By Dr. James M. Dahle, WCI Founder
[Update April 2019: This post was originally written in 2015 while my wife and I were working on our second million. As discussed in a post later that year, our second million is now well in the rear view mirror and at some point in 2017 or 2018, we became financially independent. In some ways I miss the hard work, discipline, and concentration it took to hit a net worth of $100K. Now our net worth fluctuates by that much on a particularly bad day in the markets. While compound interest certainly accelerates the wealth-building process, there is a lot more to it, which this post discusses.]
In my first book, I wrote about how my wife and I became millionaires just a little over 7 years out of residency, despite having an average income of less than $180K for those 7 years. ($180 * 7 = $1.26 Million if you're curious.) I recently thought about writing another book titled The Second Million, but I really couldn't come up with enough to fill a book. However, I did manage to come up with enough to fill up a blog post. This is it.
The media is filled with complaints about how the rich are getting richer, and the poor are getting poorer. Income inequality and all that. Don't get me wrong, income inequality is a problem. Like health care, it is complex and difficult to solve. I spent an entire ski day with a friend this winter trying to solve it without success, 7 minutes at a time while riding up the lift. But the main problem with income inequality is that the poor are getting poorer, not that the rich are getting richer.
The reasons why are complex and difficult to solve and involve inequality of education, inequality of opportunity, unfair markets, corruption, inadequate government regulation of certain aspects of our economy, greed, laziness, and differences in work ethic.
I'm not going to debate or try to solve this serious issue in this post. What I am going to do in this post is discuss why it is completely natural, even without corruption or inadequate regulation, for the rich to get richer.
It took me (together with my wonderful wife) 38 years to become a millionaire, about 18 months prior to this post being written. I figure that second million will take about 1/10th as long. We're already more than halfway there. Where did all that money come from? Several places–working hard during my peak earnings years in a successful medical practice, earnings on our investments, a business I started on the side, a book I wrote about that first million, real estate appreciation, paying down some debt, continuing to save about 40% of our post-tax income, etc.
We make more, spend more, give more, and save more every year. While I technically haven't yet made the entire second million, I've made enough of it that I understand why the first million is the hardest, and why the rich will always get richer.
The 6 Reasons the Rich Get Richer
#1 A Good Job
Most people don't become millionaires without a decent job that provides a good income. That might be a job as a business owner, an engineer, a doctor, a lawyer or something else. However, it is not a job managing a McDonald's restaurant, mowing lawns, or checking people out at the library or Wal-mart. People with those jobs don't typically become millionaires. At any rate, most people working on the second million still have the job that got them to the first million, and that's one reason the rich get richer–they earn more money!
#2 Learning the Rules
However, another important reason the rich get richer is that they know the rules of the game. I had an interesting chat with a relatively poor man in an unfortunate situation recently. He felt the game of life was rigged against him and that the solution was to take all the wealth that “those rich guys” have, and split it up evenly among everyone else. I do not doubt that within 5 or 10 years of that event, that we would all be more or less back where we started in the process.
The rich are rich because they know how to get rich and stay rich. They understand how money works. They can do basic math. They know that it is better to get interest than pay it. They know that leverage works but works both ways. They know the difference between assets and liabilities. They know how the tax code works and how the business world works. They know that discipline in spending matters.
How can you win the game without knowing the rules? You can't, not without extraordinarily good luck combined with extraordinarily good advice.
#3 Appreciation
Plenty of great adventures whether you are still getting “back to broke” or are working on your second million.
While accumulating that first million, most people generally acquire some stuff that will appreciate in value, like a home, rental property, or even businesses. These items don't generally become worth less over time, and that appreciation continues to increase their wealth. Meanwhile, the poor don't own anything that appreciates. The only increase in anything they see is due to inflation, and the only way inflation helps the poor is by decreasing the effective interest rate on their debt. Guess what? It does that for the rich too!
#4 Education
Perhaps the best way to boost people out of the lower class is through education. Well, most of the self-made rich have already got it. It might be self-acquired through years in the business world, but it more likely involves years of study in college, professional, and/or business school.
