Minimums To Millions

2/11/2022

Thomas E. Kersh

This is a very interesting hypothetical. It is simply a question. Can you make millions of dollars off minimum wage? I believe you can; but then again, I haven't done the actual math for it. My hypothesis is that you can make a million dollars if not more if you invest it, select the right place to live, and live under your means.

Here's how I'm gonna set this up. The average return for everything invested is 12% annually since many of the major ETFs give an average of 15%+ annually. We’ll also give our person an annual dividend rate of 1.5% (which to make it easier to calculate, will be included in the accumulative appreciation rate). We’re gonna base our pay off the STATE minimum wage. Anyways, let us get accompanied with our hypothetical person.

Our boy Johnny has just graduated high school. He was never a book-smart kid. His average GPA was 1.77. But one thing he loved to learn about was money management and investing - proper investing. But unfortunately, Johnny came from a family living just barely above the poverty line. And with his low GPA, he decided not to go to college but to move away from home and find a job really anything, anywhere. First, he needs to do some research on where to move to. He decides to leave for Columbia, Missouri, which is a low-cost state with a good minimum wage. He gets a job as a team associate in a grocery store. The starting pay is $11.15 an hour. He works 40 hours a week, 5 days a week plus he picks up 5 additional hours of overtime. Johnny makes $448.08 a week, or $1,917.67 a month ($23,300 a year).

For the first month, he lives out of his car, which is a Honda Civic. He knows he needs to find a place to live. He just needs 4 walls, a roof, and a bed.

Johnny finds a nice apartment for $658 a month and agrees to a six-month lease with a security deposit of $650. Johnny now needs to budget himself for next month and the months going forward. Johnny has $608 left for the month. Johnny now needs food, insurance, and a few other things.

Johnny’s Grocery list

Tortillas

Bread

Oatmeal

American cheese

eggs(60 count)

2% milk

lettuce(Romaine)

3 Peperoni pizza’s

11 pot pie dinners

12 GV tomato soup cans

12 count shrimp ramen

3 5ct kraft mac n’ cheese

Johnny understands that going to a cheap grocery store and getting store-brand food is the best way to save his money when getting groceries. He keeps his list very simple and cheap. With a total of $81.14, this will be how much he pays for groceries every month. Now we’ve got $526.86 to use so now on to insurance. This is the budget killer. Johnny drives his uncle's old 2005 Honda Civic. He decides to go with Farmers Insurance since it's what his parents used. He gets a renter’s and auto insurance plan.

Johnny learns about the miserable truth with insurance. It's expensive, especially for young adults and even more so for males. Johnny now has $253.36 left over. After all, Johnny would like some entertainment so Johnny decides to get a TV. He buys a small 32-inch smart TV for $159.99 then gets Netflix which is $10.59 a month.

(Don't worry. We’re almost to the investing part. Just a couple more budget additions, then we’ll be good.)

Another month has passed. Johnny now has $2,000.24 available. Right away he pays his rent, insurance, and subscriptions.

There are a few more things Johnny needs to add to his monthly budget and a few things he’d like to buy. First, he realizes after he paid for his subscription and TV, he needs to buy an internet plan. Johnny decides after seeing a bunch of T-mobile ads at work to have T-mobile be his network provider and service provider. He gets internet for $50 a month and gets their essential plan for $30. He now decides to get a phone. He buys a new iPhone 11 for $499.99.

The utilities in total (gas, water, electric, and trash) come out to $115.59 a month. Now all we need is a medical plan.

With the medical plan, we need to find a balance between cheap and good.

Johnny found a Medica plan, which was a good balance of a good deal and a good price. A porridge that's just right. Johnny now has his monthly budget.

Johnny has his monthly budget done. He’s adjusted very nicely to the new town he moved into and has made a few friends over the past two months. He’s got his first credit card with Discover. So that way he can start boosting his below-average credit score to a great credit score.

Johnny decides that for right now he’s going to save his money for the next couple of months before he starts investing.

