When it comes to creating wealth, it’s pretty simple. We can either save or create our way to wealth.
To save our way to wealth, it’s simple math. To retire in 40-50 years, typically just requires someone to save around 10% of their income and get around a 7-8% return. If someone wants to retire earlier than this, then this typically means that they need to save more money and not spend that much money outside of basic needs.
Someone who wants to get to $1,000,000 (which could conservatively generate $3,300 in monthly income for the rest of someone’s life), would need to invest $5,000/mo at a 10% annual return for 119 months or basically 10 years.
This path requires discipline with saving and not spending that much money that causes them to go into debt and to have an income where they can save $5,000/mo. To generate this income in order to save, people typically just trade their time for money and have the skills required to generate that income. This is the passive approach.
The other way is to create our way to wealth by learning to create a product or service that could be sold and generate earnings that can be saved or sold.
When it comes to selling a product or service, it’s going to require a lot more work, where a business owner is going to need to know the following skills or learn how to delegate them.
Skills Required To Create Wealth
- Innovation
- Operation
- Marketing
- Branding
- Sales
- Financial Management
- Legal
- Taxes
- Technical Skills
- Communication and Negotiation
- Leadership
- Project Management and Planning
- Delegation and Time Management
- Problem Solving
- Networking
No one is born with all these skills, but someone can spend the time to learn these skills by investing in themselves. If we want to focus on Peter Drucker’s definition on the role of a entrepreneur, they are responsible for two tasks. Innovation and Marketing. Everything else should be delegated.
What's Required For A Successful Business To Bring In Customers
To create a successful business that brings in customers, it requires three things, technical skills, marketing, and branding. And the ratio of creating a strong business is not evenly spread across these three areas, it’s this:
- 40% is marketing
- 40% is branding
- 20% is technical skills
This was founded by the Coleman Research Group, and shows that just focusing on the technical skills is not going to make someone successful with creating wealth. The “build it and they will come” approach only really works when something is ten times better than all it’s competitors.
So marketing is the thing that someone has the most control over in doing but the least amount of control in the outcome.
It’s also important to increase one’s technical skills because this can help with delegation and innovation.
The branding piece is basically what people say about the business when the business is not around. Having the right brand will come from having a focused message about what is offered and not letting people down with the experience that is promised.
The Math Behind Saving Using the Passive Approach
The median income for a household in the United States in 2020 is $61,937. If someone wanted to save their way to keep this level of income for the rest of their life, they would need the equivalent of $1,548,425 in assets (not adjusted for inflation). For most people this will come from social security and an investment vehicle like their 401k or IRA.
For social security, this household would need to pay 6.2% of their salary to generate a monthly social security payment of $1,941/mo at age 65. This benefit is the equivalent of having $582,300. And generated a 6.26% return.
So the remaining $966,125 would need to come from savings. If someone was to average $461.90/mo for 43 years, at a 7.5% rate of return (5.5% real rate of return after 2% inflation), this would take them to $966,125. This is about 8.95% savings rate.
If someone loves their job, then this is a fine life, but according to a Gallup poll, 31% of folks are engaged in their job. So 43 years can be a long time to save if someone is unengaged in their job.
The Math Behind Creating
Now it takes the average millionaire 11-15 years to make it in business, but if some is looking to create a lifestyle that is $5,000/mo, then it requires them to either sell a product or service until they reach $1,548,425 or they can sell a business that is generating a certain amount of revenue a year.
If someone is selling their book of clients, they typically can have 2 to 3 times their revenue. This is because the clients have a relationship with the person and not everyone is going to stick around. It is also a lot of work to onboard everyone.
If a business is generating $774,212.50 in revenues in a heavily relationship based business, they can probably sell at two times revenue, and can making the $1,548,425. And their revenues would look like this:
- Have $6,451.77/mo in recurring revenue from 10 clients
- Have $3,225.89/mo in recurring revenue from 20 clients
- Have $1,612.94/mo in recurring revenue from 40 clients
- Have $806.47/mo in recurring revenue from 80 clients
If a business had a service that was less relationship focused like laundry service to businesses in the local area, they are more likely to get a bigger valuation because the contracts are more likely to be renewed for a while as long as management and the company can ensure service doesn’t dip. This would be on the new team coming in.
So if a business was just earning $387,106.25 at four times revenue, they would generate the $1,548,425 and would look like this:
- Have $3,225.89/mo in recurring revenue from 10 clients
- Have $1,612.94/mo in recurring revenue from 20 clients
- Have $806.47/mo in recurring revenue from 40 clients
- Have $403.24/mo in recurring revenue from 80 clients
Less money is required in this scenario but there could be more competition.
