Bankers, Techies, Doctors, And Lawyers: You’ll Never Get Rich Working For Someone Else

Although I estimate an entrepreneur needs to make at least 35% more to replicate his or her day job income to run in place, I’m truly beginning to realize after two and a half years how much more upside there is to entrepreneurship than to working for someone else.

I came from the world of banking where 23 year old graduates with one year of experience can clear $100,000 no problem. Despite ascending from Financial Analyst, to Associate, to VP, to Director within 10 years, and earning Director level compensation for three years before leaving, I still wasn’t able to earn and save enough money to buy my dream home in Kahala, Oahu.

The above is a picture of me sitting on a lanai, looking down the southeast coast of Oahu towards Koko Head. The home is on Blackpoint Road in the exclusive Kahala/Diamond Head neighborhood. Since I was a kid, I’ve always dreamed about living here one day. But I’ve come to realize my childhood dream will likely never come true.

The asking price for this 6,000 sqft Kahala home with 4 bedrooms and 4 bathrooms is $3.5 million ($583/sqft). The lower level is a 1,800 sqft rental apartment that is going for a below market rate rent of $2,500 a month. The main house is therefore not that huge. $3.5 million is actually great value given the view and the size of the house. Other houses in Kahala are easily asking for $900/sqft or more.

If I had $4 million cash, I would buy this house in a heartbeat. It needs at least $300,000 in renovations given it is quite dated. But the lanai and the spectacular view are priceless. All I think about when I’m looking for my dream home is being able to sit outside in 72-85 degree weather with an ice cold beer and write about various adventures. 

_{Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.}

CALCULATING HOW LONG IT TAKES TO AFFORD A DREAM HOME

Everybody’s dream home and desires are different. I just use a home as an example because it is almost always the biggest ticket item people want to purchase. I personally don’t give a crap about driving a fancy car anymore. If I did, I wouldn’t be rolling in a Honda Fit, baby.

As I was sitting on the lanai, pitying myself for not being able to afford such an amazing property, I began to calculate whether other occupations could allow people to afford this home. Shaking my head, I realized it’s almost impossible for even some of the most well-paid worker bees.

Here’s how long it would take a person who joins an investment bank right out of undergrad to save up $4 million dollars assuming steady promotions and pay raises, 25 years of surviving economic cycles, and consistently saving 50% of his or her income without fail.

A Banker’s Financial Path

As you can see from the chart, it would take this top 1% income earner roughly 24 years to accumulate $4 million dollars, assuming no loss or gains in the market. If the banker were to pay 100% cash, then clearly s/he would have to work at least a couple more years after age 46 in order to have a cash cushion. But let’s say the banker has no problems taking out a $2 million mortgage for the home = ~$10,000 a month PMI mortgage at 3.5%. The banker could put down roughly $2 million at age 40, have a $500,000 cushion and carry a $2 million mortgage.

Some of you in banking may look at my total compensation figures and find them to be conservative. But how many of you know bankers who last for more than 20 years? The cyclical downturns in finance are vicious (income gets cut in half at age 36), and plenty of people top out in the mid-six figures with the structural decline in compensation due to government oversight and declining profitability. Furthermore, only a minority of people save 50% of their after-tax income, even at these levels.

Meanwhile, most of you are probably thinking the total compensation figures are absurdly high in my chart. I would have to agree. There’s no other industry that I know that pays as well of a salary. Just think about this for a moment. You enter the highest paying industry out of college and have to save 50% of your after tax income every year for almost 20 years just to be able to get a $2 million dollar mortgage that will force you to work at least another 5 years at the very least if you want to own your dream house. No wonder why people can’t break free from the golden handcuffs!

A Techie’s Financial Path

I’ve been fortunate to experience the techie world for the past 12 months through my consulting gig. I’ve been to numerous tech happy hours and conferences, and I’ve read a ton about tech compensation and stock options as well. Here’s a sample income chart of a typical techie in San Francisco. They don’t make as much as bankers, but they have a lot of company perks and elusive stock options to keep their hopes alive. Let it be known that for the majority of tech workers, there is never a liquidity event. Tech workers also tend to jump ship every three years, which means they never get to fully vest their options either.

