Thursday, June 16, 2011

Telling it like it is - becoming "really rich"

This article on MSN Money caught my attention.

The basic premise is that USD1 million in net assets is no longer enough either to be considered genuinely wealthy or to support a moderately affluent retirement - even if you also happen to own your own home mortgage free. This is a simple reflection on the realities of inflation at even moderate levels over a period of time (or, if you prefer, the decline purchasing power of currencies). It's also worth mentioning that inflation in the luxury sector has been outpacing the general rate of inflation for at least the last several years. Sure you can retire with this sort of nest egg, but even if you live in a low cost location, your retirement will hardly be the stuff of aspirational dreams.

The article neatly summarises the difficulties of getting to be "really rich" (defined as net assets of at least USD7.5 million). Earning a middle class income, saving and investing sensibly for a long period of time won't do the job (even with company matches to retirement plans). This is not exactly news and a little basic maths is enough to demonstrate this. As a comparison, a Barclays report in 2008 defined "wealthy" as USD10 million in net assets.

If you want to get "really rich" the key message is that, absent some exceptional talent (sports, writing, singing, acting etc) or winning a lottery (genetic, marital or other), you need either (i) to earn exceptional income (being a top end earner is a field like law, medicine, accounting, banking etc) or (ii) to take a lot of risks (using leverage) or (iii) to start your own business. This is consistent with my own thinking back in 2006 on getting to UHNW status.

While the reality of getting "really rich" is nothing new, its worth a reminder. For most of us, if you want to achieve more than common millionaire financial status and you are not earning an exceptional income, then your choices are largely limited to using leverage or starting your own business (or both). Since it's not going to come to you, the only way its going to happen is if you get out there and do it yourself.

Two additional thoughts:

  • the longer you leave it the harder it is to break away from the seemingly comfortable and secure middle class lifestyle. As your career progresses and you start to accumulate at some assets, possible start a family, the opportunity cost of taking a risk (the cost of failure) increases. In some respects I regard the failure to get off my butt and start a business as one of life's failures;

  • if you are going with the leverage route, the best time to do is is when "there is blood on the street" (attributed to Nathan Rothschild). Buying real estate (or any asset for that matter) on leverage with positive cash flow at a time when the world thinks it will never stop falling has, time and again, been a wonderful way to generate wealth. I give myself more credit here than I do on the entrepreneurial front.

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