When I was in college, I heard Mormon leader Gordon B. Hinckley say, “The world will largely pay you what it thinks you are worth.” I took that advice to heart, and it has made a huge difference in my life. Make yourself worth more by learning something that few other people know. Earn more by doing things that other people aren't willing or don't know how to do. For example, save half or more of your net earnings for a few years after residency. Most doctors aren't willing to do that. Be one that is.
#5 Capitalism
This may be the most important reason why the rich get richer. Not only are they earning money with their time/work, but they are also earning money with their money. If you have an $800K portfolio, it's like you have 800,000 little employees each busting their butt 24/7/365. Sure, each of them might only make a nickel or a dime every year, but there's 800,000 of them! Those dimes add up, and a much bigger chunk of that second million will come from investment earnings than the first million.
#6 Entrepreneurial Mindset
Many of the more well-to-do are business owners. Owning a business causes you to think differently; you develop an entrepreneurial mindset. All of a sudden you start seeing businesses everywhere, both real and potential. It is a rare week that goes by that I don't think of two or three businesses I could start or ways to increase profits in the businesses I own. Sure, most of them are loser ideas or would require more time and effort than I'm willing to put in, but when you're thinking about dozens or even hundreds of them a year, eventually you stumble onto a few that are both sufficiently interesting and profitable.
There you have it. My thoughts on The Second Million. Money might not bring happiness, but it sure can relieve a lot of misery. Want to be skinny? Do what skinny people do. Want to be rich? Do what rich people do.
What do you think? Has your wealth started to snowball? What were the big factors that led to it? How long did your second hundred thousand or second million take compared to the first? Comment below!
the rule of 72 and compounded interest really is the 8th wonder of the world
critical to save early and often
remember when I hit 6 figures and then off to the race track-money grows quite well if it is invested prudently and passively
Great post but for one item. The poor are definitely NOT getting poorer. By almost any measure, the poor of today are a lot better off than they were 20 or 30 years ago, and that is true pretty much anywhere in the world except for the totalitarian and anarchic portions of the globe. The real issue is that the wealth distribution is flattening and migrating to the right so that 1) on average, everyone is getting richer; 2) the rich are getting richer faster than the poor are getting richer; and 3) the whole distribution is flattening out and becoming somewhat skewed towards the poorer end of the spectrum. People are unhappy with the way things are going not because their own situation is getting worse, just because it isn’t getting better as fast as your situation is.
Don, where did you get the data from?
This site has some amazing interactive maps. This link will take you to democratization but you should look at the economics, education, etc…and see how the floor on poverty is being lifted worldwide and all the progress thats been made. Lots of neat stuff there.
http://ourworldindata.org/data/political-regimes/democratisation/
No, everyone cant be rich, but we can certainly lift the floor on what is considered poor and be much better off overall.
click the link to the home page and see the direct link to poverty, world health, etc…great stuff.
[Not too political, but I promised I’d delete all the political comments, so this one gets deleted.]
[Again, not too political, but gotta delete.]
Wealth is very highly concentrated in our country that could lead t more serious problems
Is not great that hedge fund managers, a few who made a billion in a year, only pay capital gains rather than earned income
It’s never bothered me that some (Mitt Romney being the poster child in recent presidential elections) pay only capital gains rates. They already paid marginal rates on most of that money at some point in the past. Taxing it at a higher rate would only discourage savings and investment. Not sure I would work so hard to live below my means and having something to invest in our economy if that investment could 1) lose money or 2) gain but incur taxes of 40-50%
I agree with both. Hedge fund managers have nothing to do with capital gains taxes for regular people, and I agree that would put a huge damper on investing. What Ken is referring to is called the “carried-interest” loophole allowing fund managers to claim all earned income as capital gains with very little if any skin in the game. They can make a killing in an AUM type model (usually a 2/20) but instead of being taxed as income its capital gains, which is criminal really.
It must be nice to make enough money to have a law written for your tiny specific occupation.
