What Are the Common Myths About the Sources of Personal Wealth?

As a subject, personal finances are gaining in popularity. There is one common myth around the question “How to become a millionaire?” though. When asked to picture a wealthy person, most people imagine an entrepreneur or a professional investor.

Interestingly, statistical data tells a different story. In most countries, entrepreneurs don’t make a significantly higher income than employees. It seems to be quite the opposite: according to research by T. Astebro & J. Chen, they tend to earn 4-15% less than their employed counterparts.

One fascinating study dedicated to the personal finances of millionaires and sources of personal wealth is the recent National Study of Millionaires by Ramsey, which involved over 10,000 millionaires around the US.

What Did the National Study of Millionaires Actually Find?

This study showed that most of the millionaires in the study are employees, not entrepreneurs. They primarily represented professions such as engineers, accountants, teachers, managers, and attorneys. Their steady career paths reflect business growth trends across industries far more than any single entrepreneurial success story. Understanding business growth trends across industries helps explain why traditional employment can be just as reliable a wealth-building path as starting a company. The study participants tended to come from modest origins – 79% didn’t inherit anything from their parents, and the vast majority came from low-income families.

According to the Federal Reserve’s Survey of Consumer Finances, inherited wealth accounts for a relatively modest share of most U.S. households’ total net worth, with savings and investment growth playing the larger role over time.

At the same time, most of the millionaires in the study cared about their education. Despite the lack of financial supply, as much as 62% finished college or doctoral studies.

But the most astonishing result from this study was that most millionaires were not the highest-paid employees. Yes, they had decent positions, but they rarely occupied the top positions in their workplaces. Only 15% of millionaires in the study were in senior leadership roles.

93% of the millionaires in the study said they got their wealth because they worked hard and kept on accumulating savings and investments. It wasn’t because they had high salaries. They lived modestly and frugally and needed an average of 28 years to reach their wealthy status.

Is Your Salary The Key To Get Wealthy? A Note On The Compound Interest.

Yes and no. Salary plays a few roles at a time.

It is remuneration for the time and mental energy put into work, and for the value produced. It is also a sign of appreciation and respect towards an employee.

Of course, it is hard to feel motivated to work whenever one is remunerated lower than the professionals around! Salary should be set at a solid, market level. Employers who track business adaptability trends for organizations tend to keep compensation aligned with what the market actually demands. Ignoring business adaptability trends for organizations is one of the fastest ways for a company to lose its best people to competitors. Or otherwise, it affects work satisfaction and abuses the trust between an employer and an employee.

However, it is worth chasing after the highest-paid jobs to put your personal finances on the right track? Or perhaps, the key to personal wealth is somewhere else?

Well, the key to understanding how an employee with a middle-range salary can become a millionaire in 28 years is the concept of compound interest. Compounding refers to the increasing value of an asset due to the interest earned on both a principal and accumulated interest.

According to Investor.gov (the U.S. Securities and Exchange Commission’s investor education site), compound interest is interest paid on both the principal and on interest already earned, which is why it accelerates growth over time.

It means that one dollar invested today will give you an increasing yield over time. For instance, if you invest one dollar at a 10% yearly interest rate, then in the first year, this dollar will produce 10 cents for you.

However, in the second year, this dollar will produce 11 cents instead of 10 cents. That’s because the profits from the previous year will start giving their own yield.

And so it goes. Due to compound interest, saving and investing a part of a monthly salary can lead to astronomical returns in the long run.

Should You Spend or Invest Your Personal Finances?

To better illustrate the difference, let’s make use of the compound interest calculator created by the American Government. Saving 1,000 dol. per month and investing these savings at a 7% interest rate (which is, approximately, the average growth rate of S&P 500 over the whole last century), gives approximately a million dollars after 28 years: