You Too Can Be a Millionaire, Even If You Are an Employee!
"Wealth is what you accumulate, not what you spend." — Thomas J. Stanley and William D. Danker
Am I a millionaire? That depends on what you mean by a "millionaire".
Wikipedia defines "millionaire" as "an individual whose net worth or wealth is equal to or exceeds one million units of currency. It can also be a person who owns one million units of currency in a bank account or savings account."
In countries like Japan, for example, a millionaire is no big deal when 1 US dollar equals 102.35 yen, and a simple dwelling unit with 2 bedrooms and a bathroom could easily cost more than 100 million yen. Indonesia's Central Bank has announced that the rupiah would be redenominated in 2014 by removing three zeros. With just one stroke of the pen, many Indonesian millionaires will lose their status soon. Thus, depending on where you live, being a millionaire may not be a big deal, whereas financial independence is always essential, no matter where you live.
As a retiree reflecting upon my life, I realize the many mistakes that I've made and would like to share the pitfalls that one should avoid. In addition, I am depending on Thomas J. Stanley and William D. Danko's book, "The Millionaire Next Door", and a few other experts on this topic, to lend credence to this hub.
What is your idea of a wealthy person? Since young and even until quite recently, I always admire people who could live in upscale neighborhoods, drive luxury cars, dine in expensive restaurants, and go for luxurious holidays to far-off places, as and when they want it. Is this also your idea of what a wealthy person is? If so, we are both dismally wrong! If there's any consolation, we are not alone. Thomas and William say:
"Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend."
The Millionaire Next Door
The Millionaire Next Door
In 1976, Thomas J. Stanley and William D. Danko began studying how people become wealthy. They began their survey by interviewing people in upscale neighborhoods because that was where they then believed that wealthy people would live, only to discover that many people who live in expensive houses and drive luxury cars do not actually have much wealth! On the other hand, many people who have a lot of wealth don't live in upscale neighborhoods!
In their book, "The Millionaire Next Door", Thomas and William say: "Wealthy people typically follow a lifestyle conducive to accumulating money." In other words, they practice what is often called "deferred gratification". The duo identified 7 common features among those who were successful in building wealth:
- Wealthy people live well below their means. They are frugal.
- Wealthy people allocate their time, effort, and money efficiently in a manner that is conducive to building wealth. They are compulsive saver and investor.
- Wealthy people believe that financial independence is more important than conspicuous spending and a display of high social status. They live next door to people with a fraction of their wealth.
- Wealthy people do not always inherit wealth from their parents. In fact, 80% of America's millionaires are first-generation rich.
- The adult children of wealthy people are economically self-sufficient. This is because wealthy people groom their children to be so.
- Wealthy people are proficient in targeting market opportunities.
- Wealthy people choose the right occupation (details below).
Can an Employee Ever Become a Millionaire?
I believe this is the question that most of us are more interested in, since most of us are employees and not business owners. Let us define "millionaire" as being "rich and financially independent", so that the question is universal.
Reflecting on my life, I would say: "Yes, you can be a millionaire, even if you are an employee". I was never a business owner, even though I went to business school. Fact is that not all of us are cut out to become business people. The good news, however, is that we don't need to be a business owner to become rich and financially independent. All we need to do is to save as much as we can and invest those savings in assets that pay us money.
There are 2 sectors that are very lucrative and where we can make very good money, even though we are employees:
- Stocks and bonds; and
- Real estate.
Warren Buffett - How to Turn $40 into $5 Million
Investing in Shares
We often hear the advice, "Buy low and sell high". Who doesn't know, right? But how do we know when the price is low enough to buy and when it's high enough to sell?
Economic cycles are a fact of life. These are fluctuations in economic activities between periods of relatively rapid economic growth (boom), and periods of relative stagnation or decline (recession). Despite being termed cycles, however, they can prove unpredictable. Yet, you do know when recession hits and that's the time for you to buy low. Conversely, you also know when there's an economic boom and that's when you should start selling. Do not bother to determine the lowest or highest point because you'll never know. What you can do is to stagger your purchase or your sales, if you want to reap some additional mileage.
I don't know about other countries but in Malaysia, the economy hit a low in the mid-1980s and during the 1997 Asian Financial Crisis. That's about 10-12 years apart. When the next economic crisis will occur, no one knows. All I know is that it will happen again, so it's best to save up as much money as possible so that you can look forward to it and cash in. That's also when you will make your pile several years down the road.
