Recently I was having a conversation with a friend about a new job he has found himself in.
His focus is to get some solid savings behind him and build wealth. I commented that I was really pleased for him because he was genuinely enjoying what he was doing and I thought he was in a great position to achieve his goal of building wealth.
Afterwards I couldn’t help think about it a bit more.
There are a few things that are essential to building wealth, but the more I think about it there is one which easily rises way above them all.
Firstly a few quick things to get out of the way because writing about wealth can be a bit cringeworthy at times.
I’m not saying that building financial wealth is the most important thing in life – good health, being happy, having good friends, a loving family, seeing and doing amazing things etc. are all more important and can be achieved without financial wealth. This is a realisation that has become clearer to me recently and I wrote about it here – What if Money Were No Object?. However I do believe having wealth takes away a bunch of worry and allows for more opportunity to get the most out of life.
Being financially wealthy also means something different to all of us – so to be clear, for the basis of this article I am talking about building a net worth of at least £500,000, but preferably £1M. Basically enough to live in a nice pad mortgage free and to have the funds to enjoy life without relying on anyone.
Ok with those out of the way, lets get into it.
Living below your means, getting into a well paid job and saving as much as you can will only get you so far – and probably not far enough.
There…. I said it 🙂
To give some context to that statement. Lets first assume you work your way up to £50K annual income over 10 years (age 25 to 35) and then sit at a £50K annual income for another 20 years (age 35 to 55), always staying in work – reasonably good going right? Now lets also assume you managed to consistently live below your means and save an average of 20% of what you earned – again, a pretty nice assumption. Based on that you’ll build approximately £200K in net worth by the age of 55.
For the record, I made some very crude assumptions on income tax and interest on savings in that calculation, but nothing else. Perhaps gains in property or some wiser investing of savings will help you do better, but also bear in mind that the assumptions in the above example (£50K salary level, staying in work for 30 years and consistently saving 20% of your income) likely puts you way above the average – so it all probably evens out.
Now, £200K net worth is nothing to be sniffed at and to do so would be first world problem whining for sure – but it ain’t ‘mortgage free, retiring at 55 and living the good life’ money. It’s actually quite the opposite – ‘still having a mortgage, working till you’re 65-70 and relying on a monthly pension’ money.
Hopefully I haven’t just depressed you with this, that wasn’t my aim.
But it’s important stuff to worry about.
At least for me, my fear of reaching my 50’s and not having enough net worth to comfortably enjoy life scares the shit out of me and has been a large source of my motivation in the last 10 years.
So how do you break into the £500K to £1M range?
Get a ‘touch’ (in fact get several of them)
What do I mean by get a ‘touch’?
I mean finding yourself in a position where you attract a lump sum, often multiple times your annual salary. And you probably need a few of them in your lifetime.
Here are a few examples of how that can happen:
1. Start and sell your own business – I’m not talking about creating the next FaceBook. A good example is I started a company when I was younger which I later sold my 50% share in. Whilst only for a modest amount, it was still considered a ‘touch’.
2. Negotiate a revenue linked bonus – if you can become a key player to an organisation you stand a chance of negotiating a bonus linked to revenue (preferably with no upper limit) – you’d actually be surprised what you can get it if you are truly invaluable to an organisation and simply ask. I’ve known this happen to a few people who never have to work again as a result.
3. Get share options in a company and be there when it gets sold – finding a good company that is going somewhere and then getting share options in that company (most good companies will have such a scheme) is achievable for everyone. Again being a key player gives you leverage – firstly to get options (not everyone in an organisation always gets them) and secondly to get a meaningful amount of them. When there is a liquidation event, you’ll be able to exercise your options and cash out. I know people who have cleared their mortgage in this way.
4. Invest in property – this is a little harder nowadays given the levelling out of the housing market, but if you educate yourself and make smart choices it can still be done. I have friends who have gotten into the £500K to £1Mnet worth range on property alone.
5. Invest – in the examples above I assumed standard interest rates on savings. Obviously you can take a percentage of your savings and decide to have more risk for higher reward. Investing in higher risk markets, angel investing in start ups, backing an individual you know well to start a business etc. All properly risky though and it can be easy to go backwards with a few bad choices. Be careful.
When I think about the people I know who have what most would consider reasonably impressive wealth (roughly in the £500K to £1M range) they all without exception built it by having a few key situations which generated the large majority of it.
Whether it’s making a killing on property, running a business and having a few key touches along the way, benefiting from the success or the sale of a company or selling their stake in their own company, these ‘touches’ helped build the majority of their wealth.
If you take just one thing from this article, take this – try and find your way into situations that can kick you a years or perhaps a few years salary as a lump sum. It’s almost impossible to build real wealth without it.