Joshua Kennon

When I was a child, I would read Scrooge McDuck comics by Carl Barks and Don Rosa. I realized that, while everyone else worked, Scrooge owned everything from the banks to the ice cream factory and the profits kept rolling into his money bin day and night. I realized that's how I wanted my life to be so I could focus on doing the things I enjoy and can give a lot of money away later in life.

Early in life, I developed a theory that there were five levels of building wealth that most self-made men (and women) go through to reach financial independence.  It was started by my love for Carl Barks Scrooge McDuck comics.  When I started reading the Federal Reserve reports of consumer wealth, empirical studies, and other sources of data, and discovered that 90% of those in the United States who are millionaires made the money on their own - that is, they did not inherit it – I started refining my theory.  It helped guide me when I lived in a series of small towns throughout my childhood, saving nearly every penny I could from working after school and pouring it into my investments.

Level 1. A hard working man gets a job in construction and is paid by the hour.  In effect, he sells his time in exchange for a set rate.  When he is done, he collects his wage and that is it.  He will never again receive a penny unless he agrees to sell more time to someone else in the future.  He is always at the whim of the economy and an employer.

Almost all millionaires started here because 90% of high net worth individuals in the United States came from those who inherited little or no money.  The only way to ever make a decent living from this level is to increase the rate at which you can charge for your labor.  By going to law school, medical school, or business school, someone can demand $100 per hour instead of $9 per hour working at a discount store because their skills are harder to find (rarer) and in demand by the public.  The term “wage slave” has been used to describe this level.

Level 2. The hard working man takes some of his savings, built up by spending less than he earned over several years, and starts a new limited liability company to hold his investments.  He contributes the money to purchase the materials to build a house.  He works on it himself to lower costs or, if he doesn’t know construction, hires someone.  He rents the property out to tenants.  Whereas at Level 1, he could only hope to make money from the time he spent on the project, he will now begin collecting rental income that will flow into his household’s income statement every month for years, if not decades, into the future barring some unforeseen disaster.  That is, he is collecting cash each month even if he doesn’t get out of bed in the morning.

Most people never get to this stage because it is difficult to have the discipline to save money and come up with enough money to get off the ground.  It’s a painful, slow process that can cause a lot of burnout, especially if you have no one to guide you and show you how easy it can be.  Instead, they give up and stay at Level 1 forever, always worried about hanging on to employment or making enough to cover the monthly bills. (more…)