In the answers shared today I focused on:
- How can somebody accumulate the first million? What are the top two or three strategies for doing so?
- What are some lessor known strategies for building up wealth? Why is implementation so important in the digital age where everything is available online?
- Why do people who make $100,000 a year feel poor in some situations? Is it only that they are living in high-cost-of-living countries, or are there other considerations at play?
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Itis quite a broad question, and in reality there are many routes to this.
Firstly, there is luck.
This could include:
- Winning the lottery
- Marrying into wealth or marrying somebody who becomes wealthy
it isn’t good to rely on luck though, nor does it usually work out for people to make decisions about who to marry based on wealth solely.
Moreover, most wealthy people are now self-made:
The above statistics also tend to be true for people who are millionaires as well.
So there are two more routes which are common
- One way people can get wealthy slowly is just to invest every month for decades
- By leveraging time, people don’t need to invest that much either
- Numerous studies have shown that in developed countries at least, the majority of self-made millionaires are millionaire next door types, who have became rich slowly by just holding onto assets like ETFs for a very long time.
- Take the below statistics. It shows that the majority of millionaires in the US are above 40, and I have seen similar statistics for the UK, Germany and other countries:
- That doesn’t mean you can’t do it sooner, but your income needs to be high and your spending habits decent to have a chance to produce a big enough surplus to get to millionaire status in your 30s and especially 20s.
- An estimated 14% of the world’s millionaires are in education, which shows you don’t need to have a super-high income to become wealthy.
- I imagine that a lot of the 1.78% who become millionaires young, as alluded to on the last point, have started their own business. Or, alternatively, they are paid on performance and not hourly.
- This is a different route to success. The process is more high-risk/high-return than getting rich slowly as per the first point. The failure rate is much higher as well.
- As the internet has made it easier for people to start businesses with less money, expect to see more successes and failures in the years to come. In another 10–20 years, we can expect to see more young millionaires, as more people try working for themselves, but also more failures.
Of course, in the real world, people also often combine these two elements.
Many people sensibly diversify from their core business, and still invest privately, regardless of how well things are going.
Covid and lockdowns have once again taught us the importance of managing risk.
In terms of habits to cultivate for either option, I would focus on:
- Reading a lot. Getting good ideas from that and associating with the right people. So, getting rid of toxic influences and people and finding positive ones.
- More importantly than having good ideas, is implementation. Ideas don’t pay the bills
- Don’t procrastinate. Execute. Set up that investment account. Start that business if it really makes sense.
- Don’t just scale your spending as you earn more (lifestyle inflation). Many people earn more but can’t invest more.
- Take calculated risks, especially when you are young enough to take them.
- Play the numbers game. You might need to try loads of ideas for one to work. People assume that somebody just got lucky catching a trend, but the more you practice and play the numbers game, the luckier you will become.
- Don’t care about what everybody thinks about you. Not everybody will share in your success.
- Don’t become complacent if you achieve success. Keep increasing your ambitious without always increasing your risk.
Also, be very persistent and patient. If it was meant to be easy, everybody would do it.
We live in a world of open information now, due to the internet. There are fewer “secrets” than a few decades ago:
So, the money is in the implementation. Many people know strategies, but few execute.
I will give you a health analogy. Almost everybody, and not just doctors, now understand the basics about good health.
Exercise, health food and avoiding some vices. Many know more than the basics.
Yet we aren’t healthier than previous generations as execution has become more difficult due to advertising and other factors influencing our choices.
The same is true in financial and wealth, but to a lessor extent. More people than ever know some basics about wealth creation, like the importance of investing early due to compounded returns, but few implement, even if they can afford to.
In any case, there are some strategies, tactics and knowledge which few are aware of
- Changing your residency to reduce cost of living and taxes. Most people are aware that some countries like Monaco and the UAE are tax-free on most forms of income, unless you are American or from countries that tax you based on citizenship (Eritrea and North Korea as well as the US). What fewer people are aware of is that there are over fifty countries that don’t tax on residency, but on a territorial basis. In other words, locally-sourced income is taxed, but most forms of overseas income aren’t. Examples include Singapore, Malaysia, Thailand and some countries (like South Korea and Japan) don’t tax overseas income for foreign residents in the first 4–5 years, and then they start taxing it. Of course though, there are caveats to this. If you are a business owner, you can’t live in Thailand and pay 0% tax on company and personal income tax, unless you also offshore your business to a jurisdiction which doesn’t charge business taxes. It is also better to seek advice. Yet the basic point is valid. If you work for a UAE or Cayman Island employer, and live in say Malaysia or Thailand, and don’t actually bring the money into the country, you can legally pay 0% income tax. A lot of these territorial countries are cheaper than places like Monaco which are ridiculously expensive
- Linked to the last point, it is possible to buy residencies if you are a retiree or working age person. Take the aforementioned example of Malaysia. They had a program called MM2H, which was recently cancelled. In return for putting between $50,000-$100,000 in a local bank account, you could get residency. Some retirees, digital nomads and online business owners used this scheme to get residency to reduce taxes and cost of living. That is one example I could have given of many. Since the pandemic, some countries have closed down their programs, but others have opened some up. Take Bermuda as one example of many I could have used – Bermuda Welcomes New Residents – Coronavirus (COVID-19) – Bermuda. Some other countries allow residency by real estate investment. Thailand has recently tried to stimulate the falling housing market by bringing in a new scheme.
