Let me ask you a question. Don’t just blurt out an answer, but actually think about it. I’ll give you a hint: It’s a trick question. If you get the question right, you are certainly in the minority.
How do you build a net worth of $10 million dollars?
Have an answer?
Well, the numbers say you have the wrong answer.
There are roughly 330 million Americans and roughly 336,000 who are worth $10M+, Said differently, that means 98.9% aren’t worth $10M and don’t know how to make $10M.
If you notice there, that means I’m considered people who aren’t worth $10M as people who don’t know how to make $10M. Sorry angry commenters…if you can’t show me a Personal Capital statement that shows $10M, then you don’t really know what you are talking about. Otherwise, you would have done it.
This piece is going to explore three things:
- Why people have the “wrong” answer to build a net worth of $10M
- How to actually build a net worth of $10M
- Tactical steps to take to start building a net worth of $10M
The advice you are going to hear in this piece will feel wrong. It’s going to feel counter to the norm.
Of course, it’s counter to the fucking norm. If this was obvious, then the entire country would have done it.
Before we go any further, let me stop to explain why $10M in particular.
$10M is an interesting number to look at from a wealth perspective because it’s an “in-between” number. To explain what I mean by that, let’s look at how to make a million dollars and how to make a billion dollars.
How to make one million dollars
If I asked you how to make a million dollars, you would have a great answer there. You probably would have said something to the effect of:
- Max out my 401K
- Work for an employer with a 401K match
- Don’t buy Starbucks
- Wait 35 years
Let’s look at the math for an example there:
- You max out your $401K at $18,500 per year starting at age 30
- Your employer puts in another 5%
If you check the Bankrate calculator, that scenario gets you a $2.6M 401K when you turn 65.
You know this already though.
Guess what, it also blows. You live a shitty frugal life to have $2.6M to spend in the last 13 years of your life before your statistically likely death at 78. That fucking sucks.
But, this plan works. You know how to make a million dollars.
How to make one billion dollars
You also know this one as well.
You could start a Hedge Fund, and become the next Bobby Axelrod. Or, you start the next Uber. Every startup is trying to be the next Uber. VC’s put money into companies based on how much potential they think the company has to be worth $1B+.
There is an unbelievable amount of emphasis in the literature on how to make this much money. From the famous “Unicorn Club” article to Peter Thiel’s Zero to One or the Learn Startup, everyone tends to focus on this particular segment of the market.
Again, you already know this. You know how to make a billion dollars, in theory.
Strategies to make one million and one billion do not work to make you $10 million
Again, let’s go back to my question of how to make $10M.
Compound interest is not feasible
You can compound interest your way to a million dollars fairly easily, but not $10M.
Let’s look at that math. To almost get to $10M, you would need:
- To invest $50K a year into the market
- For 35 years
- at 8% annual interest
That would get you to roughly $9.7M
I hope you recognize that this is beyond unrealistic. To have 35 years of compounding, and to retire at 65, you’d need to start contributing at 30 years old.
To contribute $50K a year, post-tax since this is above a $401K threshold, you would need to have at least ~$150K in post-tax earnings. Pre-tax, that assumes you make $250K a year and have a very low expense ratio.
There aren’t many people who make $250K a year at 30 and have the discipline to throw all of that into the market consistently for 35+ years.
Your odds of starting a billion-dollar company are low
The odds of starting a billion-dollar company is 0.00006%. That is four zeros followed by a 6.
Or, one out of 16,500 startups reaches a billion-dollar valuation.
People who start startups are motivated, hard-working, and smart. Are you 1 in 16,500 out of arguably the most impressive talent pool in the world? Maybe, but do you want to bet the next decade of your life on that?
Oh, and BTW, a founder typically will own around ~20% of the company by the time you reach a billion-dollar valuation because venture capitalists took the rest.
That means you really need a five billion-dollar company if you want to be a billionaire.
Working in corporate America won’t get you to $10M either
We’ve now talked about two different ways you won’t get to $10M: compound interest and starting a company.
Now, you might be pushing back and stating that you could theoretically get to $10M in net worth working in corporate America. That’s true, Jamie Dimon built a billion-dollar fortune working in corporate America. You could theoretically get to $10M as well.
Don’t hold your breath.
One nice thing about BCG is that I became very good at market sizing. I also got confidential compensation information for many companies. Let me speak in some generalities here from my experience with some overall claims.
