Can You Become Rich Working for Somebody Else?

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This is my answer to a question with the same title on Quora. This is particularly relevant with a recent article going around titled, "America is Full of High-Earning Poor People." Much of what is said here can be learned from Rich Dad, Poor Dad, linked below in Further Reading.

You're asking the wrong question.

You want to ask first, "what is rich?" and differentiate between "rich" and "wealthy."

If what you are looking for is salary, then, actually, yes, you can get a high salary (let's say over $190,000 a year, placing you in the top 5% if you were the only person in your household) pretty easily working for somebody else. Consider careers like medicine, management consulting, or financial analysis, work there for a good ten-twenty years in a growing market, and you can easily get a high income working for somebody else.

If what you are looking for is net worth and wealth (two separate concepts, but let's ignore that for simplicity's sake here), then probably not, it is very difficult to become rich (let's say that rich is a net worth of $1m, less the value of liabilities like your home) working for somebody else. As others have pointed out, a lot of the income of the wealthy comes from dividends on their assets, like stocks, bonds, etc. A lot of their assets are the kinds of things that cannot be easily acquired as an employee. Even if you are at a company where you get a nice slice of equity as an employee, unless that company goes public or is acquired, that is phantom stock and can't really do much for you. It is an asset, but it doesn't add to your income.

I like to think of being wealthy in terms of how much I have to work to get day-to-day with a net positive cashflow. If I cannot quit my job today and continue living how I live now (no increase or decrease in quality of life) without eventually having to go into debt, I am not yet wealthy. If I have assets that can at least subsidize my day-to-day and then I can take my wages/salaries and either save it or invest it (really the same thing if you have a bank account), then I am wealthy.

To illustrate this, here's the cash-flow of a wealthy person:

main-qimg-12b746189b037ae488c4184bb85466fc

Notice that the cash flows primarily from their assets into their income, not from an outside job or wage into their income. This allows them to then reinvest some of that income from the assets back into the assets, allowing them to compound the growth of both their assets and their income. This is why the rich get richer. It's not some conspiracy against the middle class or taking money from other people. They understand the power of interest and reinvestments (and this is also why successful companies like Amazon take their operating profit and reinvest it in the company).

Let's compare this with the cashflow of somebody who does not work for themselves (Left, our wealthy person cashflow is on the right for illustrative purposes):

main-qimg-b02dfb936a2e4c0ae24c83e89d7276d2

When you work for somebody else, the people you work for are really threefold:

  1. Your Employer
  2. Your Bank
  3. The Government

Your Employer -- This is obvious enough, right? This is where the cashflow into your income comes from when you are working for somebody else. You stop working for them, you stop making money.

Your Bank -- If you have a mortgage or a credit card, then the home you live in or the stuff you use really isn't yours -- it's the bank's until you can properly pay it off. If you stopped working today, you would be forced to stop paying your mortgage. If you stop paying your mortgage, the bank takes your home. If you stop paying your credit card, the bank stops other banks from giving you money in the future (FICO score).

The Government -- The primary places that people pay taxes are in their income taxes, their FICA taxes (Social Security, half of which is taken from you and half of which is taken from your employer), and your property taxes.

Also recall the cashflow chart above -- there's something very important left out of these charts, where does the government take its cut? When you are salaried for somebody else, the government takes its cut before you even see the money. Through withholding taxes, the government takes a large portion of what you get before you even get it.

When you work for yourself, you usually get your income first, can then make your expenses, and then pay taxes to the government on what remains. This can be a pretty big tax advantage for a lot of people.

Let's be realistic, though.

All the talk in the other answers of people like Zuckerberg, Gates, et. al. is nice, but you probably won't be them. And most wealthy people aren't them. Most wealthy people are the guy who owns the construction company in town, or the lady who owns a couple Massage Envy franchises, or the guy who quit his job on Wall Street to buy a fracking company. These people could quit today and would still have a net-positive cashflow. The doctor making $200,000/year can't, even though he is probably pulling in much more in terms of salary or wages than all of the above people.

I know well-paid doctors who grumble about how they should have been janitors because they pay so much on loans, board certifications, taxes, and more. They're much less wealthy than the college dropout I know who runs a successful marketing consulting company. He can quit his job today and still make money. The doctor can't.

Consider these points when thinking about "how do I become rich?"

To summarize:

  • Know what you mean by rich. Do you mean pulling in a big salary, or do you mean having a high net-worth? Jeff Bezos, the CEO of Amazon, makes less than $100,000/year. He has a net worth of $46 bn.
  • Understand where your cashflow is running. Is your income coming entirely from a salary, partly from a salary, or not at all from a salary?  If you bring in a salary but also have income from assets, you can invest some of your additional money into more assets.
  • Know for whom you work. If you work for yourself, you'll still have to pay taxes and a mortgage, but these things are considerably less dependent on other people in these cases.

Further Reading

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I'm Zak. School should have taught you how to succeed at work and build a great career. Instead, it taught you that mitochondria is the powerhouse of the cell. Thankfully, I teach what school never taught.

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