Original question from Quora:
Is it true that “you won’t become rich working for somebody else”?
It depends on how you define rich. You see, rich is a relative term and it is relative to both where you are and what you wish to do.
For example, there are many places where you can live on $10,000 a year in income, live near beautiful beaches, and have a fabulous lifestyle that in other parts of the world you couldn’t buy for $100,000 a year.
Also, how much do you want? What is it that you truly desire?
To many who grow up on food stamps, $50,000 per year is a lot of money. To someone who grew up in the family of successful doctors, lawyers, or businessmen, $50,000 is a low salary for a barely entry level position.
In the midwest, $40,000 is a good salary. On the east or west coast, you might need $90,000 to live the same way.
The idea of “rich” is in no way absolute at all. Sure, maybe over $100,000,000 you are rich anywhere you go, but compare a millionaire to a billionaire and it can be night and day.
That is the sort of funny thing. It seems like rich should be a destination and that wealth is some objective thing, but it far more contextual than most people realize.
That being said, can you become “rich” working for someone else? For the sake of what we are talking about, let’s say rich would be having somewhere between $1–5 million in the bank in cash and having all your debts paid off. At that point you are “liquid” or you have reached “F.U. Money”.
Basically, let’s say rich means you have enough money to do what you desire and have no objective need to make more money to survive almost anywhere in the world.
Can you get there working for someone else? I’m going to say 99% of people won’t get rich working for someone else. Even their 401k plans and whatnot will barely pay for a decent retirement.
Most people will never become cash millionaires working for anyone else. There are a ton of reasons for this.
It’s hard to become rich working a minimum wage job. The math doesn’t work out. So you need to get a job that pays better. That means you have to improve your skills in all areas.
Now, let’s say you put the extra effort in and improve your skills and start working your way up the ladder of success in a company or moving from company to company. You move from minimum wage up to a decent salary, and if you hustle like crazy you make it to some VP level and are making six figures a year.
Congratulations, that’s a pretty good income. You can also get there by being a doctor or a lawyer, but no matter how you slice it, you’ve got a 10 year journey to six figures if you work hard.
Here’s the problem. Human nature dictates that we will fill almost any void we can, so even if you are making a giant pile of money, you are likely to take that money and spend it on a nice big house, a nice car, and so on.
If you are lucky, you might save 10% of your $100,000 income each year. That’s $10,000 a year. That seems like a lot, but when you figure that if you stay at that salary for 20 or 30 years, you end up with $200,000–300,000 not accounting for interest.
Even with compound interest you are looking at $350,000–700,000 at a 5% compound interest rate.
That’s pretty good, but realistically, it’s going to be hard to get anywhere close to $1,000,000 in cash saving only $10,000 a year.
Now, you could find ways to be frugal and save something like $30,000 a year, but to be honest very few people ever come close to saving 30% of their income.
Alright, so even getting a high paying job is going to make it hard to become a millionaire.
And here’s the sucky part - it’s difficult to get a job working for someone else who is going to pay you more than $150,000 per year in a salary type position. Why? Because there are only so many hours in a day and at some point there are diminishing returns in paying someone a salary.
To make significant money in a job, beyond low six figures, you need to put yourself in a position where you make a portion of the profits of the business in some form or another. This can happen by getting a commission on sales, or by getting some form of stock granted to you in the company you work for.
Most employees who end up rich get there through owning a lot of stock in a company when it isn’t that valuable, and then sticking around to when the company is worth a lot of money.
For example, if you are employee #10 in Facebook and you own 1% of the company… your stock is worth $3.42 billion dollars. If you are employee #100 and owned 0.1% of the company, you have $342 million dollars in stock.
I call that hitting the startup lottery, because you are lucky enough to be in the right place at the right time and your stock options are a golden ticket.
That is not the common case, but there are enough cases where owning stock and having a company stock shoot through the roof can make someone rich, but the reason is not because the employee was good at their job…
It’s because they got themselves a share of the profit stream via stock.
That is an important lesson simply because stock is a way to get yourself a share of the profits outside of your time investment in the business. Getting a share of the profits is the only way to make more money once you maximize the value of your time for your employer.
Now, here is the practical truth and I don’t mean to sound harsh, but the truth is harsh in this case…
Very few people are willing to put the work in to improve themselves enough to get paid anywhere near six figures in their jobs. Very few people who make a lot of money will ever save back even 10% of it. Very few people will ever become debt free. Very few people will make a fortune selling on commission. Very few people will make a fortune with their stock options.
When you put all those factors together you have something like 1–5% who will ever make a significant amount of money, save a significant amount of money, pay off their debt, and make a large sum of extra money outside of their salary.
So truthfully, most people will never get rich working for someone else. Only 1–5% will ever pull it off.
Also truthfully, most people will never get rich working for themselves. Only 1–5% will ever pull it off for the exact same reasons.
As it turns out, only 1–5% will ever get rich doing anything. 95% of people are unwilling or unable to do what it takes to get there.
It’s not surprising when you think about it. 99% of football players will never play in the NFL. 99% of people will never reach the top of the mountain in 99% of things.
The real question about being rich, being a pro athlete, or being top in any field is this:
Are you willing to do what it takes to be in the top 1%? (or 5% or whatever the number is)
If you are, you’ll figure it out.
P.S. I unpack more ideas in Creative Genius.