It is funny to see how quickly the net worth numbers can jump. In my first year out of residency, my retirement account passed 50k and the equity in my condo went up by 50-100k. All of a sudden, I’m 100k or so richer. Or you could say 100k less poor since I owe around 190k in student loans. But since I have such great credit and income I refinanced my student loans to 5 year repayment at 1.9%. I recognize the poor pay more like 10-20% interest to borrow money (the loan on my ford is 0%). Numbers 1-6 above all apply to me. My main concern is to try to stay grateful for all that I have and will be allowed to achieve in my career. I think I will be happier and more giving that way than any beach house or boat could make me.
The poor are definitely not poor in this country. But the mindset of the poor will keep them there forever. Today’s poor feel they must have an iPhone, a nice car, and a big screen TV. Any capital is usually wasted on trinkets and debt.
Also, our government keeps making it easier to be poor. Being on the government dole is easy and creates a decent life with no incentive to break free. Today welfare is either given or not. If a person earned a few extra bucks, welfare is removed. Therefor there is no incentive to earn that extra money. If welfare was gradually decreased based on income instead of a single yes or no system, going to work now has some benefit and provides incentive for a better life. Unfortunately no government official is interested in cutting welfare. They would get crushed by the people. This is the reason why the number of people on the government hand out is on the rise, and it will continue to rise.
Benjamin Franklin once said
“When the people find that they can vote themselves money that will herald the end of the republic.”
Since that will never change, the poor will continue to increase. Throwing more money at them will not fix the problem.
Wow…turning a post about earning your second million into a political diatribe! Nicely done and I hope you feel a little better now.
BTW, your Ben Franklin quote has been (erroneously) credited to everyone from De Tocqueville to most of the Founding Fathers. Hey, can we go back to the subject at hand?
It’ll be interesting to me to see my monthly net worth trajectory change once I buy a house (which I am currently building). As a renter saving up for down payment my net worth is increasing by about $10,500 per month. With mortgage payments going partially to principal but also with increased house-related spending I anticipate this rate to increase even without accounting for real estate appreciation.
All of these factors relate to being capable under our economic and political system. What needs to be fixed is crony capitalism and corruption in government giving advantages to some. Income inequality, as with anything, is related to normal statistical distributions. It is too wide now but if actual capability is the reason nothing needs to be done. As is always correct narrow the distribution and move it in the direction you want. Sometimes the only way to do this is to change the composition of the group. With parts in an factory this is easy, with people almost impossible.
Don’t forget that the stock market has been cooperating–heck, all the markets except commodities–which helps the asset column look pretty good. I wonder if it is useful to look at doubling times as opposed to time for each million?
I hit my first million at about the same age you did.
But then I had 2 kids within the last 2 years, my wife stopped working as a teacher, and my income has stayed fairly flat, as has the real estate in my area (home probably would sell for about what I paid for it back in ’04).
So after hitting the million last year, I’ve literally made zero gains.
The path to 2 million to me seems pretty daunting given that I’ve both added expenditures and decreased income all at once.
And of course it’s not a straight line.
New intern and working on my first 10k but a thought of mindset at this stage. HR gave a talk on bennies including 403b with 5% match after 1 year at which point I mentioned how generous the plan was including excellent investment options and all fees paid by hospital. One guy quipped “why put money in that you can’t take it out for years!?” I didnt’ even know where to begin to answer that–so I didn’t! This was the same guy who mentioned he likes his toys (boat and new GT mustang). To each their own. I like my 25% pre-tax savings rate.
Attendings don’t have to be the only ones with a high savings rate.
The best posts IMO for WCI are the ones like this that focus on perspectives. I find the ten part series on insurance very painful (but I’m sure useful for many). I really think this is what most docs need, perspectives on money. I know I did and still do, like an addict that needs to meet with the group and get reinforcement to stay clean. Its all about keeping the right perspective and making good decisions to achieve wealth and financial freedom. I made all the classic mistakes but a few years ago decided something was wrong when I was making 700-900K per year and going deeper and deeper into debt. I had no perspective on money. Its incredible how foolish I was. We were living on the monthly payment model and getting buried in debt. I was just out of residency (it was long indeed) and we were out of control with spending.
With a high income and excellent resources like WCI, its easier to turn the ship around. So I did. I sold my custom built house for a huge profit and paid off all my debts. Like starting clean. Then I started to pay myself first and invested in dividend-paying equities through a very reputable and conservative adviser (paying 1.5% AUM). I actually made a budget and started thinking before buying. I got my wife onboard as well with better decisions. Our lifestyle in fact did not feel any different in the new reality.
