Not that long ago MassMutual took a look at how people became rich. They discovered a key theme, which was that someone was more likely to get rich by owning a business. For example, they found that 17% of people with a net worth between $100,000 and $500,000 were business owners, which is an outsized portion of the population as only 3% of Americans own their own business. Further, the higher one climbed up the wealth ladder the more likely it was that the individual owned a business. Simply put, the secret of how to become rich is to own a business.
All that being said, with any rule there are exceptions because one doesn't have to start a business to become wealthy from owning a business. There are actually several different ways to own a piece of a wealth creating business. Here are four of the more common ways to become rich by owning business assets.
Be an entrepreneur
That same MassMutual study found that more than half of those that had $1 million, or above, in assets, were business owners. Further, 86% of those that had $50 million, or more, in assets were business owners. Suffice it to say, being an entrepreneur can pay off big time.
For some, being an entrepreneur means being an inventor and developing a new product that fills a need on the market. However, being an inventor isn't the only option. A CPA or a lawyer, for example, can start their own practice and go from being a wage earner to someone that earns a portion of the profits generated by the business. Another option is to turn skills or talents into a business, such as starting a website design company or opening up a bakery. The options really are limitless and the future payoff can be just as high. That said, starting a business is risky and involves a lot of hard work. Worse yet, eight out of 10 entrepreneurs fail within their first 18 months. So, it's not for the faint of heart, which is why only 3% of Americans actually own a business.
Buy a business
Given the fact that 80% of start-ups fail before their second birthday, a safer, albeit more costly option is to buy an existing business. Established businesses tend to have a history of profitable operations and a steady customer base making it more likely to continue to thrive.
Buying a franchise is also an option. Like an existing business, a franchise is typically well established in other markets suggesting it has some staying power. Further, the franchisor will provide guidance to a new franchisee to ensure their success. That said, franchises can be costly with franchise fees, royalty fees, and other costs, each of which cut into profits and therefore the wealth a franchisee is trying to create.
Join a start-up
If owning a business isn't an option due to the costs involved or the need for a steady paycheck, then joining an entrepreneur at a start-up could be the next best thing. Sometimes stock options or an ownership stake is part of the pay package and that stake could be worth a lot if the business takes off. One of the best examples of this is Microsoft (NASDAQ:MSFT). The company not only made Bill Gates the richest man in the world, but the company minted two additional billionaires and 12,000 millionaires just among Microsoft employees. Latching on to the right start-up early in its life cycle could create a lot of wealth, but like any job it comes with the risks of layoffs if things don't work out, which would likely make any stock options completely worthless.
Invest in a great business or businesses
For those not interested in a career change, or who can't get in on the ground floor, but are still interested in becoming rich someday, the best option is to invest in great businesses that are run by strong management teams. Buying great businesses at fair prices and holding them for a lifetime has been found to be a real key to building wealth via the stock market.
Another key is to start early in order to enjoy the long-term benefits of the compounding effect of the market. A hypothetical investor (Opens as a PDF – Slide 16) that saves $5,000 per year from ages 25 and 65, or roughly $200,000 in total, would be worth nearly $1.1 million at age 65 assuming a 7% annual return. The more one saves, and the earlier they begin, the higher their net worth will be later in life with further upside by owning market beating companies. That said, markets do crash and a crash the year one is planning to retire could devastate those plans and delay retirement for years while that wealth is recovered.
The numbers simply don't lie as more than half of the millionaires in America own their own business. Clearly, the secret to become rich is to own a business in one form or another. There are plenty of options including starting a business, buying one, or simply investing alongside someone that's building a great business. While each option is risky, if it were easy everyone would be rich.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.