How Do People Get “Rich”?

January 29th, 2018 by B&C Financial Advisors

by Adam Oerther, CFP®

While the definition of “rich” is different for everyone, just about all lifestyles require money. Being able to sustain these lifestyles without having a recurring income (i.e. a salary), particularly during your retirement years, requires an accumulation of resources from which you can fund the activities you need and want to do. This may seem like an obvious connection, yet the reality is, despite knowing what it takes to fund our lifestyles, the method of accumulating these resources isn’t always so clear. In a 2017 Retirement Confidence Survey, conducted by the Employee Benefit Research Institute, nearly 25% of respondents reported having less than $1,000 in savings and investments, and 47% reported having less than $25,000 (excluding the value of a primary residence). So, then, what are some of the ways we can overcome these personal financial obstacles and steer ourselves onto the path towards our American Dream? We explore some wealth accumulation methods below, ordered from least to most common.

1. Luck

As a semi-regular golfer, and even as water seems to defy physics and become magnetic when I play, I haven’t bought a sleeve of golf balls in about two years. That’s because two years ago I was playing a round and had a random guy come up and give me a bag of about 300 balls, completely free with no strings attached. That doesn’t happen every day. Similarly, neither does winning the lottery or having someone walk up and hand you $1 million. These kinds of things do happen, but they are obviously not reliable ways accumulating wealth.

2. Inheritance

A common myth associated with millionaires is they simply inherited their wealth from their parents, grandparents, or other family members. However, as Dr. Tom Stanley found in his research for his popular personal finance book The Millionaire Next Door, only about 20% of millionaires become millionaires through inheritance. The other 80% are self-made.

At B&C Financial Advisors, we work with our clients to establish a plan. Everyone’s plan is different—some want to leave as much as possible to their heirs, and others want to enjoy the fruits of their labor and savings, choosing to only leave an inheritance if they pass away before they are able to spend down the reserves themselves. Thus, while inheritance does happen every day, you should generally not plan your personal finances around receiving a “certain” inheritance.

3. Entrepreneurship

Starting a business, or working for a company in its early stages, is not for everyone. Since the business is too young to have an established, respected presence in the industry, there is a large burden on its founders and early employees to execute their ideas efficiently, and many of those employees end up “wearing many hats,” as funding is typically more limited than in a large organization with access to an abundance of capital. However, while the risks associated with founding, or working for, a startup are higher, the potential payoffs can also be higher—just ask the early employees of Facebook, Microsoft, or Google! Obviously, only a few companies obtain the same status as these companies, and we caution not to have too much of your net worth exposed to any one company, but there are countless examples where this entrepreneurial spirit has allowed those with such drive to acquire enough wealth to fund the lifestyles they desire. We have worked with many clients over the years to plan for the disposition of closely held businesses, such as a family office, and manage concentrated positions of company stock, such as Apple, Intel, or Alphabet (Google).

4. Savings Over Time

Boooringgg. That’s right, this is the least “exciting” way to acquire wealth—it’s nothing like winning the lottery or hitting it big with cryptocurrencies. However, despite its lackluster appeal when compared to “get rich quick” proposals, it’s the most common—and, for many people, the most effective—way to accumulate wealth. We go to our jobs each week, collect our paychecks, put a certain percentage away towards savings, and invest those savings in order to provide ourselves a nest egg for retirement. This is how many of the baby boomers are currently funding their retirements, and it’s what your grandfather has been telling you to do since you got your first job. In fact, despite the bad reputation they have about their personal financial habits, it’s how millennials are building their own wealth!

Thus, while money may not literally make the world go ‘round—we’ll let gravity do its thing—it can make a world of difference in your life, and it’s important to understand where it comes from and what you can do personally to ensure you have the best chance to accumulate enough to be truly financially independent. Luckily, we have all inherited a vast amount of information and resources we can use to pursue our own entrepreneurial endeavors or contribute to a larger organization and gather wealth gradually in pursuit of our own American Dream.

The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.