Three years later and the difference is staggering. At my current savings rate and with a 7% return my investments will grow at a rate of 1 million dollars per year once I’m 65. Incredible. So yes the first million is tough and the second is easier. The 6th and 7th will come faster than you can spend them if you take a long view and work hard for a long time. I will likely retire before I get to the 1M per year growth rate but who knows, would you work another year for a 1M dollar bonus? One option would be to reduce the workload and make enough just to pay expenses and keep saving which would be easy at that point when the 3 kids are gone and house is paid off.
Its really interesting to me that all it took was a new perspective on what I was doing and some smart choices. On an MD income your lifestyle doesn’t even need to suffer to make it all work. There is no excuse really. I am grateful for WCI and others (like the many posters) who provide such perspective and allow me to keep learning and most important, to stay on track. In twenty years I’ll see you all on the beach – drinks are on me.
Great post CV surgeon. It sounds like you got your financial house in order prior to 40. It is easy to get sucked into an expensive lifestyle. It sounds like you will have the option to work less prior to 65. I concluded that I had enough to stop OB and coast on just GYN when I was 56. I just let all my dividends reinvest and live off a 3 day per week income with my paid for house. !.5% AUM is high but if this person helps keep you on track then the money is worth it.
I agree 1.5% is high for AUM. But I started with a very small investment and my guy usually only takes high-net worth people with at least 1M invested. So I was ok with this to start because 1.5% of a small number is still small. But I have an agreement with him that as it grows we will get it down to 0.5%. Yes, I could do it myself in passive funds but I know myself and I know that I will screw it up. So its worth the money IMO. I keep a very close eye on what he does and I’m learning as I go. At some point, maybe in 10 years or so I may consider just managing it myself. Once I retire I will pay no fees at all on my portfolio as I own the equities outright.
There is much debate about using an advisor and paying fees. At the end of the day he will keep things on track and keep me away from harming myself – a price worth paying. I think its much more important if you can only invest very small amounts. For example, retiring with 500K vs 300K could mean the difference between being able to retire at all. For most people on this site we are talking 2M vs 3M or something like that and it won’t prevent you from retiring by paying a 1-2% AUM.
I think knowing yourself is important. If the advisor keeps you from selling in a down market and encourages you to invest in a diversified fashion then the fee is worth it.
It sounds like you have done a great job getting your financial situation turned around. If your advisor is helping you stay the course than 1.5% is a reasonable price to pay.
Hatton – I think its great to have the option to do the kind of medicine or cases you want once you are in your 50s. I have been thinking the same thing. Maybe at 55 stop taking on-call or find an interesting admin position – the great thing is to have the ability to change your role and not be stuck doing really tough work for too long and getting miserable and broken in the process. I see it all the time, a 70 year old surgeon coming in at 3AM to do an emergency surgery. It isn’t good for anyone, including the patient. Most do this because they need to financially and some because of ego and identity issues. It won’t be me!
You are one of the rare people who planned properly and now you are in control. Good for you!
Yeah the back, neck, and fingers do eventually start hurting. I know a couple of just gyn guys still operating at 70 and 80. They both are financially secure but just enjoy working. I also know several people who are 60 and would love to quit ob but they just can’t financially do it. Planning early, investing early and avoiding lifestyle creep will get you to the finish line on your terms.
Was it hard to sell your dream home? How did you bring your wife on board. I have the reverse problem, we live in a modest house, however it is difficult to entertain in it as w two kids, toys and stuff get around. We have thought about adding an extension, but decided our priority was to save for retirement.
I live in a boom and bust town so selling a big house can be easy or impossible depending on timing. The good thing is we made the decision at the right time. What I did was calculate exactly the profit I would need to make to get clean. I decided to list the house and if we got the number, we would sell. If not, we would stay and make it work. Thankfully we got the number and started over. It was tough at first to get the wife on board but there are ways to convince them. “So honey, when are you planning on going back to work so we can start paying off all this debt?”. That can be a very effective tool.
