As I’ve previously written, many of us have a goal to become millionaires. Some people set high net worth goals so they can buy beautiful homes and travel the world. Others set high net worth goals in order to have freedom. Time freedom, that is. Freedom to use our time as we want without being compelled to work for money.
The main point of this website is that we should focus more on income than wealth. I want to illustrate two important reasons why this may be a better approach by comparing a high net worth with a high monthly income.
We’ll start off with the goal to have a high net worth.
When I first set a goal to become a millionaire, I honestly didn’t put much thought into it. I simply assumed this goal would make my life significantly better. So I rolled up my sleeves and went to work to build my wealth. I’ve had a fun journey and have learned a lot.
Looking back I wish I would have stopped and actually thought a little more about this goal. I would have saved me a great deal of time, effort and risk.
We will start with the end in mind by doing some math to see what a million dollar net worth would provide. Assuming you had the following net worth and invested this net worth in a safe investment providing 4% annually, you would expect to collect the following income levels.
$1,000,000 would pay you $40,000 a year or $3,333 per month
$2,000,000 would pay you $80,000 a year or $6,666 per month
$3,000,000 would pay you $120,000 a year or $10,000 per month
$4,000,000 would pay you $160,000 a year or $13,333 per month
$5,000,000 would pay you $200,000 a year or $16,666 per month
These numbers look pretty good, don’t they? Not a bad goal to have, right? Until you dig further and ask the next question.
What do you have to do create a high net worth? For this part, let’s assume you decide the $3,000,000 net worth is perfect for you with $10,000 of monthly income.
There are three basic ways an average person can create $3,000,000 in wealth.
1. Build a business with a value of $3,000,000.
To achieve this valuation, you would probably need to build a business with $3,000,000 of annual income, or $300,000 of annual net profits. Stop and think about this for a minute, if you’re in business for yourself now. In your existing business, what would you have to do to have $3,000,000 in annual revenue? My guess is you would have to build a fairly large business requiring significant overhead (office space, rent, utilities, insurance, equipment, etc) and several employees. $3,000,000 in annual revenue.
– Significant overhead
– Employees, payroll, benefits, etc.
– Large investments into marketing
– A great deal of risk (80% of new businesses close within 5 years)
– A great deal of work – (6/7 days a week of 50 plus hours)
2. Buy rental real estate valued at $3,000,000 and work to payoff the mortgage over the next 25 to 30 years.
You could purchase several properties with a combined value of $3,000,000, or one larger multi-unit building with the same value. It really doesn’t matter. The goal is to have the tenants pay off the mortgage over time. This goal requires less risk and work than the first goal and this is why many people choose to invest in real estate.
– 25 to 30 years
– Significant debt if leverage 75% of price – $2,250,000
– $750,000 for 25% down payment
3. Get a good job and save $2,100 a month in your retirement account for the next 30 years.
Why $2,100 a month? That’s what you’ll need to contribute each month into your retirement account if you want to have $3,000,000 in 30 years. This assumption is based off of a long-term average annual return of 8%. This goal doesn’t require you to start your own business, or buy leveraged rental real estate. It does require you to get a great job with a high income and to work this job 40 plus hours a week for 30 years.
– If you save 15% of your income, you would need an annual income of around $170,000
– 30 years
– 360 deposits of $2,100 for a total of $756,000
These three ways are really the only three options we have to build wealth, if we’re not A list celebrities or a professional athletes. Maybe, you’re following one of these three strategies currently? My original plan was to combine the first and second strategies.
Today, I look at these options and scratch my head. Setting a goal of a seven figure net worth requires significant amounts of time and risk. It really does and I wish I had thought through all of this before I charged off to become a multi-millionaire.
Now lets switch gears and walk through what it might look like if we choose to become a Cashflownaire instead. We’ll focus on creating the $10,000 of monthly income without any concern for wealth. Remember, the $10,000 of monthly income is what $3,000,000 would provide if invested at 4% annually.
To create $10,000 of monthly income, we have numerous options available. We’ll focus on mobile home investments as an example. (You could use other investments in your own analysis.)
In my area, we can buy a mobile home investment property for around $8,000 cash. This home will generate $200 of monthly income. To create $10,000 of monthly income, we would need to buy 50 mobile homes. If we were to buy two mobile homes a month for 25 months, we would have $10,000 of monthly of cashflow.
We would create the same level of income as a $3,000,000 net worth in a little over 2 years, which is significantly less than 25 to 30 years needed to build a $3,000,000 net worth.
The total investment to acquire these 50 homes would be $400,000. However, we would use the income created from the initial homes to offset the cost of future homes bringing our total investment down significantly. Or you could use leverage and buy mobile homes with borrowed funds.
– $400,000 to pay cash for 50 mobile homes
– Or leverage to buy homes with borrowed funds
– 25 months
The whole point of this post is to illustrate how important our goals are when it comes to designing our lives. If we follow what most people do, we’ll set large net worth goals and then trade away a large portion of our lives pursuing this goal.
If we stop and think about things for a minute, we may adjust our goals to focus on income instead of wealth. This shift may save us….
1. A significant amount of time – 20 plus years.
2. A significant amount of money – $300,000 or more.
Maybe mobile homes aren’t your thing. They don’t have to be.
– 25 single-family homes with $400 of monthly net cashflow provides the same income.
– 100 homes in your property management business paying you $100 a month provides the same income.
Focus on income and life gets a lot easier.
Focus on wealth and life gets a lot harder.