“There is only one class in the community that thinks more about money than the rich, and that is the poor. The poor can think of nothing else.”
— Oscar Wilde
Ever heard of the term rat-race? Wikipedia defines it as “an endless, self-defeating or pointless pursuit. It conjures up the image of the futile efforts of a lab rat trying to escape while running around a maze or in a wheel.” Sound familiar?
I believe one of the biggest fallacies in building wealth is that a high paying salary is important. My argument for this is that in most developed countries (including mine), the highest marginal tax rate on salaried income is almost half your income (about 48% in Ontario)! This means that even if you’re working your butt off to make $500k/year, every extra dollar you make will only net you 50 cents. The rest is going to pay for our government services, healthcare, transportation etc. (Thanks rich people!) Another more theoretical point is that, it is almost never the case that you can grow your salary exponentially. You are typically paid in some proportion to the hours you work, and you only have so many hours. Despite this, for some strange reason there are (what seems like) an overwhelming number of very wealthy folks out there. How?
Well this article from inc.com has at least part of the answer. Here’s how the top 400 income earners in 2009 made their money (in the US):
- Wages and salaries: 8.6%
- Interest: 6.6%
- Dividends: 13%
- Partnerships and corporations: 19.9%
- Capital gains: 45.8%
This distribution is very telling. The salary/interest/dividend column is the smallest, while the bulk of their income came from businesses and capital gains. This should come as no surprise as the former category gets taxes heavily (at least in Canada), while the latter enjoys a much more favorable tax rate. It should also be no surprise that the former categories are the easiest ways to make money, while the latter ones are much more difficult or risky. So the conclusion is, want to get rich? Start a business or find an asset to invest in. How to do it? Ah, there’s the rub. You’ll have to figure that out on your own. If you’re not up for it, I hear there’s an opening for a position as a test subject; requirements: must like cheese.