Is it true that “you won’t become rich working for somebody else”?

Is it true that "you won't become rich working for somebody else"? by Charles Tips

Answer by Charles Tips:

Getting ahead working for a living… can it be done?

If you work for a wage or a salary, it doesn't matter if you work with your hands, your back, your eyes, your mouth, your brain, your genitals… it doesn't matter if you work with a shovel, a computer or a scalpel. You have 3000 units, give or take, to sell in a year… hours of your life.

There are exceptions. I recall a pediatric heart-lung transplant specialist who was offered $2.5 million a year because having cutting-edge surgery available was part of the hospital's prestige branding, but I was never clear whether that was personal compensation or budget. Some courtesans can command $10,000 a night… occasionally.

But in the main with paid labor it is damned hard to negotiate yourself up into rarified air. That is because the dimensions of human labor are well understood. In almost all cases, your time is a commodity to everyone who might employ it (even if you don't feel it is). Take the 125,000 hours you might be able to sell in your life and multiply it by what you can sell them for on average (use constant dollars so as not to fool yourself with inflation), and there's your total income. And whatever you can average, guess what, you're probably not rich.

To top it all off, there's an ugly calculus few are aware of, namely, whether you are just starting out and making $25,000 or at the top of your profession and making $250,000, you've got about $20,000 in discretionary income. What!? Hey, moving up the ladder requires looking and acting the part. You can work in the mailroom and still live at home with your parents and spend all your money going out to try to find a spouse, but you don't move into the executive suite without a country-club membership, and you know how much that costs, and suits and car, and the kids need to be in the right schools… it's damned hard to get money-ahead working for a living. And, let's face it, wages and salaries have been painstakingly calibrated over long years to keep as high a percentage of workers as possible on the treadmill, neither too-well nor too-poor off.

How do you get out of that rut and get rich?

There are a variety of ways to beat the wage-salary game and get rich. From worst to best…

Rent-Seeker, Gatekeeper, Influence Peddler, Con Artist

Look at our public servants. They ain't doing too shabby. I've heard Harry Reid, for instance, a life-long elected politician, is worth anywhere from $10M to $80M. How? Not on his Senate salary. Hillary Clinton earns $300K for a 45-minute speech, reportedly quite dull too. I mention this category because it includes a number of surefire ways to get rich, but you're a parasite.

Commission Sales

You get a cut of the money you make for the company–the sky's the limit, right? Actually, sometimes it is. I had an older cousin who was a sales guy for Johnson & Johnson when penicillin hit the market. He, like all the other sales guys, became a millionaire in a couple of years (back when the only houses that cost six-figures were mansions). What did J&J do? They kept my cousin as a VP (at a big cut in pay), a few others too I guess, and fired the rest. Then they revised the commission structure and hired new sales guys. So, there's usually an invisible ceiling between you and all that blue sky.

My friend Sam, a lifelong commission salesman, kept a cartoon from Playboy, circa 1975, framed on his wall. Mr Hippopotamus was excitedly applying for a position as a Currency Retrieval Officer. He would turn in money he found by looking in seat cushions, gutters, under diner booths and so on, and in return he would get to keep ten percent! Sam kept it mounted by his home-office door to remind himself every time he went out that all of us selling for others are essentially currency retrieval officers.

Rare talent

With a few pursuits–acting, modeling and professional sports, for example–your individual talent can mean that you are not selling your time but getting a share of tickets sold and television revenue generated. You are the software in someone else's hardware. Not only are they willing to pay you part of the revenue stream you generate, but the fantasy compensation helps keep tens of thousands of aspirants in the talent pipeline at substandard or no compensation.

Corporate CEO

Who do our money-grubbing politicians deflect attention to as the ultimate bad guys getting criminally rich? But this is hardly true. In a $100B industry, one percent of market share is worth a billion dollars. As a rational person who is one of the company shareholders you want someone with the contacts, acumen, stature, stamina, etc. to gain you half a percent share of market. What is such a person worth? Especially if it's mostly performance-based? I'm not saying there are no shady aspects sometimes, but it's basically just commission sales at a high level. And the fraternity of actual and potential Fortune 500 CEOs numbers probably under 1000 at any given time. Not a strategy to bank on starting out of B-school.

Intellectual Property

Take it from someone who was in book publishing for a long while, nobody gets rich writing books, although as with the rare-talent game, there are the J. K. Rowlings. Songs and movies are better bets but still hit or miss, and, in any case, the whole publishing game is rigged like commission sales. Just remember that all those sixties rock stars got rich not so much off album sales as by going around the concert promoters who had been paying them to play and renting out the concert halls themselves, paying others to do the promotion.

Rentier

Now, this is the life. You get to make money because you're already rich. So, how does someone not already rich use this strategy? My oldest son is a cinematographer, and he's been paid from time to time to review new camera models about to be released. He has a good idea which ones will be market hits, and he buys one on credit. He then hands it over to the production rental place and they rent it out for him for a split of the proceeds. Not only do checks show up in his mailbox in excess (hopefully) of what he has to pay each month, but if his cameras are not rented out, he can use them for free. Money in the mailbox is a good road to getting rich.

Leverage, Equity, Risk

The surest way to get rich? All you have to do is be a key figure with founders' equity in a startup that goes to the moon. If you're not key-figure material, you can do it the way my window washer taught me:

Charles Tips' answer to What is the best route (or tips) for a 25-year-old to become financially independent?

Is it true that "you won't become rich working for somebody else"?

