A study of wealth involves gaining a clear picture of financial goals and establishing targets based on the habits of the wealthy.
- Target #1 is obtaining financial independence for life by being able to cover all necessary expenses comfortably. Simple as it sounds, 95% of the workers in the U.S. will fail to meet this minimum goal.
- Target #2 is becoming wealthy—enjoying luxuries rather than just meeting basic necessities. A mere 1% of the workers in the US will ever reach this lofty goal.
- Target #3 is leaving a legacy of wealth by passing assets on to future generations. Sadly, very few financially successful people will pass their “wealth mindset” on to their children and assets will be squandered, often dissipating in just one generation.
Defining “Millionaire”. This term is often used as a synonym for a wealthy person, so I want to examine the millionaire concept. It could be just anyone who has acquired at least one million U.S. dollars. Some may be asset millionaires with a net worth of a million dollars or more. (Net worth meaning what you own minus what you owe.) Others may have a million or more in income, so entertainers, sports figures, lottery winners and high paid executive might all be considered millionaires.
In fact, anyone who earns $50,000 a year for 20 years has, technically, touched a million dollars, but could not be called a millionaire. Many who get their hands on millions still end up broke—with neither the assets nor the income to qualify for millionaire status. These may fail to reach any of the three targets goals. So, let’s look at another angle.
The Single-Digit Millionaire. The first time I heard this term I was in a meeting of a few thousand self-proclaimed wealth builders. The speaker was the personal financial advisor of our multi-millionaire mentor. Here’s what he said:
“A single-digit millionaire is nothing more than a middle-class person trying to figure out how to make it financially.”
I was shaken by this thought! Later, I heard a similar but stronger quote attributed to billionaire entrepreneur, Peter Thiel:
“The single-digit millionaire (in America) cannot even provide a proper defense for his family!”
Hmmm! In studying the subject more I learned that the wealthy have recognized the need to accumulate multiple millions—double digits! They believe nothing short of $10 million will support the target goals mentioned earlier. So, swallow hard as we consider some sobering thoughts. We’re on a mission to “change our think” when it comes to money.
Here’s a simple exercise often used to help think through the issue of how much is required for financial independence.
Assume a person has $1,000,000 in cash, with no additional income. If living expenses are just $4,000/month ($48,000/year) the money will last for only 20 years or:
For a 25 year-old: until age 45
For a 45 year-old: until age 65
For a 65 years-old until age 85
Admittedly, the exercise is a bit unrealistic because it fails to recognize a couple of obvious factors that would have a positive impact on the numbers. It assumes no additional income, but in fact the person will likely be working and bringing in additional income to add to the initial $1,000,000. Also, this sum would be invested to increase its value. So, we’re likely to think that this amount of money would surely stretch further and not simply run out at age 45, 65 or 85. That’s how we feel, but we have to dig a little deeper to get a good answer to the real question: Can a mere $1,000,000 ever really be enough? If not, what’s the right number?
To get answers, let’s break down the exercise even further:
- Can a person or family live on just $4,000 per month? Is $8,000 or $10,000 closer to the mark? If the monthly expense number is unrealistic then clearly the $1,000,000 asset is inadequate.
- What is the impact of inflation over the course of 20 years? 40 years? and beyond? Inflation will shrink the value of the initial $1,000,000 and increase the expense load over time.
- How do we factor in life expectancy? Today some people may realistically live 90 to 100 years. Consider the funds needed to cover living expenses from age 65 to age 100! Then factor in increased medical expenses and decreased earning potential during these years.
- Finally, we need to allocate something for catastrophic events: Accidents. Major illnesses. Disabilities.
The Double-Digit Millionaire. Are you convinced yet that a monetary goal of more than $1 million is required? Maybe its $2 or $3 or $4 million, but more than likely double-digits ($10 million) is a reasonable starting point. Facing this number is shocking, but we can draw comfort in knowing that the same “wealth mindset” that revealed it will also provide a clear strategy for attaining it! In a future discussion, we will go into the details of how becoming a double-digit millionaire is possible. But for now, let’s just consider these key points and be encouraged. Here’s what we know:
- That freedom is possible! If 1% of the population can become wealthy, each of us can do it.
- That time is our best friend. We must begin with a sense of urgency, knowing that it’s never too early to get a head start and it’s never too late to catch up!
- That recognizing the goal is half the battle—and we’ve already done that!
- That “paying ourselves first” will be an essential step and our greatest reward!
- That we will learn to develop multiple streams of both active and passive income to drive us to success.
- That what we become through the process will be just as fulfilling as what we acquire from it.
- That working in community with others will make the process rewarding and fun.
I’m inviting all future double-digit millionaires to stay tuned and stay the course.