You can spin any story. This is what makes a good interviewer separate from a bad interviewer. He can spin his resume to sound like all of the decisions were intelligent, rationale and value additive to an employer. Similarly, he can also spin his background as a positive when going out on dates. In essence, the way you view the problem will determine how “difficult” or “easy” a specific task will be. As you already know, we view the path to a million as relatively easy. But. For fun we’ll paint both sides of the story to see how convincing things can become. This is our view of the Robert Frost Poem “Two roads diverged in a wood, and I—…. I took the one less traveled by, And that has made all the difference”
Millionaire A Difficult Path
If you’re born in the United States you have a small chance of making it big. It fact your odds are around 3%. This means of the ~335M people in the United States, there are only ~10-11M millionaires. Not an easy task. It gets worse from here. You don’t want to be rich when you’re old do you? No you don’t. You want to be rich when it is enjoyable. Lets use 40 years of age as a hard cut off. At 40 years of age your body slows down a bit and everything becomes more difficult.
So how many people get to a million before 40? Not a lot. In fact the number of millionaires under 40 is well under 15%. That is right. So we went from 3% and cut that down to just 0.4% or so. For every 100,000 people you meet just 400 of them will be worth a million dollars and under the age of 40. Oh it also gets worse from here!
Since we’re already talking about 0.4% we didn’t include some other important items. Do you care about your health? Do you value your free time? Do you want to have enjoyable life experiences? Guess what… All of that changes the probabilities. Approximately half of people are over weight. Your chances have gone to just 0.2%. For fun we’ll say that only 25% of wealthy people are overweight so we’ll take it 0.3% to be generous here. Next step. Business owners do make up the majority of under 40 millionaires, around 75% or so, taking this number down to 0.225%. To put a bow on it, we’re going to be extremely generous and say that half of wealthy people under 40 are exciting and fun people (no odd personality disorders) creating a number of just 0.1125%. Since we were generous with the prior sentence we’ll round it all out to make it easier to remember at 0.11%.
Scary isn’t it? Just one tenth of a percent of people will hit this hurdle. Of the 335 million people in the USA (one of the most opportunistic countries in the world) just ~370,000 people will make it. Unicorn chasing by those raw numbers. Still want to roll the dice eh? Lets see how ugly this gets. By asking a quick question… Is a million dollars a lot of money?
A Million Bucks You Say?
Well all of the above math that brought down the field to just 370,000 people? It was based on a 1 million dollar hurdle. A million dollars gets you to around $40,000 to $70,000 a year in annual passive income (assuming a 4-7% annual return on your investments). The bigger question? Does this include owning your own home? It probably does which makes the math worse. If your home is worth $1 million and is paid off, well you are technically a millionaire. Just on paper.
The natural follow up is where we can say you’re comfortable. Push it to $2 million. This becomes a lot harder to argue against. With a $500,000 property paid off limiting your overhead and $1.5 million generating money, this leads you to $60,000-$105,000 in income *without* any overhead. This is pretty smooth for any individual. The rub? Well. If you want to raise the bar by a million dollars you have cut the field in half.
Cutting the field in half now leads us to ~185,000 people in the entire United States. That includes everything: Hawaii, Alaska, California, Florida and New York. Every last one of those states. Want to take a guess on where these millionaires live? That is right, most likely in the higher cost of living areas: New York, the San Francisco Area, Los Angeles, Miami etc. You guys know the drill already. If the city is expensive, the wages are likely higher which means the ability to stretch a dollar is much more difficult. It gets worse.
Hello Uncle Sam
Well you know how we said that $1.5 million dollars would get you $60,000-105,000 a year? That was before taxes. If you generated 4% returns you’re likely doing that with a lower tax bracket of around 15% since dividends (3% yield) are only taxed at that rate. If you’re making closer to 7% it is much more likely that you have higher tax rate. Two reasons why. First ,to get higher returns you usually end up taking on more risk which usually leads to higher taxes (unless you hold for over a year). Second (and most important). The tax rate depends on your income as well, if you have non-qualified dividends these are taxed by the normal income standards. A person making $60,000 a year has an effective tax rate of around 25%, while $105,000 would lead to around 29%. So. Lets go ahead and cut those numbers to $45,000 in spending and $75,000 in spending per year.
Is this headache worth it? You’ve now broken into the top 0.1-0.2% in the United States and all you have to show for it is $4-6K in monthly income.
A Millionaire – Smooth Sailing
Welcome to the United States. First of all you’ve already won the lottery. There are only 335M of you within a population of something around 7 billion. No need to take it so seriously, its a rough estimate. Maybe 5% of people are born here. Sure. Maybe there are a couple of other specific locations where you have a better chance to getting to a million but that is for whiners and complainers. At the end of the day, the government wastes so much money that you can get access to books written by anyone on the planet for free. At the library. Oh and we also have fast internet.
Now of those 335 million people about half of them are stuck (financially speaking), now we have 167.5M. We are against student loan debt in the 6 figures and have always said it is a disaster. With that sentence out of the way, the reality is that they are no longer competition for you. That is right. While a few of them will figure it out, the ones that are in massive amounts of debt just won’t be able to climb themselves out of the hole they are currently in. To be more conservative, we’ll say that people with consumer debt (people who work and without student debt) are the lowest form of competition. This number is still startling at around 50%. That is right. About half of your “competition” lives paycheck to paycheck because they would rather consume all of their earnings.
