Wealth Creation Elements – Part 1

What is the one common element in the “wealth creation” formula?

I was watching my favorite TV show, Gold Rush on the Discovery Channel, and I saw a shining example of this one common ingredient to getting wealthy.

“There are a million ways to make a million dollars!” – Tim Van Milligan

While each way is different, there is that one common element that each method contains. That one universal component is “taking a risk.”

In the Gold Rush show, this aspect is magnified to a very high extent. It is a key part of the show. The premise of the show is that six men leave family behind and take a huge risk to mine gold in Alaska. It is fascinating to watch, because many of the men are out of work and need money to pay mortgages and to feed their families.

As I was reading the Sunday newspaper this morning, I read about how tightening of credit is making it harder for people to start businesses. On man went to the extreme. Notice what he says about “taking risks”:

Bob Ireland, who opened a Max Muscle Sports Nutrition franchise in east Centennial (Colorado) in September, said he didn’t spend much time applying for a bank loan because his income was limited.

Instead, working with a franchise consultant, the retired United Airlines engineer and manager opened 15 credit-card accounts and used them to borrow more than $150,000. Spotless credit helped, he said. Ireland paid no interest for the first six months, but now the cards are charging 13-15 percent.

“It’s a great motivator to pay those off as quickly as possible,” he said. “I’m satisfied that the potential for success is high. It’s not without risk, but it’s risk I’m willing to accept.” – Source: Denver Post

Being able to take a risk is one key element in making a fortune. But it doesn’t guarantee success. When you take a risk, there are two outcomes: Success or Failure.

We often overlook the failures. The guys on the Gold Rush show know all about the failure part. Last season, their gold-mining gamble was a bust. Between the 6 of them, they only pulled around $20,000 out of the gold mine. That wasn’t enough to pay their expenses, which according to the show was about $1,000 per day. They burned through all their start-up capital, and then some…

Now most people, particularly the ones with the personality type that I call “Morale Officers in the Human Army,” are very risk avoidant. They want success without taking any risks.

They are the ones that are marching in the Occupy Wall Street protests. They are protesting that wealth is being accumulated by some individuals, and not trickling down to them.

But these people aren’t willing to take any risks, so they won’t ever reap the rewards of the successes.

A Common Story of Success

For example, to make this clear, let me tell you a little story.

Larry and Tim grew up in the same neighborhood as childhood friends. After high school graduation, they both took jobs digging holes in the ground. It was hard back-breaking work. Larry was really good at it, and his boss paid him a good wage.

Tim, after thinking about it for a while, decided that the ground where he was digging was too hard. Maybe if I dig my holes somewhere else, he though. So he did. He took a small risk, because he didn’t know if he could find a customer (a new boss) that wanted holes in another location. But he was successful, and there was a person willing to pay for a hole in the softer ground.

Now Tim had another idea. Since it was easy work to dig in this softer ground, maybe he could hire someone to help him dig holes. The risk, of course, is that he still needed to find customers to buy his holes in order to pay the wages of the employee. But that is what Tim did. He hired someone to help him dig holes.

And you know the story of this one too. At first, Tim couldn’t find many customers to buy his holes, but he still had to pay his employee. So Tim had to skimp and forego a lot of luxuries in his own life. He was looking at his pal Larry, who was seemingly living in luxury compared to himself. Larry had that new car, while he was driving around in a 15 year-old junk-heap. And on top of that, his employee was complaining that he wasn’t getting paid as much as Larry either. Plus, his customers were complaining because the holes in the ground weren’t being dug fast enough. Tim had headaches galore.

But after some time, Tim learned from this mistakes, and invested some more money in equipment to make his worker more efficient. Now his little company was paying better wages, and the customers were much happier. In fact, the customers were so happy, that his business grew.

After 10 years, Tim’s initial risk was paying off. He was able to make a lot of money, and his employees had nice stable jobs. Plus, his customers were happy!

Larry, on the other hand, was well paid at the beginning, especially since he joined the local hole-digging-union. But the work didn’t change, so he really didn’t earn extra. It was still back-breaking work.

After seeing Tim’s success, Larry approaches his boss and offers him a deal. In exchange for working extra hours on the weekends, he would like a bit more money. Unfortunately, his boss turns him down: “Your union’s work rules say that if I allow you to work on the weekend, I have to also pay the senior workers the same amount. I just can’t afford to do that, so if you want extra money, you’ll have to get a job outside of here.” In the end, Larry takes a second job to make ends meet.

The moral of the story: a job is what you get when you are risk avoidant. You trade away the risk of failure for a steady income.

Capitalism DOES Work

Sorry, But a job isn't a right... It is what you end up with if you won't accept any risk.

Taking a risk, and starting your own company could mean that you end up totally broke. In fact, according to the business statistics, about 80% of all businesses fail within ten years. Therefore, there is a really really good chance that by starting a businesss, you’ll go bankrupt.

That is kind of scary, isn’t it.

But, if the reward for starting a business is great enough, meaning that you end up with a very large wallet (the kind that make the Occupy Wall Street protestors envious), then many people will take the risk. Just like Bob Ireland from Centennial, Colorado.

Minimize Your Risk

It is one thing to take a risk. But you don’t have to take “stupid risks.” I’m sure you’ve heard of the phrases: minimize risk, or manage the risk.

These mean that you take steps to lower the chances of failing for the same amount of money that you plop down on the table.

For example, getting an education from smart people that know the pitfalls of an industry will greatly minimize your risk. Right?

The miners on the Gold Rush show, got educated too. Unfortunately, like many people, they learned at the school of hard knocks. It was a very expensive education – the most expensive you can get. But if they really learned from it, then it was worth it. We’ll see what happens in Season 2 as the show progresses. But almost everyone is predicting their chances of success in Season 2 of the show are much better now (it is hard to do worse than what they made in Season 1).

The most cost-effective education is that you obtain by being the protege of a good mentor that has himself achieved success. After that, a formal school education is pretty good too. That is why your parents always wanted you to go to college.

The Other Elements of Success

There are two other elements in the success formula that I believe are also universal. So no matter what path you take to make your millions, like “taking risk,” they are big part of equation. Without these two elements, you will not succeed.

But I’ve gone way too long here in this article, so they will have to wait until my next blog entry.

Until then, “Be Fruitful.”

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Trickle Down Photo Credit

Sleeper on the Bench Photo Credit

 

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