After working in the corporate finance sector for over 13 years, I’ve had some realizations when it comes to money and wealth. An employee, even a fairy well-paid employee may struggle to truly create the life that he or she desires from their employment alone. You see, I define financial wealth as having the capacity to acquire those dream assets, like the house or the car or the holiday home abroad with just cash and no loans or mortgage.
When I was a kid, I always viewed owning the £1m house as being the benchmark for being truly wealthy. Of course, with inflation a £1m house today may be worth £5m in the future – and in that same future, £1m doesn’t buy you alot. But essentially everybody’s dream home and desires are different. I just use a home as an example because it is almost always the biggest ticket item people want to purchase.
(My dream view)
And I specifically selected the salaries of a UK and US Investment Banker as they are the highest paid professions in Finance, and I want to illustrate that despite their earnings and status – it’s harder to acquire that £1m (or $1.5m) house with CASH ONLY – no mortgage.
I’ve put together 2 tables – one for the UK Banker, and one for the US Banker. The tables show how with age, the banker’s savings accumlate alongside the change in house prices.
This is only a model, and I have inserted my assumptions below each table – the key being that both bankers save away 20% of their annual salary;
UK Investment Banker financial path:
Assumptions: Salary & bonus growth at 15% annually, UK tax rates for 18/19, Personal savings rates of 20%, No interest on savings, UK inflation at 2%, Annualized house price growth is 3.7%. No other investments or sources of income.
US Investment Banker financial path:
Assumptions: Salary & bonus growth at 15% annually, US effective tax rates for 2018, Personal savings rates of 20%, No interest on savings, US inflation at 3.22%, Annualized house price growth is 5.4%. No other investments or sources of income.
From the UK table, it would take the employee (starting at a £40k salary) 34 years before they have acquired enough savings (£3.49m) before they can afford that same £1m house – which is now valued at £3.316m after 34 years.
From the US table, it would take the employee (starting at a $60k salary) 42 years before they have acquired enough savings (£13.12m) before they can afford that same $1.5m house – which is now valued at £12.958m after 42 years.
This line graph summarizes how the accumulated savings largely lag the house value over time;
You may look at my total compensation figures and find them to be conservative. But you gotta bear in mind the economic cycles, burnout and structural changes to the industry. Again, this is purely a model with my own researched assumptions. Even, the savings rate of 20% is an average. Some people save almost nothing and purely rely on living pay check to pay check.
Of course, after 34 or 42 years, and with that kind of savings, the banker may choose to buy a property elsewhere where there is more value for money or even downsize. But, the point is that, upon seeing their dream house (valued at £1m or $1.5m) when the budding banker was 21, it would take them a helluva time before they can pay for it outright in cash.
Sure, the banker can still take out a mortgage to make up the shortfall at any time during his career to buy the dream house. But it would just mean continuing to work for another 10 or 15 year to meet the mortgage payments.
The above data illustrates that an employee (with no other investments or income sources), will struggle to purchase their dream asset if they were paying for it in cash. However, being an Entrepreneur and owning several businesses and sources of income can help you achieve this goal.
Sure, the business owner may not pay himself much in comparison to the earnings of a top ranking Investment Banker, however the benefits of having multiple sources of income are as follows;
- Not subject to economic downturns as much as an employee, who may lose their job. The Entrepreneur can rely on other sources of income if one or two take a hit;
- Not working for anyone else. Be your own boss. As a result, take as much time as you need off;
- As a business owner, you have controlling ownership in your company which leads to my next defining point…
- More chance of huge cashflow or liquidity events. What this means is that one of your businesses could eventually be sold or partially sold for seven-figures if it’s a successful venture and has been creating huge value for customers. Alternatively, a minority stake in your overall portfolio company can be sold to investors. These events create huge windfalls and allow the Entrepreneur to purchase those dream assets much earlier. And they don’t have to one-offs either.
- Another benefit of entrepreneurship is the incredible satisfaction you gain from creating something out of nothing. Having the freedom to do whatever you want provides for tremendous happiness as well.
I highly recommend that everyone should start their own business, and in particular – an internet business to leverage the lucrative digital economy. There are so many ways to make money online (refer to my post to ‘4 Realistic Ways To Make Money Online‘) as well as;
- Blogging (written and video)
- Online training courses
- Downloadable templates
- Video subscription
You definitely need to start by creating your own website, create a blog and build your brand and potentially access over three billion people online. And you can do this so easily and cheaply these days.
If you would like to make the first step to creating your online business, and learn how to market effectively online, click below to access a free video series workshop that will really open your eyes to the possibilities for making money. You will wonder why you didn’t start this process earlier! In fact, that’s something I always ask myself, especially having gone through the traditional route of academics and employment.
Take the first step to your freedom friend.
Best of luck