What is wealth to you? It is $5 million in assets? Is it spending your time how you want? Is it traveling around the world?
Wealth is defined differently by different people. I know people who feel wealthy when they have $1,000 in their bank, retired people with $300,000, and people with over $10,000,000. They all feel wealthy, despite the different amounts.
Also, I know people with those same exact amounts who do not feel wealthy.
Wealth is easy to measure on paper. Most people define it by your assets minus your liabilities – also known as net worth.
Unfortunately, there is no class in school about how to become wealthy. There are tons of articles, classes, and Youtube videos about how to become wealthy, but they feel a little slimy. They might say, “How to become rich in 10 easy steps.”
Let me tell you – there are no easy steps.
In fact, it’s a grind, dull, and boring at times. It takes repetition, creativity, and luck. You need time and discipline.
Although the world may shout anybody can become wealthy, there are really only a few different routes to become very wealthy, which I’ll define for today’s discussion as a net worth of $5 million and above. In the United States, that puts you in the 97th percentile of wealth.
For some reason, people, particularly in higher-paying jobs, tend to see $5 million as the point where they will be happy. In reality, as net worth increases, people pick a new number that would make them happy. The goal post almost always moves.
Yes, very wealthy could be higher or lower – that’s not the point. I’m picking a number most people will never achieve, but dream about.
If you’ve thought about how you can become wealthy, this article is for you. There is no 10 step guide, easy actionable steps, or even a roadmap. I’ll simply talk about the few routes I’ve seen people take to become wealthy. Hopefully, it will inspire you to define what wealth means and contemplate what actions you need to take to realize your definition of wealthy.
Today I’ll answer, what does it actually take to become wealthy?
Method 1: Stock Awards
I live in Seattle, which has developed into a major technology hub over the past decade. As a result, there is tech money here. Google, Facebook, Salesforce, Pinterest, DocuSign, Microsoft, Amazon, and the list goes on.
Many of the employees of these technology firms are paid in stock awards. This could take the form of Restricted Stock Units (RSUs) for publicly traded companies. It could also include Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs) for privately held companies. As the company grows in value or the stock price goes up, their compensation goes up.
For example, if someone was hired by Amazon ten years ago and received RSUs, they likely did very well. Amazon stock is up over 1,600% or a compounded return of over 33% as of this writing on March 6.
Imagine if you were hired ten years ago and received 250 shares vesting over four years when the stock price was at $250 a share. The 200 shares vested 5% after the first year, 15% in the second, 40% in the third, and 40% in the fourth. This means 10 shares vested the first year, 30 shares the second year, and 80 shares each in the third and fourth year.
If the share price goes up the first year to $285, your first 10 shares vesting will be worth about $2,850. In the second year, let’s assume your shares vest when the stock price is at $360, which means you receive $10,800 of stock. Then, the stock price goes to $425 in the third year and you receive $34,000. In the fourth year, the stock vests at $700 and you receive $56,000. If shares were sold to cover the tax liability each time, maybe you have about 134 shares and 66 were sold for taxes after four years. I am using really rough figures to make a point on how to build wealth – not calculate the exact amount.
If you held the shares until that fourth year when the stock was at $700, you now have $93,800 in Amazon stock. Let’s assume you held those shares until today, when Amazon is at about 3,000 a share. Your value is about $402,000 on those original shares because of the growth in the company, and it does not include any future vesting of shares if you continued working for the company. It’s easy to see how continuing to hold the shares and receiving RSUs over ten years could add up to a significant amount of money – likely already wealthy or on a clear path to becoming wealthy.
To be clear, I’m not advocating holding the shares, but many people do. For many people, it can be very risky to hold the shares because most of their net worth and compensation are tied to one employer. If something happened to that one employer, such as bankruptcy, their entire life could change overnight.
It’s easy to look at a story like Amazon and say holding the shares was the only smart choice, but that’s not the case. For every Amazon, there is another company where their stock price went nowhere.
If you are currently receiving stock awards, always ask yourself, “If I received my RSUs as cash, would I buy this much of my employer stock?” At the end of the day, that is what you are doing if you are holding onto the shares.
Amazon is a publicly-traded company, but there are plenty of private companies that go public and make their employees very wealthy.
For example, as an employee, someone may have been granted 10,000 shares in a company, such as DocuSign, and then today after it has gone public and increased in price, it could be worth over $1 million. Private companies and start-ups tend to be riskier and come with lower pay, so they are compensated more heavily in stock. Most start-ups don’t work out, so most stock awards are never worth anything, but if the company is bought or goes public, the payoff can be enormous.
Stock awards are one way to become wealthy; however, it’s not guaranteed. There are plenty of people who lived through the early 2000s, who saw their stock awards go to $0. As with anything in life, it takes luck being in the right company at the right time.
Method 2: Build a Business
Another option to become wealthy is to build a business. This is not for the faint of heart. According to data from the U.S. Bureau of Labor Statistics, approximately 45% of businesses fail during the first five years. Said another way, if you and your friend each start a separate business, one of you likely won’t succeed.