A few months pass. Johnny's lease is almost finished, but Johnny had an epiphany. Why pay for a place to live that he’ll never own when he can pay less for a home over time to own? So Johnny talks to a new close friend of his, Craig. Craig has a cousin who works as a bank manager. Johnny gets a good word put in for him from Craig. Johnny tells Craig’s cousin that he doesn't have much money but he would like to get a long-term mortgage for a house he’s been looking at. The cousin tells Johnny that since his cousin Craig put in a good word and the house is cheap and needs some work, he’ll take whatever he can put down for a downpayment and give him a 30-year loan with an interest rate of 1.75%. Johnny agrees instantly and thanks the man profusely.

Johnny understands that it’ll take some work to get the house in top shape. But now he can start putting money towards owning a home. It’s also cheaper to pay off this house rather than paying for rent each month. Johnny’s monthly payment is $447.48.

Johnny is just now turning 19 years old and has a mortgage, and a good one at that. He’s got some new friends and is financially stable. But Johnny knows something. He knows that the time to start investing is now.

Johnny now has more available funds. He now has $652.24 left over each month right now. Johnny opens up three accounts. He gets a 401k with his employer and then he opens a brokerage account with Schwab. Last is a Roth IRA, also with Schwab.

Johnny puts 6% of his pay into his 401k ($1652.43 annually or $137.70 per month). His employer matches dollar for dollar. This is great for Johnny. It’s free money, and it gains value in the long term. (We’ll say Johnny’s 401k appreciates at 7% annually.)

Johnny decides that instead of saving money he's going to invest it. He decides he’ll invest $150 into a brokerage account. He's going to put his money into some of the major ETFs available, like SPY, QQQ, DIA, VOO, etc.

Johnny decides he should have two retirement accounts so he gets a Roth IRA, which he will contribute $175 every month. He will invest in the same ETFs as in his regular brokerage account.

Johnny is thriving in his community. He’s met so many people. He's paying off a house and starting to invest in his future. He’s even dating someone he met off Tinder, Susie, who's the same age as Johnny and works as a barista making the same in wages, still only just dating. Johnny’s now-best friend Craig heard about Johnny cleaning and working on his house to make it better and look more modern. Craig offers to help Johnny out on the weekends and pulls some connections with some friends of his like his boy Dan who owns a junkyard and his childhood friend Bill who’s a manager at a construction company.

After the year had passed, Johnny had turned 20 years old. His new home was looking significantly better. The total value of all three of his accounts is $7,545.33, and his home was 1/30 paid-off. Also, Johnny and Susie are now officially in a relationship.

It's been an additional year. Johnny is now 21, and Susie has decided to move into Johnny’s place. She agreed to split the mortgage, utilities, internet, phone plan, but she pays for groceries since she doesn't agree with Johnny’s diet of pot pies and mac n’ cheese. Johnny decides it's also time for a new car. Johnny decides to sell his old Civic. Johnny gets $5,000 for the car since it was in very good condition, and he has an

Johnny knows what he’s actually paying for, when buying a car. He finds this 2019 Hyundai Sonata and agrees to pay it off over 3 years with an APR of 2%.

The total is about $193 every month. But since we have a new car, we need to add it to the insurance. Since our last insurance plan wasn't great, we’ll make a new one.

Johnny has a new car, better insurance, his house is looking better, he's cementing himself in the community more, and his money is starting to work for him only a little bit though.

It's been 5 years since Johnny moved away. He's now 23. Johnny has met so many more people in the community. Craig was the person to introduce him to other people. Johnny and Susie are engaged and are going to get married soon. His house now looks beautiful, especially with the help from Craig, Dan, and Bill. Johnny received some new appliances from Dan’s junkyard, and Bill had helped to replace some of the more run-down bits on the house. Johnny’s three accounts now have a total value of $25,119.07.