- The average Fortune 500 company has roughly 50 people who make more than a million dollars a year.
- These individuals are typically:
- SVP (Senior Vice President, one step below C-Suite. They typically run entire countries or divisions of companies)
As you might guess from these titles, these individuals are typically 50+ years old. It’s extremely unusual to be below 45 years old and have these titles.
Someone in their 30’s and 40’s who is on their way to these titles typically is a Director, Senior Director, or VP. These roles will pay anywhere from ~$150-$300K per year, then taxed at a higher rate.
Let’s play this out then. You bust your ass and slave away for more than two decades to get one of these roles. Let’s also be generous and assume you’ve saved up a million dollars at this point from the years as a Director/Senior Director/VP.
You are now 50 years old, have a million dollars in the bank, and make a million dollars on the job.
But, you are now in the top tax bracket. After all taxes (federal, state, social security), you have roughly ~$500,000 left.
You probably have a family since you are 50+, maybe even kids in college. That’s an expensive life. I’m going to assume you spend $150,000 to support your life, or more than $10,000 per month.
Now $350,000 after everything and $1M in the bank.
To save up those last $ 9 million dollars at $250,000 a year will take you 26 years to do so.
But, you are 50 years old. You don’t want to work that long, and companies will replace you once you get to ~55 and you aren’t CEO. You are considered “too old.”
The math doesn’t work here either for the corporate path to $10M. You don’t make enough until the very end.
Let’s recap. We’ve now covered the nuance behind making $10M is driven from the fact you know how to make $1M and $1B, but not $10M. We’ve also talked about how the paths to $1M and $1B can’t be stretched to make $10M. These are all the wrong ways of thinking.
This concludes part one, regarding why most people have the “wrong” idea on how to make $10M. Now, let’s dive into the “right” way to make $10M in net worth. Remember, more than 300,000 Americans have figured this out. There’s no reason you can’t be one of them.
You need to own a business to get to a $10M net worth
This chart from Financial Samurai tells you everything you need to know about how to get and make a significant amount of money. For the purposes of this article, we’re focusing on the $10M bucket.
Let’s eyeball the $10M bucket and look at the standard distribution of assets there. It looks like:
I promise you, this is a lot easier to achieve than you think it is.
Let’s break down the math by examining how you get this distribution of assets in order to reach that $10M net worth. We can work in order from top to bottom.
Our goals have now shifted from intangible to tangible.
Right off the bat, notice how we’ve now shifted our perspective. We are no longer trying to “become a CEO” or “start a billion dollar company.”
We now have a specific sub-metric to shoot for. The first, and most important as we’ll now see, is to have business interests worth $4M. Not only does this give us a specific goal to shoot for, but it’s also extremely straight forward now, compared to something esoteric like #billionaire.
How to get business interests worth $4M
Here’s the key word in the above sentence: “interests.”
That means your business must be valued at $4M for you to be on pace to reach $10M in net worth. You don’t need to make $4M a year in profit. After all, if your business makes $4M a year in profit, then you will quickly exceed $10M in net worth!
This now leads to the obvious question: how do you get a business that is valued at $4M.
There are many ways to value a business, especially a SMB (Small-to-Medium Business). For now, we’ll focus on the easiest one to understand which is an earnings multiple.
Earnings multiples are fairly simple. Wall Street investment bankers get paid millions, but at the end of the day, all use some variation of multiple analyses.
Let’s say a business earns $100K a year in EBITA (when you see EBITDA, think profit.)
A fairly standard EBITDA multiple is roughly 5X. This multiple can be lower for a serviced based business (such as consulting) or higher for a scalable technology company (such as WordPress hosting). Let’s stick with 5X for now.
That means the business that generates $100K a year is worth $500K.
So, if we wanted a business that is worth $4M, and our EBITDA multiple is 5X, it means a business that does $800,000 a year in profit is worth $4M.
But remember, we aren’t talking about a fast-growth startup here. That means venture capitalists don’t give a shit and the owner of the company will likely have all equity. A business that does $800K a year in profit should be 100% owned by the owner themselves, making their business interests worth $4M.
Remember, this is a net worth number. You don’t need to immediately start a business that does $800K a year in profit. You can spend a decade working at it first to get up to $800K a year in profit.
Now we know how to get a $4M business interest contribution to net worth, let’s now look at how to get the other $6M of the way to $10M.
