My best friend, Bill King, is 11 years older than me. Like me, he’s a CPA and a CFP. When I was just starting out in my career, Bill gave me the best financial advice I ever heard.
Bill and I were discussing what it takes for the average middle-class individual to become financially free. Bill said that most people live paycheck to paycheck. Bill continued. “The worst part about living paycheck to paycheck is that at the end of your working life, you literally have nothing to show for all of your hard work, except a small amount of equity in your home and your Social Security benefits. As a result, most are forced to sell their home and survive on Social Security benefits, when they can no longer work.”
I asked Bill why that was so. Bill said most people have a tendency to spend exactly what they make. They increase their standard of living as their income goes up. They buy bigger homes with bigger mortgages, bigger utility bills, higher maintenance costs and higher real estate taxes. They buy more expensive cars. They go on more expensive vacations. They go out to restaurants more. They buy new furniture even though the old furniture looked just fine.
“So, what’s the solution? What’s the secret to being financially free when you stop working?” I asked. These were Bill’s exact words:
Same House, Same Spouse, Same Car.
I never gave those words much thought until I began studying the daily habits of the rich and poor. In my five-year Rich Habits Study, I discovered that there were four paths towards wealth for most self-made millionaires:
Path #1 – Saver-Investor Path
Most of the Saver-Investors in my rich Habits Study were employees. They made a habit of saving 20% or more of their net pay and then prudently investing their savings. In order to be able to save that 20%, these Saver-Investors forged the Frugal Spending Habit and organized their life in such a way to be able to maintain a standard of living that enabled them to save 20% of every pay check.
Path #2 – Big Company Climbers
The Big Company Climber in my Rich Habits Study typically worked for just one company and devoted their entire careers climbing the company ladder. Some did switch jobs, but always to a company that was very profitable and for a more senior management position.
Seventy to ninety percent of the wealth Big Company Climbers accumulated were tied to Stock Compensation – Incentive Stock Options, Restricted Stock, Stock Appreciation Rights, Stock Grants, etc.
Path #3 Virtuosos
Virtuosos are individuals who devote themselves to becoming an expert in their industry. They can be Knowledge-Based Virtuosos or Sill-Based Virtuosos.
The Knowledge-Based Virtuosos in my Study typically had advanced degrees beyond a college degree. They devoted years to study in order to become the best in their industry.
The Skill-Based Virtuosos in my Study typically discovered some innate talent early in their lives and decided to devote their entire lives to improving and perfecting that innate talent.
Path #4 Dreamer-Entrepreneurs
The hardest and most financially rewarding path to wealth is the Dreamer-Entrepreneur Path. Dreamer-Entrepreneurs devote a significant portion of their working lives to the pursuit of some dream – one that can be monetized. It is the hardest path because it requires the most hours and sacrifice.
It is the most financially rewarding path because the Dreamer-Entrepreneurs in my Study accumulated an average of $7.4 million in the shortest period of time, 12 years. Most people do not have the desire or personality to be an Entrepreneur. It requires too much work, too much risk and too much sacrifice.
Becoming financially independent is a process. The path you take, is that process. Which path is right for you, depends on your particular personality. But if creating a life of financial freedom is important to you, you must choose a path near the beginning of your work lie.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, “Effort-Less Wealth”, “Change Your Habits Change Your Life”, “Rich Habits Poor Habits” and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”