Entrepreneurship

Realistic Path to Wealth

Oftentimes you may hear a family member, friend, random classmate, or hell even the kid you despise all boast about the same thing. Pardon me, post the same thing, usually on Linked-In. Along the lines of, “I am excited to announce I will be joining XYZ firm…. I want to thank *half-ass* mentor A, my professor, and oh yeah my parents.” In essence, some variation of announcing an entry to the mid-level position that they believe will begin their road to riches. The question is, is this a cause of celebration? The short answer is yes, (we’re not the Grinch). The long answer it’s complicated, but no. Insert theme 1

Trading Time for Money

To argue against the entire foundation of capitalism would most likely lead to an early exit and possible block. So I won’t do that, instead, I will illustrate why capitalism works for some, and why some work for capitalism. The most finite resource in the world, the only asset on the planet that can not be replicated, or bought is time. More valuable than any amount of money (if you don’t believe me ask again when you are 85 years old). Enter the average American..

Before I upset anyone, there is nothing wrong with being average, once again… There is nothing wrong with being average. One last time for the people in the back, there is nothing wrong with being av… I’m assuming you are fed up, good that’s the point. Continuing on, a simple illustration of why a job most likely won’t get you to what you consider as wealthy:

A sane capitalistic company: Pay you 200,000, because you earn them much more.

An insane company that doesn’t exist: Pay you 200,000 because you earn 200,000

Now at this point, I hope you are thinking to yourself “They didn’t do any of the work that makes them get the money I worked for.” In fact, the one reaping these rewards, the owner was probably sleeping, or better yet riding his Jet Ski in the Bahamas. I’m sure this is aggravating as it should be, doesn’t change anything. The fact of the matter is that Capitalism rewards those who take the largest monetary risk. Enter in the know-it-all “yes, yes risk/reward.” Well no, not necessarily. The fact of the matter is when starting a company there is a limited downside, an unlimited upside. Meaning, if you invest 40,000 dollars to start your own company, the most you can lose (unless you’re an idiot) is 40,000. And the upside? The upside is by default unlimited, meaning theoretically with some luck the company could grow exponentially for years to come. Does this always happen, of course not. But does it happen enough to make it proven, well you tell me, go to your nearest city, look at all the businesses, and take a guess at how much money the owner has. Hint: It’s more than you.

So what does time have to do with this? Well as previously mentioned the business owner was probably riding a jet ski while you were formatting that Excel file. How you may ask? Equity. The rules state (I don’t make them) that the rewards, or in our case the profits go to the owners of equity. Is this making it much simpler than it actually is? Of course, but in general, this is what occurs. As the business grows, technically the owner can delegate all roles while simultaneously keeping the most amount of the profits, due to owning the equity.

Where does that leave you? You could give a rat’s a**’s about some made-up millionaire. Me too. That most likely leaves you at a job, whereby probability the more you get promoted (if ever), the more difficult it is to continue to get promoted. I.E. the higher you go up, the fewer spots there are above you. Not to mention if the company only makes 3 million a year, news flash you aren’t making anywhere near that. As mentioned, the owner is still relaxing, in fact, he’s off the jet ski and getting a tan now. So as we interest you more…

Let’s take a look at the business owner in terms of growth opportunities. As an employee, you most likely are rising the ranks Machiavellian like most C-Suite employees. As an employee we mentioned the higher you go, the more difficult it gets to grow your salary. Right, well for the business owner, we see the opposite trend. As the business grows, opportunity grows. New avenues, acquisitions, and relationships are being built and doors are open. Now is it as simple as opening an LLC and becoming wealthy within two years? Of course not, but this is the simplest explanation of what often occurs.

The reality is the majority of millionaires are small business owners. Not to mention, taking into account that employees can get fired, education can be necessary to rise, and opportunity cost rises as the job demands more as you get promoted. As you can see the list seems to get worse as you get promoted.

Well, what about the earnings? You see, as the employee breaks their back to increase productivity, they most likely don’t see the rise of earnings in their paycheck. Why is this? Well you didn’t take the original risk to start this company, and you don’t own any equity. While the owner, who does own most of the equity gets to keep the money you are providing toward the firm. This may sound unfortunate but this is the reality of how capitalism works.

So what do you do?

Well, it seems we have given you the ideology, but of course, that is not enough. We will save that for another time.