At 24, Johnny and Susie had a small wedding and are planning on having a kid. But remember, Johnny’s financially smarter than the average American. Johnny knows he’s got a lot of assets. Johnny would like to keep those assets in the unlikely event of a divorce. Johnny asks Susie very politely to sign a prenup. Susie protests a little bit, although understands where Johnny is coming from and signs anyway. In return, Johnny helps Susie to learn about building up assets and securities. Also, Johnny’s car is now paid off, and his house is 1/6 of the way to being paid off.

Johnny decides to give his future child the opportunity that he never got. He opens a 529 Plan and puts $50 into the account every month. But since the child is not born yet, the beneficiary of the 529 is Johnny, temporarily. But when the child is born, Johnny will change the beneficiary of the account to the child with no penalty or tax consequences. Since Johnny is married with a kid on the way, he gets a new budget. Johnny changes his W-4 at work. So he now gets a new after-tax pay of $25,153 a year, Susie decides to give Johnny money every month to help with the kid and for retirement. This comes out to $27,541 a year or $2,295.08 every month. With this tax break, he decides that he will contribute an additional $50 to his brokerage account and an additional $75 to his Roth IRA. All accounts combined are now valued at $35,343.

Next year Johnny and Susie now have a baby girl named Ava. During Susie's past and current leave, she received maternity leave pay. Johnny is ecstatic with how he and his family are doing. He’s got friends and family. And for the first time in forever, he feels financially stable.

Fast forward 5 years, Johnny is now 30. His daughter is now 5 years old in kindergarten. Johnny’s net worth is now approximately $200,000. Susie has a new job as an office worker and is starting to invest in her future and her retirement from what Johnny has taught her.

Johnny and Susie have had another kid. A newborn named Paul. Johnny opens another 529 Plan and starts contributing $50 a month.

Let's fast forward. At the middle-age of 44, Johnny has a net worth of $1,135,962.50. This is his 401k, Roth IRA, brokerage account, both 529 Plans, what's paid off on the house, and his car. Even with both 529 Plans taken off, he’s still at $1,063,456.12. Johnny has technically done it. He's become a millionaire from working off minimum wage. It is a bit misleading, so let's keep going till he retires.

Johnny is now 48 years old. Ava has now graduated and is going to a 4-year college in Oregon for accounting. To help cover some of her expenses, she already has a paid internship lined up. Unlike her father, she was extremely booksmart with a 3.15 GPA out of high school. Her 529 Plan comes out to $51,108.38. And after hearing what had happened to her father at her age, she is grateful and forever thankful to her father. This means Johnny can take $50 off the 529 Plan monthly contribution from his budget.

The next year something big happens for Johnny. At 49, Johnny’s house is finally paid off. Since he renovated his home early on, the house is now worth approximately $250,000. Johnny is now considered rich with a net worth of $1,942,035.50 with all of his combined accounts, his home, and his car.

A year later: Johnny turn's 50 years old. Johnny’s other kid Paul graduates with a 2.9 GPA and goes to a 4-year college in Texas. His 529 Plan is valued at $51,108.38.

Five years later, Johnny is now 55 years old. Johnny decides to retire and withdraw from his 401k. You may be saying “Johnny can’t withdraw from his 401k without penalty. He's not 60.” This is partially true, but the IRS has a forgotten rule, The Rule of 55. The Rule states: “The Rule of 55 affects how and when you can access your retirement savings. If you are between ages 55 and 59 1/2 and get laid off or fired or quit your job, the IRS rule of 55 lets you pull money out of your 401(k) or 403(b) plan without penalty.” Now, with this rule being in effect, since Johnny is 55 and has worked at the same place for 37 years, he decides to quit his job and now start his retirement. Unfortunately, the Rule of 55 does not apply to his Roth IRA, so Johnny will wait till he turns 60 to withdraw from his Roth IRA. His 401k is now valued at $471,323.35, and his brokerage account is valued at $1,409,321.49. So Johnny, being the smart investor, now needs a reliable income. He could live off of his dividends from his brokerage account, which is 1.5% annually, which comes out to $21,139.82 a year or $1,761.65 a month. Johnny has $471,323.35 to use for his retirement. He decides he's going to move to Texas due to how tax-friendly they are with dividends and capital gains, and he would like to live near a coastline. Susie believes it's a great idea.

