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Is it hard to make $1000000?

The Power of Compounding One of the reasons that the first $1 million is so hard is that it is such a large amount of money relative to where most people begin. To go from $500,000 in assets to $1 million requires a 100% return—a level of performance very hard to achieve in less than six years.

investopedia.com - Why The First $1 Million Is The Hardest - Investopedia

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Existing in the shadowy world between trope and meme is the notion that on the path to wealth, nothing is quite as hard as making the first $1 million. While it may be a phrase repeated in jest by people who think building even $1 million in wealth is unthinkable or impossible, there are actually a lot of interesting reasons that this saying is true. Moreover, the more people understand about the difficulties that go into building the first $1 million, the better their odds of surmounting these obstacles and achieving that worthy goal. Key Takeaways There are now more than 11 million millionaires in the United States. These individuals have amassed more than $1 million in net wealth.

These individuals have amassed more than $1 million in net wealth. Wealthy people often quip that earning their first million was the hardest. Why is this the case?

Having money makes it easier to make more money, through investment, ability to take risks, and opportunities that reveal themselves.

The Difference Between Wealth and Income

For starters, it is very important to distinguish between making a million dollars and having a million dollars. While having an accumulated net wealth of over $1 million is an attainable goal for most people, only a very select few will ever earn that much in a single year. Moreover, "earning" a million-dollar paycheck may not leave someone as rich as commonly thought—recent history abounds with examples of athletes, entertainers, businessmen, and lottery winners squandering their money by throwing away unthinkable amounts of money on frivolities. It is also worth noting that there are many "million-dollar earners" who do not actually earn $1 million. Someone may own a business that brings $1 million in revenue, but has to pay most of that out in expenses. Likewise, owning a million-dollar piece of property secured by $2 million in debt is not really being a millionaire.

Hard to Get Started

One of the biggest obstacles to having $1 million in the bank is the slow rate at which people save early in life. While some jobs do offer starting salaries in excess of $60,000, they are the exception. More often, new graduates are scraping by to pay the rent, repay student loans, and still put together enough to have some semblance of a life. Even for those highly disciplined few who can save $10,000 or $15,000 a year, that would take over 66 years to build $1 million with no interest or compounding. But as people advance in age and experience, the picture changes. Not only do people typically see their salaries rise, but they often find that they no longer have to pay so much for those "starting expenses"—student debts are paid down, they have the furniture they need, and perhaps they have a romantic partner with whom they can share living expenses.

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The Power of Compounding

One of the reasons that the first $1 million is so hard is that it is such a large amount of money relative to where most people begin. To go from $500,000 in assets to $1 million requires a 100% return—a level of performance very hard to achieve in less than six years. To go from $1 million to $2 million likewise requires 100% growth, but the next million after that requires only 50% growth (and then 33% and so on). In fact, many wealthy people can and do "live off the interest." That is, they put a chunk of their fortune in a relatively safe collection of income-generating assets and live off of that—allowing them to be more adventurous with the rest. Consider that $1 million invested in a portfolio of AAA-rated corporate bonds would produce in excess of $50,000 of interest income (pre-tax), and you can see some of the leverage of passive income and compound interest.

Extra Wealth Means Extra Options

In at least one key respect, the rich are different; they have access to investment options that regular people do not. Hedge funds are simply not accessible to most people because they do not meet the minimum income or wealth levels established by regulators (to say nothing of the minimums that individual firms/funds impose). It is also hard to invest in "ground floor" opportunities without wealth. Start-ups and venture capitalists want to attract millionaires and billionaires, not regular people who can invest a few thousand (or even tens of thousands) dollars. Similarly, it can be very difficult to invest in lucrative asset classes like farmland or timberland without a sizable amount of wealth to start.

Risk Aversion: Easy to Risk a Lot When You Have a Lot

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Risk aversion is another under-appreciated obstacle to accumulating and building wealth. When many people are first starting to save and invest, they zealously guard that grubstake against risk for fear of losing it all. Although it is understandable, the fact remains that the ties between risk and reward are hard to break. Though investors may rightly fear the relatively small risk of "losing it all," playing it safe means that they are earning lower returns and making it all the more difficult to build towards that first million. A portfolio of bonds and conservative stocks may outpace inflation, but it will make the road to $1 million very long indeed. Conversely, once people have enough wealth that they feel comfortable and not particularly vulnerable to an economic downturn or bear market, they often take bigger risks. Not all wealthy people invest this way (Warren Buffett being a famous example of a wealthy and very conservative investor), but many do.

The Bottom Line

There is no point in minimizing the fact that it is hard to build that first million dollars of wealth. But just because something is difficult is no reason not to try. Try to save as much money as possible, invest that money with a prudent balance between risk and opportunity, and be on a never-ending hunt for ways to work better, smarter, and harder. After all, the rewards are there to be won and figuring out how to make the second million dollars is a problem that is certainly worth having.

investopedia.com - Why The First $1 Million Is The Hardest - Investopedia

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