I know this is a loaded question, I am really wondering why the statistics seem to point to most millionaires being self-employed or business owners.
(Read: The Millionaire Next Door by Stanley and Danko, where they say that most millionaires next door are ordinary unassuming business owners).
Stanley says that 90% of business owners or the self-employed are NOT millionaires, but for me, it’s still curious that a large percentage of self-made millionaires say that working for themselves seems to be the golden ticket.
POSSIBILITY #1: SELF-MADE MILLIONAIRES MAKE MORE MONEY
This is true in my case, but it is not true for all industries or jobs, and it takes a certain niche to be able to freelance with nothing but your brains invested in it.
Even as a business owner, you have to imagine that they need to pay employees, buy supplies, pay vendors, manage customers and collect the $$$$.
Sure, the income could be higher, but there is so much to think about and pay, that it might be more profitable to be an employee.
POSSIBILITY #2: SELF-MADE MILLIONAIRES KNOW HOW TO MANAGE A DOLLAR
I have learned a lot more about managing overhead expenses like traveling, or setting aside buffers in the bank account and taxes.
I’m going to assume that if you run a business successfully, you have to know how to manage your money.
No ifs, ands or buts about it.
If you don’t have money to pay the guys who drop off your supplies every week, because you didn’t invoice your customers on time — you’ve got a problem!
Managing cash flow, bills, debt and keeping expenses down are quick lessons that are hard won when you run your own business.
POSSIBILITY #3: SELF-MADE MILLIONAIRES HAD NO OTHER CHOICE BUT TO SAVE
Risk. Risk is a big thing when you’re on your own without much of a safety net.
They literally had no other choice but to save and scrimp at the start of their business.
You have to save like there is no freaking tomorrow. When your contracts dry up, or if you go through a rough patch in business, you need something to tide you over in the bad times.
When you go through such an experience of either heavy debt, lack of savings or no safety net, it changes your perspective on money.
You can’t spend like a rockstar and expect to be fine when the market tanks.
(This is also true for employees (even top ones) who are fired because of company shifts.)
Saving is key especially for the self-employed, and their emergency funds should be as fat as possible.
CONCLUSION
Perhaps there’s a grain of truth to the fact that a lot of self-made millionaires are self-employed, but I think we shouldn’t just zero in and focus on that correlation.
Not all businesses make it. 90% of them fail in their first year. Others just go on to ‘make a living’, but they haven’t made themselves into millionaires.
I think the millionaire mindset can be applied to employees as well, it’s all just about saving, keeping expenses low and watching your cash.
You don’t necessarily have to own a business or work for yourself.
The main difference may be that perhaps in a business, losing your shirt and literally everything you’ve worked for is a lot more painful (emotionally) than losing a job, so there is a greater fear in wanting to save, save, save.
There are plenty of others out there who became millionaires quietly — just by saving their money, living frugally and investing properly.
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Very interesting post. I think being self employed is far more rewarding than the money comes with. It's the pshychological factor of being in control and pushing your self to higher limits. I do find it hard to believe that 90% of millionares are not self employed, which is an interesting statistic in its own. I agree with some of the posts above, that being self employed and/or owning a business, you sure have more tax advantages and ways to make money work harder for you. My recent post : http://www.financefox.ca/index.php/canadian-debt-…
That\’s very true. I do work harder for myself, I guess. I feel more professional, and I know that sounds bad 😛
It's definitely possible to become wealthy as an employee, but the jobs for big companies that have big upside basically require you to, in many ways, attract your own clients and run your own book of business, not that different from running a small business in many ways. For example, successful law partners make partner at big firms because of the clients they bring in and basically manage. Similarly, a successful investment banker at the Managing Director level has to be able to bring in business, manage his relationships with his clients, etc. Same goes for sales executives and directors at big pharmaceutical or tech companies. Sure, you have the support of a big corporation and its resources, but there's the entrepreneurial aspect of bringing in business and managing "your" clients and their needs.
great post. it is making making the right money management decision. It is sometimes easier to make money than to management money right.
great post. It is about managing money and making money work for you instead of chasing after it all the time. I know successful business owners who still live like they have month to month salary b/c of poor money management style.
All great points! Owning my own business puts a lot of responsibility in my shoulders which pushes me to take more risks and work much harder for my success than someone elses. I will be willing to make a lot more sacrifices. All these things will be rewarded (I hope) with unlimited earning potential. And the added tax cuts might help as well.
