The Easy And Hard Ways To Create Million-Dollar Fortunes

I am friends with a woman whose father is a partner at a law firm in Missouri. I do not talk about her dad’s occupation much, other than the fact that she constantly mentions that her dad works a “ridiculous amount of hours.”

Me, being me, I immediately sought to put some labels and back-of-the-envelope numbers on what I knew, and then I wanted to relate those facts back to business ownership, on a comparison basis.

These are the estimates I came up with:

Although “ridiculous hours” is a vague term, I guessed it to mean something roughly analogous to this:

8 AM-7 PM daily, with an hour for lunch.

6 hours aggregate on the weekend.

48 weeks per year of work.

That means= 10 hours per day for 5 days, plus an extra six spread out over the course of the weekend. In other words, a 56 hour workweek.

Because he was a partner, I’m guessing he had at least a month of vacation that got used for some time off around Christmas, a summer vacation, and a couple days here and there throughout the year.  In other words, my educated guess is that he gives up around 2,688 hours per year for his occupation.

I looked up the estimates for salaries among law partners in his field, and I came up with a likely range of $250,000-$325,000.

In other words, that works out to $93-$120 per hour. The money is great, but the cost is high: unless you absolutely love what you do, you are essentially giving up your life for somewhere in the vicinity of $100 per hour. I suspect when he looks back on his 20s, 30s, 40s, and 50s, he will see that “work” was the dominant source of his life’s memories, although they certainly may not constitute the best ones.

Now, let’s picture something else. Let’s talk about a man who is, to use a favorite political buzzword, a “small business owner.” His profession of choice is car washes. To use decently conservative estimates, you ought to be able to buy a car wash for $250,000 that generates at least $50,000 in profits that reach your pocket per year, after adjusting for the cost of water, soap, and wax, as well as the cost to keep the lights on, insure the place, pay taxes, and so on. If you add a vending machine and sell knickknacks like air fresheners and towels for the interior of the cars, you can add a couple grand. Much more importantly, the time commitment of singlehandedly managing an establish car wash can be handled in under 20 hours per month—you do the paperwork, change the money as necessary, make sure the water and soap suppliers are fulfilling their end, and so on.

The interesting thing about the $50,000 per year mark is that it is roughly equivalent to what the average American household takes in per year. The key here, though, is that a person running a car wash doesn’t have to deal with the hassle of showing up somewhere at 8 AM or facing sanctions, dressing in a certain attire every day, and so on. Most importantly, there are two things he doesn’t have to deal with in life: job-related stress, and giving up long hours for his employment.

And if the car wash owner is decently diligent with his savings rate over the course of his life, he could easily acquire five or six car washes that he owns free of debt.

Imagine the math on that.

5-6 car washes generating about $50,000 in income= $250,000-$300,000 in wealth

Here’s where things get really crazy: Not only would he work 60 hours per month managing his small little car wash empire, but he would only have to put in a fraction of the time—he would be working in a month what our law partner would be working in a week. Not to mention the lack of stress associated with seeing people put quarters and dollars into a machine every day that you will be able to convert to profit.

And, of course, there is the biggest difference of all: the car wash owner has a capitalized asset. Not only does he make $250,000-$300,000 per year, but he could sell it for $1.25 million to $1.50 million and bring in a tidy windfall to show for life’s work. It’s difficult to analogize this part to our law partner—because I have no idea what kind of pension or profit sharing plan to compare with, and there is even a slim chance that there may be none at all.

And if you do not want to be a direct business owner for whatever reason, you could use the savings from your job to stockpile cash as partial ownership stakes in excellent businesses. Imagine if you put $10,000 per year into Johnson & Johnson over the past thirty years. You would have compounded your money at 14.60% annually over the course of that time (about 12% came from business growth, and the other 2.60% came from the automatic cash additions of reinvested dividends). That would have turned into $4.8 million today. You’d have just shy of 54,000 shares that would be paying you $142,000 in dividend income per year.

You wouldn’t, of course, put all of your money into Johnson & Johnson, and I wouldn’t count on 14.60% growth from any stock over the next thirty years (even with dividends reinvested).  But the point is to open yourself to the possibilities made possible by owning excellent companies.

I mention these things to get you thinking about life design—it’s not really about being a lawyer, owning a car wash, or even owning Johnson & Johnson stock. It’s about thinking about the relation between the amount of money generated relative to the amount of time you have to expend. To command a high professional salary, you have to put in years of schooling, work long hours, and be damn good at what you do. On the other hand, there are businesses you can own—where you can be your own boss—that do not require the extensive time commitments. And, of course, owning publicly traded stocks is the least time demanding of all—you get your dividends just for staying alive. When you think about money, you should always simultaneously be thinking about the amount of time and effort you have to put in to get that money. There’s no virtue in creating “hard” paths to wealth. It just diminishes your life enjoyment and prevents you from reaching your potential if you took an easier route and then leveraged it to amplify the benefits.

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14 thoughts on “The Easy And Hard Ways To Create Million-Dollar Fortunes

  1. says:

    This is one of your best, simply for showing the hidden costs of labor vs assets oriented accumulation of wealth. "The Millionaire Next Door" shows how doctors and lawyers, while highest paid, are some if the worst at accumulation wealth. They work too much to think about saving and spend everything they make on mansions and cars etc. The "rich" own business equity and real estate. But that mindset is not mentioned anywhere in our school system.

    1. Well, to play devil's advocate, can't the law firm partner simply sell his stake in the partnership? I think if you start a law or accounting partnership, you can build a client list, and when you retire, you sell your stake to someone else. Unfortunately, business takes time to grow -but you should know that, being that you are going to Law school 😉

      I have been looking at businesses to buy such as laundromats and car washes, but I think that dealing with hourly employees who STEAL or don't show up for work would make it very difficult to have those businesses being "passive income generators", unless of course you have trustworthy managers.

      I would much rather own dividend paying stocks, sleep well at night.

      Best of luck fro Dividend Growth Investor

  2. I'm a salesman. The more I work, the more sales I make and the more money I earn.

    Everything is connected to everything!

    I love my job and that's why I do not notice it when I'm working a lot!

    Working is fun – and if I need a break then I suppose it just me!

    Work hard – play hard – and party hard;-)

    regards

    D-S

  3. Mickey says:

    Tim,

    I admire your articles a lot for their clarity of thought. This one to is up there with the rest.

    However, one thing you miss out on in your articles is that how would one go about getting the wealth in the first place to invest and see some tangible returns which are comparable to the examples you frequently give in your articles. Owning a car wash is a significant investment upfront let alone 6 of them to reach a figure that can match the lawyer's salary in your example. If the avg. American household salary is 50K as you mention then how would the family spare money to buy even one car wash ? With that salary it is very difficult to imagine the family ever accumulating 54,000 JNJ shares as you would advise them to.

    Your advice is good for someone who can spare 10,000 for buying JNJ stock every year. Av. American family cannot do that – i.e. put 20% of their annual salary in a stock. Maybe if they were earning 200K+ to begin with then it is a different matter.

    Mickey

  4. Victor C says:

    Good article but there is the other side of the coin: Risk.

    The hard working lawyer will have a minimal chance of losing his income but the business owner (especially when he expanded his business on borrowed money) will bear a great risk of losing his income and his capital if things don't pan out as planned.

    After all, there is no free lunch!

  5. HelloSwat says:

    You made great points on how income is valued based on time. Making businesses generate an income for you is the way to go. I believe even if it takes 3-5 years to build your ” empire”, in the long run you will be thanking yourself 5 years from now for your hard work.  

    -S

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