It’s no mystery why the rich are getting richer in most places around the world. Our whole system is build on the fact that the middle class pays a huge proportion of the fees. That is a fact and I don’t personally get upset about it. It’s something that will be difficult if not impossible to change for several reasons. Because of that, I personally think the key to reaching the passive income lifestyle is to be very aggressive in the early years. As I wrote a few weeks ago, I’m not talking about being overly aggressive in your investments but rather being aggressive in saving money aside, setting up passive income flows, and building your portfolio as quickly as possible. Why? Because every 100K will become easier to build after the first one is done…
Why The First 100K Is So Difficult
There are many things that make it very difficult to get to that first 100K, here are some of them:
-Debts: Most that are unable to reach that 100K in net assets have trouble because of debts. Some pay interests on credit cards, loans, credit lines, and in many other ways. Paying back debt is a huge challenge and for many becomes an almost impossible task
-Absolute Fees: So many fees are the same no matter how rich or how poor you are such as ATM fees, trading fees, etc. Proportionally, the poor and middle class do not have close to the same amount of money to pay for these fees.
-Taxes: In theory, the rich pay a bigger percentage and thus a much bigger absolute amount of taxes. The reality however is that the middle class pays the largest amount of taxes. When you have some resources and a decent salary, you get hit big time. Why? Because you do not make enough to implement the dozens of possible ways to save a lot on taxes.This will NOT change. I understand how some people can get upset about it but these are facts and they will not change. Why? Because you would need virtually all lobby groups and all governments to sign up and it is not going to happen.
-Investment Opportunities (mutual funds, real estate, etc): The richer you are, the more options you have in terms of investing. How so? If you have $5000 to invest, what are your options? You will generally get a recommendation for a risk free investment, or a mutual fund that will generally have high fees, etc. These are low quality investments. However, who could blame someone for sending you towards those… It’s not like you can invest in real estate, buy in a hedge fund or build your own portfolio, it’s just not possible. The other aspect of it is that as you become richer, you can sustain more risk all things being equal. That will generally yield you better returns.
-Easier to save money: This is not rocket science is it? The more money you make, the easier it becomes to save. The reason? While it’s possible to expand expenses very quickly, generally having higher revenues translates into a higher surplus as well.
-Compound Effect: I don’t think I need to do the math or demonstration here. Saving 100K by age 30 or by age 60 will make a world of difference in the end. Just to give you an idea, 100K by age 30 at a 5% return by year would give you up to $432,000 by age 60. That also means that the rich end up making money even while sleeping.
-Education: No matter where you live, education is expensive. The more money you have, the more likely you are to have a good education. The correlation between education and income or being rich is incredibly high. Sure, there are tons of exceptions, but as a general rule it is very solid.
-The Rich Receive More: For some reason, the rich always get treated better. Become rich and suddenly people will start inviting you for dinner, you will get free drinks, discounts, etc. It’s not always the case but I would say that as a general rule, it’s accurate.
What It All Means?
I think it becomes very clear that gaining a competitive edge as early as possible is critical. In the end, it will make a world of difference. If the rich are becoming richer, then it is critical to jump on the bandwagon as early as possible.
It’s A Race To 100K
The reality is that as I’ve discussed in the past, I think it’s very important to set ourselves objectives, and plans of action to reach them. In this specific case, I think the initial goal should be to reach 100K of net assets as early as possible.
Does It End After That?
Once that is done, you should be able to reach 200K more quickly, the third one even faster, etc. Whatever it takes, I would focus on that. Things will get easier after that first step