plonkee money an english-er's thoughts on personal finance

May 11, 2007

starting a business will not make you rich

Filed under: education and career — plonkee @ 10:59 am

I’ve often read comments on other personal finance blogs that essentially state that the best way to generate wealth is to start your own business. Undoubtedly there are people who have successfully made a lot of money in this way – look at Microsoft, Apple, Yahoo and Google for very modern examples. The Millionaire Next Door (which I haven’t yet read) is cited as evidence for the success of this method towards wealth as one of the facts which is commonly pulled from the site is that many of the millionaires interviewed for the book own their own businesses.

As you can probably guess from the title of this post, I think that this argument is flawed. I actually think that its quite hard to become wealthy through working for yourself. When you start off, you are likely to have a negative cashflow for a while as you try to get your business off the ground. You’ll probably need to work long hours for a long time paying yourself at wages that are effectively much less than the minimum wage. Your business is likely to fail within ten years, with luck this might not leave you out of pocket, but not everyone can have all the luck all the time. In any case, you need a lot of time and start-up capital to build a business that will truly give a good rate of return – not that many people have both on their side.

You could argue that if you are working for yourself you are more likely to be motivated and so will generate more money. That might be true, but there is also the possiblity that you will be more risk-averse than you need to be because its your own money at stake. Its certainly the case that when you are working for yourself, any money that is made through your efforts goes into your pocket. Making an effort, however, doesn’t necessarily lead to making money.

My final point, is that getting rich isn’t really about the money you make, its about the money you keep. The foundation of true monetary wealth is likely to be a well diversified portfolio. If all your money is invested in your business, then that the very definition of poor diversification. The simple way to wealth is to spend less than you make and invest the difference. This is probably easier to do with a regular salary than with your own business.

By all means, start your own business if you think it will make you happier, but don’t think that it is a path to wealth.

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