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Thanks for coming by. 🙂 I agree that if you have a personal stake in things, you really push yourself to work harder and produce more just because it\’s your livelihood and not someone else\’s
you say, 90% of all businesses fail within their first year. So I agree that, it doesn't matter whether you're an employee or an entreprenuer, the bottom line is, if you manage your money wisely, invest properly and live within your means, like you said in the above, then anyone has the chance of becoming a millionaire ((next door)) in the end. 🙂
Thanks for the super nice comment you left on my blog, FB, by the way 🙂 I'm sorry that I disappeared from the PF-blogosphere and went AWOL for that 1½ year. But, as you probably already know from your stats, I've been a silent blog "lurker" (ninja?) around her, hahaha- Always hanging around and reading your posts, but never commenting. So here's a loooong comment 🙂 Probably the longest one I've ever written in my life! Hahaha 🙂 But I'm really glad to hear from you again! 🙂 I promise I'll plug into the blogosphere conversation again, and not just be an invisible "blog lurker", hahaha 🙂
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Allll right 🙂 If you say so. I don\’t mind if people lurk and comment once in a while on things that interest them.
I definitely agree with the fact that "regular employees" have just as much of a chance as business owners at becoming millionaires. I didn't actually agree with this at first, to be honest, but then I remembered a few stories, I've heard. For one, my dentist's brother-in-law is a banker in Switzerland who earns a couple of million a year (he's a regular bank employee, albeit in a top job position), he's definitely a millionaire 🙂 Or a distant cousin of mine who works in a very high-paying job position at IBM. He's definitely a millionaire too, since he earns at least 1 million a year, but he's a "regular employee" (drone, haha) as well. He has never started his own business, but instead has always lived on his paychecks, ever since since he graduated university. And of course, the same is applicable the other way around. Just because you have your own business, doesn't guarantee that you'll be a millionaire. For as
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These are the exact reasons why I wouldn't want to go into freelancing. I am absolutely horrible when it comes to saving. Sure these past months I almost didn't spend anything, but that is because I was too busy with work. I don't think I could live with thinking that so many things depend on me saving a truckload. Plus I'm the type who wants to "enjoy my money".
My parents deplore the amount of money I spend while away on holiday. But really, that is all money put aside to enjoy my holiday to the most. Granted, I'm still not dining in 5 star hotels, but that's not something I miss.
I guess I'd rather save, so I could afford to spend a lot once or twice a year (when I go on holiday), as opposed to thinking more mundane things like oh… surviving. :
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*LAUGH*
All right that makes sense to me actually. I do like spending on holiday. I go all out eating, and shopping and sightseeing. BF gets all squirrely on me and tries to save on everything when he thinks he\’s spending so much. I\’m not so stuck to a budget.
Hah! I'll totally direct them to your blog next time they make not-so-subtle remarks.
Hmm… come to think of it, this gave me an idea for another blog post. 😛
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Yes!! Spreading blog creativity 🙂
My fiance is working for himself; however, recruitment agencies have his CV and they called him to see if he wanted to attend an interview, so he asked them what the salary offer was and he realised that at this point in time it pays him more to be employed and receive a stable salary every month by just working with a company, rather than have to chase clients to get paid, have them call him on a whim, try and find more clients, etc.
I think it's about timing too. As in, there are times in your life when you need to be supported by a structure.
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That\’s a great point. I\’ve said before that a lot of industries are just not cut out for freelancing. It\’s far better to have a stable job sometimes because chasing clients to get paid or to not have a schedule can be frustrating.
I think all your possibilities are correct, but I also think it is possible for employees to become millionaires. However, they often do not have the mindset, since they just go to work every day, sit there, collect their paycheck at a set date and use it as if (which is often the case) next month another one will magically appear. So it is basically living paycheck to paycheck. If you're self-employed, you have to think about less fat months, you have to consider taxes, you might need to invest, and you cannot just sit still, because the competition is also moving, and standing still might cost you clients.
I think that I should be able to make about the same kind of money as I do now, if I have a regular job. I would have to work more hours, but it would also be more regularly (no evenings and no weekends), so I think that the effort would be the same, since I prefer working when I want to, not when my boss wants to. And if I made that kind of money every month, I would still – as opposed to many of my employee-friends – save up quite a lot. That is because I'm used to considering the possibility that things might change for the worse. By doing that, I think I would still be able to become financially independent when I am about 40 or so.
