important, it’s what you do with it. If you invest it, your odds of becoming wealthy will be much higher than if you spend it. That may sound like common sense, but many people try to live like they’re wealthy before they are; they wrack up debt and end up broke.
The most important lesson from “The Millionaire Next Door” is that if you want to become a millionaire, you’ll need to live frugally. You don’t become a millionaire by maxing out your credit cards every month. Keep debt to a minimum and don’t buy anything you can’t afford. Look for sales, cut coupons and don’t be wasteful.
The more money you save by living frugally, the more money you will have available to invest. The wealthiest 1% of Americans put three-quarters of their savings into investment assets, according to CNBC, while those in the middle class have most of their assets tied up in their homes.
Warren Buffet once noted the importance of making investment a second source of income. Whether you invest in stocks, real estate, cryptocurrency or some other asset, you also need patience, as it will likely take decades of saving and investing to become a millionaire.
Why the rich get richer
Once you are reasonably wealthy, you may find that adding to your wealth is less of a struggle. The rich often do become richer.
Is this an unfair consequence of a capitalist society? Not exactly. Consider why:
Sound financial and work habits. If, as in most cases, a person became wealthy by living frugally, that habit will likely continue once wealth is achieved. What made you rich can make you richer.
We can all live frugally, invest or start a business. Some of us will be better at it than others. Some of us will be lucky. Some of us will work harder than others. But we all have opportunities.
Compounding. One reason it can take decades to become wealthy is that the wealth-building power of compounding can take a lot of time. Compounding can make anyone’s investments multiply in size, but it takes time. However, time is less of a factor if you already have wealth.
Let’s say a person of wealth has $10 million to invest and you have $100,000. If the person with $10 million earns a 10% return this year, he will have a $1 million return. Assuming your $100,000 is also earning 10%, your return after a year will be $10,000. It would take 7.2 years for your portfolio just to double in value. But your $200,000 would double in value again in 7.2 years to $400,000, then to $800,000 after another 7.2 years.
Hold onto your investments for a couple of years after that and you’ll likely achieve millionaire status — after about 24 years.
Ability to take risks. Wealthy investors can also afford to take more risk. Higher risk often yields greater rewards — and those who are wealthy can afford to take risks that the average investor cannot. They likely have their money in enough different investments that if one fails, another provides significant rewards.
Attracting the best advisers. Even so, their risk is likely less than it would be if the wealthy didn’t attract the best financial advisers. Everyone wants to manage their money, so they have family offices and teams of professionals to do their bidding and ensure that they earn high returns without taking unnecessary risk. They get the best-of-the-best advisers (at a discounted rate). You get the robo-advisers.
Those who are rich can afford the best lawyers and accountants, as well, but the large sums they pay for their services are helping to make others rich, too.
More choices. Wealthy people can also invest in assets that others cannot. Hedge funds, for example, have minimum investment requirements, ranging from $100,000 to $2 million.
In addition, some investments, including private equity, hedge funds and other private deals, are open only to accredited investors, because regulators assume that the average investor lacks the knowledge and expertise to invest in such potentially lucrative investments. Accredited investors must meet certain criteria, such as having a net worth of $1 million or more, or earning income of at least $200,000 a year.
The Obama administration touted its opening of private equity to average investors when it enabled them to dabble in crowdfunding. Crowdfunding may be the riskiest investment ever, and the chances of earning a significant return on investment are tiny. Companies that rely on private equity may be worth billions and typically have a great deal of potential, but the average amount raised in a crowdfunding campaign last year was just $824.
Those with wealth are also the first people to be “allocated” shares in potentially hot IPOs. They’ll take precedent over average investors because of their “brokerage relationship,” meaning they make money for the brokerage, while the little guy does little to help the bottom line.
Today’s automated investing has also created opportunities that primarily benefit institutional and wealthy investors, such as high-frequency trading, quantitative funds and dark pools.
Increased influence. If you achieve a high level of wealth, you will likely develop a new group of acquaintances. You may be invited to join boards. You may choose to make big donations to nonprofits or politicians. You may even decide to become a politician, like Michael Bloomberg and Donald Trump.
If you have enough wealth, you may be in a position to influence policy or to at least have your views be heard by influential people.
If you’re feeling envious about those who are rich, you may take some consolation in knowing that wealth can be fleeting. The average millionaire goes bankrupt 3.5 times. And 70% of wealthy families lose their wealth by the second generation.
You may also take some inspiration in knowing that, based on current projections, 1,700…
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