Money

Self-made millionaire: Here's how to guarantee you'll be 'poor' making $2 million a year

Being rich is not a function of the number on your paycheck.

So says Scott Galloway, a serial entrepreneur who sold his company L2, Inc., reportedly for over $130 million.

"What's the definition of rich? The definition of rich is having passive income that's greater than your burn," says Galloway, or spending less than you make.

Galloway says his dad and stepmother are the perfect example: Collectively, they take in $48,000 per year from social security payments and their pensions, he says.

"They spend 40 [thousand dollars per year]. They are rich. They have more money than they need without having to leave the house and work," Galloway told CNBC Make It in September.

Meanwhile, Galloway says people making millions can be "poor" if their expenses are high enough.

NYU professor Scott Galloway
Tobias Hase | Getty Images
NYU professor Scott Galloway

"I also have friends here in New York who make between $1 [million] and $3 million a year as investment bankers or partners at a law firm," Galloway says — incomes which would put them in the top 1 percent of all wage-earners in the US, according to an October 2018 report from the Economic Policy Institute.

But says Galloway, "between the alimony to their ex-wife, their house in the Hamptons, their fat co-op on the Upper West Side [of Manhattan] and private school tuition, they may make $2 million but they spend [$]2.1 million — they are poor because they have the stress of knowing if there's a hiccup in the economy or they lose their job there are deep s---," Galloway says.

The upshot: Bringing in a lot of money doesn't make you "rich" if you spend more than you earn and you depend on a salary.

So advises Galloway, "Focus on your burn. And have an honest conversation with yourself around how do you get to a point of true wealth and being rich — and that is getting to a point where with passive income from rental properties from [stock] dividends from some sort of a pension from the money you make from stocks — that at some point that will be greater than your burn."

At the same time, don't let your spending grow along with your earnings, tempting though it may be.

"It's also easy to fall into the trap of believing that I will spend to my income because as I get older I get more and more awesome and make more money," says Galloway, who is also a professor of marketing at NYU Stern School of Business. "Children focus on their earnings. Adults also focus on the other side of the ledger — and that is their burn."

The key, says Galloway, is to starting putting a bit away every month when you are young.

"So how do you increase the likelihood that you'll be a millionaire and have economic security at some point? Most of us when we are younger believe that we're going to have the big win, we're going to hit a home run and have a big liquidity event. But again assume that won't happen," says Galloway.

So "pay yourself first every month. Force yourself to save a little bit of money. Saving a little bit of money at a young age goes a long, long way in case you don't have that big liquidity event," says Galloway.

"The one thing I can promise you is that time will go faster than you think, and savings will compound faster than you think. So it's hard and I'm not saying that this is something that most people have the discipline to do, but the people that have the discipline to every month put a little bit away and start focusing on creating passive income are the ones that are going to be rich you know no matter or not whether they have that big hit."

— Video by Claire Nolan

See also:

This self-made millionaire says not all masculinity is toxic

Self-made millionaire: 3 things you need to do to be successful, happy and wealthy by age 30

Sam Adams founder: Unless you're a sociopath, being happy is better than being rich