Johnny pays in cash for this home, but doesn't sell his other house because Johnny understands the importance of having multiple incomes. Instead, he puts his old home up for rent for $1,250 a month. Johnny now has to pay higher property tax on his new home, which is $4,364 annually. But Johnny doesn't care. He's got the money. Johnny has $251,959.35 of available funds left from his 401k withdrawal. Johnny buys the car he's wanted for a very long time. Well, he decides to buy two cars.

He first buys an Aston Martin Vantage V8 coupe for $148,800. A car which he has been wanting since he was just a kid. He then buys his other car. He buys a comfortable car since he knows he can't always drive a nice coupe. But remember, Johnny knows what he's buying with cars, and he does understand he is mostly paying for the badge. But Johnny knows and fully understands this and he is fine with it.

He buys a red Tesla Model 3 for $46,990, leaving Johnny with $56,169.35 from his 401k. Johnny will use the rest of his 401k and the rent from his other house for his income, and he will wait until he can withdraw from his Roth IRA. He was thinking about taking from the dividends of his brokerage account, but he would much prefer for both accounts to grow. He will also no longer make contributions to his brokerage account or his Roth IRA. Living off of his 401k and rent for the next 5 years comes to $26,233.87 a year or $2,186.15 a month. We also need new insurance for the cars and the new house so we change it up and go with Allstate.

Johnny and Susie get the house and both cars insured for just $253 a month. This just goes to show that when doing your insurance, your age and gender drastically change your insurance prices.

So with all these new costs put together, Johnny now has a new monthly budget. This allows for both Johnny and Susie to live under their means and not fall into the pit of desperation called Lifestyle Inflation.

Johnny decides that for the next year he’ll use some of the leftover money to fix up the exterior of the house and maybe make some new additions to the backyard.

Now is where we come to the end of Johnny’s Journey from minimums to millions.

Johnny, at the age of 60 years old, has a net worth of approximately $6,518,828.52. If he chose to live off the rent of his old home and dividends from his brokerage and Roth IRA, he’ll get an annual pay of $103,477.93 a year, or $8,623.16 a month. And both his IRA and his brokerage account will still increase annually by 12%. When he turns 70, his net worth will increase to $14,863,541.53. If he chooses to take 13.5% from his brokerage account and IRA every year and includes his rent from his old home, he’ll get $811,301.35 a year, or $67,608.45 every month. His net worth would keep a neutral balance. This means Johnny has truly made millions from minimums.

Summary

My hypothesis was indeed correct. Not only was it correct, I had somewhat underestimated how many millions our hypothetical person Johnny would make. With the correct money management and investments, he had made millions fairly easily. All it cost him to make millions of dollars was time and a couple of hundred dollars a month.

Now throughout Johnny’s Journey, I tried to teach a few lessons. One lesson is more of a phrase “It’s not what you know, it's who you know.” I tried to do this through Craig. If you noticed, Johnny knew what he wanted to do involving his house, but he didn't know really how he was going to do it until Craig helped Johnny get a bargain of a mortgage and a few friends to assist in the renovation of Johnny’s new home.

Another lesson is to live under your means. Just because you have the money to spend doesn't mean you should spend it. Johnny lived under his means. He never overspent or used his entire budget. He did come close to it, but he never did. Even living on such low wages he even had two kids and paid for their college all because he started investing early.

Seriously, he opened his 401k, Roth IRA, and brokerage account at 19 when he was financially stable enough to do so. He opened his kid's 529 Plans as soon as they were born, if not before they were born. Since he started doing all this so early, he didn't need to put in large amounts of money simply due to how early he had started investing.

You know Albert Einstein once said “Compound interest is the most powerful force in the universe.” Johnny not only knew what he meant, but he had taken these words to heart. So if you start investing, saving, and practicing proper money management early on, you’ll easily make millions and all it will cost you is time.