At the end of the day we sold, restarted, and we are building another custom home. At the right time I could probably sell again and make more $. But this time I’m in good shape financially and I want to live in this great house, raise my kids, and die on the back deck while drinking Macallan 18 scotch. My kids can have the house. Its on a great property that will likely be worth a lot more in 20-30 years. Or I may sell when I retire and use the money to buy two smaller homes with one in the sun. Nice to have options.
Selling and moving is disruptive and difficult. We had to rent and that had its issues. But it was worth it for the long term benefits. It was all a calculated risk but it paid off.
I don’t think you need a really big house (mine is too big but YOLO) but you do need a house that you can live comfortably and entertain etc. I think with a wife and kids and a busy career this is a great investment for your whole family. You won’t make huge money on your house unless you are lucky but its a great investment in your lifestyle and happiness. There is a certain pride a daily has in their home and I don’t think its silly at all. I simply figured out how much I needed to save every month for retirement and then calculated what I could afford for a house. If you can go bigger do it – you can over-save and over-invest as well and I believe strongly in consumption smoothing – lets face it, we see people die in their 40s and 50s all the time at work. I don’t hoard my money or take any pride in how much I have saved. Its just a tool. But you need to save enough and enough is a tricky business to figure out.
why does a guy who is working and making north of 700k/yr need to invest in dividend paying funds? Not sure I get the strategy
Equities that pay dividends – not a fund. Very common and safe approach to long-term investing that has a very good chance of returning 7%. Not sure your income level changes how you should invest does it?
It’s definitely a snowball effect. The sooner you start making the snowball and the more effort that is put into getting it going early, the quicker it starts to roll on its own and the bigger it gets. Paying down debt and having equity in your home definitely is a great starting point, however, for the snowball to move and grow on its own, the assets need to be a value producing assets. The best kind of income is passive income. Some business owners are great at this, they get the business set up in a way that it runs without them, they take vacation and the money continues to come in. As physicians, if we don’t see patients, we don’t make money. Unless you start up your own business like WCI, the next best way to make money is to accumulate income/appreciating assets early and let them grow on their own. Make the snowball as big as you can, as early as you can and then let it do the work. It took me 37 years to get to the first million, 2 more years for the next million, and less than 1 year for the next. I’m sure there will be setbacks along the way and the snowball will melt at times, but it is definitely working harder than I am at this point and doesn’t take much effort on my part to keep it rolling.
Snowballs do melt. My portfolio lost greater than 1 million both in 2000 and 2008. You have to recognize that this is going to happen again. View it as an opportunity and harvest tax losses then you will be fine.
An engineer chiming in here. Your points are excellent analysis!
I graduated from college at age 22 with a net worth of about $200. Hey, it was positive!
It took me 19 years to hit $1 million. Then about 7 years to hit $2 million.
On track to hit $3 million about 4 years after that.
A good #7 might be understanding the power of compounding, but that probably would fit under #2 as well.
The strongest argument to the guy who “felt the game of life was rigged against him and that the solution was to take all the wealth that “those rich guys” have, and split it up evenly among everyone else” that it HAS BEEN ALREADY DONE in 1917.
In the country that no longer exists called the Soviet Union. Result= millions of people dead from starvation/deprivation, execution by the firing squads sent by the “equality advocates”, frozen to death in Siberia’s Gulag for the sake of ” equal society”. The rest had an utterly miserable lives for 70 years.
The best story that today’s advocates of ” taking from the rich and splitting it up” are not told, that in the Soviet Union employment was mandatory (if you don’t have a job (any job) you will go to jail. The State will give you a job if you don’t have one- and guess what- it may be a job in a chemical factory or a power plant.
[Insert political comment about democrats that will be deleted by WCI here]
Lol! 🙂
Yes, “the first million is the hardest” After that wealth grows easier and quicker for all the reasons you mentioned. There may be another reason too but it isn’t a clear idea in my head yet. It may be conservatism or loss aversion? I know how hard it was to make the first million. I want to grow wealth but not take risks that would lose the bulk of capital. The volume of income generation starts compounding faster with each million reached. It is the opposite of what is felt by the typical family with credit card debt, car loan, mortgage etc who feel to world closes in faster on them each year.
