Want To Be A Millionaire? You’re Chasing The Wrong Goal
Want to be a millionaire? Who doesn’t? Maybe your goal is to be a millionaire by 30 or 40 or in 5 years. If this is what you’re working towards, I’ll let you in on a secret, it’s probably the wrong goal.
In 2006, after reading “The Millionaire Next Door“, I figured if I could just hit seven digits in net worth, I’d be able to retire early.
Fast forward eleven years. It’s 9:15pm on a cold Tuesday night. A sharp winter wind is blowing straight through our rickety window frames (must remember to install those window seals) and all I can think about is my warm bed, when my husband thoughtfully turns to me and says that our net worth is over a million dollars.
And then….nothing happens. No fireworks or champagne or confetti. Which is probably lucky because the wind keeps on blowing and we all know confetti makes a mess. Yup, mother nature doesn’t stop even for millionaires.
Actually, I think he’s got it wrong, but at that point, all I want to do is sleep. And the truth is, our net worth at this point is irrelevant. It’s not like either of us can retire at the end of the week.
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Wait, everyone says net worth matters more than income
Yes, net worth is king. It’s a very useful way to measure the health of your finances and provides a representation of all the good financial moves you’ve made. Ideally, all of your assets less your liabilities should add up to a positive number. If yes, congratulations.
But there is one thing that is more important than net worth. It’s your goals. Realistically, the main beneficiaries of you being a millionaire are the people listed in your will. You have written a will right? Because to make the most of your net worth, you would need to liquidate those assets.
Which means you’d have no house to live in, or car to drive, or watch collection, so you’d never know what time it was. Probably not a big deal if you’re dead, but a problem if you need to catch that 6:15pm movie tonight.
Have you ever heard the term asset rich, money poor? It characterises many baby boomers in Australia who are sitting on a million dollar property, but struggling to make ends meet on the pension.
Why? Because a high net worth doesn’t necessarily make passive income when it’s tied up in assets that don’t generate money.
Your primary residence is one example, but another is shares that don’t pay dividends or a rental property with lots of equity that is negatively geared. And of course there is good old untouchable super if you’re under the preservation age.
This means that if your goal is creating passive income, forget chasing a million dollar net worth.
Unless you’re specifically looking to create a legacy, your main driver is likely to be replacing the income you get from your job. If that’s the case, then you need to reframe from ‘I want to be a millionaire’ to:
‘I want to generate $50,000 a year in passive income by 2020’
‘My goal is to have 7 different streams of passive income’
‘I’m going to find a residual business income opportunity in the next 12 months’
Even if you have no plans to retire, it’s worth having multiple streams of income in case your primary one – your job – goes down the gurgler. Multiple streams of income hands down offers the best form of financial security.
It’s a lesson that I keep on learning over and over again even when I love my job. Stability is an illusion.
Best Ways to Make Passive Income
There are literally hundreds of residual income opportunities. They fall into two main categories:
- Creating a business
Passive Income Investments
The advantage of investing is that it’s very easy to get started. You can literally invest your spare change if you decide to use an app like Acorns or pop your money into a high interest savings account.
Investing also doesn’t take a lot of time, either up front or while you’re earning an income from it and you are likely to get a return on your money.
The downside of passive income investments are:
- You need capital upfront;
- Many options, like rental properties are medium to long term investments – you’re unlikely to see cash flow for many years;
- The rate of return is limited – over the long term you can expect to get a 7% return;
- There are risks with all types of investments.
To figure out which investment option is best for your situation, consider the risk, likely return, ease of investment, liquidity, and the amount of your time that’s required to maintain it. Also keep in mind that some options are better than others in different decades.
Once upon a time, you could have had a respectable income from bonds. That’s the approach recommended by Jo Dominguez in “Your Money or Your Life”. That’s not true today and is one of the reasons why property investments have been the go to option on the east coast of Australia.
Typical passive income investments include:
- High yield savings accounts – interest
- Term deposits or Certificates of Deposits – interest
- Bonds – interest
- High dividend stocks – dividend payments
- Investment properties – rent
- Realised capital gains from sales of assets like investment properties
Creating A Business: How To Make Passive Income Online
The advantage of starting a location independent business is that unlike investing, you don’t need a lot of money to get started. You can turn your computer into a money making machine via the internet with very little upfront.
The amount you can earn from your own business is virtually unlimited. In fact, most billionaires have made their fortune by starting their own business. As Dan Gilbert the founder of Quicken Loans says:
“those who seem to be motivated by taking a great idea and turning it into reality are the ones who end up acquiring significant wealth”
Ways to make money online include:
- Start a blog
- Create a niche site
- Teach an online course
- Selling your photos through Shutterstock or iStockphoto
- Writing a book and earn royalties
- Building an app
- Build an ecommerce store
- Design greeting cards
- Start a You Tube channel
How much can you expect to make from online income sources? Until you find the right strategy, probably pennies, but after that, the sky is the limit.
The realities about earning money online (or any other business)
Where investing is easy to get started with, creating a passive income business that pays a decent amount isn’t. If it was, everyone would be living off the residual income opportunities out there. Nicole Pedersen-McKinnon of The Money Mentor Way says this about creating passive income business:
- They’re an extraordinary amount of work up front
- It’s not necessarily cheap and you may need to invest a fair bit upfront
- There is ongoing maintenance even with the lowest maintenance opportunities like
“I don’t believe the overnight success exists. There’s a lot of hard work and time involved beforehand.”
On the upside, Sam from Financial Samurai believes that anyone who is willing to dedicate at least two years to their online income source, can generate $10,000 a year from it.
Diversification is an important part of managing your money and I believe it shouldn’t be any different when selecting passive income streams. Especially if you are planning to live off them.
Allegedly, the average millionaire has 7 income streams, which include a mix of business options and investments.
Personally, this is how we earn passive income:
- A rental property
- High yield savings account with RAMS
- Share investments
- Several blogs
- Plus one and a bit traditional incomes
At the moment, the rental property and blogs are making a loss and overall, we’re only making a few thousand dollars a year from passive sources. So despite our net worth, we still need a job to pay the bills. At this stage we’re reinvesting your passive income entirely, so year on year it should keep growing.
Over the coming years, my goal is to create more passive income sources rather than growing our net worth.
To sum up, your net worth is the best measure of your overall financial well being. But if you’re looking to make money while you sleep, then becoming a millionaire is the wrong goal. Re frame and focus on sources of passive income instead.
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