How to have $6M of assets (excluding the business)
Let’s study the chart again. There’s some “personal” stuff here, like a primary residence, liquid cash, other assets, vehicles. Combined, those equal $1M. $1M is not worth diving into because, again, you know how to make $1M.
Let’s instead focus on how this standard $10M person has:
- $1.5M in mutual funds
- $1M in investment real estate
- $750K in trusts
- $500K in fixed income
- $500K in stocks
- $500K in retirement
That’s a lot of diversification in investment, (diversification is always great), but it totals nearly $5M worth of assets. How did they get that?
Let’s go back to their $4M business and how those numbers look.
As we’ve established, the business profits $800K a year. However, it would be a monumentally stupid idea of the owner to take all of that cash and put it in their pocket at the end of the yeear. The business needs a “reserve” of money to pay staff, pay bills, buy raw materials, etc at the start of the next year. Reserving 25% of the money here is completely fair.
That leads the numbers to look like this:
This means, at the end of the year, the owner is writing themselves a $600,000 check from the business.
Since the owner is a small business owner and this isn’t “salary”, but profit, the tax rate on this should be lower. A lot of small businesses are set up as S Corps for this reason.
Let’s assume they pay ~33% in total taxes, fair for profit in this case, which leaves their net “take-home” from the profit as $400,000.
But wait, there’s more.
Importantly, the profit check is not the only payment the owner will receive all year. If the owner is smart, which they should be if they build a $10M fortune, they are also paying themselves a salary throughout the year. Since a salary is a fixed cost to the business, however, it appears above the EBITDA line. We already assumed that.
The downside to the salary, however, is it will be taxed at a higher tax rate. Let’s conservatively put your salary at $150,00 and say it’s taxed at 45%. total.
But wait, there’s still more.
Did you know that a small business owner can contribute more to a $401K than you think? The reason is a small business owner can put their personal contribution into the $401K AND have the business (which they own) contribute as well. A small business owner can contribute $57,000 a year in 2020, tax-deferred, into a $401K.
That means the total numbers end up looking like:
Between the $400K after taxes on profit, the $97,500 after taxes on salary, and the $57,000 in 401K, a small business owner is making $550,000 a year after tax.
And they still fucking own a business worth $4m!
Remember our corporate executive above? They slaved for decades and beat the odds to be one of the very few people at Fortune 500 who make more than a million dollars. Since that is salary, however, they probably pay a higher tax than our small business owner. They also don’t have a $4M business.
So, their net after-tax income is about the same, even though our small business owner didn’t slog through decades of corporate ass-kissing. Again, they also don’t have an asset worth $4M!
What do you think is easier: building a business to $800K a year in profit or reaching the Fortune 500 C-suite?
How $554K a year allows you to quickly build $6M worth of investments
The biggest problem our Fortune 500 Executive faced, outside of the fact just becoming an Exec is hard as shit, is that they reached that level at the end of their career.
I believe you can build a small business that profits $800K a year in a decade or less. Or, you could buy one that already makes that much.
Either way, the implication is you can get to this profit level in your 30’s or 40’s instead of your 50’s.
If you make $550K a year from the age 35 to 50, you’ll make $8.25M post tax over those 15 years. This isn’t including rent from the $1M in real estate they own. This also isn’t factoring in that profits should increase ~3% a year, minimum, with inflation.
Assuming you spend $150,00 a year, or >$10,000 a month on personal expenses, you’ll spend $2.25M over those 15 years. $10,000 a month is a sizeable mortgage, car payment, and some flashy clothes, BTW.
Either way, you’ll have $6M left in the markets.
That’s also not including any appreciation for the money that was added to the market on year 1 of 15.
Said straight: the most conservative of assumptions still get you to $6M in assets.
A note on taxes and how it validates this net-worth approach
I’ve written in the past that there is a functional naivete in the idea of taxing “the 1%” by increasing income taxes. As we just saw from above, someone who is worth $10M doesn’t make their majority of their money from “income.” They make their money from other sources, namely business income.
This means two things:
- This wealth-building strategy is enabled by the fact it is tax minimization at it’s finest
- A politician who talks about “increasing the income tax rate” isn’t actually talking about the right metrics.
I’m not an accountant! Talk to an accountant for more info here.
Recapping thus far, we first talked about how NOT to become worth $10M. Now we’ve talked about how to do so.