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I agree! Employees can certainly be millionaires. Read: Being your boss is not the only answer
A lot of employees may not have the mindset, but that\’s where I think budgeting, having financial goals and frugality comes into play. I very much agree that you have to think about so much more risk when you are not working constantly and lulled into a false sense of security.
I like your goal of financial independence by 40! 🙂
Hi, I just started reading your blog this week (came here from My Pretty Pennies blog) and think your articles are really interesting and fun to read. 🙂 I'm working part time and going to school part time, trying to figure out the right career for myself and increase my financial freedom.
Cool 🙂 Glad to have you over from MPP! Hope the articles help.
I have friends who once owned a small business and would tell us stories of writing out checks to their managers that were more than their own monthly stipend from their business. That puts a lot of things into perspective. It takes a certain type of person to run a business. Sometimes it doesn't work out. But when it does work out, the risks pay off.
Totally agree with you, but I guess they might be in it for other reasons? Being able to work for yourself is something that can\’t really be quantified even if it isn\’t millions.
These are all valid points. I believe that if you are self employed, you pay more attention to your bank details, and such. For instance I dont track all I spend to the cents because I know my next pay check is coming two days, however if I were self employed, i'd be more conscious and stringent at thesame time.
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I definitely watch my money. But I did that before. I tracked every penny before I started working for myself, just because I was in so much debt!
Everyone I know well that's wealthy is either self-employed / a business person or a CEO or very highly paid other type of exec. The self-employed ones I know that are wealthy are more frugal – for sure. One piece of advice my dad has always had if you go into business – get into something with a high margin. (Or I guess volume if you're looking at something like Wal-Mart). Same can be said for a contractor / consultant – get into something that allows a high hourly rate.
To be honest though, I haven't seen too many entrepreneurs (or executives for that matter) who had very well-balanced lives. A successful local businessman just dropped dead of a heart attack at a restaurant a coworker was at this weekend (during dinner). He was 44. Left behind 3 young kids, a home in Whitefish and one in AZ. Maybe there's no correlation, but…
Agreed. High margins make a big difference because you\’re factoring in the cost of the months where you DON\’T work.
Oh goodness. I really don\’t want that kind of high-stress life. Perhaps that\’s another driving factor of my keeping my expenses low, so I don\’t have to worry about paying for everything and hustling every day.
I like the idea of being self-employed but if I were to ever do that I'd do it through something like freelancing in accounting or web/graphic design. I don't like the idea of buying capital, taking on debt, etc. Hopefully I'll be able to make that a reality. I've found out recently that I don't like being managed and I don't like managing someone either. My boss is awesome but I'd be happier on my own.
Have you read escape from cubicle nation? The author used to be a consultant for high profile companies and found out that even at these great companies, employees wanted to jump ship. So it seems many people share this desire of self-employment. My mom recently retired and she sold her business last week. Anyway, she was very careful with her finances, was never in debt, has a credit score of 800+.
She had a small business so of course she had to manage her own finances and her business finances as well. The only thing about self-employment is how do you separate work from home, and how do you meet new friends? That's my only worry.
Like Jacq from Single Mom Rich Mom! She does freelancing in accounting 🙂
I think you\’d definitely be suited as a consultant. I don\’t want to manage anyone either.
I haven\’t read that book yet, but I\’ll put it on my list.
I think to meet new friends.. I might be past that. I meet new people via this blog, just at work, or I have 3 really good friends I call on occasion.
I didn't know that about Jacq, well I'll check out her blog, thanks. Am always interested in how other accountants are doing. 🙂
OH and I separate work from home by not working.. at home 🙂
I have an office I go to, but I\’d prefer to be remote, although most clients are not keen on not seeing people they\’re paying, to not be in the office.
So, do millionaires become sel-employed, or do the self-employed become millionaires?
Is it truly that when you are self-employed, you are more use to fluctuating income? And thus have to be more frugal? I don't know. I've never been self-employed.
Great blog by the way.
Thanks Marcia!
I\’d say that versus being an employee, I am far more frugal than I was knowing a cheque came in every 2 weeks. At least with a job you have a sense of when you will be laid off or how the company is doing.
