Getting Rich in America
Who says the American dream is dead? The path to wealth is as open as it's ever been, thanks to easy access to the capital every would-be millionaire needs.
By David Futrelle

(MONEY Magazine) – Broke stay-at-home mom starts a multimillion-dollar business. Son of a Mexican-born railroad worker goes to Harvard, makes partner at big law firm. Daughter of Vietnamese refugees invests in real estate, becomes a mini-mogul. If the stories of Rosie Herman, Arturo González and Lisa Van Deusen don't embody the American dream, what does? The idea that anyone can make it here is so key to our national self-image, it ought to be printed on the dollar bill. Were we to somehow cease to be the Land of Opportunity, it would occasion more than a little soul searching.

Which is why it's hard to ignore claims by an increasing number of economists that the U.S. no longer lives up to its promise--and that getting ahead is becoming so tough that the very idea of the American dream is threatened. The reality is considerably more nuanced. Getting rich has never been easy, whether you start poor or somewhere north of the middle. But the assertion that the rich have pulled the drawbridge up behind them is simply false. In an economy as dynamic as this one, they can't.

You could argue, in fact, that a door once closed to most aspiring tycoons has actually opened: the bank vault. In an egalitarian twist on the old saw about how it takes money to make money, the middle and even the working class have a much easier time gaining access to capital today than they did a generation ago. A financial system that's grown accustomed to managing risk offers the means to start a business, earn an advanced degree or invest in real estate to most any ambitious person seeking the way to wealth. That path, of course, has more than its share of bumps, and the foolish or the unlucky will end up in worse shape than they started. But as you read the stories of Herman, González and Van Deusen, you'll find reason to believe that the chances that you or yours could make it to the top are as good as they've ever been. The rest is up to you.

Minting Millionaires

For a land where it's allegedly getting harder to get ahead, the U.S. produces a lot of millionaires.

According to a study in 2004 by TNS Financial Services, there are 8.2 million households in the U.S. with a net worth (not counting their homes) of $1 million or more. That compares with 4.9 million in 1996. The growth in the number of households worth $5 million or more has been even more robust. In 1996, 250,000 were in the $5 million club. Last year there were 720,000, a nearly threefold increase.

Looking ahead, the marketing research company Claritas expects the number of American millionaire households to jump about 52% between now and 2009.

So why is anyone worried about the American dream? Some economists and policymakers point to the dramatic widening of the gap between rich and poor. The top 1% of American families, for example, now own as much as the bottom 95% combined, the highest such gap among developed nations.

Although growing inequality offends many Americans' sense of fairness, there's no conclusive evidence that it has lessened the odds of getting ahead, especially if you're already middle class. "Access to the top is still as open or closed as it used to be," says New York University economist Edward Wolff, one of the nation's leading experts on wealth and a vocal critic of growing inequality.

Susan Mayer, an economist at the University of Chicago, adds that Americans tolerate inequality precisely because we believe we can get ahead. "In Sweden, which we think of as being such a model of egalitarianism, income inequality isn't all that different from the U.S., before you count taxes and government assistance," she says. It's the government's redistribution of wealth that evens things out. If we wanted Swedish-style equality, we could vote ourselves a Swedish-style tax system. In fact, we've been doing just the opposite since the Nixon administration--cutting taxes on the rich and raising the incentive for everyone to grab for the brass ring.

"Moving even a little closer to the top translates into a big improvement in your standard of living," says Mayer. "If you're an optimist--if you expect to get ahead--this is the system you'd want."

Go Long in Education

Even if you're more realist than optimist, the first stop on the path to wealth absolutely has to be college (see the chart on the facing page). People with a bachelor's degree make 80% more than do those with only a high school diploma, an advantage that adds an additional million bucks in earnings over their working lives.

Graduate degrees can be worth much, much more. Salaries for doctors and lawyers are all over the map, but consider that the median income of a cardiac surgeon is $400,000, according to Medical Economics magazine's 2003 earnings survey. The average partner in many of the nation's elite law firms makes $1 million or more. (You're invited to tear those numbers out and nail them to your teenager's bedroom door.) Plenty of mid-career workers go back to school too, and with good reason. According to the Graduate Management Admission Council, an M.B.A. typically makes almost 45% more after graduation than he or she did before entering the program.

