I wrote a post about the habits of the rich; it was really just an excuse to show a video interview of the ‘rich v the poor’ by Michael Moore that I thought was quite funny.
However, my take on this video drew some sharp criticism, so I countered with some comments by Prof. Thomas J. Stanley (author of The Millionaire Next Door and The Millionaire Mind) in a later post. To which Jeff said:
I’m only a couple chapters into the book but my big take away thus far is that being a moral person of high standards who owns and invests in their own business has been a key success factor. This is similar to the tone you take here at 7M7Y and one I’ve seen espoused in other books (e.g. “Get Rich, Stay Rich and Pass It On”).
Well, my experience is actually a little different to the findings put forth by both books – The Millionaire Next Door and Get Rich, Stay Rich and Pass It On – which, each in a slightly different way, are both attempts to interview wealthy families and ‘codify’ their findings into whatever the authors believe is the ‘true path to riches’.
As I replied to Jeff:
Just because that’s how MOST made their money, doesn’t mean that it’s the BEST way to make YOUR money … that’s what we want to talk about here. Of course, the Millionaire Mind does lay down some useful groundwork.
By the way, the ONLY thing that I found useful about “get rich, stay rich, pass it on” is their Benchmark (even that, I have some disagreement over … for example too much of these millionaires’ net worth is tied up in their personal real estate (home, second/third homes, etc).
Also, the book’s authors appear to have confused CAUSE with EFFECT:
Because so many millionaires have made their money in business, their conclusion is that if you are rich in some other way (say CEO, professional, consultant, etc.) and want to pass your wealth on to the next generation you should then buy or start a ‘real’ business … poppycock!
Now this might sound confusing, because – on the surface – we seem to be saying similar things, as Jeff observed:
Maybe I’ve misunderstood your philosophy. I read both 7M7Y and 7MIT and have used your methods to try and determine my own number. Through that process I have come to the conclusion that owning your own business is one of the best ways to achieve the necessary compound growth required to achieve my number.
So, now we get to the crux:
Making Money 101 : Business = Too Early
Making Money 201 : Business = Good
Making Money 301 : Business = Bad
Firstly, let’s understand why, then I’ll point to some exceptions that I believe actually confirm my rule:
Owning a Business As A Making Money 101 Strategy
Many people do, and by default you may find yourself in this situation … but, it’s very high risk: if you are in business AND in debt, with poor financial ‘housekeeping’ then you really are at the mercy of luck and circumstance … a business failure will simply wipe you out.
Unless you’re planning a very low cost part-time business as a way of helping you supplement your income – for the sole purpose of paying down debt, increasing savings, etc. – then I would recommend that you keep your ‘day job’, and get your financial house in order before plunging into a business of any kind.
Owning a Business As A Making Money 201 Strategy
This is all about increasing income and rapidly building up your net Worth … owning a business can be ideal (for some) for both objectives.
Of course, owning a business is generally well-understood as being a risky undertaking; but, as Jeff points out, the right business can have such a great return that it (a) justifies the risk and, (b) can help you achieve a large Number … relatively soon.
My advice is that you only undertake such a venture (and, adventure!) if you can stomach the roller-coaster ride that is inevitable.
What the Millionaire Next Door talks about is actually quite different: it finds that most millionaires are those who have held onto a boring business for a long, long time, tightened their belts quite a bit (cheap houses, cars, suits and liquor), thus building up a fortune very slowly, over a very long period of time …
… which may or may not suit your Number/Date requirements … or, your temperament!
Owning a Business As A Making Money 301 Strategy
This is all about maintaining your pre-retirement income after you stop working, while also maintaining your Net Worth … owning a business can be destructive of both objectives.
Yet, through comparing families that own great businesses with those that sold out, the authors of Get Rich, Stay Rich, Pass It On erroneously and dangerously conclude:
1. That you need to KEEP a business in order to maintain your wealth through both your retirement and the next generation/s, and
2. That if you don’t already have such a business you should go out and find one; and, not any boring, old business of the Millionaire Next Door type, but a high tech / high growth business of the 7 Million 7 Years type!
That is the surest way to put your hard-earned retirement at risk; because they recommend having 1/3 to 1/2 of your retirement net worth in such a high risk enterprise …
… haven’t the authors ever heard of ‘business failure rates’, ‘credit crunches’ and ‘tech crashes’ ?!
So, my strategy is very simple:
By all means have your high growth / high risk business when you are starting your journey and have time to fail and recover … just in case you aren’t wildly successful the very first time you try 😉
Then, if the business has ‘matured’ to the point that you are certain that you can leave it ‘safely in the hands of others’ (as I have for one of my businesses) to run for the next 100 years without you … then go ahead.
But, I would still prefer if you sold it and invested the money elsewhere … and, would certainly ask you to have your head read before you even consider buying / starting a high growth / high risk business in retirement (except as a ‘hobby’ using very small amounts of your own money, as I am doing).
The exceptions may be if you decided to buy a franchise or two (under employed management … unless living your Life’s Purpose involves you owning/managing such businesses yourself) or a car wash or other more ‘passive’ business purely as a potentially higher-returning ‘semi-passive’ investment, say, as an alternative or adjunct to a real-estate holding – if you happen to fee so inclined.
That’s the 7 Million 7 Year Strategy … what’s yours?