I was talking to a friend at work last Friday about what he did for the Fourth of July. He went on to tell me about going to a friend’s parent’s house for a pool party. He said their house was amazing. I immediately asked what his parents did for a living or how they made their money.
For most of my life I have been very interested in how people build and attain wealth. As a child I noticed that the people who had a lot of money seemed to have a less stressful and generally easier life (or at least as a child it seemed that way!). Because everyone has to work and provide for themselves and their family, it only made sense to me to figure out how people attained their wealth and copy those who have reached “financial independence.”
I’ve realized there is one key to wealth generation: own something.
There are many jobs that can make you wealthy. Doctors, lawyers, CFOs, etc. all can demand very high pay for working similar hours as the manager in a cubicle slaving away 60+ hours a week. They can leverage this money through investments, which is consistent with my point that generating – and sustaining – wealth typically comes through owning something.
Let’s pretend that you aren’t going to be a CFO of a Fortune 500 company, nor are you going to be a specialist performing surgeries each week that keep your bank account growing. Or let’s say you simply don’t want to have to answer to anyone, so working as a director at a corporation is unattractive even if it is attainable. There is are other ways to build wealth, and it’s through owning revenue-producing assets.
I talk a lot about side hustles and side income on this site. One thing I often stress with these is that a side hustle that has potential to grow into a legit company that is worth something in equity is by far the best path to take. Ideally you can remove yourself from the entire business one day, if you so choose.
There are plenty of reasons people do not pursue ownership and development of income-producing assets:
- Risk – There is always risk when you own a small business. You could lose some of your personal savings and assets if the company gets in financial trouble. You can get sued over something and have to defend yourself in court.
- Time – Initially building up a company can take a ton of time. Many companies started with one entrepreneur who did pretty much all the work. It’s not uncommon for the founder of a company to spend many months (or years) working long hours for meager returns. Not many people are willing to make this sacrifice.
- Comfort – Many people will start a 9-5 job, get comfortable in their position, and never pursue anything further. Go to any corporation and you will see people who want nothing more than to check in, check out, and enjoy their time outside of work. There is nothing wrong with this, unless you desire wealth and “something more”; you just might regret getting too comfortable too soon.
With these risks in mind it’s important to also think about the potential benefits of ownership. Do you think Mark Zuckerberg would have been better off simply developing web applications for huge corporations? I don’t think anyone would argue that.
If you take risks, you have a higher chance of return.
Owning a rental property is a risk, but it can generate you income while also building equity. Owning a website that you work on at night is a risk because you may be sacrificing a ton of time and energy for something that never generates a profit. Your small business may start requiring more of your time and you might not want to make that painful choice of staying at a comfortable corporate job or leaving it to pursue your small business full-time.
Taking these risks are sometimes necessary, though, if you have goals of attaining a level of wealth that allows you to never work again (unless you want to) and to stop trading your time for money. If you make $50,000 a year at your salaried job, you are never going to attain a net worth of $10 million unless something changes. With that being said, it’s also important to realize that if you are just starting to build income-producing assets – particularly those that can be sold to investors down the road and release equity back to you – it’s not going to happen overnight. It’s more a mind-shift from traditional trading your time for money to thinking how what you do today can benefit you long-term down the road.
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What do you think about my theory of ownership and wealth?
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Nice post DC and I agree with you on the theory of ownership and wealth. We live near a lot of people who have nice homes and when I talk to them majority of them own a business, invest in real estate, or came from parent who owned something and passed to down to them. It just amazes me when people say that they are going to be wealthy but from working. I always seem to be stocked at how many of them think the will be CFO’s etc when they hate working more hours and often have been in the same position for years. With great risks comes the chances of great rewards. But I rather a calculated risk and investing my time in myself and growing a business. Earl Nightingale said it best people just conform too much.
YourDailyFin Definitely. It is true that you can become wealthy by simply being an employee, but I think it can be limited unless you are actively investing your income into assets that produce you additional wealth. There are certainly plenty of CFOs who make milions a year, but like you said it takes a special type of person to make it that far. I have a friend who I am 99% sure will be one of those people and is dedicated to making it to that level, but a (large) majority never will.
