What it takes to be a REAL Millionaire
Is there any sexier word in the English language than “millionaire“?
For this finance blogger, the answer is a resounding “no”. Not “Ferrari”, not “Filet Mignon”, not “Dom Perignon”, and not “Emily Ratajkowski”. It is the holy grail that is hopefully awaiting me, you, your great aunt susie, and your crazy neighbor two doors down. But if there’s one thing that I’ve taken away from my year of blogging, it’s that words matter very much. And their meaning can sometimes be… well.. left to interpretation. Which begs the question of this entire article:
What is a millionaire?
This might sound a little redundant. After all, the definition sounds like it’s hiding right in the name. A millionaire should be someone that has a million dollars. But is it really that simple? After all, does a millionaire HAVE to be someone that has a million dollars? Or can it be someone who earns a million dollars? Or someone that has a million dollars in assets? Equity? The list goes on and on…
But obviously, because of this annoying little economic constant called “inflation”, a million dollars tomorrow is simply not as valuable as it would be today. So with that in mind, let’s look into what it really takes to be considered a “millionaire” in this day and age!
First, the most important equation… like ever…
If you’ve ever had to sit through an introduction to accounting course, then there should be at least one thing that you took away. No, not that accounting is for boring people. You should remember the following equation:
Equity + Liabilities = Assets
Very simply put, the equation means, “If you take all the stuff you own (equity) and you add up all the stuff you owe (liabilities) then the resulting number should be everything you have (assets).” The easiest example is a house. You might have $30,000 in equity on the home, and you might still owe $80,000. The result should be that the house is worth $110,000. Simple enough, right?
But when taken into the context of defining a millionaire, things get a little bit hairier. Is a millionaire someone that simply has a million dollars worth of stuff, such as a house, stocks, bonds, businesses, cars, etc.? Or is is someone that OWNS a million dollars worth of stuff?
To continue with the house example, there is a WORLD of difference between someone who has 4 houses valued at $250k a pop, and someone who owns those houses outright and has $250k of equity in each house. After all, the first person might still owe on their mortgage, which might even mean that they have negative equity (OWE more than they OWN). So how are we going to define a millionaire in this context?
I’m going to make the argument that the equity is what really counts. After all, it’s theoretically not hard at all to purchase a bunch of assets; just borrow at the risk free rate and purchase equities. But it’s when the equity, the ownership, starts to outpace the liabilities that we really see an increase in purchasing power and financial independence.
For for today’s argument, I’m going to be assuming (and happily making an ASS out of U and ME) that when I talk about “millionaire” and how much “they have”, that I’m talking about equity, and not just assets.
OK, so millionaires have a million dollars worth of equity
But let’s dig into that at little bit further. So we know that millionaires own at least a million dollars worth of stuff right? But what do most millionaires own, either to some large extent or outright?
Which is awesome; it’s probably awesome not to have to spend money on a mortgage. One day, I’ll know. But if they own some or all of their house, that means that a solid chunk of a millionaire net worth is tied up in an asset that’s not yielding any cashflow. If the average house price in the U.S. is roughly $190,000, then we know that anywhere between $50,000 and $190,000 of a millionaires net worth is tied up in their house.
Let’s just say, for argument’s sake, that $100k of that millionaire’s net worth comes from his/her house.
That means that the other $900,000 comes from other assets. Probably something along the lines of stocks, bonds, and maybe some more investment-style real estate.
So, let’s assume that our millionaire gets roughly 4% return on that money per year. If that’s the case, then our millionaire is making roughly $36,000 per year on those assets.
That’s it. $36,000.
It turns out that being a “millionaire” really doesn’t mean that you’re making that much money. Here are the problems with that $36,000:
- How long will it last – If you hit millionaire status at 50, and die at roughly 80, then you’re looking at making that $36,000 per year last for 30 years. Do you honestly think that you can live on that little for that long? I think it might be possible, but you have to start thinking about quality of life when you’re getting up there in terms of years.
- Inflation – That rat bastard. Inflation means that roughly 2% of your purchasing power is going to be eroded each year. Which means that yes, you might have $36,000 one year. But in ten years? It’s only worth $29,532. And in twenty? $24,227. Which means your money starts to lose value quickly.
- It’s not that much – The average salary in the U.S. is something to the tune of $51,000. Which means you’re not evening hitting the average. Yikes, bruh.
So what’s the solution?
The solution is to redefine what it means to be a millionaire.