The College Branch Hurdle
Get ready for a huge drop off! We haven’t even started cutting off the competition. A fun fact to be aware of is that ~30% of people graduate with a four year degree. Now lets pause here. That takes the number down from 167.5M to just 50.0M.
We’ve been pretty vocal about starting a company. This means you do not need to go to college. And. This is a HUGE pause… those guys who skip college could have attended top universities. Let that sink in. The guys who could have gone to Harvard (insert any top university), simply dropped out or they created something (didn’t even need to attend).
This brings up another fun point. The fact that you’re reading a ex-Wall Street blog implies that you already know what Wall Street is! Most people still believe Wall Street is about making “money” off penny trades (that died years ago). Why are we highlighting this? It implies that top universities are what we should really use as the filter. This makes sense due to the competitive atmosphere. If you enter into a school with a 90% admissions rate, the chances are that the school does not have high quality competition or resources.
We re-read the last 3 paragraphs. It reads terribly and is jumbled but we’re leaving it as is. Why? Too much excitement caused those paragraphs to be written since it implies that anyone reading this is already going to pass our hurdles! Keep reading below to see how tiny the competitive pool is!
What a difference this filter makes. There are approximately 2,500 universities in the USA that give out 4 year degrees (private and public combined). Once we realize that the vast majority of millionaires will come out of this group we then adjust for the fact that they will come out of the top 10% of these universities. Being more realistic we should only look at the top 5% or so… this means 125 universities. To prove this out, does anyone know what university is “number 100” in the USA? We don’t know. (okay just looked it up apparently it is “Loyola University of Chicago”… never heard of it before). Take those 50M people you’re competing against and now you’re at 2.5 million.
Oh. We didn’t even control for relevancy. Of those 2.5M you’re now competing with, about half of them are dead on arrival. They have decided to follow their dreams and “learn” about things that won’t make any money in the future. History, sociology, ethnic studies… the list goes on and on. The important thing to catch here is that we’re going to take a blanket cut of 50%. This means some of those bad major guys will actually show up later down the line (good for them they fixed their situation). The more important news is that you’re left with just 1.25 million people.
Side Note: At the end of the day, we know that doctors are not in the competitive sphere either. Why? Well even if they make $350,000 a year they are not able to make this type of money until they are around 30 years of age to begin with. So it is unlikely that many of these guys will clear a million in net worth by the time they are 40. Besides. If you studied and worked like a dog to make $350,000 a year, you’re not going to live with a bunch of guys to save on cost and drink cheap beers.
The Business Starting Hurdle
Instead of cutting the medical students out of the race, lets just cut out the “business talkers”. These guys are the most common in the 1.25M you will compete against. Roughly speaking, there are only 4 million businesses in the USA. Of them many (emphasis on many) are run by the same person. of the 1% who try to start a business a small fraction are “new risk takers”. We cannot do precise math here since it would be incorrect. But. What we can do is the rough math on “new businesses started by new people”. This number goes down to 50% or so.
Of the 1.25M people you’re competing against we are down to 625,000. If you simply try to start a business in the first place, you’re creating an enormous chasm between you and your peers. This cannot be emphasized enough. “Most businesses fail” does not account for 1) shell companies used as tax shelters, 2) profit losing companies for tax purposes and 3) other fake businesses used to simply save a few dollars on cost. No big deal here. The point is that trying alone gives you a 50% edge. Since 75-80% of millionaires are business owners anyway.
50/50 or 25% insanely good chances!!! After all this cutting, we now see you’ve got around a 50/50 shot at being a millionaire and a 25% shot at being a multi-millionaire before you’re 40. Not bad at all! All you had to do was make sharp risk adjusted decisions and you’ve got yourself a seat at the roulette table placing a bet on red or black (yes we know it’s slightly less than 50% just making a visual).
Pay no attention to the guys who cry about taxes, inflation and returns of 4-7%, you got better things to worry about. You made your first million dollars by around 30 anyway which means you were able to put away $100,000 after tax per year. That is $100,000. Only about 10% of the entire population is able to earn this in a full year (pre-tax!)! You’re putting a large amount of distance between yourself and your old peers at this point. Also. Do you think you were making more money when you were 21 or 31? The answer is obvious.
Since the answer is obvious it means you can now save six figures a year while increasing your spending by the investment income each year! That is some serious leverage. Forget about spending $75K a year, you’re able to spend $75K + your regular spending each year. You’re not going to quit working at age 31 anyway. You’re having too much fun playing this video game on easy mode.
So there you have it. You have a 50/50 shot of getting rich or just 0.1-0.2%… all depends on how you look at it. Besides. What have you go to lose? Beer pong Saturday’s with dirty balls that have been stepped on by shoes entering the public restroom? The latest episode on the food network where the “grand prize” is $10,000? That bachelor party in Vegas where the guys try and hook up with the Stripper addicted to pain killers? It’s a tough call isn’t it.
Q&A Announcement: The next Q&A will be held on Monday the 13th. To participate please keep your purchase of either Efficiency or Triangle Investing.
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