Can you get rich on a salary?
Thinking about how much highly paid doctors, lawyers, dentists, and business executives make can certainly create the idea that salaries can get you rich.
But then there’s the statistical side of it. The top 20% of the wealthiest people in the U.S. control 84% of the wealth. To make the top 1% as of 2015, you have to earn roughly $380,000 according to the IRS.
So what about the rest of the world and the average person who makes between $30,000 – $60,000 a year? How can they get rich off such a small salary?
Odds are they won’t. It just won’t happen. But they can become a millionaire easily by following the right finance rules. Being a millionaire isn’t being rich though. Ordinary people become millionaires every day. Saving, Investing, and letting your money compound over a long period of time can turn you into a millionaire easier than it may seem.
So what is rich then?
Most people would consider rich $10 million or more. Super Rich is having 100’s of millions and having billions of dollars. $1 million seems small compared to the billionaires of the world who have made $1 million…. thousands of times.
A net worth of $1 million may be considered financially secure and a net worth of $5 million may be considered as doing great.
Today’s millionaire isn’t as special as it was in the 1970’s and 1980’s. Achieving $5 million is the new millionaire of the 21st century due to inflation and the higher cost of living we face today as well as the larger incomes people make today compared to years ago.
What can you do on a salary to build wealth?
First of all, let’s put it out there that you can choose your path to financial success regardless of your salary. If you decide in your mind you want to build wealth, you’ll figure out how to do it. If you decide you want to retire young, you’ll figure out how to do it. You have to commit first to achieving what you think is possible. What you don’t think is possible is only self-limitation.
Now that you’re committed here’s what you can do with a salaried career:
(1) Control the growth of your paychecks
- Negotiate your compensation
- Prove your value to your employer
- Invest in yourself (training, education, and mental mastery)
- Manage your career path and prevent set backs
(2) Maximize how much of your paycheck you keep
Cash is king. The more you cash flow you have, aka what remains from your income less your expenses, the more likely you are to achieve your goals.
- Live frugal
- Get out of bad debt and manage the good debt effectively
- Budget, save, and invest consistently
(3) Purchase Assets
- Spend your cash on real estate instead of a new car
- Spend your cash on extra shares of stock instead of extra cups of coffee
The people who get rich in the world are the ones who own assets. The more assets they own, the wealthier they are likely to become.
What really matters?
Most people don’t care about being rich and they’ll use excuses like money isn’t everything or money is evil to justify it. But in the end what matters is that you achieve the financial success that you want to achieve and that you are happy.
You can go the slow route and save a small portion of your salary away in your 401(k) or you can go fast by increasing your income through starting a business where you can control how much you make not your boss.
Overall, since salaries are usually capped, your earning power is capped and you’ll likely not become “rich” as defined by multi millionaires and billionaires. You can build wealth however by sticking to the basic principles of finance that say to save 20% or more of your income and invest it consistently every year for many years.
3 Important Tips to Help Prepare You For Retirement
Retirement may be a long ways away or it may be knocking on your door soon. Whichever the case, here are 3 important tips you should be considering each year as you map out your finances and manage your money.
Tip #1: Calculate Your Annual Living Expenses You Expect in Retirement
Everyone lives different lifestyles that cost different amounts of money to sustain. Some can get by living off of $30,000 a year and others may spend $80,000 per year. When you retire you should have a game plan of how much you expect to spend each year.
If your house and cars are all paid off you may have a fairly cheap lifestyle that will allow you to travel more and eat out more in replace of those other expenses you no longer have on your budget sheet.
Tip #2: Determine Your Retirement Investment Plan
This goes along with Tip #1 because in order to calculate how much you can spend in retirement you need to know how you want your retirement money to work for you.
Do you plan to move all of your money to a cash account and draw from it until you run out or pass away?
Or do you plan to keep it in investments so that it keeps generating you passive income to live off of and never have to touch the lump sum that’s in the investment account(s).
I personally am working towards the latter option so that I can live off of the passive income and hopefully keep the lump sum amount in the account stable or growing over time. Moving it to all cash is risky because you could outlive the money and run out, causing family to support your expenses. Or it may cause you to have to cut back your retirement lifestyle if you see that you’re running low on funds. Keeping it invested will help keep retirement fun and less worries about running out. Research Annuities vs Perpetuities.
Tip #3 Determining Your Risk Level/Strategy in Retirement
If you elect to keep all or a large portion of your money invested and generating you income that you’ll live off of, then you need to choose your risk level.
- Low Risk = 2% to 4% return on investment
- Moderate Risk = 5% to 8% return on investment
- Above Average Risk = 9% to 12% return on investment
- Higher Risk = Above 12% return on investment
Let’s assume in an example that you expect to live a fun retirement and spend $80,000 per year. You have about $600,000 put away right now in investments. So right now to earn $80,000 a year from your investments you’d need a 13.3% return on investment.
Therefore, if you were to retire today you would need your money invested in higher risk investments to give yourself a chance to earn the $80,000 needed to cover your retirement living expenses. You’ll probably settle for 5% as a safe risk level so that means you need $1.6 million invested to make the $80,000. Hard to say if that’s reachable since you’re currently at $600,000 and need an additional million saved by retirement.
Keep these retirement tips in mind as you begin your investment journey in real estate, stocks, or whatever you choose to pursue as an investment with your hard earned money.