Education, of course, is not cheap, particularly the elite kind. Four years at Harvard and three more at its law school currently run about $300,000. Most students borrow to finance at least some of their education. In 2002 the average undergraduate debt was $18,900, according to the student-loan finance company Nellie Mae. Grad students owed $31,700 on top of that. Law and medical students finished school carrying an average debt load of $91,700.

In this respect, though, investing in an education is like investing in real estate or in a business. It involves leverage, spending other people's money--be it a Pell Grant, a student loan or a gift from Mom and Dad--to increase the value of an asset. The asset here is your most valuable one, the earning power of your brain.

As a high school senior in rural Roseville, Calif., Arturo González, the son of a Mexican-born railroad worker, painted HARVARD OR BUST on the side of his beat-up VW bug. "I'm sure people thought it was a joke," he says. Five years later, González was working his way through Harvard Law School. Today, at 44, he's a partner at Morrison & Foerster, a large San Francisco-based law firm at which the average partner made $740,000 in 2003, according to The American Lawyer magazine.

"For a kid who grew up in a house of modest means, borrowing $30,000 to go to law school did seem daunting," says González. "But I wanted to go to Harvard and was not about to let money or the lack thereof stop me. When I first began at Morrison & Foerster in 1985, my salary was $38,000, which I thought was pretty good. It was almost twice as much as my father was making working for the railroad."

As with any investment, there's risk in getting an education. The rise of managed care, for instance, has reduced wages for primary-care physicians, souring somewhat the return on their investment in medical school. And software engineers, who once seemed to have their tickets punched for life, now face tough competition from abroad that didn't exist just five years ago.

Still, the trend is strongly in favor of investing as much in education as possible. NYU economist Wolff points out that the ratio of the average earnings of a college graduate to that of a high school grad has more than doubled since 1980. The biggest risk is forgoing the opportunity to get as much education as you can.

The House's Money

The appeal of real estate is simple: It's one area where regular people can get a significant amount of investment leverage.

If you have decent credit and $40,000 to put down, you shouldn't have much trouble getting a mortgage for $200,000. Buy a house that appreciates 6% a year, and in five years your investment will have grown 169% (see the chart at right). That's the power of leverage.

Fortunes have been made on it. Lisa Van Deusen arrived from Vietnam with her parents in 1978. The family was virtually penniless. Her mother worked as a seamstress, while her father worked on an assembly line building electronic components. "We lived on rice and soy sauce for a while," she says.

Van Deusen, now 31, started out as a real estate broker after college (education, remember?). Then she and her fiancé (now husband) Todd began buying and selling for themselves. Along the way, they've accumulated property worth $5 million, in which they have about 40% equity.

Their first deal, in 2000, started as a home purchase. The couple scraped together $25,000 to put down on a $230,000 condominium in Northern California. When Todd got a job in Santa Barbara, they sold the condo for about $400,000. Van Deusen used the proceeds to wipe out her credit-card debt, pay for her wedding and buy a 1996 Lexus. That left her with $50,000, which she and her husband used to buy a condo in Santa Barbara. Within a year its value had risen by $125,000. The couple then borrowed against their equity in the property to buy more. Now they own six single-family homes and a triplex in Arizona, and this April they were closing on a 30-unit rental property in upstate New York. They're also looking for opportunities in Texas and Oklahoma. "Basically I had $50,000, and I've been playing with the bank's money," she says.

The flip side of making a fortune, of course, is losing your shirt. Rising home values have made real estate today's "obvious" path to wealth. In 1999, tech stocks were. No one wants to learn that lesson twice. Rising interest rates can knock a big chunk off the value of any property you buy these days, especially in an overheated market. If that happens, can you afford to sit on it for five or 10 years while the real estate market comes back?

Van Deusen says that for the past few years she and her husband just bought whenever and whatever they could. But about a year ago, after they sat down with a financial planner and looked at what they had, they began to diversify by property type and location, as well as by asset class, even purchasing those investments of yesteryear--stocks and bonds--for the first time.

