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!
For all those people who have amassed multiple millions. I ask, why keep going? Why keep saving instead of retiring, or simply working less? What is your goal or end game?
I ask because I find myself living a pretty decent life right now on $100K/yr. For a more extravagant life maybe $150K/yr. If $2.5 million will provide a $100K/yr lifestyle, and $3.75 million will provide an extravagant lifestyle, I see absolutely no reason to go out of my way to make more than that. I enjoy my job, but I enjoy it much more when I have plenty of time off in between shifts. At some point spending more time with friends and family is worth so much more than an extra million in the bank.
I am also a strong believer of not giving my kids too much as it breads laziness and an entitlement attitude.
Excellent point! This is very personal. It is great to be in a financial position to be able to not work. That doesn’t mean you have to stop. For example, I’m ‘only’ 48. I may live until 90. I have considered stopping or changing fields, but I continue for many reasons. I may submit a guest post on this sometime but for now: I love using my mind, being challenged, making money, helping people, having structure in my day, mentoring younger doctors, teaching, listening, caring, etc. I love taking vacations and enjoying weekends off but the contrast from work makes it even better. I use extra income to donate to charity and to help family members in need. My thinking along the lines of “never retire” have been influenced by Daniel Lapin (2 books), Stephen Pollan (several books). Our very own WCI wrote a brilliant piece in his March 2015 newsletter which I read often and quote below:
“Personal finance is both personal and finance. I’ve spent a lot of time this week comparing and contrasting two alternative philosophies about personal finance. Both involve learning to be happy with your situation, but they both differ dramatically in how your life is lived.
Exhibit A is what I call the Mr. Money Mustache philosophy. Basically, this is for people who hate their job and would prefer to spend their time doing something else. These folks simply learn to be just as happy with less material goods and consumption. They work really hard, save like crazy, and then retire extremely early to a life of frugal living. It is best exemplified by this quote from the Mustacheman himself:
Your current middle-class life is an Exploding Volcano of Wastefulness, and by learning to see the truth in this statement, you will easily be able to cut your expenses in half – leaving you saving half of your income. Or two thirds, or more.
Exhibit B is what I call the “Find a job you would do for free and never work a day in your life” philosophy. It is best exemplified by this quote from Seth Godin:
Instead of wondering when your next vacation is, maybe you should set up a life you don’t need to escape from.
Basically, find, create, or design a job that really fulfills you and really makes you happy. Who needs to retire at age 30 from something they love? Most physicians spent over a decade acquiring a very specialized knowledge and specialized skills. It seems a shame to simply save 75% of your net income for a few years and pull the ejection handle. One huge benefit of working longer is that you can save dramatically less and make all kinds of financial mistakes and still have a comfortable lifestyle during your career and your retirement.
I suspect that most of us are somewhere in the middle. We’re not willing to go grocery shopping on a bicycle (especially at age 70) but neither are we interested in working into our 70s. But I think there is great wisdom in combining BOTH strategies. Quit spending your money on stuff that doesn’t make you happier (and ruins the planet to boot.) Figure out ways to improve your work environment. Save up some “FU money,” work fewer shifts, take less call, see fewer patients per day, and eliminate as best you can those parts of your job that don’t make you happy. You’ll enjoy your career more, be better off financially due to the improved career longevity, you’ll be happier at home, and maybe we can slow down global warming and save what’s left of my ski season.”
Great post. Agree 100% with the balanced philosophy. Seems to fit with WCI and its why I read the site. I also read MMM just for comic relief. Exhibit A people are fairly common outside of medicine and its really a tragedy. I didn’t start “working” until I was 35 and finished my training. In my 40s I’m just getting more valuable to my patients and colleagues. Can’t imagine stopping anytime soon even if some days and nights can be pretty tough. I’m sure my wife would choke me to death if I was home all the time. The great thing about being a doc is you can do it for a very long time and still be relevant and valuable.
I’m with you. At a certain point, the marginal utility of extra money falls dramatically.
Hitting that 1st million was an amazing psychological milestone. When I was in medical school I thought it would take me decades to reach. I did it in 6 years while still traveling and enjoying life living on $100K/yr. What is interesting is that once I hit the 1st million, I realized that without adding another dime, at some point that million will hit 2 million and then maybe even 4 million. All of a sudden working full time is just not necessary.
Once I realized I don’t need to make that much more money, without changing a thing about my current job, the work has become more enjoyable. I work because I feel like I am accomplishing something valuable. Though I am also starting to consider cutting out some of the things I hate. If I did that, my income will drop substantially. Am I willing to cut it by 25-30 percent? This has been a very hard trigger to pull. I am taxed at about 45%. Every extra dollar I make I only get to keep 55 cents. Is it worth putting up with some of the things I hate for a fraction of the pay?
I don’t have “FU money” yet, but I have “I need to think about it money.” The biggest thing holding me back is this long standing bull market we are currently in. I realize that my first million can drop very rapidly with the next bear market. Although I am comfortable with my asset allocation and that eventual future drop, I am not yet comfortable giving up the extra income because of that eventual some day in the future recession. Maybe I need to wait for that second million.
I know how you feel.
What % of assets of the majority of doctors is in their ret plans?
