The Millionaire Misunderstanding

millionaireDo 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 o 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 a guy that showed me his $4.5 million real estate portfolio. He had it on a spreadsheet with addresses and values of 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, in fact, he was only able to pay his bills by collecting rental money and not paying the mortgages. 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, if you own a primary residence free and clear (with no loans on it) and it’s worth a million dollars. You will still have to pay significant monthly bills to continue to own that property. You must pay for property taxes, property insurance and maintenance. 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 investments, does that define you as a millionaire? 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? Commercial loan rates only stay fixed for 5 years or less, so if the interest rates go up, even if you have plenty of equity, all of a sudden you’re not making money anymore. It’s entirely possible to own a million dollars in equity in real estate, even income producing properties, and still be losing money. Plus, equity can be a subjective determination and although an asset can appraise for a certain amount, that doesn’t mean it would sell for that appraised value.

 

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.  The reality is that when income goes up, so do 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 a million dollars  cash in the bank, does that designate you as a millionaire? If you reach this milestone, you will deserve a big round of applause. That is a very impressive feat because it is extremely challenging to start 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 a million dollars cash.  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 is 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 million dollars 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 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 on it, that means you have $100,000 worth of 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 one.

 

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 to accomplish 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 assets.

Comments

  1. Ray Busgith says:

    Great stuff finally some one who know the art of realestate, I want more info.

  2. Tiffany Negron says:

    Great video, very informative, I hope to join your apprentice team one day.

  3. Jerry Stanford says:

    Good morning! Enjoyed the latest video today.

  4. George Lubiw says:

    Phil, you hit the nail on the head.My goal my whole life was to accumulate 1M and retire. Well I retired at 55in 2008 and thought I would live off the returns of my investments. I was getting a steady return but I needed more because I forgot about medical and disability insurance for me and my wife. Then the stock market dropped and in the same year I had a stroke. It took me as long to recover from that as the stock market took to recover. Now I use some of my investment money to buy rental property in upscale neighborhoods. I tell all my children, by the time the retire the will need three Million dollars in savings.
    I used to hate your shirt with the white collar,but the more I see it the more I like it.
    Phil, you’re the best. Great job.
    Thanks,
    George L.

  5. Phil, you have an excellent way of cutting thru the clutter! You are a gifted teacher and as a beginner I Love the help! Thank You

  6. David Wood says:

    I have heard many definitions but the ROA makes the most cents 🙂

  7. EARLENE D Ferguson says:

    Great insight!

  8. Excellent video Mr. Phil you always teach the right stuff & gives all this knowledge for free thanks David 😃

  9. I’ve been watching your videos for about 6 years now I’m very close to being a millionaire.

  10. jeffrey doto says:

    Totally changed my thinking…Thank you sincerely.

  11. Jeanie E? Himagan says:

    Wow….. Great learning. Thank you Phil….God bless

  12. Ashfaq Ahmed Sheikh says:

    Excellent video.

  13. This is an under-the-radar great video by Phil. He tells you how to think about your dream of being wealthy, maybe being a millionaire. How to think about your financial condition when you finally accumulate a bit of money or real estate equity.

    BTW, there are very few businesses where we can honestly talk about millionaire status. Real Estate Investing is front and center in millionaire-potential category.

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