I’m a little more cautious when it comes to taking financial risks now as we are only on a single income and we have our son to think about. I guess it all comes down to your personal situation and what your risk appetite is like.
I still want to own a rental one day, but i think it might have to wait for a few years.
MonsterPiggyBankFamily certainly comes into play here. Even without a kid, I am married now and I always have to weigh that into any sort of investment I make (time and money). My top priority is to provide for my wife and to lay a strong financial foundation for when I do have kids.
So true DC. We finally realized this over the years. There is nothing wrong with simply going to your job and making money. However, if you want to be wealthy, you have to be willing to take a few risks.
Holly at ClubThriftyAgree 100%! Momentum comes into play as well. If you start attaining income-producing assets it becomes easier and easier to attain more as well as have flexibility.
Very true DC! Like Holly said, there is nothing really wrong with going to a job to make money. The issue is that it’ll make so few wealthy. That is part of the reason why we started our business. Yes there are risks, but they’re measured ones and will get us closer (we believe) to what we want in life.
FrugalRulesI’m glad you guys have your small biz and I certainly love to read you and Mrs. Frugal Rules blog posts about owning a small business. Hopefully many more years of content will come from it!
Bang on :D I recently read about someone who bought 2 tandem parking lots behind Commonwealth Ave in Boston, MA for $50,000 in 1993. It was just a property like any other home or real estate. At the time I don’t think many people would have thought anything special of it. But even though parking lots are boring, they can be turned into an income generating asset :) especially in urban areas where it’s hard to find parking. Even at $100 per month for each spot that’s almost a 5% return. You’ve probably heard the rest of the story but last month the same 2 parking spots sold for $560,000 at auction lol. It certainly takes risk, work, and patience but I’d rather become rich owning something than working my butt off to become a doctor or something.
Liquid_IndependYes I did hear about the sale of that spot! I did not realize it was bought for $50k two decades ago, though. That’s an awesome return on investment and I’m sure there will always be demand from some high earners for the spots.
Kind of a side note but I do think that doctors live a very fulfilling life. I might have missed my calling there, but I think I can contribute to the cause of health in other ways.
It’s a great point about building huge amounts of wealth. You likely need do need to build and own something to get to that point. But many people don’t need that level of wealth to live the worry-free life you describe. You may not get to $10 million, but you can get to a very comfortable life by making a reasonable salary and saving a big chunk of it. Neither choice is inherently right or wrong, you just need to know what your values are.
Matt @ Mom and Dad MoneyI agree, and there are definitely ways to leverage a full-time salaried job (and enjoy the benefits of not having to worry about the bottom line as much or your time outside of working hours). Investing your money in dividend-paying stocks is one conservative way to leverage the “ownership principle.”
Good one DC. I would also add fear to the reasons why people don’t jump into a small business. The fear of the unknown and of failing cause people to not pursue a small business. It happens, but as you said, the risk takers are the ones that usually prosper.
DebtRoundUp Definitely agree. I think once you have a family and feel like you need to provide for them and not expose them to too much risks it also really comes into play (an earlier commenter pointed that out).
I think that’s one problem I have is that i’m not a huge risk taker. I don’t own anything either. I’m not even sure what steps I would need to take next. Food for thought though!
Beachbudget Everyone has a different risk tolerance. Perhaps just starting out with some dividend-paying stocks and slowly building it up fits your risk tolerance? Like you said, food for thought for sure.
The people that I have witnessed making the most money when operating their own business were ones where they created a business that was easy for them to sell a few years later.
Coming up with an idea, taking it to the next level and then selling it.
One example is a woman in the UK that created an accounting firm. She had a staff of 10 other accountants. She ran it for several years. Had everything organized well, and then sold it for a very nice profit. Other examples are all of the companies over the past 10 years online where people have created an online service and then been bought out by Yahoo or Google for billions. And you are right, by taking risks you stand a far better chance of generating a high rate of return when things work out in your favor.
And of course, many people flip their websites for much more cash than one may think.
