Here at The Money Gym, we teach people there is only four
ways to make money - using what we call the "Four Lanes Of
The Wealth Highway". People get easily overwhelmed (I
certainly do!) and if they feel overwhelmed, they feel
helpless and therefore unable to take action. In Malcolm
Gladwell's "The Tipping Point" he says that any number
between 3 and 7 is manageable, so 4 is a good number to
move forward with.
By breaking it down into the "Four Lanes" we can break down
the question of how to become a millionaire within five
years and examine each lane to see how suitable it is, as a
vehicle to reach this goal.
We can then look at the fastest way to make money in each
lane, then examine how achieveable this is, then look at
what will need to happen to tackle the plan, then time-line
it so we have some interim goals.
This article is in three parts so make sure and hunt down
Part 2 and Part 3!
Luckily we have lots of experience in this kind of
strategic wealth creation planning, as The Money Gym has
worked with hundreds of people who have asked a variation
on that question many times before.
First though, let's look at the definition of a millionaire
and then lets dare to ask the question "why"?
1. What is the definition of a millionaire?
The official definition is someone who has more than
£1 million in assets, after taking all liabilities
(debts) into account. And the other consideration to take
into account, is how much are they paying for that debt.
Thus who is better off? Someone who has over £1
million pounds worth of equity in their house and a
mortgage of £500,000 at 6% over 25 years, with no
consumer debt? Or someone who has £1 million of
equity and a mortgage of £200,000 at 6% but
£100,000 of consumer debt at 14%.
Once you know that £3000 of consumer debt at an
average %, who is only paying just over the minimum off per
month, will take 37 years to clear...it becomes obvious who
is the more financially intelligent person there.
So once we know that you need a million pounds worth of
assets to be classed as a millionaire, we can look at
questions like "is it better to have a million in the bank
or a million in equity in your house?"
The latter is the financially intelligent answer, as the
million in equity has traditionally doubled in value every
7-10 years in most of Europe, the USA and Australia, so
£1 million in equity will make another million in 10
years. What's more, there are ways to get at that money
legally and tax free!
Whereas £1 million in the bank might be making 6-10%
per annum at a push, but the rise in the cost of living and
the fact that you will pay tax on any interest at your
highest rate (40% or more if you have those kind of assets)
will ensure that your million is effectively shrinking not
growing at all.
(Dont' believe me about the doubling in value? check your
local Office of National Statistics website)
2. Why Would You Want To Become A Millionaire?
Moving onto the question of "why" we have to consider the
question of why you would want to become a millionaire?
Most people would answer one of the following:
1. Freedom
2. Choice
3. Peace
Freedom from a job they hate, to spend time with the kids,
to travel. Choice of how to spend their time, whether to
have another baby, where to live. Peace from worrying about
money and from having to do things they hate.
Well, you don't need a million to achieve all that. This
was a personal revelation for me!
You just need to create a passive income from your
investments to be able to cover your living expenses.
If you are having a pretty nice life on say $2000 net pay a
month, and you are working for that and having tax deducted
from your gross pay, then you only actually need to
generate about $2500 gross a month from your investments,
as there are quite a few more tax breaks for business
people and investors than there are for the employed. (A
great book to explain this clearly is "Swimming With
Pirahna Makes You Hungry" by Colin Turner).
So let's say a really great living would be $5000 a month
and you don't need a million in the bank, then all you have
to do is look at each "Lane of the Wealth Highway" and
figure out which one is most likely to get you to a passive
income of $5000 a month the quickest.
So what are those "Lanes" that I keep talking about, then?
1. Property Investment
2. Business
3. The Stockmarket
4. The Internet.
LANE #1 - THE STOCKMARKET
Now, I'm going to largely leave the stockmarket for now, as
the learning curve involved is a bit steeper for most
people, but briefly, in order to generate 12 x $5000 a
month, you would need to be generating $60,000 per year
from your investments.
If you assumed that a good investment was generating say
20% per annum (and I know of many simple strategies that do
that and more) then you could say that you would need to
have $300,000 invested to generate $60k a year at 20%
return.
The other challenge with the stockmarket is that you have
to sell, to realise the cash, and that incurs charges, and
capital gains tax.
LANE #2 - BUSINESS
Business is the way many of the wealthiest people in the
world have made their money. They then often put their
money into property and I'll come to that lane in a moment.
So what would it take to become a millionaire from the
business Lane of the Wealth Highway?
You have two ways, to create a business that can pay you,
over and above the amount you need to live on, $1 million
over five years. So say you need that $60k to live on every
year, your business would have to pay you $60k x 5 =
$350,000 plus another $1 million (or $200,000 per year).
Now that nasty thing tax kicks in again.
if you want $1,350,000 out of your business but you are on
40% tax again, that $1,350,000 represents 60%, so you will
need to be paid $2,250,000 in total over the five years or
$450,000 per annum gross.
I worked this out by dividing the amount you want to take
home by 60 then multiplying it by 100 to get the gross,
after 40% tax has been deducted.
If you calculate that a business can afford to
pay.....say.... 10% of it's profits to it's founder, then
in order to pay you $450,000 gross per annum, then it must
be making $4,500,000 ($4.5 million) per annum in pre-tax
profits.
Now all you have to do is figure out which business to
start that has that potential, and start building it.
The other, more attractive way, is to build up a business
and sell it, usually for a multiple of turnover or profit -
each industry sector is valued differently. Sometimes
businesses are valued and then sell for x 5 annual turnover
or x 10 annual profits for example.
So for you to pocket $1 million within five years, you need
to enter a sector with good high valuations on sale, and
then build your business to the levels when it becomes
attractive to a potential purchaser.
If you are in a x 10 multiple of profit kind of sector, you
need to build your turnover to profits of $100,000 per
annum. Other factors are a good database of customers,
repeat business ideally on some kind of automated marketing
system and they really don't want the business to be
dependent on you being there!
"Rich Dad's Guide to Investment" by Robert Kiyosaki is one
of the best books I've ever read on this topic.
So that covers the stockmarket (not in detail but it's
there) and the business Lanes of the Highway.
I will cover Lanes #3 and #4 in the second part of this
article.
----------------------------------------------------
Nicola Cairncross
Wealth Coach, Speaker, Author &
Founder, The Money Gym
http://www.TheMoneyGym.com/Blog
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