Two Ways to Get Rich: Save Like Crazy, or Start a Business

Cash ImageTom Corley performed a study examining 233 self-made millionaires over 5 years, and found that they fell into one of two categories as outlined in this Business Insider article:

  1. They were fanatical savers.
  2. They sold something.

This aligns with my own observations as someone who has thought about financial independence nearly every day for over the last 10 years. My version:

  1. You can become financially independent by managing your income and expenses carefully over a long time. If you start at zero, you will need a 50% savings rate to retire in 15-20 years. You will need a 30% savings rate to retire within 25-30 years. Thus a household making $100k has to live on $50k (both after taxes). Being a steady, salaried or hourly-rate employee will do just fine. There is no secret besides applying discipline and consistency.
  2. You can become financially independent faster by starting a scalable business. By starting a scalable business, you are breaking the link between hours worked and money earned. As a salaried or hourly worker, you’ll never earn more than a set amount, be it $40k a year, $400k a year, or $20 an hour. As a business owner, your income has no ceiling. You take the risks, and you get all the rewards. Ideally, this results in a lump-sum “liquidity event” like a sale or IPO that provides the same amount of money as decades of steady savings. (Controlling your expenses still matters, even millionaires can go broke when the income stops flowing.)

The first option can be described as “get rich slowly” or “get rich surely”; it is more reliable but may take longer (or at least feel longer). The second option is “get rich quickly” but also “get rich maybe”; there is more risk and results are not guaranteed despite the size of your efforts. Luck will have a role, but if you don’t even try then your chances are zero.

If I was to make a broad recommendation (i.e. what I plan to tell my kids), I’d say that if you really wanted to get rich, you should (1) do both options above and (2) do it now, hopefully when you are younger and don’t have as many responsibilities. Keep your expenses bare-bones and start a business. Being a single 24-year-old meant I could still have fun with minimal expenses and spending 60-80 hours a week working on a project didn’t destroy my family or personal life.

Comments

  1. Good observation, checks with what I’ve observed as well. I’m taking the both approach. By diligently saving 50%+, I know I’m guaranteed FI in a few years. But I’m also taking a few moonshots (online businesses, supporting my wife’s start up) to expedite the process and keep things interesting.

  2. Thank you for highlighting this post on how to get rich. For ordinary salaried people, saving a large portion of your income is a must if you want to retire early – and this has a higher chance of success if you are diligent enough.

    Starting a business could generate a lot of money, but also has a higher risk of failure. We all celebrate the business owners that made it big, but we never hear about the ones that kept persisting and never really made it. Of course, if you figure out a way to earn money on the side, you can essentially increase your savings amount exponentially (particularly if you do not succumb to lifestyle inflation and bank the whole new stream to investments)

  3. Number 3, invest in real estate. After 20 years of investing like number 1, I’ve been acquiring a portfolio of real estate that should allow me to retire in about 3-4 years( at 50). My goal is 100% current income replacement, not living on a portion of my current income.

    • I would be interested to hear about your strategy in real estate. Are you buy residential (and if so, single-family or multi-family?), commercial, industrial, or what? How do you find and finance the properties you buy?

      • Hi Andy,
        I’m mostly buy and hold. Although I’m 3 months into my first rehab and flip (doing all the work myself).
        My first 4 properties I bought through estate auctions and the most recent was a HUD foreclosure. My area has low cost of living, so housing is not too expensive.
        What I look for is properties that are as close to 70% or more discounted off ARV(after repair value). All my rental properties, I have made rental ready. Rental ready costs for me have averaged $3000 – $5500. Some of my properties would be ready to sell at full market price in the rental ready state, and others would need $15000 to $20000 more to the get maximum ARV. All of them I could sell today and recuperate all costs and commissions plus pocket extra. Since I’m not selling, the real number that has meaning to me is cash flow. Cash flow is running at 15% for the lowest and 21% for the highest.
        Financing is relatively easy on the first 4 financed properties (including your home) after that I have worked with a local bank securing an in house portfolio loan. Here’s the cool thing about owning rentals, once you have a few, you get to count the full potential value of your properties, the full revenue of rents, plus regular income on your Personal Financial Statement to the bank. In my experience, banks really want to work with you the more properties you acquire.
        Currently, I’m on track to add 1-2 properties a year and scale up as I’m able.

        • Appreciate the time you took to write this up! Now i’d love to learn even more. If not here, maybe a good doc write up?

          A couple things I am specifically interested in… (a) how long have you been doing this (b) how many properties should one have to have needed scale [is just one worth while?] (c) what has your total capital expense been at different stages and what level of free cash do you need available for operating expenses (d) what home price / rent return do you aim for (e) what books/references do you think have good information for getting started.

          Thanks again and hope to hear more.

          • I won’t be able to answer every question fully in a comment section, but I can point you to Biggerpockets,com. Lots of good advice there, especially their podcasts. There is an element of car salesman/seminar feel to some of the people who post there that you should filter out (lot’s of real estate professionals there after all), but there is also a lot of sincere, real people making it happen. Starting out, you’ll need 20-25% down for investment property loans. Smaller banks with in house portfolio loans will allow 10-15% down payments. If you can start there, then it will be easier to grow, but it depends on your bank and your overall financial position.
            I invest in B+ to A neighborhoods, with an ROI target of 15-20% or better. I self manage (important to maximize returns and not as hard as some think). Some people invest in lower class C to class D neighborhoods and can see higher returns, but have higher risks, higher costs, and for sanity, do need property management unless you are thick skinned.
            Important things to know:
            1. Learn how to screen and set your criteria before ever listing a property (a vacant rental is better than a problem tenant)
            2. There is a thing called “analysis paralysis”. Eventually you’ll need to get your feet wet with your first deal. This is where all the true learning will come in, actually doing it. Some people never get past the research phase and become “paralyzed” to action by all the info out there. Doing is the biggest educator.

            Good Luck.

  4. Yes to both!

    Most of my retirement was due to #1 above (high executive income and low spending rate) but also juiced from time to time with smallish side businesses. It was a lot of work to have a job and a business, but well worth it as I retired at 52 and am able to live off the income generated by my assets.

  5. These are good observations and I agree with your recommendation. Keep your salaried job and save aggressively. Meanwhile, start a side-business that can scale. If your side-business doesn’t work out, no problem, you still have your day job. If your side-business takes off, then you are set!

  6. A sales job could also be considered a small biz in some ways. You aren’t tied down to a salary and instead are paid based on your productivity and effort. It’s a bit of a mix of the two worlds.

  7. Being in business is great but not always easy.
    There is the uncertainty with money when you get started and for many people knowing how to scale a business is the biggest problem. So many “business people” are just self-employed workers.
    I agree that you need to scale a business and the World has become a smaller place with the internet etc so this is becoming easier, but it will still need dedication.

  8. I too am trying both strategies by 1) savings 50% of my after-tax income to invest in high-quality, dividend-paying stocks and 2) building an online brand through my blog. Hopefully both will contribute to my future wealth!

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