As a freelancer, I can\’t predict projects, so I take it easy, squirrel away as much as possible, live comfortably but not extravagantly and relax.
As others have mentioned, it's like any other arena where there's a high risk and high reward. You rarely become a millionaire by being employed by someone else because there's less risk involved (you don't put in any of your own capital, you're guaranteed a salary as long as you're employed, etc), just like you don't make fabulous returns investing in bonds. If there weren't outliers making fantastic amounts of money, very few people would endure the potential stress, sacrifice, drudgery and/or huge loss potential of becoming an entrepreneur or an actor or investing in options. While I think all three of your hypotheses are correct, imo the first one (along with a solid dash of luck) is the most applicable. The percentage of entrepreneurs who are millionaires is simply too low to attribute it solely to 2 and 3.
Luck is definitely a big one. I think opportunity that you seize and take advantage of, sometimes just isn\’t so obvious!
There is more earning potential with a business. Sure, lots of businesses fail, but the ones that are successful can make a lot more money than someone working for a base salary.
I also agree that people who own a business are probably smarter with money as well.
I can't decide which is more important. My initial reaction was the earning potential, but I'm leaning more towards being smart with money. Anyone who understands compound interest knows you can get "rich" by just earning a moderate salary and saving wisely.
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So you think smart with money is a bigger thing? That they have more risk to contend with, so they are more conservative?
Employees pay taxes on everything. The self-employed can claim many business expenses. Two contractors of my acquaintance–both w/ far higher incomes than a teacher–pay almost no tax. Most of their income is written off for depreciation of car, etc. One of those contractors has a child in college. Because he has almost no income, she gets a lot of financial aid (grants, not loans).
My father was self-employed for about 10 years. My mother always said that made the biggest difference in their retirement savings.
Of course, most small businesses fail….
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I guess it also depends on what kind of business too. Capital (in your head) or assets in a service, or selling things. Each has its own pros and cons.
Yes I think all the points you mentioned which lead to one big advantage to working for yourself ( if you can pull it off) – the ability to compress time frames. Getting a salary does not often allow massive income increases even if work tine and intensity are increased. A good business should lead to higher income if more time and improved processes/execution are done
Chris
Should. But I\’ve seen good businesses drop off over night just because the market shifted so quickly.
Hard to say!
I definitely agree that successful business owners are more likely to have better money skills out of necessity as well as a higher income. Additionally, there are clearly some tax advantages that business owners can take advantage of that most employees do not qualify for.
Yes, tax advantages are another big thing. Being able to write off stuff is sweet.
Not to be boring or all academic here… But (IMO), this question goes back not to about personality but a more Marxist conflict theory. If you're an employee, you're being paid a wage to do work. There is (almost) no way you can become a millionaire this way unless there are billionaire's paying your wage. And even so, that's unlikely, because those who are rich & in power will want to keep your wages low so that they get richer & keep production costs low. The only way to escape that route is to become one of them so that you can own a small business and "exploit" your own workers. Self-employed/business owners have an opportunity to make money compared to employers who are just given a standard wage (unless the employees are people who are investing smartly in a crapload of stock – but this again, according to Marx, this would now classify them as business owners & thus exploiting workers.)
This all changes for a bit consultant workers but in general the theory still works.
PS-Sorry. I'm doing a paper on economic theory right now. @_@
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Well I think employees can still be millionaires if they live frugally and bank a lot of cash.
Ooo. I guess I\’m exploiting myself as a consultant then 🙂
I think working for yourself gives added motivation where working for someone else is less exciting at times. There is greater risk but also greater potential. Also, I think that percentages are incredibly misleading and difficult to interpret.
I wish we could really find some true correlations between it all. I\’ve been reading all of these books and it\’s such a small percentage ,but they all seem to point to the same things.
I am leaning towards more that luck/opportunity is a bigger factor.
I have no comment to make although I did enjoy the post. I,m still muddling through on a minimum age.
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Thanks for coming by 🙂
It's simple: if you believe in the power of compounding then clearly you want the highest possible compound growth rate (assuming you stomach the risk/reward) … this table (from Michael Masterson's excellent book) compares business to real-estate and stocks, bonds, etc: http://7million7years.com/2008/09/30/its-the-grad…
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Thanks for the book rec!