1% fee or expense ratio OR ADVISORY FEE equals ONE MILLION DOLLARS
OUCH!!!!!!!!!!!!!!!!!!!!!!!!!
stick with vanguard DIY
My concern with wealth inequality is as the rich get richer and middle class incomes remain stagnant eventually more and more people start thinking like the man mentioned in the blog who want to take all from the wealthy. Eventually society reaches a tipping point. I think Bernstein alludes to it as “the peasants storming the ramparts” or something like that. I don’t have good solutions to this dilemma either, though I do believe raising the minimum wage would help somewhat. It has not kept pace with inflation. Not even close.
That solution has its own issues. All you have to do is carry it out to its logical ends. For example, why stop at $15 an hour. Why not make it $200 an hour? The reason why is it causes jobs (and the businesses that provide them) to go away. It does the same thing from $10-15 an hour as it does from $15-200 an hour.
At any rate, an interesting topic, but not really the point of this post. If people stay polite, they can continue to discuss it here, but if it starts generating more heat than light, I’ll start deleting comments.
I think a lot has changed since the old times, when people had better health insurances or paid less or a lot less for it. They had better benefits and retirement accounts. How ever all these luxuries cant be afforded to them now.
At the same time the top level executives salaries have gone up. And the way they can get more bonuses or further increase their salaries is to cut more costs. Perks and vacation time is one of the first things to suffer beside personnel numbers for these CEOs to make more money.
Heck just look at my own MD self, my salary has not kept pace with the CEO salary of my mid size hospital.
I think minimum wage increase was inevitable. No benefits for them, at least they get more money upfront.
I also think if a company has a loss, the CEO should not be rewarded for it. They should make board members a non paid position.
Read some articles on Twitter if you want to see a c-suite/board that is egregiously sucking value out of a company for their own profits. Its wild, but happens.
Everything is a spectrum, and a tradeoff. We have to find out what provides essentially the “best of both worlds” and the lesser of the evils at the same time. Its daunting.
[Well-reasoned comment deleted, sorry, being pretty strict on the political stuff on this one.-ed]
However, this isnt the point of the post and I’ve rambled on.
Lol, no problem, this aint the place.
Have friends that went to New Zealand a couple of years ago. It was a hot day so they looked around for an ice cream parlor, but couldn’t find one. When they asked, they were told they had all closed. When the minimum wage increased to $15 a lot of the service businesses closed. They could only find ice cream from vending machines.
[I’m never going to post again if I have to go through clicking on all the roads pictures….]
Yea, I noticed the other day those pictures are back again. I thought I had those turned off. I’ll have to look into it again.
All right. Captcha is completely off. Let’s see how many blog spam comments I get this weekend and we’ll see if I have to turn it back on.
I am always fearful of the real estate market, especially since the last meltdown a few years back. I have seen numerous people still fighting to regain some of their equity in their personal homes and rental properties. I even live in a very-fast growing area (Raleigh, NC), with tons of good growth (Tech, Healthcare, University). I bought my house and only did 5% down at the time (as advised by the lender). I got a good rate on a 30-year note at 3.65%; and bought a very manageable mortgage compared to our income. We pay an extra $3,000/year in Principal payments, but the tax value of our home has barely increased in 4 years. I’m talking maybe 1% over that time.
We won’t be in this house forever (reason for 5% down)- I do plan to 1031 the equity into our “permanent” home that we will build, or rent this house out. But I don’t really have the time or desire to be a landlord, or pay someone to do it.
I’ve considered commercial property as good investments, if you can afford the 20% down. I’ve looked around- but a goal would be to quickly pay off the note, and then cash flow in 10-15 years. I’m just hesitant to rely on a very volatile value (that doesn’t go up every year), and the ability to have a tenant at all times.
Any one pursue commercial properties with success? I just want to diversify from equities and looking at options. I’ve even considered buying a commercial fishing license and “leasing” that!! They don’t issue new ones, but are in high demand on our coast.
Real estate appreciation is definitely lumpy. Some years have a lot, some have little, some are negative. Over the long run, on average, it is suprisingly low without leverage. Land appreciates at the rate of inflation or just above and the building depreciates.
