Sunday 20 May 2007

Why the First Million is the Hardest

I don't know where the expression comes from originally, but I'm sure most people have heard that "the first million is the hardest". The funny thing is that when you're starting out on the road to accumulating wealth, it somehow seems to be a bit of a put down - you think it's just a throw-away line of the mega-rich, along the lines of "Let them eat cake!" Of course, it's easier to save once you have a million dollars and are living on easy street!

However, once you get closer to having $1m net worth you realise that this truism, like so many in personal finance, does actually encapsulate some fundamental truths.

Some reasons why it really is true that "the first million is the hardest":
* When you start out, your income is generally at the lowest point of your working life. So even saving 25% of your gross income will only build up your net worth very slowly. For example, I started full time work on a salary of under $20K, so saving 25% of my gross salary only added $5,000 to my net worth over one year.
* When you start out you generally know very little about investing. Even if you study some economics and financial analysis subjects in High School or University, you often won't gain a practical knowledge until you've been "hands on" investing for several years. When I started saving I was focused on bank savings accounts, and slowly progressed through government savings bonds, term deposits, and later into shares and property investment.
* When you're starting out you have smaller amounts to invest. This makes many avenues of investing unavailable or uneconomic. Although things are much better these days than when I started out - the advent of the internet and discount brokers has made many more types of investment accessible to beginners.
* Once you have a substantial investment portfolio built up, the "passive income" flowing from your investments becomes a large component of your "savings" in relation to your salary income. However, this only holds true if you stick to "reinvesting" your investment income, rather than using it to supplement your lifestyle spending.
* Some aspects of financial planning such as asset diversification and efficient asset allocation ("efficient frontier") only become applicable when you have larger amounts to invest.
* Any "emergency" that causes you to dig into you savings will have a much larger impact on your net worth when you are starting out. Conversely it is much more important to pay for various types of insurance when you are starting out - for example, starting a family it is important to have life insurance in case the main bread winner dies unexpectedly. Later on, the expensive of life insurance may be avoidable if you have paid off the mortgage, the kids have left home, and you have built up an investment portfolio.

Looking back to when I started out saving it was incredibly hard for very little result. For example, in High School I would work 9 hours at a market garden weeding or sorting and rebagging potatoes (ie. removing the stinking rotten ones, washing off the others and rebagging the remainder for sale). I earned around $10 for the whole days work, and spend $1 on lunch and $1.20 on busfares to and from work. In the end a whole day of my life resulted in adding less than $8 to my net worth. However, that initially stage of developing my finances provided a basic understanding of the value of money, and provided the "seed capital" required to start saving and investing. If you try to take a shortcut from McDonalds worker to property tycoon you are liable to end up another Casey Serin.

Enough Wealth


soem dood said...

After tiring myself out trying to figure out what the heck this dude Casey Serin is actually up to, I finally found a place that catalogs his activities, history, associations, and purpose.

The site bills itself as "the leading semi-satirical wiki about foreclosure blogs", and I'd say that's accurate, given the predictably rather vertical market for "semi-satirical wikis on the topic of foreclosure blogs." Still, it's a good read.


Casey Serin

Anonymous said...

I love this article. It's very inspiring. An excellent example of how a little disciplined investing, time and patience leads to huge rewards!

Box said...

The article was good until it recommended not taking big risks i.e going from MacDonald s employee to r.e tycoon. THis is the old mindset. Work your way up the corpoate ladder. That was fine and dandy 50 years ago when the company you joined on with was likely to stick around but goo luck working your way up the ladder in times like this. Yes we will pull out of the recession but the company you sign on with might not make it. Right now is the best time to take a risk. ESPECIALLY if you are young. Right now I am working for a Sea World but in my free time I invest about 50 percent of the money I make into advertisements for my real estate investment business. I Will infact go from Mcdonalds worker to r.e tycoon and a poorly guided article like this only motivates me. said...

@Box - so how is live as a RE tycoon treating you? I'm still working at the 2nd employee job I ever had, and my NW is now over $4MM. Did you end up the 1-in-1,000 RE tycoon like Kiyosaki, or one of the other 999-in-1,000 that tried to 'get rich quick' by leveraging up properties during a RE bubble, then went bust in the next RE downturn (like Ramsey in his 20s etc.)?