I’ve been doing a lot of pondering lately. I now have a wife that I’ve vowed to support and we have a new baby on the way! What if Liz wants to become a stay-at-home mom? What if we decide to send our kids to private school? Are we going to stay ahead financially without forcing me into 40 more years of corporate work? As the financial nerd of the relationship, I started running some calculations to see where we’ll end up with our finances in the next 2 years, 4 years, and 6 years. The results weren’t what I had hoped for…
Our Plan: The Poor Man’s Way to Wealth
After reviewing where we’ll likely end up in the future, I suddenly realized that there was a rich man’s road to wealth and a poor man’s way to wealth. Unfortunately, I discovered that I’m on the poor man’s road.
The poor man goes to school, earns a degree, finds a job that he can handle, then he works hard to make a living while saving a small portion of his income for the distant future. If his investments do well, he might even become a millionaire, which sounds fantastic, but it will take him nearly all of his life to get there… The poor man can become wealthy, but only through constant sacrifice and delayed gratification.
Unfortunately, this is the plan I’m on. Liz and I have paid off all of our consumer debts, we paid off our house, and we’re in the process of buying a rental property with cash. What does all this hard work earn us? Well, we don’t have a mortgage, which is great, but by investing $80,000, we effectively create another stream of income that nets us only $6,000 a year. It sure doesn’t see like much, does it? Can this method actually create wealth?
The short answer: yes, it can. But as with the 401k investments, it takes time before the wealth really begins to grow. From my curious calculations yesterday, this is where my 2 year, 4 year, and 6 year projections took me:
- That $6,000 per year combined with our yearly salary allows us to buy another rental property in roughly two years.
- The two rental properties earn us $12,000 a year, which allows us to buy yet another rental in two more years
- The three rentals now produce $18,000 a year, and we can buy another rental in just under two years
Okay, so after 6 years, we have three properties that produce $18,000 a year.
After all this hard work, can I quit my job yet? Ummm, absolutely not. $18,000 a year does not support a three-person family very well. So what’s the point of this plan? Why did I sign myself up for this?
As it turns out, the benefit comes later in life. Six years from now, Liz and I will be 36 years old and most certainly won’t be millionaires. BUT, we’ll be getting closer. By age 40, our rentals will be generating $36,000 a year and will be worth over $750,000.
The poor man’s way to wealth won’t get you out of work by 35 years old, but it almost certainly will lead to wealth later in life.
The rich go about their wealth a bit differently. Wealthy parents send their kids to only the best schools and train them to become doctors, lawyers, and perhaps even business managers. Right out of school, those kids have no debt and have the ability to earn $150,000 a year or more. Just with their base salary, these individuals are already able to buy large assets with very little effort. Their executive home and their simple investments can quickly out-earn your mediocre salary. Basically, the high-income earners can become wealthy in very little time and with very little effort.
The High-Risk Way to Wealth
If you’re not on the ‘poor man’s way to wealth’ plan and you don’t have wealthy parents, this doesn’t mean that you can’t become wealthy. There is yet another way to earn wealth: and that’s with leverage.
Robert Kiyosaki calls it ‘OPM’ – Other People’s Money. By finding an investment that earns a positive cash flow, even after the monthly loan payments, some people choose to leverage the bank’s money to earn a greater income themselves each month. If the investment continues to perform, those that borrow money can become wealthy much faster than those that choose the poor man’s way to wealth.
Yes, leveraging other people’s money can lead to quick riches, but it doesn’t come without an increased risk. If the investment started to earn less than expected, it could very quickly become difficult to make the monthly payments on the loan, which could easily lead to a bankruptcy situation. So, while it might lead to faster wealth, it can also lead to an expedited financial failure.
As I reflect once again on the road that Liz and I have mapped out for ourselves, I have become contented once again… Am I a descendant of wealthy parents and grandparents? No. Am I willing to leverage my money to potentially win big, but increase my risk at the same time? No. Therefore, I am forced into the poor man’s way to wealth. But what’s so bad about that?
I have the ability to get rich slowly – some don’t have the option of getting rich at all. Basically, I need to stop my crying, roll up my sleeves, and increase my income one property at a time.
Sure, it will be slow in the beginning and I won’t be a millionaire tomorrow, but maybe it’s actually better this way. On the poor man’s way to wealth, I’ll be forced to repeatedly drip with sweat, to be patient, and most importantly, to gain a full understanding of what it takes so that I can appreciate every bit of it once I get there.
Are you on the poor man’s way to wealth?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.