Do you want to be a Millionaire? Most people do. Do you know what that looks like? Most people don’t. And is becoming a millionaire really your ultimate financial target? Most people have never asked themselves that question. I call this the Millionaire Misunderstanding. In this training, you’ll discover what the millionaire misunderstanding is all about and a simple yet profound way to truly define what a true millionaire is.
What is the Millionaire Misunderstanding?
Most people who set a goal to become a millionaire have never thought through the exact details of what it looks like to actually be a millionaire and if that’s even their ultimate goal. Further, the definition of a millionaire is incredibly misunderstood. And as you probably know, if you want to achieve any goal in life, you need to clearly define what that goal is and be able to visualize yourself achieving that goal. Therefore, if you want to be a millionaire, you must clearly understand what a millionaire truly is.
Million Dollars in Real Estate?
If you own a million dollars worth of real estate, are you a millionaire? When I first got started in real estate, I met this guy and he showed me his $4.5 million real estate portfolio. He had it on a spreadsheet with the addresses, the values, and it contained single family homes, duplexes, triplexes and quads. I was mesmerized and envious.
I later learned that although those properties added up to $4.5 million in value, he owed $5 Million! He wasn’t a millionaire at all. He was beyond broke. He was upside down by a half million dollars. The only way he was able to pay his bills was by collecting the rent and not paying the mortgage payments! He eventually lost his entire portfolio to foreclosure.
A million dollars in real estate does not make someone a millionaire.
Million Dollars in Equity in a Home?
If you have a million dollars in equity in a home, does that define you as a millionaire? On paper you could call yourself a millionaire, but are you really a millionaire? For example, let’s say you own a primary residence free and clear (with no loans on it) and it’s worth a million dollars. You still have significant monthly bills to continue to own that property. You must pay for property taxes, property insurance and maintenance pool. So it costs you thousands and thousands of dollars each year to maintain your millionaire status. Is that what you envisioned when you pictured yourself as a millionaire?
A million dollars in equity in a home does not necessarily make someone a millionaire.
Million Dollars in Equity in Investments?
If you have a million dollars in equity in investment real estate (or a business, for that matter), does that define you as a millionaire? Once again, on paper it does, but this too can have issues. For example, let’s say you own 200 multi-family units and the equity in each averages 5,000 per unit. What if this debt forces you to lose money each month? Which is entirely possible, especially considering that with commercial loans, loan rates only stay fixed for 5 years or less. If the interest rates are high, even if you have plenty of equity, all of a sudden you’re not making any money anymore. It’s entirely possible to own a million dollars in equity in real estate, even as income producing properties, and still be losing money. Plus, equity can be a subjective determination and although an asset could appraise for a certain amount, that doesn’t mean it would sell for that appraised value if the owner ever had to sell.
A million dollars in equity in investments does not necessarily make someone a millionaire.
Million Dollars in Income?
If you earn a million dollars income in a year, does that qualify you as a millionaire? Not even close! Federal and state income taxes can exceed 50% once your income rises above $413,000 (for single filers) and $464,000 (for married filers). Plus, the more money you earn in life, the more you will spend. Despite what you may think, the reality is that when income goes up, so does expenses. This means more money is going to taxes and spending than saving.
A million dollars in income does not qualify you as a millionaire. Not even close.
Million Dollars in Cash?
If you have $1M cash in the bank, does that designate you as a millionaire? If you reach this milestone, you will deserve a very big round of applause. That is a very impressive feat because it is extremely challenging, starting from economic ground zero, to earn the income, and then pay the taxes on that income (as well as pay all of your other bills) and then be able to accumulate $1M cash. That’s impressive. Pat yourself on the back. It’s very hard to do but it can be done. I’ve done it. It’s an exclusive club in this world. But are you a true-blue millionaire?
If you have a million dollars cash in the bank, the first problem is that your cash will deteriorate thanks to Inflation. Inflation devalues currency and it’s a very real part of our economy. The second problem is that if you don’t have other money coming in, you’re going to have to spend a portion of your million dollars cash to survive. So whether through inflation or from your own spending, a $1M cash won’t last. And you want to stay a millionaire, right? Ask anyone who has ever been rich and lost it all and they will tell you that it is far more painful to be rich and then become poor than to have always been poor.
A million dollars of after-tax cash defines you as a millionaire that day but doesn’t guarantee you will continue to be a millionaire,
What is a True Millionaire?
Having debunked many of the myths of what a millionaire is, now we can truly define what a millionaire really is. A millionaire is someone who has a million dollars equity in assets (real estate, businesses, etc) and, in addition, the equity in those assets must generate returns each year exceeding the inflation rate, but preferably much higher. I call it your Return on Assets, or ROA, and this is a percentage return of the equity in your assets.
If you own a single family rental home that is valued at $200,000 and you have a $100,000 loan it, that means you have $100,000 in equity in that home. If the property generates $300 per month in positive cash flow (net returns after all expenses), then your ROA is 3.6% ($3,600 returns / $100,000 equity). 3.6% is VERY low. A much better target is at least 10%. In my personal finances, I shoot for 20% ROA.
When you accumulate $1M in equity in assets and that equity has an ROA of 10% or more, you can officially call yourself a millionaire and remain so.
How to Increase Your ROA
How can you build equity in assets with high ROA? Watch my other videos, learn how to be a real estate investor, learn how to build businesses, learn how to build and acquire assets. Learn how to generate the kind of income necessary so you can do this. In fact, I have a great video on the perfect formula for building wealth in real estate. It is really helpful and uses the Monopoly board to explain this concept of building to this level of assets.
That’s the millionaire misconception and a clear definition on what a millionaire truly is.