I would bet 50-75%
Better invest wisely and conserve it upon retirement
Lots of variability there I bet.
This is very variable as some physicians only have $18K yearly contribution limits in retirement plans, while others have $53K yearly maximum contribution. Then those with defined benefit plans may have even more. I don’t think this question matters as much as how much you are saving as a total between retirement plans, and taxable accounts.
For the record, I do not count my home in that formula since I will never sell a small piece of my home to pay for a vacation or dinner.
Greg the intern
Any way that you can contribute twice as much and get the full benefit for each calendar year? That’s what I did as an intern and got them to match two years instead of one despite only working there for a year. As noted, gotta know how the system works to make it work for you.
Good question Jay…but I’m contributing 25% as it is (which is 5x what they’ll match if I understand what you meant). They were specific in saying we need 365 days of employment before matching contributions kick in. I’d love to get around that and snag an extra year! Time to start asking questions about this. Appreciate the tip!
Great post! I love the quote from Jim Rohn… “If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.”
I’m in a similar position and am amazed to see how quickly and reliably our wealth building has started to accelerate now that my husband and I have reached the first million. Nearly every month our net worth jumps due to one or more of the following:
-home and rental property amortization ($30K a year),
-saving 45% of our gross income ($120K a year),
-stock market appreciation/dividends/interest ($34K a year assuming a 5% return on our current portfolio),
-regular boosts to income such as bonuses or employer stock vesting which are saved (variable)
Of course it took many years to get the education and build our careers, accumulate the fist few hundred grand in retirement investments, and save enough to buy the real estate. But now the investments are doing most of the work to simply keep growing. The first million really is the hardest, as cliche as that sounds!
WCI – great post! Like CV surgeon, these are the most useful posts for me. The Big Picture, rather than detail posts (although those are helpful as well). It took my 5 years post-residency to see the light and realize that it wouldn’t be a good idea to be receiving social security checks with one hand and writing checks to Sallie Mae with the other! 1st million by 42, 2nd million at 45, but with the last few days events am back down below 2M 🙂
For most physicians, it’s not hard to become rich, even in these days of ever lowing reimbursement and ever increasing overhead. My father told me that the key to becoming wealthy was to act not wealthy, which is really the crux of what you preach. Like you, once we were well on our way to our second million, we started to ‘relax’ a little bit, started spending more of what we made, etc…but as long as we stay somewhat grounded we will be OK.
There was a study done once looking at post-operative infection rates, when they looked at the infection rates retrospectively, they got one (higher) number, and when they prospectively looked at rates it was much lower. The conclusion they reached was that just the fact that they were examining post-operative infection rates lowered the rate of infections. I feel the same way in regards to finances- as long as you are tracking your expenses and investments, you will be OK.
Great post as usual. I have noticed this effect in my life as well. It is one of the reasons saving aggressively after residency is such a great idea. One of the most financially beneficial things we can do for our children is “seed” their retirement early. Help them by making Roth IRA contributions for work they do when they are in their teen years. If you make a $5000 contribution for them at age 15 (and nothing thereafter), this will grow to $225,000 by age 65 assuming an 8% rate of return (not inflation-adjusted)!
Whether your children will benefit from such a large largess is another question entirely, but if you educate them about finances early, hopefully they will learn the benefits of saving. It could provide them with financial freedom that very few of their peers will ever have.
So,.. I (we) have been fortunate enough to get to the 1st million by age 38/ 39 and now just after my 40th bitrthday we’re at about 1.25 million. A nice figure I am very proud of Here is my rant: It seems like soooo many institutions are expecting their cut of our money and honestly they did nothing to earn or create it. We achieved this so far through my contracting business, my wife is an RN, real estate (investment type & we have a very nice primary residence) and smart/ lucky investments (so far so good).
….. No matter what the platform, or the avenue; local taxes on rental vs. homestead properties, an online platform that was once fee free basically, but then takes a huge cut as it sells to a conglomerate and they bash the common person over the head with “service fees” but provides nothing more. It’s everywhere. Yes it’s greed. It’s business or government monetization but it’s gross. It’s like why does an Uber driver get a 70/30 cut vs. a fair 90/10 cut. The software is built, functioning. Our prison system is even monetized. But on the reverse; the people have created things like Venmo, Napster, $10 or less stock trades etc. If it’s not broke don’t fix it. If it is broke (or seems to GREEDY) smash it to bits and start over. Gordon Geco was wrong and the 80’s were not as cool as the 70’s. Capitalism is fun and it works but once you get over the debt and start moving in the right direction get your money to work for you.
Thank you for this website! I’ve also purchased your book and several others related to investing and personal financial planning, as my goal is to not require the services of a financial advisor. I do hope it is possible for me to be able to manage all of our investments, etc. I am a physician getting ready to finish my gastroenterology fellowship and I’m going into practice (not academics), so I am so thankful for this resource. While you were accumulating your first and second million, was your wife working outside of the home or was it done on a single income? Thanks!
She taught school when I was an intern, but that was it from the time we graduated from med/grad school until she started doing WCI work a couple of years ago.
Yes, you can certainly learn to this yourself. If you have the interest, you can acquire the knowledge and develop the discipline.