Will Your Boss Ever Make You Happy? On Salary Versus Wealth.

October 12th 2021

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SUMMARY / KEY TAKEAWAYS

  • The urban legend says that, in order to become rich, you should start your own company. However, in most countries, entrepreneurs don’t make a significantly higher income than other employees. So, how to get rich then?

  • In this article, we discuss the fascinating results of the National Study of Millionaires by Ramsey. As it turns out, most millionaires didn’t inherit their money, and didn’t start businesses either!

  • We also discuss the concept of a compound interest and its impact on your personal finances.

On Some 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.

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. 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.

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, not 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. 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.

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 as 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.

Spending Versus Investing In Personal Finance.

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:

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Putting aside 1,000 dollars is perfectly within reach of every middle-class American family, especially if they consciously decide to live a frugal lifestyle – and become millionaires.

On The Lifestyle Inflation.

At the same time, it is also easy to spend the salary, no matter how high it is. Many employees experience a phenomenon known as lifestyle inflation.

Namely, the more they earn, the more they spend. They move to better apartments, send their children to more expensive schools, and go for more expensive vacations. As a result, no matter how much they earn, they have no savings.

The bottom line is: your salary won’t ever make you a millionaire. Whether or not you eventually become one, fully depends on what you do with the money you get.

Health and Work Satisfaction Also Compound.

So, it is worth chasing after the best paid positions, especially when it comes to the cost of work satisfaction?

Well, taking part in a rat race to secure the top seats also has downsides to it. In competitive environments of the job market, you usually need to put on more hours and struggle with work-related pressure to get promoted in order to reach career advancement.

Perhaps, if you decide to resign from fighting for promotion and spending extra two hours in the office every working day, and actively decide to spend one evening a week on learning about the macro economy, reviewing and planning your personal finances instead, then, in the long run, you will be wealthier, happier at your job and wealthier at the same time.

Conclusion: A Career and Personal Finances Are Two Separate Areas.

The conclusion from the study by Ramsey is that the key to personal wealth is NOT inheritance. It is NOT entrepreneurship. It is NOT cashing a high salary either! The key is good education and using that education to make good use of the money, namely, patiently saving and investing them.

Many professionals expect to find all sources of well-being in one place. They wish to complete their career paths and find fulfillment at their job, and additionally, become filthy rich in the process.

However, this strategy tends not to work too well! It is good to ask yourself: What do I really want? Is it my goal to have a high salary, or is it my goal to have a job that I love AND be wealthy? You can gain these two values from different types of activity — just as the vast majority of American millionaires do.

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Please cite as:

Bielczyk, N. (2021, October, 12th). Will Your Boss Ever Make You Happy? On Salary Versus Wealth. Retrieved from https://ontologyofvalue.com/will-your-boss-ever-make-you-happy-on-salary-versus-wealth/

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