Many people dream of having wealth during their lifetime. For some there is a desire to retire early and re-claim their time. For others wealth is seen as a way to help their family thrive through education, or to be able to contribute to charitable causes.
While there are many paths to wealth, I will highlight three that I have experienced and observed during my time as a financial advisor.
Get Rich Slowly
In 1996 I read The Millionaire Next Door by Thomas Stanley and William Danko. The authors had surveyed millionaires and found that many had earned their wealth over a career of living within their means and investing the difference between their income and expenses. These millionaires ranged from highly paid doctors and attorneys to middle income teachers, plumbers, and middle managers. What they had in common was living well within their means. This allowed them to save a significant percentage of their income. After a few decades of compounding growth on their investments they were able to comfortably retire as multi-millionaires.
It is not enough to simply have a high income if most of it is spent. There are many highly paid professionals who appear to be rich but in reality have very little wealth.
By living below your means and investing the difference eventually significant wealth can be built. This is perhaps the most accessible path to wealth.
Equity Compensation
Your career choice and company you work for can have a significant impact on your path to wealth.
It is increasingly common for employees to have the opportunity to be compensated with an ownership interest in the company that they work for. This can take the form of non-qualified stock options, Incentive Stock Options (ISOs), Restricted Stock Units (RSUs), and Employee Stock Purchase Plans.
Equity compensation is common at both large publicly traded firms and smaller private startups, especially in the technology sector.
In the case of options (non-qualified and ISOs) you as the employee will have a leveraged position in the future growth of the firm.
For example, assume you were granted 1,000 non-qualified stock options to purchase shares in your firm at $110 per share any time in the next ten years (assuming no vesting period). You have the option (but not obligation) to purchase the stock in your employer for $110 per share. The firm trades at $100 per share, so currently your options are “out of the money”. If your company trades above $110 per share you could exercise your option, purchase the shares for $110, and then hold the stock or sell to lock in your gain at the higher market price.
Another way to look at this is that for each dollar the company trades above $110 your stock options increase in value by $1,000. If you keep working for the company, are granted more options over time, and the value of the company stock increases this can lead to rapid wealth gain.
Of course, for every Amazon and Microsoft there is a Lehman Brothers and an Enron (all companies where employees tended to hold significant company stock). If and when your company stock becomes a significant portion of your net worth good financial planning becomes important to balance the concentration risk against your long-term financial goals.
I have known many people over the years who were able to build significant wealth by choosing a growing company to work for, being successful enough to be granted significant equity compensation, and then sticking with it long enough for a payoff. There is certainly some luck involved but in many cases I have seen this as a successful path to wealth.
Business Ownership
Depending on the survey, a high percentage of wealthy people in the United States are (or were in the case of retirees) self-employed business owners.
A successful business owner is not only compensated for their labor but also on the profitability of the business. In addition, if the business owner can create enterprise value, the business itself can be sold in the future to unlock additional wealth.
Some paths to business ownership could include starting a business from scratch in your current field, purchasing a franchise, or buying an existing business.
While this is the classic way to build wealth it also has a high failure rate and is potentially the most difficult of the these three paths.
What all of these paths have in common is that wealth is built through equity growth. While having a high income is helpful, it is just as important to not only be compensated directly for your labor provided, but also to share in the upside of the business itself (or of other businesses in the case of investing in the stock market). In other words, being an owner (whether directly or through stock ownership) is the key to significant wealth building during your career.