Based on my chart, a techie could potentially afford my dream home at the age of 44 by dumping all s/he has (~$2 million) into a downpayment and taking out a $1.8 million mortgage. Unfortunately, she will be sweating bullets every month because she’s only taking home roughly $90,000 after tax a year based on a 50% savings rate, which is equivalent to $7,500 a month. A $1.8 million mortgage costs around $9,000 a month! As a result, she’ll have to lower her savings rate to 0% in order to eat.

The more realistic age when this techie can more comfortably afford a $3.8 million dollar Kahala dream home is closer to 50 years old. Her semi-liquid net worth will be around $4.2 – $5 million by then. But then again, dumping 70-90% of her net worth in a dream home might not be the wisest move. Personally, I don’t recommend having more than 40% of one’s net worth in property. Read this post if you want to know what my net worth allocation splits should be.

I’m actually surprised by how little techies earn given their skill set. Plenty of them are frustrated they can’t even comfortably afford a median $1.1 million home in San Francisco. Plus, we only tend to hear about the massive tech wins. The losers are just left for dead or brushed under the carpet.

A Good Doctor’s Financial Path

I feel kind of sorry for doctors. When they first entered medical school 15 years ago they were promised a much higher salary than they are receiving now. For example, my friend who has a post fellowship from Cornell Medical will be making roughly $200,000 as a cardiologist at 36 years old. When he entered medical school in 2001, he was expecting to make $300,000 – $400,000 to start!

For three years he made $40,000 – $50,000 a year as a resident after four years of medical school, and $60,000 – $75,000 a year as a fellow for the next three years after that. Luckily for him, his parents paid for all his medical school tuition. The median education debt was $170,000 in 2012, and surely higher today according to data from the Association of American Medical Colleges.

The good doctor will be able to comfortably buy my dream home when he’s roughly 50 years old. He’ll put down $2 million, take out a $1.8 million mortgage, and have $854,850 in liquidity or various investments. That’s 50 years old folks. Several of us won’t even live until that age! Because a big mortgage has been taken, the doctor will need to work for another 5 years to feel comfortable. If he wanted to pay for the home in cash, he could potentially get there around 53, but have nothing left.

I’m being very gregarious with my total compensation assumptions for doctors. Doctor’s salaries have done nothing but go down thanks to big government and difficult insurance companies. I doubt most doctors will ever make $1 million a year anymore, let alone $700,000. But I’ve thrown the figures in my chart anyway since this is one very special cardiologist.

CHANGE YOUR EXPECTATIONS

Who knows what homes will cost 15-30 years from now. If a $3.8 million dollar home rises with inflation at 2% a year, that’s $76,000 every year. But even during your best income years at $300,000 for a techie, your salary isn’t going to go up by 25% a year to keep up. You’ve got to be making more than $700,000 a year to keep up with a $76,000 annual increase. Hopefully most bankers, techies, and doctors have more than my chart’s estimates given I provide zero growth rates for savings. But I’m doubtful since life gets in the way all the time.

One obvious solution to finding your dream home is to change your parameters. If you’re willing to sacrifice on size, location, food, and weather, surely you’ll be able to find a dream home somewhere in America for under $2 million. At $2 million, the banker above can achieve his dream at age 35, and the techie and doctor above can achieve their dream home by age 40. At a $1 million price tag, both banker and techie can buy their dream homes by age 30.

The problem with finding a dream home somewhere else is the labor market. High paying jobs are usually located in expensive, urban cities. The exception is Hawaii where there are very few high-paying jobs, yet luxury housing prices rival the housing prices in San Francisco, where six figure jobs are ubiquitous. The best bet is to live frugally, aggressively accumulate your nut in an expensive area, and then relocate.

Instead of seeking full-time employment as a banker or techie, why not try and be an entrepreneur who not only earns a modest wage, but controls a massive amount of equity as well? I spoke to the realtors of four Kahala listings between $3.5 million and $7.5 million, and they told me every single owner is an entrepreneur. The owner of the most expensive listing runs a chain of Korean BBQ and other no-name fast food restaurants in Honolulu. The restaurants aren’t that great or impressive, yet he is able to afford a $7.5 million home! Of course the $10 million house in front of him at water’s edge is owned by Honda Corp’s President.

