I read this article today on Investopedia:
A couple of points in the article stood out to me and I figured some folks on BP may have some opinions about them:
1. Extra Wealth Means Extra Options - In other words if you're an accredited investor you can literally invest in things other people can't. Even with Title IV I don't see this going away any time soon because most promoters will still continue to use other exemptions
2. Risk Aversion - Those with more chips to play don't have to worry as much about losing some of them. Since risk and reward are positively correlated and linked the risk aversion at the low end of the wealth spectrum is an impediment to the growth needed to make the first million
Other points in the article abound in other places like it is literally easier mathematically to make the second million because of the power of compounding and the fact that the percentage change for each subsequent million is lower.
Any thoughts on the items above? Agree? Disagree? Does this same reasoning apply to folks on BP who may generally understand you can take MORE risk when you are worth less because you have less to lose and longer to correct mistakes if you're young.
I'm no millionaire, but I certainly think that if you are an investor, your case makes sense to me.
As a non-millionaire, I believe that it's far easier to generate incredible returns by engaging in creative investment with smaller amounts of money. For example, a house hack for me allowed me to put down $12,500 (plus about $7,500 in repairs), live for free, and still get a shot at appreciation, tax breaks, and principal paydown. If I save $6,000 in rent, cashflow another $1,000, the property appreciates by $5,000, and I pay down $4,000 in principle, I've just realized a return of 80% on my initial investment. That return can have a massive impact on my net worth over the next couple of years, but would hardly be worthwhile for a millionaire.
I think I'll miss being able to claim enormous returns on my investments should I ever become a millionaire - probably not too much though ;).
I think that those types of creative ways to generate outsized returns relative to your total portfolio slowly disappear as you become wealthier, because sacrificing small conveniences and luxuries for small dollar investments becomes less appealing. At the same time, you are completely correct about new and exciting private investments becoming available as an accredited investor - I've certainly voiced my strong opinion of discontent with not being able to access investments only open to accredited investors before.
Getting to the second million must be easier overall for the reasons you state, but your overall rate of net worth growth may slow. I think that I'll go from $50,000 to $100,000 much more slowly than I'll go from $1,000,000 to $1,050,000, but going from $50,000 to $100,000 is a 100% increase in net worth, vs a 5% increase in the second case.
Yep, that is very accurate. I have been there / done that myself.
I think the hardest part of making your first million...is when you have a standard, 40-hour a week, middle class job and you have a wife and/or kids a home. In that situation, you have to work around your job's hours on the weekends and evenings building passive income...say with real estate or a small business...to build yourself up enough cashflow to replace your monthly (job) income. That can be hard! Most folks don't realize you'll need to work 60+ hour weeks for a while, sometimes years, and have a very supportive family to get where you need to go.
Once you detach from that job, and you are financially free...aka you are living off the income from your assets AND you can set your own schedule each day...that's when things get moving faster. By having a full 40+ hours a week to focus on your business, real estate, etc...you begin making a lot more earned income, to in turn put into passive investments which generates more passive income, and before you know it you're a millionaire.
And then bam, you do it a 2nd time - but a lot faster than the first time.
That's the basic reason why the rich get richer, despite the fact the economy is good or bad, simply because they have lots of assets that consistently generate income...and they live on way less than they earn. They cannot get layed off, fired, etc from their job - as they own their own job. And when you live off just say 10% of what you make...damn...you cannot do anything but get richer, irregardless of economic ups & downs (with exception to maybe the great depression).
@Steven G. has covered this very well.
The buzzword in many places is to work smarter not harder. I had to make sacrifices and work hard to become financially independent.
Because of those sacrifices and choices, I have not needed a job since 1998. Once you are financially independent (defined as your passive income meeting or exceeding your required expenses), you are truly free to pursue those things in life that are really most important to you.
If you are reading this and wondering if the sacrifice will be worth it, my advice is to "Go for it!."
Good luck on your journey.
Although those factors are completely accurate, I would say the knowledge that you learn along the way to earning your first million is the most important component for earning subsequent amounts.
Yes, knowledge is certainly key. Nothing replaces experience.
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