The last section of this article is tactical advice about how to get to $10M in net worth.
There are two paths to an $800K a year business: do you have time to spare or money to spare?
We’ve now established the key driver to $10M is a business making $800K a year in profit.
Let’s now talk about how to get to $800K a year.
First, $800K a year in profit is not the most intimidating of numbers. That’s $66,666 per month in profit or $3,333 a workday in profit.
Making $3K a day as a person may seem intimidating (yes, I know I’m trying to get to $10K a day), but making $3K a day as a business seems much more realistic.
Since it’s realistic, let’s figure out how to get there. The key question to ask is: do you time to spare, or money to spare?
The time to spare option
You are hungry and are willing to spend a decade to start and grow a business. Time to learn.
You’d be surprised how many small businesses exist that make $3,333 a day in profit, and in very “boring” industries. There are painting companies and cleaning companies and traffic sign repair to pest control to everything in between.
Boring is better here. Boring businesses will never be worth a billion dollars, but you also aren’t trying to make a billion dollars. You are trying to make a consistent business that generates $800K a year in profit. Boring, boring, boring.
Let’s say you decide house cleaning is the most boring business you can possibly imagine. You work for a year at a local house cleaning company to learn the business.
Let’s grossly simplify:
- You learn startup costs are under $1,000 (Legalzoom LLC, cleaning supplies, business license).
- You learn the margin in house cleaning is 48%
- You learn the average house cleaning in the country is $160.
You net $77 per clean. You need to make $3,333 per day at the end of a decade, which is 43 houses per day. With a team of 3 being able to do 4 houses per day, that’s 11 teams of 3.
Most people in your area get their house cleaned every two weeks. That means you “repeat” the same two weeks constantly. At 10 working days per two weeks, that’s roughly 430 customers
Here’s what you need to do to build a residential cleaning business to $800K a year:
- Find 430 customers willing to hire you
- Build a team of 33 cleaners
Remember the last section: I gave you a decade to figure this out. You spent the first year working for someone else to learn the business. Year two could be you knocking on doors and hire two other cleaners for one crew.
Year three could be another 50 customers from referrals, and then another 4 or 5 cleaners. You’re profitable here, with the business profiting nearly $100K already…..(50 customers X 25 cleanings a year X $77 profit per clean).
If you tell me that’s too hard, then I’ll you that you are lazy.
Pick up a phone book and start dialing. Get down on your hands and knees and scrub a toilet. I’ve done it, as have most wealthy people.
The money to spare option
In this world, you don’t spend time building a business. Instead, you just buy a business. This is best if you’ve made money consulting or through your day job.
Remember, a $4M business is what we are talking about here. Businesses sell all the time at that price point, particularly as Boomers who built them for ~30+ years look to retire.
In this case, the financial model is really simple. You get a loan. Just like a mortgage, you can take out a loan to buy a business.
This can get complex with SBA loans, seller financing, and other ways to do this. For simplicity’s sake, let’s say you get a loan for fairly standard terms:
- 20% down payment
- 10-year term
- 6% interest rate per year
Here’s a model:
You buy the business in Year #1. For simplicity, let’s assume EBITDA increases ~5% a year to slightly outpace inflation.
In this world, you have a yearly “mortgage” payment of $426,319 per year. The business still puts 25% of profit away as “reinvestment” as well.
In this world, your distribution is lower for the first couple of years. You make less money because you’re paying off the loan that allowed you to buy the business. Although, as the business is growing 5% a year, your distribution climbs from $173K in year #1 to $300k in year #5.
Remember, the distribution doesn’t include the $401K or your salary as well.
Once you get to year #11 and the loan has been paid off, a couple of really interesting things start to happen:
- Your distribution is now nearly a million dollars a year
- You own 100% of a business worth more than $6.5m.
Assuming you haven’t been blowing your several hundred thousand dollars a year in distributions and have invested, you should be easily worth more than $10M at this point. The business alone gets you 65% of the way there.
Do you actually want to make money?
In this article, I’ve explored:
- How most don’t know how to make $10M+
- How to actually make the big money (a small business)
- Tactical advice on how to get there
My hope is that this article has been informative and motivational. Please feel free to stick around $10K as this site contains a daily case study that shows how I’m working to build my own income to $10,000 a day by the age of 30.
I hope you use this article in some fashion on your own journey to $10M net worth.