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Getting Out of the Middle Class

An Excerpt from the book Zero to One Million: How to Build a Company to One Million Dollars in Sales by Ryan Allis

The large majority of persons (at least in the industrialized world) work at a job, earn $30,000-$60,000 per year and spend nearly all, if not more, of their incomes each year. Some of these persons go into debt for items they do not need, spend an hour cutting coupons and in the supermarket to save two dollars, and at the end of forty five years of working must live the last years of their life dependent on Social Security and anything remaining in their 401(k). Many of these persons are content with such a life. However, many are not. If you are not, then please read on.

The rich, on the other hand build assets, invest in assets, and have their assets work for them. They certainly are willing to work at a job for a period of time, but the experience and contacts they gain from a position is much more important than the initial salary to them. They gain control over their expenses. They put off present consumption and purchase of luxuries like vacations, boats, and big screen televisions so they can invest in building an asset that will provide enough passive cash flow to buy twenty vacations, a cruise line, and a big screen television company in the future. They never go into debt for something that is for pleasure and not investment. They buy things like businesses, securities, options, bonds, and real estate. They intelligently use their businesses to pay most of their expenses, thus receiving numerous tax advantages. They use their expenses to make them richer, and have no fear of debt, as long as they are using debt to build an asset and not purchase unnecessary items.

The poor often live frugally, not realizing that time is more important than money. The rich realize that time is more valuable than money as with time one can make money but with money one cannot make time. They understand the principal of opportunity cost and do not hesitate to spend $1000 for someone to paint their house if during that time they can make $2000 working at what they do best.

The rich have their money work for them. They do their due diligence and research and invest it in public and private companies, and then sit back while their money makes them more money. They build companies that make them money while they are sleeping. Most mornings they will wake up $10,000 richer than when they went to bed. They realize the importance of developing multiple streams of income and creating passive cashflow—money that comes in whether or not they go to work. They stay out of the middle and lower classes by waiting, if possible, until they have consistent passive cashflow from their businesses and investments before they become married and have children. While they may have to start off making money through earned income, they realize the advantages of and focus on building passive income from investments. The rich also know that they cannot become wealthy quickly, and they invest the time, gain the knowledge, make the contacts, and take the actions needed to become successful.

The rich keep close track of their cash flow. They have accountants and in the early stages use programs such as QuickBooks, Quicken, and Money to keep track of all of their income and expenses, both personally and in their companies. They believe that it is better to work for years to build and increase the value of their own companies and assets rather than spend a whole life sweating blood and tears, being paid a wholesale rate, to increase the value of someone else’s asset.

The validity of the above principles is made clear to me each and every day in my life. There is a terrible disparity between the rich and poor, even in the streets of Chapel Hill, North Carolina. While certainly some of this disparity is caused by a lack of equality of opportunity, some of it is there for reasons beside differences in education and opportunity. Some of this disparity exists because those who are poor did not follow the above principles. They work for others and not themselves, will spend more money than they earn and go into debt for unnecessary items, will never delay present consumption to invest, never take the initiative to improve their financial literacy and business education, and are married and have children before they even have a well paying job, let alone a stream of passive and portfolio income. Try not to let your life go down this path, and if it
has, learn and apply the above principles in everything you do and you will make it through.

Robert Kiyosaki states in Rich Dad’s Guide to Investing that the secret to becoming rich is to “build businesses and then have your businesses buy other cash producing assets such as other businesses or real estate.” This statement captures the essence of the process needed to become extraordinarily wealthy. I would modify this statement slightly, however. I believe the following:

The secret to becoming extraordinarily wealthy is to build businesses and then use the excess cash flow from your businesses and the capital gains from any liquidity events to invest in future ventures, early stage private companies, emerging markets, and other cash producing assets such as real estate.

Please reread this statement a few times. This is the path I will follow throughout my life. I am currently in the process of building a successful business. Once this is accomplished, I will use the funds to make additional investments in early stage private companies, build additional companies, invest in real estate, and explore investments overseas. I intend to make my first five million dollars by building companies. I’ll make my next one hundred million by investing in my future businesses, private equity, and real estate, all the while keeping half of my assets allocated in small cap, emerging markets, and commodity index funds.

It’s important to remember that financial security and financial prosperity should be looked at as long-term games. If you are 30 and are $40,000 in debt, make a goal to have this debt paid off by 35. Then by 40, make a goal to have $200,000 in bank. Then by 45, to become a millionaire. Take it a step at a time, work with five year plans, and each day make sure you’re working toward your long-term goal. It will become easier and easier as you gain in experience and contacts and as you are able to leverage your existing capital to help create more capital.

If you’re young, consider saving up what you can and opening an online trading account with Etrade or Ameritrade. In my experience, the easiest thing to do if you don’t want to actively manage your investments is to put your assets in no-load index funds. I have put 50% of my overall assets in a portfolio that is structured as follows: 35% in a small-cap index fund, 15% in a mid-cap index fund, 25% in an emerging markets index fund, and 25% in a commodities index fund. While I am not qualified to give financial advice and I would certainly recommend consulting a financial advisor, if you can get $15,000 into a portfolio by age 25 that closely matches the market and not touch it until 65 and let the returns compound, you would have $471,000 after inflation by the time you retire (assuming an average inflation-adjusted annual return of 9%). If you can get $15,000 into a portfolio structured similar to this by age 25 and commit to putting $1,500 per year into the portfolio, you will have $1,023,000 after inflation by the time you retire. A little sacrifice early on can make a big difference down the road and allow you to feel safer taking larger risks such as starting your own business with the other 50% of the money you save.

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