I agree. I think “land” in it’s purest form can work wonders for a return on investment, but again it’s location, location, location. And time.
It’s always a fun chase to get to the $1 million mark- we are at almost $350k and I feel good with that in my early 30’s. I’ve had to force our habits to live modestly, but still enjoy life. My wife hated the amount of money we were saving and investing at first until she saw the results. Now she’s bought in- I think that is key too for couples. If one is a reckless spender and the other disciplined, it’s very difficult to get to that goal and beyond. I’ve seen dentists and other private practice physician’s retire from medicine in their 40’s, and live off residual income. That’s a good place to be!
Agree with WCI. Hard to make money on sfh, they require so much constant upkeep. There is usually better returns with multifamily units. Some people have done great with commercial real estate or so I hear, but I’ve also been hearing some buzz about it possibly being in a bubble (depends on locale as always) right now iirc.
On a side note, that your tax value hasnt increased is only a problem if thats reflective of the comps in your area not increasing at all.
I’ve also been thinking about these issues as I strive towards my first million because I’m currently making my way through Thomas Piketty’s Capital In the Twenty-First Century (which I would recommend to WCI).. I think the single biggest factor is participation in ownership. Well-compensated workers have the ability ( when disciplined) to save larger chunks of money which they usually use to purchase ownership (home equity, real estate, stocks, new ventures, etc.). And the simple fact is it’s hard for poor people to save and sequester their wages in any meaningful way. Not a week goes by that I don’t hear about someone around me having a problem like an expensive repair or medical bill and I think of how minimally disruptive the same thing would be if it were to happen to me. My family has had some rather large medical bills this year and it’s been little more than an annoyance. Participating in ownership just isn’t an option when you live so close to broke.
While it is obviously easier to save and invest more on a higher income, it’s important also to realize that how much you earn is at least partially in your control, how much you spend is even more in your control, and ownership of stocks and index funds is available with a very low level of assets. Luck is involved, but so is hard work, and anyone who doesn’t recognize the importance of both isn’t going to arrive at a reasonable solution to issues like this.
Agree with most of the above comments.
The first million is undoubtedly the most difficult million to accumulate. It takes the most discipline, patience and time.
After the first million, each successive million comes easier and earlier. This is because it is no longer just you saving and investing. You now have a good friend who is also saving and investing along side of you. His name is Compound Interest. Reinvested dividends and capital gains will propel your portfolio forward with amazing speed. That first million serves as the inertia or critical mass where Compound Interest really helps. Each million will come sooner and sooner due to this phenomena.
I know as I have accumulated over $8 million. The money I saved early in my career, creating that initial million is/was the workhorse of creating the nest egg I have today. I am amazed at year end to see what Mr. Compound Interest has contributed to my nest egg.
I’m disappointed by the comments showing: contempt for the poor; reductio ad absurdum (minimum wage $200/hr ); misconceptions about economic mobility; missing commentary about the rich getting richer because they “manipulate” the rules of the game, etc.. Here are some columns by Paul Krugman, nobel prize winner in economics, which refute these misconceptions:
http://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html
http://economix.blogs.nytimes.com/2013/09/10/the-rich-get-richer-through-the-recovery/
http://www.nytimes.com/2013/09/27/opinion/krugman-plutocrats-feeling-persecuted.html?
http://www.nytimes.com/2005/06/06/opinion/the-mobility-myth.html
M. Cort MD
All right, we’ve now heard from both sides of the political spectrum on the income inequality issue. Further political comments on this thread will be deleted. Otherwise, this is inevitably going to start generating more heat than light soon.
Good Job WCI.
Do not let WCI become political forum!!!
Says the guy who shares a name with one of our nation’s earliest and most controversial politicians? 🙂
Agreed. Plenty of political forums elsewhere.
[Political comment removed.]
I appreciate this post WCI. Trying hard to work out of the debt ditch where compound interest is pulling me the wrong direction!