Filed under: Uncategorized

What are most people ignorant of that prevents them becoming financially wealthy?

What are most people ignorant of that prevents them becoming financially wealthy? by Charles Tips

Answer by Charles Tips:

Nobody ever got rich working for a living.

                             –My dad, to me, frequently

What in the world can it mean that working doesn't make you rich? Well, how many of those fabled bad guys our progressive left obsesses over, the dread "Top One Percent," punch a clock, do you think?

To be sure, you will work hard in order to get rich, and the harder and smarter you work, the better your chances. As my dad would explain, "It's okay to work eight hours a day for someone else. Just work eight hours a day for yourself too… and twelve hours a day on the weekends." And that's exactly what he did, all his life.

Selling your time by the hour will not get you ahead. Human resources departments know to the dime what they have to pay per hour to acquire requisite talent. Even if you degree from a prestigious law school and catch on with a leading firm and can bill at several hundred dollars an hour, by the time the expenses are extracted, you'll be lucky to be grossing a third. Even if you work yourself into an early grave by billing out 3000 hours a year, you're not, by that effort alone, putting yourself on a track to get wealthy.

So, what do you have to know to become financially wealthy?

Probably the first insight you need is that you are out to get wealthy, not financially wealthy. Financial means pertaining to money, but you'll need to recognize that money is simply a "parking place" for past production. The economy runs on "you buy the production of others with your production." Land and production and equity in those things underlies wealth. Money is just a convenience for wheeling and dealing.

Here's what you need to understand if you want to not miss the turn that gets you to the intersection of Luxury Lane and Big Bucks Boulevard.

Know what you are after. Having a big operating budget is not wealth. You can be "churning" millions of dollars a year, but you are only getting wealthy to the extent you are profiting on that churning. A lot of churning with little profit is actually worrisome. A huge house of cards falls just as fast as a small one.

Financial leverage (also known as Other People's Money). A business acquaintance mentions he needs 200 reciprocal capacitors (or whatever) to keep his production line going. He's desperate and willing to pay $2 each. You've got $100 and know where you can get such capacitors for a dollar each. You could double your money! Or, you can borrow, $100 paying back $110, and almost triple your money. Even better, you can get your acquaintance to pay in advance and clear an even bigger cut without putting your money at risk.

Labor leverage. At one point in my retail career, I took on a new window washer. The next time he showed up in a suit, took my $20 from petty cash and left his associate behind to do the window washing. I started seeing his associates around town, at least three different ones. I idly started calculating what he could potentially make with three window washers under him while he concentrated on selling and coordinating–maybe there could be a little money in cleaning glass. When it dawned on me the guy could easily be grossing $120 an hour with a labor cost of at most $21 an hour (35 years ago) and additional overhead of at most $2 an hour, I was shocked that he was netting about four times as much as I was as a partner in a thriving retail business, and with significantly fewer headaches! and employees!

Spotting opportunity. The productivity cycle that creates all the goods that actually represent the economy begins when an enterprising person looks to the future and sees the opportunity to make a profit. Think how easy it would be to start a window-washing business. So, why then do 99 percent of all casual window washers go about it all wrong by doing all the work themselves? Understanding how to spot situations that can be turned into profit-generating opportunities is an acumen that must be cultivated. Most people don't start their own business; they create a job for themselves in addition to which they have to function as boss, secretary and marketing person–four jobs in one, a burnout track rather than leverage.

Make money with money. How did Mark Zuckerberg make $4B in one day last week? How did Jeff Bezos make $6B in twenty minutes a couple of days ago? Was it by increasing their hourly wage? No, as you know, it was by equity. You are frail. You've got something like 100,000 to 150,000 working hours in your entire life (multiply that times what you can net per hour, and there's how rich you will potentially be). Money/equity can work 24/7/365 and not break a sweat. The trick is to live as frugally as possible when starting out young, forgo every non-essential, and set aside every dime you can. Putting your money to work for you can make money for you even while you are sleeping. You can eat out at a nice restaurant and make the money to pay for the meal while you are dining. (Better yet, you can have your fellow diner who wants your business pick up the check.)

And how did it turn out for my dad?

Dad is now 94 and comfortably off. He got a bit wealthy late in life. He played the real estate game and spotted a huge opportunity back in the early 60s. The new Interstate headed through Dallas would create rapidly-growing suburbs. We moved to a small town when I was 12, and he plunged his savings into buying up a couple of square blocks in the poor part of town but near the intersection of the two main roads. I can still remember how bullish he was to score such a coup.

And then all the growth took place, not in the old downtown area as he had assumed, but in the cattle pastures on the other side of the new highway, land he could've owned for a mere $50 an acre at the time (and worth as much as $2M and up now). To make matters worse, just when he realized he needed to be across the highway, interest rates went up to double digits; too high to make money. He spent 20 years feeling like a bug trapped in sap, unable to budge, and that changed him into a very sour man.

The final lesson then, is you have to be cut out for a life spent trying to acquire wealth. There are risks. There are pitfalls. You can get everything brilliantly right, make one deft move after another, and still end up worse off than you started.

Not everyone is cut out for such stress, strain and uncertainty, and this makes a job working for someone else at a reasonably secure salary look pretty good.

---

Charles Tips' answer to Is it true that "you won't become rich working for somebody else"?

Charles Tips' answer to What should we do to encourage innovation and entrepreneurship?

Charles Tips' answer to Wanting and Making Money: How do I become a billionaire by 30?

What are most people ignorant of that prevents them becoming financially wealthy?

Filed under: Uncategorized