If you reduce your taxes legally, and also cost of living, it will make a massive difference if you are young or relatively young.
That is because your surplus to invest will skyrocket. Simple example. Let’s say you are a high-income business owner in Australia or the UK. I could have used other countries as examples of course.
If you are earning $500,000 or currency equivalent, $200,000 would go on taxes, if not more, especially if you include indirect taxes.
Now let’s say you spend another $150,000, as you are stressed due to long hours and so on.
Now, if you moved to a lower tax and cost of living country, you would say up to 200k on taxes every year, and reduce your spending to live the same lifestyle in some cases as well.
I personally, in my own network, know plenty of location-independent business owners and digital nomads who have done this.
This has included people earning very little, through to mid-income and high-income people.
Eventually, as this becomes more common now the pandemic has ensured that more people can work remotely, an increasing number of countries might go down the US’ dreaded citizenship-based taxation system.
If that happens, only people who are willing to renounce their citizenship and residency would be able to do this.
Nevertheless, to go back to my original point, even these lessor known strategies are easily found online, for people who search for it.
Below is some of the most expensive cities in the world for rent:
It is a world anyway from some towns and cities, where you can rent a decent place for a few hundred.
The point is that gross income isn’t important. What is important is how much you can save after tax and cost of living.
If you earn $100,000 in the UAE, or many other tax free places, you are left with $100,000 net.
In some low tax places in Eastern Europe and beyond, you are left with $80,000-$90,000 net.
In some places, you are left with $60,000 net after taxes and not much else after.
If you are earning $100,000 in some parts of the US, or somewhere like London, at least half (or more) will go on spending, and 30% or more on taxes.
$65,000 net of taxes isn’t a lot for a family of four to live on in Central London. It is a lot of money if you are living in some parts of the world.
I was speaking about this to an expat friend of mine. He made 350k a year in Singapore but saved and invested about 35k due to all the distractions and costs.
He saved 70k a year living off 130k in Vietnam a few years ago, having moved from Singapore.
Yet few people are as concerned by the purchasing power parity of their money, as the prestige of earning more.
This is one reason why in many high-tax countries, business owners don’t make much money on paper.
In some countries the name of the game is to reduce your taxable income, and use more for expenses and business expansion.
Another reason is perspective. People tend to judge themselves by the company they keep.
If you are surrounding yourself with people who are earning much more than you, you can feel poor even if you are earning $1M.
Likewise, many people in some parts of the world feel “rich” or at least well off earning 3k a month.
I remember when I lived in China many years ago. In a third tier city, one of my Chinese acquittances thought 10,000RMB a month (about $1.700 a month) was very well-off.
30,000RMB (about $5,000 a month) was really considered to be quite excellent.
Yet if the same people went to first tier cities or Hong Kong, they often felt poor, because of the cost of living but also the law of comparison.
Now, that was 10 years ago, and things have changed, but the point remains the same.
Finally, you have spending habits. Many studies have shown that people earning between $35,000 and $100,000, are much more likely to spend on luxury items than people earning much more than that.
This is especially the case with consumer goods which are dead money, but it is also the case with purchases of watches and other items.
Take the statistics on Rolex’:
Americans who own Rolex watches 2018, by income | Statista
People earning between $6,000-$9,000 a month are more likely to own them than people earning more.
The keeping up with the Jones’ mentality also can affect the issue you allude too.
In the answers below I focused on:
- How can somebody living in Africa invest in US stock markets? Is DIY or using an advisor better?
- How can somebody build wealth from the age of 18?
- What are some of the biggest reasons why many wealthy Chinese people invest overseas?
- Why are stock markets increasing during moments of uncertainty like this?
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