I took a day off to ponder on the topic of millionaires. I’ve had an increased curiosity lately in studying millionaires in order to understand the different ways people achieve this financial milestone. I came to an interesting realization that most people never talk about. There are several categories of “millionaire” and they are not created equal. Today, I would like to share with you these five types and examine their differences…
Some people define being a millionaire as making a million dollars (or more) per year. While this may not be the net-worth definition, it certainly meets the criteria. But here is something interesting to think about. What if you actively earn $1,000,000 a year from a salary or in W2 income and you spend $600,000 per year on your lifestyle expenses? It seems you would be living below your means – right? Not so much. You would essentially be left with $0 at the end of the year due to taxes (federal, state, and payroll) and in some high tax states, you might even be underwater and owe more if you spent $600,000 after-tax dollars. We are all too familiar with the many professional athletes, celebrities, and lottery winners who went broke after making their millions. It’s not what you make, it’s what you keep.
Some attribute saving a million dollars as the path to achieving millionaire status. Consider someone living frugally throughout their working career while earning an annual salary of $100,000. They might pay somewhere in the ballpark of $30,000 in taxes each year and perhaps they live on a modest $40,000. This means they could potentially save $30,000 a year – right? Possibly; however, this process would take over 30 years to accumulate 1 million dollars “in the bank” ($1,000,000 / $30,000 = 33.33 years). This strategy can be a very long pursuit without investing the money or benefiting from the power of compounding. Additionally, inflation works against you by often outpacing what interest you may receive from the bank. This begs the question…how much will $1,000,000 buy 33 years from now?
Many of us chase the good old American Dream of owning a nice, big, paid-off house. While a big home may be nice, Robert Kiyosaki, the author of Rich Dad Poor Dad said it best: “your house is not an asset, it is a liability.” Why? Even after paying off a house, there are still property taxes, insurance, maintenance, and expenses that go along with it. Therefore, it takes money out of your pocket every month. Without having a job or investment income to pay for these expenses, you may risk losing your home. This begs the question…do you ever REALLY own your house?
There are two primary ways you can invest. You can focus on equity or income. An example of equity investing could include buying a stock at $10 a share and hoping it goes up to $15; then selling the stock if it does. Or buying a rental home for $100,000 and flipping it for $150,000. The profits are your “equity”. While there is nothing wrong with either of these strategies, the fact is that you must keep working and stay active to produce these equity gains. If you choose to walk away from this business or side hobby, the profits are likely going to stop or reduce significantly. Time is money.
Finally, we arrive at the income investing approach. Income investing is not based on “buy low and sell high” although that very well could be the icing on the cake in some investment types. This strategy is primarily focused on income-producing assets that produce cash flow, interest or dividends. The real benefit of this strategy is having the option to live on the income. These passive income streams could potentially replace your day job, or at least provide additional sources of income in the event that you lose your job, choose to take some time off, switch to part-time work, or retire altogether. Examples of this type of investing might include, owning real estate where tenants pay rent to you every month, buying REITs (Real Estate Investment Trusts) which are commonly traded on the stock market and usually distribute a large portion of their profits in the form of a monthly or quarterly dividend. Additionally, bonds, CDs, annuities, tax-liens, notes, ATM machines, producing oil wells, and dividend-paying stocks are a few other examples of income-producing investments.
No matter which type of millionaire you currently are or wish to become, it is important to know the differences between the types. This was an eye-opening discovery for me and I hope it helps you clarify your approach to wealth building. Which type of millionaire strategy suits you best?
You can be rich by having more than you need, or by needing less than you have – Tony Robbins
To Your Success
Travis Watts
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.