Here’s the realistic financials of a small business owner I know very well.

This entrepreneur can comfortably afford a $3.8 million home by the time he is 40 with $5 million liquid left to spare. It would be a little too risky for the entrepreneur to buy the home before his $5 million liquidity event given he lives off a modest salary.

The reason why the entrepreneur was able to capitalize on $8 million worth of liquidity events is because the entrepreneur owns a large majority of his company. He was able to sell off minority percentages of his holdings until he finally sold everything at the age of 40 to retire. The entrepreneur paid himself a modest salary relative to the size of the business because he didn’t want to pay both sides of the FICA tax.

The interesting thing about the entrepreneur’s lifestyle is that often, for many years, s/he lives a very sparse lifestyle. Then one day, they hit it big and everything changes. Hence, one has to make a choice between a smoother consumption curve, or a highly unpredictable one.

For those of you who are complaining that my charts are too conservative since I don’t back in any growth, feel free to multiply the figures by 130%, 150%, 200% if you wish. The path is still not easy for the normal working person.

START YOUR OWN BUSINESS

Clearly, being a super successful entrepreneur is a long shot, but so is being a successful banker, techie, doctor or employee in any field for 20+ years. The big difference is that you actually have to study hard, get good grades, and go to a pretty good school to land one of the coveted banker and techie jobs. Meanwhile, getting into medical school and passing the boards is a Herculean task that even a smaller minority can achieve. If you’re an entrepreneur, you can be a high school dropout and still succeed!

Another benefit of entrepreneurship is the incredible satisfaction you gain from creating something out of nothing. Having the freedom to do whatever you want provides for tremendous happiness as well.

It’s been over seven years since I started Financial Samurai and it’s making more than I did as an Executive Director working 60+ hours a week at my investment banking job. The upside is that I’m having a lot more fun, working wherever I want in the world, and spending much less time making this income. Plus, I’ve created an asset that can be sold for a multiple of revenue.

Everybody should start their own website and potentially access over three billion people online. From there, you can build a business. You don’t have know exactly what type of business you want to start. The key is to just start and build your brand. If you can do something on the side while working a day job, even better. Your ideas will start coming to you as you start tinkering around. The cost to start is next to nothing nowadays thanks to technology.

When I started Financial Samurai in 2009, I just wanted to have a site where I could share my thoughts, connect with like-minded folks, and make sense of all the chaos during the financial crisis. I had no business plan or thoughts of making big bucks. But two and a half years later, Financial Samurai was making about $75,000 a year, enough money to give me the courage to negotiate a severance and dedicate all of my time to this site.

Since 2012, I’ve become much more strategic in building “Financial Samurai Inc.” I’ve focused on building the brand, finding fantastic product partners that add value to readers, and leveraging the site for interesting consulting opportunities. The opportunities are endless and go far beyond what I could ever imagine. Below is a realistic income snapshot from blogging and consulting.

I hope this post gives you some insights into the power of starting your own website and business. Change your thinking from being an employee to an owner. Not only can you potentially generate a lot of online income, you can also find new job or consulting opportunities, build new friendships, and reduce your tax liability as well. Don’t let analysis paralysis prevent you from starting. Once you get going, the ideas and opportunities will just come to you.

Start your own website and improve your future. Check out my step-by-step tutorial guide on how you can launch a site like mine in under 30 minutes for just $2.95/month. A website legitimizes your business and becomes your online portal. Not a day goes by where I’m not thankful for starting Financial Samurai in 2009. In just 2.5 years, I was able to quit my job and be free. Everyone should leverage the internet to build a brand, build a business, and become untethered from an office to live a life of purpose!

Open up a business rewards credit card. If you’re going to have a business, then it’s important to have a business rewards credit card to separate all your business expenses, provide you buyer protection, and give you a healthy amount of rewards. My favorite card is the Chase Ink Business Unlimited because there’s no annual fee, you get 1.5% cash back on everything, and you get a healthy $500 for free if you spend $3,000 within the first three months of opening.

_{Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.}