How a High School Student Can Create $1 Million in Wealth

In this article I will explore how a teenager can set themselves up for retirement before even graduating high school. Indeed, it is possible to build over $1 million in future wealth before starting college.

Methodology

Most teenage students can manage part time work during the school year and full time work during the summers. With few expenses, the teen is able to invest every dollar earned. Of course, not all students will fit this profile. Some won’t find work. Others will be required to help with family expenses. But I think – with enough discipline  – many students can make this a reality.

I believe that the more hours you work at a part time job while in school the worse your academic performance. Therefore, I will keep weekly working hours during the school year at a very manageable level.

After all, this whole exercise is about setting up a successful future. That includes future earnings, which is dependent on a good education. So this experiment should not come at the expense of future earnings.

Also Read: Is Your Scarcity Mindset Holding You Back?

Assumptions:

  • Let’s assume that during the school year the student works one 8hr shift per week. 
  • School year is 40 weeks
  • During the summer, let’s assume the student works a 40hr week.
  • Summer is 8 weeks
  • Starts working in grade 9 through to grade 12
  • Earns $15/hr ($1 above minimum wage in Ontario, Canada)
  • No taxes or transaction costs

Based on these assumptions, the student would earn $9,600 each year (see table below) for four years.

But how does he turn this into $1 million by retirement?

Observations

If the student invests the $9,600 at the end of each of the four years and does nothing else, he could have over $1 million by age 65. The chart below illustrates how the investments would grow assuming average annualized returns of 5, 6 or 7%. (These are conservative estimates given long term historical returns are close to 10%.)

Of course, $1 million in the future will be worth less than $1 million today due to inflation. The chart below adjusts the investment returns to account for an annual inflation rate of 2%. Still, the student’s initial investment ($9,600 × 4) is worth between an estimated $166-430k by age 65 in today’s dollars.

That is more than most 40 year olds currently have saved for retirement. Can you imagine what this might look like if the student kept investing throughout his life?

The message here is simple. Start investing as young as possible and let the power of compounding grow your wealth.

Landlords Beware

Painting: Badminton House from Badminton Park by Giovanni Antonio Canal, 1748

Many, many people believe real estate is the key to wealth creation. While I agree that a leveraged investment in a (generally) stable asset is one way to gain wealth, I must warn you: landlording ain’t easy!

You can do everything right and still get screwed.

Let’s assume you’ve bought a property at a reasonable valuation in an area that has a low vacancy rate and good long-term prospects. Let’s also assume the potential rental income on the property leaves you in a ‘cash flow positive’ situation, meaning the rent covers the mortgage, insurance, utilities, property tax and a decent profit.

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So far so good. All you need now is someone to rent the property from you.

This is where things can go very wrong. I highly suggest you consider all the downsides before jumping into the rental game.

Below are 6 horror stories from various landlords around the country. If you’re thinking about becoming a landlord, read these accounts directly from landlords who have been to hell and back.

Reddit user krustyy:

We have always run credit and background checks from the beginning and once let our personal impressions of the potential renters skew our judgement, only to be hosed.

We had a renter who was a nice single mother looking to rent our small 2 bedroom apartment. Credit report came back at like 450 with a previous court judgement on her record. Since she was the only applicant at the time we decided to take the risk but asked both for first and last month’s rent as well as a larger deposit.

She wrote us a check. We gave her the keys.

Then the check bounced and we were stuck being strung along a 6 month eviction process. I think in the end we got 1 month of rent total.

Reddit User Monkey-Tamer:

Happened to my mom. I warned her, but she bought in to the woman’s sob story about being a victim of domestic violence. No credit check. She couldn’t pay first month rent and security deposit. My mom waived that condition in the lease. A month later I’m being called to do the eviction action since no rent is being paid. I told my mom I’d draft the paperwork but her or my stepdad would be paying the filing fees and appearing in court. I wasn’t going to burn vacation days going to a county two hours away after she didn’t listen to me. I had advised her to rent the house to college kids since it is mere blocks away from a university. The house has been vacant for years bleeding her in property taxes. It’s like she does the opposite of what I tell her. House has been on the market for 5 years.

Reddit user TMKF2:

Used to be in the property management business and had a renter who was so good at gaming the system that she managed to occupy the same apartment for nine months on having paid only three months rent.

Moves in, pays first month and security deposit. 30 days pass, no rent collected. Give the usual notices and process for eviction on day 49. She paid in full on day 64. So far three months collected.

Restarted the occupancy clock. 49 days later still no rent, start legal eviction again. (Day 113)

Court date gets set for day 138. She gets the court date pushed out due to her “disability” (day 160).

Applies for rent assistance and some disability benefit, and gets an extension on the court date to the end of the application process (day 180 ish).

Rent assistance comes through, of which she’s responsible for 60% of the rent, but we have to settle and close the case to collect the funds. We decline and move for judgement and eviction.