There is money to be made in any industry, but the key just look at what strategies are needed to become successful and then following through on those strategies. And success is not guaranteed either. People can do everything right, but then something like a global pandemic can happen and wipe out all the gains.
But if someone takes right steps, they can minimize a lot of these risks and create their way to wealth faster.
Another way to create your way to wealth is by selling a product in the following way:
- Sell a $1000 product, 1,549 times
- Sell a $500 product, 3,097 times
- Sell a $250 product, 6,194 times
- Sell a $125 product, 12,388 times
- Sell a $62.50 product, 24,774 times
This path has it’s own obstacles with logistics and placement of the products. Info products also seems to have great margins, but requires a lot of marketing and branding.
If someone was to start from scratch at $1 and wanted to get to $1,548,425 in ten years, they would need an annualized return of 315.90% a year, which is 26.325% a month, or 6.075% a week.
Now this amount of a return is not an absolute truth but gives the idea that if we work six days a week on our craft and ourselves and just improve 1% better every day, in ten years we can create the wealth we desired and didn’t have to save.
Now there are risks associated with this path, but it also gives someone the most control over their future.
This will require someone to get one percent better every day, and be prepared for the upcoming challenges of being a business owner and managing that risk.
If someone is not properly managing their business cash flow, over leveraged, or taking on too much risk, then the first downturn is probably going to put that business out of business.
Breaking Down The Required Business Framework To Be Successful
James Altucher has a really good episode about the three things required to become successful in a business, which are understanding the domain, the field, and having the right skills for the job.
If you were to look at online delivery, Amazon has done a really good job at mastering this industry and it’s because they’re understood the field, the domain, and had the skills to make it happen.
When it came to the field, Amazon saw that a lot of other companies tried to offer free shipping on products sold, but they typically went out of business like pets.com, which did pet food and supplies and Webvan who did grocery delivery. Basically every product was sold at a loss. So Amazon had to figure out a way to become very economical, or be able to handle losses until things grew into a more stable spot.
So they created Amazon Prime. People who got Amazon Prime spent more money than someone who didn’t do Amazon Prime. The membership fee also gave Amazon the injection of cash to offer free two day shipping. Amazon could also see what it’s competitors were doing and see what the best technique were to adopt or improve on. They even bought the company Zappos so that they could gain their skills of online delivery and helped sped up the learning curve.
For the domain, this is the equipment and personal required to make things successful. There are a lot of different steps that need to be required to offer shipping and Amazon needed to make sure the warehouses and drivers were available to handle two day shipping. This is the reason why Amazon started building big warehouses in different parts of the United States and invested a lot into logistics, so that two-day shipping could be done at a lower price. There are other things that need to be done, but here is the general idea of how domain works.
The last piece is skills. The management team of Amazon needed to look what was the best way to lead and manage a project like two-day shipping and they had the human capital to get it done.
If a business can lock down the domain, field, and skill set, they just increase their chances of creating wealth. Luckily for us we can do great in three areas if we choose to get one percent better every day.
The Investments Into Yourself
When it comes to personal investments, I would say there are two areas that people should invest their time and money into. Their human and social capital.
The human capital comes in four different areas.
- Physical Self – This will give you the energy you need to handle your day
- Mental Self – This will help your decision making and being innovative
- Emotional Self – Helps over come imposter syndrome, holding onto grudges, moving on with life, and not let yourself get in your own way
- Spiritual Self – Help you understand who you need to be in life and where you should be focusing your energy
Working on these areas every single day will allow someone to grow one percent better every day and allow them to grow their business. The key thing is to be patient with the growth and not try to do too much too soon.
The other area is working on your social network. It’s better to have friends than to have money. If you can find a friend with yacht, it’s better than owning a yacht. Friends can help you when you’re at your lowest as well. Focus on creating a great network and becoming successful in business will be a lot easier.
Friends can also give insight and guidance on what to do since it’s best to learn from the mistakes of others than to make the mistakes yourself.
A really great course on networking is Jordan Harbinger’s course, which can be found here.
Life Is About Choices
Whatever path someone chooses for wealth, is up to them and if someone doesn’t make a choice to save or create, they still made a choice for the future. Is that the future that they want, is something that needs to be explore.
When it comes to wealth, we can either save our way towards it or we can create it. Or do a combination of both. To have wealth means that we have to make an investment into ourselves, which can generate the business or career that will allow us to save or create.
Hopefully, now you have a clearer idea of your options for the path that you should take.
Resources To Assist In Creating Wealth
Please do your own research or consult a professional before you make any changes with your financial plan.