TacklingOurDebt So true about being able to sell the business. You really need your ducks in a row to be able to “detach” yourself from the biz. Google, Yahoo, AOL, etc. are always looking for businesses to buy up and fully leverage through the integration of their resources. These are really good things to keep in mind!
I agree that it takes risk to be wealthy as well. My bosses all put a ton of time into creating their business, and it’s interesting to hear about the early days when they first started out. They left their jobs to create something that they never imagined would be this successful. They have said, “If you told us five years ago that we would be where we are now we wouldn’t have believed it.” It can be really rewarding, but I don’t think business ownership is something I would pursue. I’d much rather own rental properties.
JourneytoSaving Rental properties can be businesses in and of themselves! Definitely come with their own set of risks, but also can provide nice consistent (and straight-forward) income. I don’t blame you for wanting to pursue that.
This is a great point, David. It’s really tough to build wealth without owning something. Also, it’s important to plan ahead on what you own. If you’re constantly buying material items (i.e. TVs, cars, etc.), that won’t help you build wealth as quickly as buying items that appreciate in value.
CommonCentsWealth I think as long as you have the income to purchase those items it’s fine, especially if you are working towards building a business that can later be sold or whose income stream can be utilized.
Well said DC. The caveat here is that you have to own things that increase in value. :) I have a brother-in-law who made a bunch of money selling real estate, bought a bunch of cars, and now has little money or wealth left while his business is tanking.
ayoungpro Yikes sorry to hear that :/
I couldn’t agree more. Owning property and a business that makes money are great assets to have. I didn’t really have any idea when I bought my practice what I was doing, but it turned out to be a good decision.
Eyesonthedollar Yeah it seems to have worked out for you!
I took this to heart many years ago. I invested in income property. I like the idea of my tenants paying for my expenses and I could make a profit. Besides the cash flow, I made a profit when I sold. It helped me achieve financial independence.
krantcents1 I like that idea as well! We started small, currently renting out half our basement to a tenant. I would love to have stand-alone rental properties in the future.
Great article DC. Ownership is the key to financial success. Too many people are to afraid of the risk that it takes. If they can get over their fears they will able to acheive a lot more.
OneSmartDollar I agree!
There are lots of assets that can produce an in come. Property isn’t the only one. How about a regular savings plan into an income producing equity mutual fund – as time grows, your investment into it does, as do the dividends from it.
Also, purchasing on a monthly basis reduces the volatility of investing as the dollar cost averaging smoothes out some of the movements.
Buying a mutual fund on a monthly basis also means you don’t have to find a large lump sum that you might need to purchase an investment property (and associated other fees such as legal work) and would actually reduce some of the risks associated with renting – bad tenants and the like. Also, selling a property might not be easy to achieve.
Of course investment values can go up and down – irrespective of asset bought. If you can give it a long enough time horizon, values should rise.
I definitely think risk is an important factor. There aren’t many people willing to do that and take a chance. I personally would hate to work in a cube all day so I try tons of different ways to maximize wealth and create my own unique income. When the hubs becomes a physician, I’m really not interested in the “physician lifestyle” We’re losing too many investment years while he’s in school and we’re going to have to “catch up” as much as possible once he actually has a salary. However, I’m hoping we can own something :) and leverage the income and investments to have a nice life and provide for our future kids.
This is exactly what I got from reading “Rich Dad, Poor Dad”. Great article DC!
That
is indeed the best way to build wealth. Or to lose all your money. It will
depend on the efforts you put in to do your homework before and keep up with
the business during. But you are right, you can’t get rich just with a basic
day job, unless you invest smartly most of your income.
The WSJ put it perfectly “Getting rich doesn’t buy you happiness- it cures ambition anxiety” I have a serious case on ambition anxiety currently- and I’m just trying to cure it :-) Sometimes I wish I could be happy with just doing the standard 9-5 job- but I’m ingrained to want more. It is not so much about achieving wealth but creating something (although if you do the second part right- wealth typically follows). *Cheers to the side hustle*
MillennialCents That’s a great way of explaining it. I like the term “ambition anxiety” and I really do think that’s what I’m experiencing! I also know what you mean when you say you “want more” and that feeling comes natural to me as well.