Is Becoming a Millionaire That Easy?
Every so often I come across an article that I find compelling on many levels. I am copying the one below for you because it is compelling and has a lot of little nuggets that can be utilized to change your financial future. Enjoy:
What they don’t teach you in school about accumulating wealth.
There are really only a few ways to become a millionaire:
- Inherit money
- Win the lotto or a game show
- Save/invest your money over a long period of time
- Be an early employee at a fast-growing company
- Start a company of your own and grow it
Options 1 and 2 aren’t even worth talking about. Option 3 is achievable for almost anyone given the right time frame and asset class. For example, if you invest $50K per year over 20 years and can at least keep up with inflation, you’ll have $1,000,000 in purchasing power.
But that’s the slow game. If you’re reading this post, you probably think in months or years, not decades. So how can you become a millionaire?
We’re left with options 4 and 5. I was never a good employee, so I can’t even pretend to tell you how to find a fast-growing company that you can join early enough to “ride it up” and accrue wealth via stock options.
What I can say about being an employee though, is that you’re always trading your time for money, so you have little to no leverage. Each week you trade 40/50/60 hours of your time for a salary and then repeat it the week after that and the week after that.
There’s is absolutely nothing wrong with being an employee. But know that it probably won’t make you a millionaire unless you can pick the next Google, Uber, Virgin, etc.
When you want to make money, you always have two things you can leverage —time and capital (money). Early in your career when you’re just getting started, you leverage your time because that’s all you have. You work hard, move up the ladder, get a bigger salary and hopefully start saving or investing some of that money.
Maybe then you think about starting a company using either your savings or money you borrow/raise from investors. That’s when you shift from time leverage to capital leverage, which produces exponential results if you leverage your capital properly to grow something of value.
That’s also where option 5 comes in — starting a company of your own and growing it from nothing to something.
When it comes to money, or more specifically, accumulating wealth over time through a company, there’s really one rule you need to understand:
Your wealth mirrors the number of people you can help and the speed in which you can help them.
Subscription Revenue & Compounding
Accruing value in a company happens a lot faster if you sell a product or service based on a subscription, as opposed to a one-time purchase. That’s because the revenue stream becomes more predictable and you get the amazing benefits of compounding over time.
If you build a business (such as a retail store) that sells items once, it’s a lot harder to accrue value in your business because your customers aren’t paying you every month or every year.
Subscription businesses are valued relative to their existing customer base and future potential revenue and in all cases, a subscription business will be valued higher than a transactional business with no subscription revenue.
As such, a subscription business with less revenue is worth more than a non-subscription business with more revenue. That’s an extremely important rule to remember. Predictability of future revenue is paramount when it comes to valuing any type of asset, including a company.
One of the keys to accruing real value in your company (and therefore personally) is to sell essentially the same thing to the same people every month or every year. Even if it means completely changing your product, it’s worth it in the end.
Back in 2009 when we pivoted my previous company from 7 software products that you purchased one time, to 1 subscription product you paid for every month, we gave up $6M in annual revenue but made tens of millions in revenue over the next few years because we understood the power of subscription businesses and compounding revenue.
Let’s look at two examples.
Example #1 — Overview
You love helping people so decide to start a marriage coaching business. You’ll meet with couples struggling with their marriage and will teach them how to better communicate, listen to each other, etc. They’ll pay you by the hour and you’ll grow via word of mouth.
Example #2 — Overview
You love helping people so decide to start a marriage coaching business. You find a technical co-founder and build a platform that matches struggling couples with qualified, experienced relationship coaches online. You also bring on a few dozen relationship coaches as contractors who actually run the coaching sessions.
Couples pay a flat monthly fee of $99 for unlimited coaching sessions. 70% goes to the coach and 30% goes to you.
The two examples above essentially help you accomplish the same thing, but one is slow and limited by your available time, while the other is fast and potentially has an unlimited market, considering 1 in 2 marriages fails.
Starting a company also gives you leverage — eventually you can hire people in exchange for a salary, so instead of just your 40 hours a week, you can have dozens (or hundreds) of other people also contributing 40 hours a week.
If you have 9 other people working for you, then you achieve 9 * 40 (360) hours per week of output instead of the 40 you would do on your own. Over time that compounds and adds value to your company if you’re all working on things that drive growth.
Let’s compare the numbers and what you might expect to make over a 5 year period from the two examples above.
Example #1 — Numbers
- Revenue per hour of coaching: $80
- Hours coached per week: 40
- Revenue per year: $80 x 40 x 52 = $166,400
- Revenue over 5 years: $832,000
- Business value: $166,400 (assume 1x revenue)
No doubt a great income for one person, but let’s compare that to our second example.
Example #2 — Numbers
- Revenue per customer: $29 / month (equal to 30% of $99)
- New customers per month: 1,000
- Revenue per year: $29 x 1,000 x 12 = $348,000
- Revenue over 5 years: $1,740,000 ($348,000 x 5)
- Business value: $3,480,000 (assume 10x revenue)
Obviously the maths above doesn’t factor in churn, upsells, net new MRR, customer acquisition costs, etc. I’ve kept the calculations simple because they’re not the focus of this post.
As you can see from the two examples, there are two different ways to spend your time, with two very different outcomes. In the first example you’ve spent 5 years building a business worth $166,400. In the second example you’ve built a business worth $3,480,000.
Yes you might have a co-founder, investors, etc, but it’s not unrealistic to assume you’d still own 30% of the business after 5 years which would be worth $1,044,000. The key with most subscription businesses is that they are valued on a multiple of REVENUE, not profit.
Remember I said earlier that you want to create and grow value in an asset that can increase over time? With a subscription business, as long as you’re adding new customers and your monthly churn rate is sub 3%, you’ll continue adding revenue and will keep growing.
As such, the value of your business will be a reflection of your top line revenue. On the low end it will be 3–5x revenue. On the high end it could be 20–50x if you build the next Uber or Airbnb.
The example above is overly simplified and doesn’t factor in risk, competition, etc, but it does show how there are really only two ways to think about your time — you can either be a part of someone else’s plan or your own.
You’ll work hard either way and one will provide you with a high paying job while the other could make you a millionaire and give you choices in life.
Everything comes back to how you value your time. If you can spend the next 5 years in the game building a business, as opposed to working for someone else, you could realistically become a millionaire.
If you don’t like risk, don’t want to learn, are scared to hire people, don’t know which product to build, etc, then at least start there. Start learning. Take online courses. Find mentors. Spend the next 1–2 years learning as much as you can and then jump in and take the plunge when you’re ready.
Even if you fail, you’ll learn a hell of a lot.
I’ll leave you with my absolute favorite quote about wealth and building a business, from Mark Cuban:
In business, to be a success, you only have to be right once.
Original Article: https://medium.com/keep-learning-keep-growing/how-to-become-a-millionaire-understanding-time-capital-leverage-c65871fd88ad?inf_contact_key=418822293c2d495fa650cfcb04b451e465a1fc42276dcf04c2e2ad983006e50c#.5yfsentk5