Why the First Million is the Hardest

If you’re dreaming of a hard-won financial independence secured by multiple millions of dollars in the bank, you may be wondering how anyone gets there. You see the stories of multi-millionaires who retire by 30, 40, 50, and you think — how? Is that really possible?

Well, it’s not easy, but it is possible. And know this: the first million is the hardest.

After reaching the $1 million mark, you may be surprised at how quickly your net worth builds. It may take years and years to get that first million dollars, and then under 10 years to get the next million.

There are multiple reasons why the first million is the hardest and the next million is so much easier:

The First Million Comes Mostly from Your Income

When you are working toward that first million, a good chunk of your income is going toward your daily survival, including food, clothing, shelter and some modest luxuries here and there. You don’t have much extra to save, which means you don’t have much to invest. While you eventually will make good returns if you invest wisely, a very large piece of that first million dollars comes from your ongoing income.

However, once you have a million dollars, you have a large hunk of money that does nothing but feed on itself, growing without you doing any work. If you have $1 million in money to invest and it makes a 5% return per year, which is very achievable, you are making $50,000 without lifting a finger. And, thanks to the beauty of compound interest, the next year you’re making 5% on $1,050,000, which means you make $52,500 without lifting a finger. If your investments do better, your money adds up even quicker.

Millionaires Have Less to Lose (Well, Not Literally)

Once you have a million, you have fewer worries, right? You’re going to be able to pay the mortgage, the car, etc. That means you can take some chances, make some riskier bets without worrying that you’ll be sunk financially if they don’t work out. And some of them probably will work out, you just don’t know which ones.

But when you have less money, you can’t risk the little you have. You’re less likely to put $25,000 into a business or investment that you believe in but has real risks. You don’t have the cushion to bounce back if you’re wrong. So you’re more likely to stay on a safe path that offers more security but less upside.

Millionaires Get Better Offers

When you have money, companies & people both treat you better. I don’t mean they kiss your ring because you’re rich. I mean they offer you financial opportunities and deals. Examples:

  • Maybe the most popular mutual fund is the Vanguard 500 Index Fund, which mimics the returns of the S&P 500 stocks. It has super low expenses, just 0.14% annually. But, if you invest $100,000 with Vanguard, you get “Admiral Shares,” which have an expense ratio of 0.04%. Either way your expenses are low, but the expenses with the Admiral Shares of this fund are 71% less. On $100,000, that only saves you $100 per year, but that is something. Over 10 years, you save $1000, and that $1000 is actually invested in the fund earning returns instead of being taken away from you.
  • I have a friend who retired early and joined an “angel fund,” making investments in very small startup businesses. He had to have a certain amount of money to be invited into the fund. He gets to see promising businesses and decide to invest in them before others even know about them. Now this is a risky thing to do, of course, and he tells me he has rarely actually participated. But he gets an added benefit: access to other high-net-worth individuals who are also in the fund. He has actually gotten more profitable opportunities from casual conversations with these people than from investing in the fund. But, if he didn’t have the money to be in the fund in the first place, he wouldn’t know most of these people and he would miss the opportunities.
  • Travel companies, credit cards, and all sorts of other companies offer better deals on their products and services to those with money. Why? Because they want you as a long-term customer and they know you have more choices than people with less money. This fact can indirectly add to your wealth, because it saves you money, allowing you to keep, invest, and grow what you already have.

The rich get richer

For all the reasons above, the first million is the hardest, and the next million gets much easier. The rich get richer, while those at the bottom struggle to climb the ladder. How you feel about that fact is probably strongly correlated to how much money you currently have, but it is the truth in our capitalist society.

However, people move up the ladder all the time. In some ways, it could be motivating to realize that growing your wealth becomes easier as you get wealthier. You have to work hard, but once you have some success you have a foundation to build on, and things get easier. And, truthfully, you don’t need $1 million to start enjoying the fruits of your labor. It is simply a round number that is easy to use as a goal. Many of the benefits described above kick in long before $1 million.

Author: Adam Jusko

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