Judge grants the eviction, but not before griefing us for “dragging this out”, and not being accommodating. As a parting gift the judge gives her 6 weeks to move. She left the place empty, but filthy on day 274 and had the audacity to literally take the keys and lock off the door when she moved out.

I left the business later that year, but I’m certain the owners never recouped on the rent or damages.

We were the first of three properties she’d eventually do this to.

Reddit User alopgeek:

Happened to me… I had a vacant house, nice grandmother applied… Seemed super nice. She told me upfront that there were problems with her credit, and that I didn’t need to check it, because it was bad and she knew it.

Should have been the red flag, but I fell for it anyways. She gave me first month + deposit… and was OK for about 6months. Then she started being late, then there seemed to be “out of pocket” repairs that she had done without calling me, then she just stopped paying…

I ended up selling the house after a lengthy eviction

Reddit User deadinsidelol69:

My mom used to rent her 2nd house, she didn’t run the background check, but they gave her cash. Then they immediately brought their 4 pitbulls into the house, destroyed all the furniture, carpet, and walls over 6 months, then ditched the house and never contacted my mom again.

Reddit User GenericUserBot5000:

Even the background checks are not fool proof. I had a lady rent from me pass the criminal and credit check stiff me after the first month. She paid her sd and first months rent and I never got another cent.

The kicker was that it was a duplex and I lived in the other half. I saw her almost every day and made sure to ask for the rent when I saw her. Took 4 months to get her out and I’m still trying to get the 4k she owes me.

On a side note, if you are thinking of getting into the rental thing you NEED to have at least 3 months property expenses saved up. My goal is 6 and I’m at about 4. Also don’t include the sd in this as usually you need to give it back when the tenant moves out.

Also, and I can’t emphasize this enough, YOU WILL NOT GET RICH. At best you will break even or come out a little ahead until the mortgage is paid off. Maintenance costs money, things break, natural disasters happen. One years gain will supplement next year’s loss.


Is $1 Million Still F.U. Money?

Painting: The Tribute Money by Masaccio (1401–1428)

Ask someone how much they’d need to quit their job and follow their dreams. For most people the magic number to walk away from it all is $1 million. That’s their F.U. (f@ck you) money.*

*F.U. money is the money you’d need to have saved to say “F.U.” to your boss and job.

However, people have been quoting that number for many, many years. Realistically – with inflation – $1 millions means less today than years ago. But it’s a nice clean amount so it has retained its status as the magic number.

Is $1 million still a lot of money?

Let’s not pretend to be stupid. A sudden inheritance of $1 million would be life changing for most people. You could take care of a lot of shit with that kind of money. But is it enough to buy a lifetime of freedom?

If you won $1 million, you’d probably first need to pay off your debts and mortgage. If you’re lucky to live in a an area with reasonable house prices you’d probably be left with about $700,000. (If you live in a place like Toronto, New York or Tokyo, consider moving to a city with a lower cost of living.)

If you invest that $700,000 in a balanced portfolio I think it’s fair to say you’d get a conservative return of 4-6%. If you didn’t touch your initial capital, you’d be generating $28-42k annually. This is livable, if you have your primary residence paid off. However, it might be an unreasonable range if it’s only 25% of your current income.

Of course, one must consider taxes in a situation like this. Often, income from investments is taxed more favorably than regular income. So $30k from investments might be worth more after tax than a $30k salary. Meaning, you might require slightly less capital to generate a desired level of after tax income. However, for purposes of simplicity – and because I don’t know who you are and where you live – I will ignore taxes.

A 75% cut in income would most likely require a substantial change in lifestyle. Moreover, the real value of that lower income will be eroded by inflation as time goes on. The longer remaining life you have the worse it’ll get.

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The previous example assumes you don’t touch your initial investment. If you change your strategy by withdrawing initial capital along with your gains you can draw a larger income. The downside is you will eventually run out of money.

For example, if you drew an annual income of $50,000 (assuming 5% rate of return), you would run out of money in 23 years. Increase that income to $60,000 and you’d run out in 17 years.

To achieve a consistent annual $50k income over 40 years you’d need $885k in starting capital (given a 5% return assumption). Again, that $50k is worth less and less as time proceeds, due to inflation.

For some, that amount and timing works perfectly. For others it doesn’t. If you can handle a $50k lifestyle and are well into retirement age, $1 million might be your magic number. However, $1 million no longer appears to be F.U. money for anyone with a considerable time horizon.

Additional sources of retirement income (e.g. government pension) will help, but it won’t amount to much for most people. Many people will require more.

After reading all this, if you’re anything like me, you’re thinking “well that’s just f@cking great – I’m going to be a corporate schmuck forever then.” Maybe. Or maybe there are other options.

For starters, you can take out a smaller income and supplement it with part-time work…perhaps a secret passion project. Or you can live like a student on ramen noodles and Pabst Blue Ribbon.

Cut and supplement. If you can’t do that, I’m afraid you might need to play the corporate game for longer. Because $1 million is no longer F.U. money.