That’s it, folks.
Gone are the days when being a millionaire actually implied something about the amount of financial freedom you could attain. We just looked through the facts that basically state that being a millionaire (a technical millionaire) doesn’t mean much for your bottom line. All it is now is a number (allbeit, a pretty cool one) that takes you from 6 digits to 7.
Don’t get me wrong, I’d love to be able to say that I had a million dollars in assets. And the crossing over from 6 to 7 digits is certainly a rite of passage for those of us in the personal finance biz. But to think that all you have to do is hit $1,000,000 and BANG you’re rich is poorly thought-out logic.
FINE PAUL!!! HOW DO I MEET YOUR EXCESSIVE STANDARDS, THEN?!
Woah, sparky. Don’t jump down my throat just yet.
I really think that figuring out how much the new standard of millionaire should have in assets is as simple as just reverse engineering the process, with a couple of caveats.
- We’re not going to include any residences that aren’t being used for investment. So your primary residence? You know, the one located in the good school district, next to parks and only a 10 minute drive from the local Target/Sears/Whole Foods? It doesn’t count. Nor does your condo in Miami! NO IT DOESN’T! If it ain’t makin’ you cash, then it doesn’t get counted in the millionaire calculator.
- We’re going to assume that in retirement, for it’s entirety, that a millionaire should have all that he/she needs, and most (but not ALL) of what he/she wants.
- We’re going to assume that retirement is going to last for 30 years. Because I’m sure we’d all like to retire early, and live well past the average, that puts us right around 30 years.
So what’s the number that we should be aiming for, then?
Well, we know that we’ll be able to make somewhere between 3-4% on our principal every year, in relatively safe investments such as T-Bills and bonds. We know that the average salary in the U.S. is right around $51,000. In order to hit the “everything we need, and most of what we want” I’d say that to double it and add a bit would be a good method. (I have this on good faith, as this is pretty much what my father earns, give or take. He seems to make due with trips to Vegas every few months, and literally has not thought about money in years.). So, let’s say that you need $110,000 to have “all of what you need and some of what you want.”
So if we reverse this, we know that we need the 3-4% of some number to come out to $110,000. If that’s the case, then we know we need something to the tune of $2,750,000 – $3,666,666.
Let’s call it a cool $3.3 million. You need $3.3 million in order to live a “millionaires” lifestyle.
The Tricky Part
I don’t have to have a gallon of veritas serum (sorry, watching Harry Potter) to know what your next question probably is…
“How do I accumulate $3.3 million dollars?”
Well, if you find an easy solution to that one, let me know. But here’s what I do know:
- If you invested $22,000 a year for 30 years at 9% per year, you would hit that $3.3 million. Granted, investing $22,000 per year is no easy feat.
- If you invested $6,600 a year for 30 years at 15%, then you would hit that $3.3 million. Now, you’re not going to get those returns in the stock market. But you can get those kinds of returns in real estate. At least, in terms of cash on cash return, which is what really matters in the end anyways.
- You can start your own business and somehow get it to a valuation of $3.3 million, sell it, and invest the sum of money you get from the sale. But realistically, you’re not going to sell a business for that much and then keep ALL the proceeds, ESPECIALLY if you have partners in the business.
So while we’ve established a new number that’s going to allow you access a “millionaire” lifestyle, the tricky part is going to be to figure out a way to get to that number.
I’ll race ya! 😉
What it takes to be a REAL Millionaire – The Wrap Up
Unfortunately, this article wasn’t a “feel-good” article, nor a “10 ways to…” article. But this one is really necessary to make sure you have a firm understanding of what it’s going to take in order to achieve the lifestyle you want. In a word, it’s going to take more than a couple of frugality articles and some tight budgeting. It’s going to take some intense saving, investing, and business…ing, to get there.
Remember, it’s $3.3 million or bust.
For more from The Code To Riches, check out:
- The Seven Steps to Avoid Being a Money Moron
- The 7 Vegetarian Meals That Are Saving My Budget
- How Much Is Half A Million Dollars?
- The 10 Best Finance Books Money Can Buy
- 9 Credit Score Hacks You Must Know
- Why I Never Want To Retire
- The Laziest Way to Riches – Investing In Index Funds
- Budgeting Basics – Allocating $$$ Like A Boss
- Fuck You, Frugality
- Why A Million Budgeting Tips Will Never Be Enough
Keep trying to crack the code,
Paul AndrewsFollow me on social media!