Warren Buffet's advice is to buy stocks in business that you know. But what do we know? Although his method is good advice, we have to admit that we are not as smart as him. My advice is to look at blue-chip stocks. So do read up as much as possible about the companies you intend to buy in an economic downturn because as Captain Michael says: "If you think education is expensive, you should see how expensive stupidity is." And education doesn't necessarily mean that you ought to go back to school. But it does mean that you have to put in a considerable amount of time and effort. With the availability and ease of access to the internet these days, you can self-study and comb for relevant information. All investments involve a certain amount of risk, so the more information you gather about the companies you want to buy into, the lesser your risk.
And do remember what Warren Buffet says in the video, "Buffett's Best Tip for Personal Finance". Never borrow money to invest in stocks. Forget about share financing because the hidden cost will kill you. And never get involved in stock speculation or technical analysis. That's the fastest way to go broke. Always look at the long term and do not get carried away. It's safer that way.
Donald Trump shares his ideas on becoming rich
Investing in Real Estate
We are no Donald Trump but that doesn't mean we can't invest in real estate. Real estate is one area where we can put our money to work for us and make it grow. As real estate is a limited-supply commodity, its demand and price will rise over time, with population growth. Yet real estate appreciation is not the only way of making money with real estate. You can also generate profits by collecting rental income, or else become a real estate broker yourself.
Investing in real estate is different from investing in stock but you can also wait until the market is depressed, before going in. When the market is down, you may also be able to pick up some choice properties at the auction market or in your local courts, apart from the open market.
Unlike investing in stocks where Warren Buffet advises against borrowing money to invest, the name of the game in real estate is to use OPM, i.e. Other People's Money. There are several methods of doing this but the simplest and easiest method is to get a bank loan. Since you are investing, it would be a good idea to stretch the duration of the loan period for as long as is possible in order to free your own money for further purchases. As in all forms of investment, there's always an element of risk. Do not buy all your properties in one location so that if one location doesn't do as well as expected, you may still be able to reap substantial profits from your other properties in a different location.
Wealthy People Choose the Right Occupation
In "The Millionaire Next Door", Thomas J. Stanley and William D. Danko advised that you work in sectors that target "the affluent, the children of the affluent, and the widows and widowers of the affluent". Their logic is that, very often, those who supply the affluent becomes wealthy themselves. (You obviously cannot expect to earn a good income, working as an assistant in a corner grocery store, for example.) Thomas and William then went on to address their own paradox, saying: "But you have told us that the affluent are often frugal. Why target those who are not 'big spenders'?" The duo supplied the answer to this question by saying that the wealthy are NOT frugal when it comes to purchasing investment advice and services, accounting services, tax advice, legal services, medical and dental care, education products, and homes. Thomas and William listed the following businesses and professions as likely to benefit from the affluent:
- Attorneys who specialize in estate law, income tax, and immigration laws, for example;
- Medical and dental care specialists;
- Asset liquidators, facilitators, and appraisers;
- Educational institutions and professionals;
- Professional services specialists, e.g. accountants;
- Housing specialists, e.g. home-building, remodeling and renovation contractors, mortgage lenders, residential real estate developers and agents, interior designers, and marketers and consultants of alarm and security systems.
Whatever it is, pick the sector that you are most passionate about. But what if you have no passion in any of the above sectors? Well, then just choose the sector that you are passionate about, even if it is outside these sectors. It may take you a little longer to become rich but at least, you will feel happier and be more successful in your chosen occupation.
No Fun in Living Frugally
You may ask, "What is the point of being wealthy, if I have to live like a guy who has no money?" That's a very reasonable question and one that everyone has to decide for himself or herself.
For me, I think that those straight out of college and launching a career should aim for at least 20-30 years of frugal living, after which, they can begin to enjoy the fruits of their sacrifice. Should one be 100% frugal during these 20-30 years? I would say no. One can still pamper oneself occasionally with a splash, e.g. to celebrate a marriage anniversary or a parent's birthdays.
After 20-30 years of frugality, you may find that you are financially independent enough that you no longer need to worry whether you lose your job or otherwise. Once you arrive at this stage, raise your glass and celebrate.