Personal finance

Why It’s Hardest to Make Your First Million

The idea that reaching your first million dollars is the most difficult step on the road to prosperity exists in the gray area between trope and meme. Even though this remark is often used in fun by those who believe it is impossible or impractical to amass even $1 million in wealth, it is true for a variety of fascinating reasons.

In addition, the more people are aware of the challenges involved in raising the initial $1 million, the more likely it is that they will overcome these challenges and succeed in their noble endeavor.

In the United States today, there are over 11 million millionaires. These people have accumulated a net worth of over $1 million.
Rich people sometimes remark that getting their first million dollars was the hardest. How come this is the case?
The ability to invest, take calculated risks, and seize chances all make it simpler to earn more money.

The Distinction Between Income and Wealth

To begin with, it’s critical to understand the difference between earning a million dollars and actually possessing a million dollars. While most people can achieve their objective of amassing net worth of over $1 million over their lifetime, very few will ever make that much in a single year. Furthermore, “winning” a million dollars may not make one as wealthy as is generally believed; recent history is full with instances of athletes, celebrities, businesspeople, and lottery winners wasting their money on extravagant frivolities.

It’s important to keep in mind that many people who claim to be “million-dollar earners” actually make far less than that. Even though a person’s business generates $1 million in income, expenses still account for the majority of that sum. A millionaire is not always someone who owns a $1 million piece of property that is backed by a $2 million debt.

It’s Difficult to Start

The modest rate at which people save money in their formative years is one of the largest barriers to having $1 million in the bank. Even though certain positions do have starting salaries that are more than $60,000, these are the exception. The majority of recent graduates struggle to make ends meet while also making student loan payments, paying rent, and maintaining a minimal standard of living. It would take more than 66 years to save $1 million without interest or compounding, even for the extremely disciplined few who can save $10,000 or $15,000.

But as people become older and gain more life experience, the situation changes. In addition to seeing an increase in their take-home earnings, people frequently discover that their “beginning expenses” are no longer as high because their school loans have been paid off, they have the necessary furniture, and perhaps they have a romantic partner with whom they can split living costs.

The Strength of Combining

The fact that the first $1 million is so much money in comparison to where most people start out is one of the factors contributing to its difficulty. A 100% return is necessary to increase assets from $500,000 to $1 million, which is very difficult to do in fewer than six years. A similar 100% growth is needed to get from $1 million to $2 million, but just 50% growth is needed for the next million (and then 33%, and so on).

In actuality, a lot of affluent people “live off the interest” and do so. In other words, they invest a portion of their wealth in a group of reasonably secure assets that generate income and rely on those to support their lifestyle, freeing up the remainder for more risky investments. You can see some of the leverage of passive income and compound interest when you consider that $1 million invested in a portfolio of AAA-rated corporate bonds would generate more than $50,000 in interest income (pre-tax).

More money means more options

The wealthy are distinct in at least one important way: they have access to financial opportunities that ordinary people do not. Because most consumers do not match the minimum income or wealth requirements set by regulators (not to mention the minimums imposed by particular firms/funds), they cannot access hedge funds.

A lack of wealth makes it difficult to invest in “ground floor” prospects. Instead of average people who can invest a few thousand (or even tens of thousands) of dollars, startups and venture capitalists seek to draw millionaires and billionaires. Similar to this, without a significant amount of wealth to start with, it can be extremely challenging to invest in attractive asset classifications like farms or forestry.

Risk Aversion: It’s Simple to Take Big Risks When You Have a Lot

Another under-appreciated barrier to acquiring and constructing wealth is risk aversion. When many people first begin to save and invest, they fiercely protect that grubstake from danger out of concern that they will lose it all. Although it makes sense, the relationship between risk and reward is difficult to break. Though investors may understandably be concerned about the comparatively low danger of “losing it all,” playing it safe results in lesser returns and makes it more challenging to accumulate that first million. A bond and conservative stock portfolio may outperform inflation, but it will take a very long time to reach $1 million.

In contrast, people tend to take more risks after they have enough money to feel secure and less exposed to a bear market or economic crisis. Many affluent people do this, although not all do (Warren Buffett is a well-known example of a wealthy and very conservative investor).

The conclusion

It serves no use to downplay how difficult it is to accumulate that first million dollars in wealth. But just because something is challenging doesn’t mean you shouldn’t try. Save as much money as you can, invest it with a careful balance of risk and opportunity, and continually look for methods to do your job better, smarter, and harder.

After all, the benefits are there to be obtained, and solving the mystery of how to make the second million dollars is unquestionably a worthwhile endeavor.

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