Many people say to me: “I can’t become rich like you because I don’t [insert excuse of choice: have a business; have a profession; earn a high income; come from a rich family; have much time left on this earth; etc.]”.
Now, they may be right … but, if they don’t even try they absolutely will be right 😉
Let’s tackle just one of these ‘objections’ : that you need to be a professional (doctor, dentist, lawyer, accountant, pilot; etc.) to become rich.
Here’s some bad news for you, if you’ve been spending the last 8 years working on your Masters so that you can get a job in a top national firm:
Being a professional is an impediment to becoming rich!
Three major reasons – besides the lousy rates that the health insurers pay doctors 😉 :
1. You have (or soon will have) a steadily increasing high (possibly very-to-super high) income, so your spending habit has this way of growing at least as fast.
The Millionaire Next Door gives a supposedly true story of two doctors on roughly $700k each a year: one was rich (as you would expect!) and the other was basically broke … it’s surprisingly easy to spend $750,000 a year, when you earn $700,000!
2. You have a built-in expectation of a certain minimum standard of living, which typically starts with the amount that you earned at your first job and continues to rise along with your pay-rises.
In other words you have a mental ‘bar’ that you won’t go below … that can have the inverse effect of limiting your upside. For example, it’s unlikely that a professional will give up his lucrative career to start a business (unless the ‘business’ is opening his own practice, in which case he still has a ‘job’) because his earning power will no doubt go down to an unacceptable level before it goes back up.
After 10 years, I was earning a $60k package at the IT company that I was working for, but I could only afford to pay myself $30k a year when I left in 1990 for IDB – In Dad’s Business 🙂 That poor excuse for a ‘professional’s salary’ did not increase past $50k a year for at least the next 10 years.
3. And Scott (who is a professional himself) seems to understand the third reason pretty well:
After tonight’s live feed, I really started thinking, worrying actually, about how in the world i’m going to reach my NUMBER. 10 million, in 8 years in my current profession. The guy I worked for (that i’ve recently semi-separated from) has spent his entire career, 20 years, opening multiple clinics with other doctors and eventually selling them to those Dr.’s. He has made a wonderful living for himself, been very frugal with his lifestyle and is definitely a multimillionaire, but I suspect not quite where my number is. My concern is that my Number and the time that I need it aren’t congruent with my current profession and would be near impossible to achieve just merely focusing on opening multiple clinics.
I’m wondering if focusing every penny that I make in my profession toward the purchase of more and more commercial real-estate is the only way I have a shot at getting to my number in time?? I know you were able to address this somewhat in the live feed today, but i’m not sure that just owning the real-estate that my clinics operate in will be enough to make my goals happen so i’m thinking that I may need to focus on other, more “big-time” real-estate purchases, the kind of purchases where “Subway”, “Blockbuster” and “Kroger” want to pay you for….Any suggestions on this, or what you would do if you could do it all again and were in my shoes?
The problem is that professionals who then do go into business (i.e. open their own practice, or start / buy into a multiple partner practice) find that those businesses aren’t worth that much – they often sell as a multiple of annual revenue, usually in the range of 0.75 – 1.5 of (say) the average of the last three years’ fees.
Since professional firms don’t tend to grow that large, and when they do it’s usually by bringing on more and more ‘partners’ across whom any profits – and proceeds of any sales – must be spread, the ‘big bucks’ that Scott is looking for just ain’t there.
So, the smart professionals – like the ‘rich’ one in the Millionaire Next Door example above – divert as much of their income-stream into real-estate and other investments as possible.
And, that can provide Scott and other professionals like him with a great nest-egg for their eventual retirement: they can buy the ground under their current practice and/or they can use their high incomes to support negative cash flows on multiple investment properties and/or build up multiple deposits.
The depreciation and other tax-benefits of investment real-estate also work particularly well for highly-paid professionals who otherwise have no legal avenues to ‘hide’ their income from Uncle Sam so would otherwise pay the highest rates of tax.
But, it’s a strategy that is unlikely to produce ‘super riches, super soon’ … which is what Scott is looking for.
The problem lies in simple math:
– Let’s assume that Scott’s total Net Worth is $100k today and he wants to get to $10,000,000 in 10 years; that means that Scott is looking for a 67% compound growth rate.
– According to Michael Masterson in his book Seven Years to Seven Figures real-estate (actually, a mixture or real-estate and stocks) is only good for a compound return of 25% – 35%. It wouldn’t matter if Scott was investing in the real-estate under his clinic/s or in Walgreen’s stores (in fact, his own clinics would produce a higher ROI than Walgreens real-estate due to competition) … he wouldn’t be able to push the returns much higher.
– If Scott put his returns on steroids by investing in a mixture of real-estate and small-businesses (as his ex-boss was doing by opening multiple clinics then on-selling them), Michael Masterson says that he may be able to push his investment returns higher: say into the 40% – 45% – 50% range. This could take him to the $3 million or $4 million that he suspects that his old boss has, but not the $10 million that he wants.
So, Scott, you – as do most other professionals – have a real problem … a problem that can only be overcome by opening your own ‘real’ business … the type of business that others will want to buy for many multiples of earnings because it isn’t tied to the personal exertions of you or the principle/s.