I have to agree. Early saving is huge. I am 38. We (wife and I) broke 1MM just after my 36th birthday. Hoping for 2MM at 40. I finished training at 31. we have been saving ~100k/year in a combo of tax advantaged and 529 plans. We are paying down mortgage principal at 4k/month. I still drive a starter car. My wife has an SUV for the kids. A sequoia. I’m sure WCI knows why. We are just starting to grapple with the idea of spending a little more. My wife desperately wants a pool, and I am actually starting to consider it. Our youngest is just about to swim without a “bubble” on. By the time we could actually have a pool built, I’m sure she will be swimming. Putting some money into our house while we can use it makes sense. I refuse to lower our savings rate, but I don’t see much need to increase it either. Hopefully I am getting close to critical mass to see the portfolio grow on its own.
John
Good for you finding the balance. I am able to put 6 figures into investment accounts and don’t see the need to increase it too much more either. We spend the rest, mostly on kid activities, vacations, services that I don’t want to do(cleaning, lawn).
Thanks WCI for your posts.
you may already have clarified this in previous posts and I apologize if I have not seen them.
How do u calculate your assets? Do u include 529? Do you include your equity? Do u take in count the what u still owe in mortgage or loans? Thanks for the clarification
Net assets: You include everything House value (appreciated) + 529 + retirement accounts + savings – debts
Retirement accounts: Dont include 529 and primary residence.
Its nice to look at net assets but truly you should look at retirement accounts to see how much spendable money you have.
Also if you really want to be pessimist, you can say 10-20% of my retirement account will be spent in taxes, so only look at 80-90% value of it.
If you want to be really really pessimistic, include inflation value on it (roughly 2% a year) and say what will be the buying power of my money in todays dollar.
On the other hand if you just want to be happy look at net assets even though not all of it can you spend in retirement. As your assets grow hopefully your retirement part of the net assests makes a bigger and bigger chunk of it
I think its best to use inflation-adjusted numbers as it makes a huge difference over 25-30 years. Run the numbers and you will see. People who are aiming for 1M in 30 years might be surprised that its not very much money even though it sounds good.
Yes I’m curious as well. Did you include the boat? It is an asset afterall. 🙂
you should include the depreciated value of your personal property like boats/ cars in your net assets.
I think people do need to realize a net asset of 2 million does not mean one has 2 million in retirement money. Even though its nice to say 2 Million.
You can do whatever you want. That would be a big pain for me to do so I don’t bother.
No, I don’t include cars, furniture, clothing, jewelry, or the boat. I include investments (including the equity in the rental property), the value of this business (I estimate it at 2X advertising income without considering royalties or fees I charge for speaking, writing, or consulting), home equity, 529s, retirement assets, short term savings etc. I include the savings account, but not the checking account. There is no debt besides the mortgages, but if I had that, I would include it as a negative number.
I agree that what matters when planning retirement is only your retirement assets, and perhaps even those should be adjusted for taxes or even inflation. But that’s not what I’m discussing here; I’m discussing net worth.
Although I could sell the boat and with careful budgeting my family could live off the proceeds for a year. 🙂
–For me the most accurate way to look at retirement savings is to only include non-depreciating assets that I won’t need during retirement (exclude: boats, cars, house, etc) and then subtract out all debt.
–In terms of looking at it from the snowball affect, I only look at appreciating assets (include: equities, commercial real estate due to cash flow; exclude: practice ownership, emergency savings)
–In terms of nest egg needed, I assume 3% annual inflation (it has been closer to 2% recently, but historically, it has been closely to 3%) and I assume 3% withdrawal rate (I know monte carlo says 4% is conservative, but I have seen several people suggest that could be too high going forward and that 3% should be used as a conservative withdrawal rate–however, the counter argument would be then that inflation would also likely continue to be low as well and 3% may be too high for inflation)–I’m very conservative with my calculations.
I really like the idea in the second to last paragraph. Wanna be skinny? Do what skinny people do. I don’t know how many times I hear people comment that a skinny guy or gal going for a run doesn’t need to run because they’re so skinny. The reason they’re skinny IS that they run so often!
It’s very similar with money. You’ll hear about rich people getting more money, and others will start to feel jealous and wonder how much more money they need, instead of figuring out how they can make more money themselves. Very good post.