Fire Your Boss

"The thing about being self-employed," says Thomas Stanley, co-author of The Millionaire Next Door, "is that there's no upper limit." According to the Federal Reserve Board, between 1992 and 2001 the average net worth of households headed by self-employed people rose from $714,500 to $1.2 million, a level five times that of the average working-stiff household (see the chart on page 104). Given that eye-popping differential, is there any reason not to quit your day job and get cracking on that business plan?

For starters, there's not much in the way of a downward limit for the self-employed either. About one out of three businesses fail within four years, according to the Small Business Administration's Office of Advocacy. And a business crisis can all too easily translate into a personal one. One study found that about 20% of people filing for personal bankruptcy claimed significant business debts. That's because starting a business often puts the owner deep in the hole. The SBA says that about 80% of all small businesses have some debt on their books.

The good news is that, as with real estate investors, would-be entrepreneurs have remarkably easy access to other people's money these days. In February, members of the National Federation of Independent Business reported that they paid an average rate of 6.7% for short-term loans vs. 10.1% just four years ago. The long slide in interest rates and a robust economy have gone hand in hand with a blossoming of small enterprise. There were, for example, nearly 3 million more sole proprietorships in the U.S. in 2003 than in 1993.

Some businesses still have trouble getting outside financing, however--particularly those starting from scratch. Owners often have to throw in a lot of their own resources and put their own credit on the line. Just ask former manicurist Rosie Herman, 42, of Tomball, Texas. She developed her One Minute Manicure line of hand and nail products after she went $75,000 into debt paying for fertility treatments. She'd put her twin girls to bed, then stay up at night experimenting. "I never planned this to last," she says. "I just wanted to get out of debt."

To do that, though, she went further into debt, funding her business with as many credit cards as she could get. "I kept applying for more credit cards, getting $1,500 credit on each,'' she says. She even rang up $10,000 buying supplies on her sister's credit cards. That's a gut-wrenching level of risk most people wouldn't--and probably shouldn't--be willing to take. But funding a business with plastic is common among small businesses. The SBA says that about 46% of small businesses in 1998 were borrowing from personal credit cards.

Risk can be a heck of a motivator. "I was under stress knowing I was in debt, and I was making it worse and spending money every day," says Herman. "I had to do something to make the sales." She went to stores and beauty parlors trying to convince them to buy her stuff. Often, she says, they slammed the door in her face. But she pressed on. "I created the demand by going around and making people try it, making my own buzz," she says. Result: Over the past five years, she's done about $20 million in sales.

If you have good credit and a solid business plan, your own start-up might not be as harrowing as Herman's was. But remember, no matter how hard or easy it is to borrow, the odds on any new business are always long.

Get Rich or Get Ahead

So does that 1999 way of getting rich, the stock market, matter anymore? Yes, but definitely not as a quick way to wealth.

One of the reasons that people thought you could get rich in a hurry buying stocks a few years ago was that many people did. The S&P 500 returned about 28% a year for the five years that ended in 1999. That party, of course, is long over.

The optimists expect stock returns in the high single digits for the foreseeable future. That's enough to move you up quite a few rungs on the economic ladder and provide for a nice retirement if you save diligently, but it won't push you into the very top unless you're practically there already.

"You're not going to get rich with investing," says Harold Evensky, a financial planner in Coral Gables, Fla. "You're going to get rich inventing widgets, or by being an outstanding person in your professional field, or by putting sweat equity into real estate or a business."

Over the long run, though, the stock market still offers a good return, particularly if you start early. A return of, say, 8% a year doesn't sound very dramatic, but over 20, 30 or 40 years of investing, that can mean serious money. And at a substantially lower risk than Rosie Herman took on.

Good thing. After all, not everybody is wired to make it in business or real estate. Not everyone is cut out for grad school either. But there's no reason that every American can't have a nice fat nest egg.

Real estate: the big lever

Buying with borrowed money can multiply your return. Of course, you'll also have to cover mortgage payments, taxes and other costs. And there's a downside: If the price falls, you still owe the bank.

SOURCE: MONEY research.

Working for yourself works

People who run their own businesses (and survive) tend to build wealth faster than employees do.


SOURCE: Federal Reserve Survey of Consumer Finances, 2001.