December 20, 2014 0 Comments Motivation, Thoughts and Feelings Working in Alberta

Theory of becoming rich

If you’re relatively frugal, use a roommate or two, and have no significant car payment, you can be worth $750k in 15 years, assuming you’ve been making about 60k/yr for the first 5 years, then 100/yr for the next 5, and 120/yr for the last 5. I just made this fun model as I had nothing better to do and was personally curious.

theoretically, you could have a monthly expense scenario like this:

– Housing cost: 600/month
– Vehicle fuel, maintenance, insurance: 700/month
– Phone and other misc.: 100/month
– Groceries: 300/month
– Eating out: 200/month
– Misc. like medical, clothing, etc.: 200/month
– This should put you at 2100/month spending…

Suppose you grossed 300k over your first 5 years; this is net about 3300/month. Should save about 60k.
Now put this down on a roughly 300k home that has 3 bedrooms. Rent out 2 of the rooms.
$1135.79 mortgage payment at 3% 5 yr fixed. Suppose your various bills, fees, maintenance, etc. and factoring in the occasional vacancy, make this to 1500/mo. Rent out each room for 550; so then your housing cost would be 400/mo.

Now suppose you aggressively sought to advance in your work and made substantially more (possible), and grossed 500k in the next 5 years; 5500/month net.
– Housing cost: 400
– Vehicle: 700
– Phone and other misc.: 100/month
– Groceries: 300/month
– Eating out: 200/month
– Misc. like medical, clothing, etc.: 200/month
– Add 300 to enjoy life more
– Should put you at 3300/mo. saving… Now suppose you on average gained 6%/year in investing and added another 3300$ worth to your portfolio every month (this is a rough example). 5 years later this will be about $236k, and will owe about $205k on the house; have 95k equity assuming the home has just appreciated along with inflation (a pessimistic example).

Now suppose in the next 5 years, you’ve moved up and are now making more; gross 600k. 6700/net per month
Assuming all other expenses constant, now you’re putting away 4500/mo. and adding this to your portfolio.
$634k approx this will be, and will owe about 175k on your house assuming now you’re paying 1% more for your mortgage for these 5 years; now 125k equity.

Of course this is a theoretical example and practically you can twist this, primarily such as aggressively searching for higher income or taking more aggressive risk in the stock market. There are people who will be making $200k+/yr 10 years later or maybe a couple less; those who invest and don’t raise their expenses much could be a millionaire in today’s dollars within this time frame. Notice that if you have kids early on, want a huge house to yourself and your spouse, eat out a lot, or a big car payment then this dream quickly goes out the window unless you can increase your income to compensate.

It is interesting because I met someone who had a friend who walked away with a million dollars after coming to Alberta’s oil patch for 10 years, as it is an unique industry where you can be making $200k+/yr in less than a decade, 5 years with luck and an extreme work ethic. He was frugal, worked all the overtime he could get, and invested aggressively.

But whether it is worth to be rich by going through these sacrifices is questionable, and that’s why you don’t see as many millionaires around as you’d expect.