Even if a business stays open, there is no guarantee it will be financially rewarding.
With the negativity out of the way, building a business can be a good path to becoming wealthy, but it usually requires years of hard work, grinding, and putting a system in place later on that removes you from the business. If you only build a business with you working in it or only hire a couple of employees, it’s unlikely to make you wealthy. Wealth is created through businesses as they scale, which usually requires hiring the right people to grow the business for you.
If you want to build a business to become wealthy, you likely need to think big – more employees, more investment, and more time. As it scales, your income and value in the business should grow, but those first few years are usually tough as there is not very much money to go around and your income will be small.
For self-starters, building a business can be a great option compared to working for a corporation.
Method 3: High-Paying Career
This is probably a “yeah, duh” one, but I am still amazed by how many people want to be wealthy, but don’t intentionally choose a high-paying career.
If you want to become wealthy, train for the right career with better odds of a high-paying job. Although pay has declined in some areas, doctors, dentists, lawyers, software engineers, information systems managers, investment bankers, financial advisors, engineers, and sales professionals are still great careers to earn a lot of money.
Some of these professions, such as doctors, dentists, and lawyers require many years of expensive schooling, often racking up more than $150k in debt, but the long-term payoff is normally worthwhile. Many of these professionals can make $150k per year and the top end can earn more than $500k.
If you are not keen on school, sales jobs can be lucrative. The best sales professionals can make $250k+ per year. With a high-paying job, it’s easier to invest money for the future to become wealthy.
Without that high income and investing, it will be tough to become wealthy. There are plenty of these high-paying professionals who are great at earning money, but terrible at investing it for their future.
The key is to pick a profession you can love and earn a good living to become wealthy. There are some careers where you will likely never become wealthy. For example, social workers and counselors often earn under $50,000, but still require advanced degrees. If you want to be wealthy, you may want to skip those types of careers.
Method 4: Win the Lotto
While not likely, it is possible to become wealthy by winning the lotto. I’m not sure there is much to say on the topic, and I certainly don’t advocate buying lotto tickets considering the odds of winning jackpots around one in 302 million. You have better odds of drowning, being killed by a vending machine, or being wrongfully convicted of a crime.
I only mention this because people look at lottery winners and fantasize about their life after. In reality, many lotto winners are miserable.
Method 5: Concentrated Investment
Tesla has been in the news over the past few years because of its skyrocketing stock price. It’s turned some into millionaires.
It’s the perfect example of how you can concentrate your investments to become wealthy. It’s not easy and far from guaranteed.
In fact, most of the returns for index funds come from a small subset of “winners.”
A few things to highlight from the study linked above:
- About 2 out of every 5 stocks lose money
- Almost 1 out of every 5 stocks lost at least 75% of their value
While you may think you can identify which stocks will do well, research says otherwise. You could just as easily end up with a “loser.”
Concentrating your investment is one way to become wealthy. It just happens to usually go to a lucky few.
Method 6: Save and Invest Diligently
This is the boring one and it usually needs to be combined with an above-average paying career. Nobody likes this one because it’s not sexy. I can’t sell you a class that says, “Save diligently, invest regularly, and repeat until you become wealthy.” But, I could sell you a class about becoming a millionaire by identifying the next Tesla stock, how to pick lottery numbers, or how to build a real estate investing empire.
Now those would be sexy classes. This is precisely why they sell. You take one outlier of a person who hit it big – likely through some skill and a decent amount of luck – and downplay the rough road to becoming wealthy.
Despite what people say, saving and investing diligently is how most people will become wealthy. You may not become as wealthy as the other ways mentioned earlier, but you can build a good life.
For example, if you could save $19,500 per year for 40 years and earn 7%, that would be over $3.8 million in the future. Unfortunately, that’s not easy to do every year for forty years. And, it’s not achievable for many people if they can’t earn a high income.
Despite what we see in the news, many retirees become wealthy simply by brute-forced savings and investing in a diversified portfolio for decades. You don’t hear about them because that story does not sell, but it is a very viable path to wealth.
Summary – Final Thoughts
As you can see, with the exception of winning the lotto, there are no shortcuts to become wealthy. Each method requires some mix of grit, patience, and discipline – usually combined with a fair amount of luck.
After all, remember you can have two college graduates with the same degree go into the same profession, but for different companies. One could have joined Amazon while another joined “Some Company You’ve Never Heard of Because They Did Not Hit It Big.” The former is likely on their way to become wealthy while the latter is not.
If you want to become wealthy, be intentional with your training and career. Wealth usually comes from risk – whether it is taking on debt, accepting a lower salary for stock, or starting over while building a business. It does not come from an easy, sexy path as some articles and courses will say.
Lastly, remember wealth is not only a number. It’s the time you have, the relationships you build, and the flexibility to live the life you see for yourself.
Now, go build your definition of wealth.