Most of us begin our working careers with essentially nothing. I graduated from college with $500 and a 10-year-old car, and sought employment in the middle of a major economic recession. That was more than 40 years ago. I would eventually find myself included among America’s many millionaire households. To get there, I embarked on a savings and investment regimen. But then I added to that regimen. I became an entrepreneur.
Wealth starts with income
Income comes from investments. The first income most of us ever receive is in the form of a paycheck, which is the product of investments we and others have made in ourselves. Most financially successful people I know never cease to learn, investing in their abilities throughout their lives. But income, no matter how high, is not financial wealth.
Financial wealth comes from having investments apart from ourselves. It comes from owning stocks, bonds, real estate, private companies, collectibles and other stores of value that can enable us to achieve a personally satisfying lifestyle without the need for a paycheck. People who achieve this, no matter their lifestyles, should consider themselves wealthy.
Building wealth comes from sacrifice, because it requires that we withhold portions of our paychecks and other income to make investments apart from ourselves that we believe have the chance to grow over time. Building wealth is important, because the investments we make in ourselves unfortunately cannot be expected to last or grow forever. That is what retirement savings is all about.
Degrees of income and wealth may hold different meanings for each of us, but one way to measure ourselves is against the U.S. national report card, which is shown below. The net worth amounts include home equity but exclude pension or Social Security benefits.
The first path to wealth
Regularly setting aside a portion of income to invest in a diverse basket of publicly traded stocks and bonds has long been a reliable way to get rich. The level of wealth certainty increases the longer your investment time horizon. Over the past 50 years, the rolling 30-year return for the S&P 500
averaged 10.9%, with the worst return not far off at 9.2%. But the shorter the time horizon, the greater the risks.
Assuming you could invest 5% of your income over your working career, your retirement savings might look as shown below. To try to make the results comparable to current household net worth statistics, I discounted the ultimate savings back to the present using an inflation rate of 3%.
Most of us do not save enough
As you examine household net worth in the first table in this article, look at the 75th percentile and below. Now, compare that to the amount of savings in the previous table that might be accumulated over a 40-year career using a 5% savings regimen. There is a glaring observation to be made: Net worths at the 75th percentile and below are less than they should be. Not even a U.S. tax code that encourages tax-free savings accumulation seems to help.
The majority of Americans simply do not save enough. In fact, about 43% of Americans sadly have no savings at all and rely solely on pensions or Social Security benefits for their retirement.
Part of the savings discrepancy between reported net worths and expected accumulated savings is a function of the increasing difficulty of saving the same income percentage at lower income levels. But the prevalent lack of savings certainly suggests a profound need for greater financial literacy.
There is one final hurdle to savings: 40 years is a long time to wait. The act of not saving does not immediately hurt. To make matters worse, the act of spending can actually feel good. In delaying a savings regimen, many among us simply think we can catch up later by saving more at some future point that never arrives. Or, to quote another maxim, “if it doesn’t pinch, it doesn’t hurt.” Only it does.
The second path to wealth
The wealthiest do something different. Compare the 99th percentile of household net worths to the amount of savings one might expect with a 5% savings regimen. Their net worth is more than triple the expected savings. An obvious reason for this might be that the richest 1% of households save more than 5% given their higher levels of disposable cash. But there is much more to it.
“ Self-employed people are four times as likely to be millionaires as those who work for others. ”
When it comes to millionaire households in America, it is estimated that over two-thirds got that way through business ownership. Self-employed people are four times as likely to be millionaires as those who work for others. Business ownership is also generally a much faster way to save. This accounts for much of the difference in apparent household savings at the highest net worth levels. Business-owning households chose an additional investment path to savings: investing in the businesses they founded or ran.
The further you move up the wealth rankings, the greater the dominance of business as the primary source of wealth. In fact, each of the billionaires on the Forbes 400 list of richest Americans owe their net worths to companies they or their families founded or led. The rapid growth of the values of their businesses resulted in net worths and savings that would dwarf any amount they might have ever accumulated with a paycheck and savings regimen.
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Choose your path
Getting to be a millionaire is attainable but clearly takes some planning. If your income level is in the 75th percentile or above, a solid lifelong commitment to a savings and investment regimen can get you there. Trying to start a savings habit later in life is much harder. Old habits (in this case, not saving) die hard, years of return compounding are lost, and investments become riskier with a shorter time horizon. If you are below the 75th percentile, savings sacrifices required to be among the 12% of American millionaire households get substantially harder.
A faster path to savings is to start or own a business. At the age of 46, I left a good-paying job to do just that. I had saved enough money so that I could afford to not have a paycheck for awhile and did not want my career to pass by without giving it a shot. I had invested a lot in myself and felt ready to take the plunge and see if the investment would pay off.
To put myself in a better position to take the risk, it helped that I had followed the advice of countless writers on wealth to keep my personal debt and monthly obligations low. It helped that I had established a savings regimen.
I would end up conceiving, co-founding and leading two successful companies and owe most of my personal savings and net worth to these endeavors. Even a disciplined savings plan based on the paycheck I left would not have approached what I was able to accomplish financially through my entrepreneurial efforts.
I found personal great satisfaction in starting the companies I led. Like many entrepreneurs, I found joy in the relative autonomy, the jobs I was able to create and the many lives I was able to positively impact. As to the risks of starting a company, I could have lost both my investment and the savings that supported my family as the business got started. My fallback was to take another job and then do what all employed people should: commit to a savings regimen.
To allude to a seminal poem by Robert Frost, there are two basic paths to savings and personal wealth creation. I took the one less travelled by, though one most common among millionaires. I started a business.
Christopher Volk is author of “The Value Equation: A Business Guide To Creating Wealth For Entrepreneurs, Investors And Leaders.” He has been instrumental in leading and publicly listing three companies, two of which he co-founded. The most recent is STORE Capital
where he served as founding chief executive officer and then as executive chairman.
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