Episode 050 - How a minimum wage worker can make a $1 million and be financially sustainable

Yes, it is true. You don't have to earn some six figure salary to generate wealth and become financially sustainable. In our 50th episode, I will show you how it is done. I did it, and when I did it the interest rates were nowhere near as low as they are now. So what's your excuse?

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Show Notes

There are a lot of common misconceptions as to how to generate wealth.  Most of the discussion seems to be around saving 50-70% of some massive salary, investing in equities, and compounding.  But Financial Sustainability refutes that and provides a path that anyone can pursue regardless of income.

Let’s say you earn $15 an hour.  That’s pretty much around minimum wage these days, although I’m sure many earn less than that.  But if you are working 40 hours a week, you are generating a gross revenue of $600 a week, or $2400 a month.  

In the United States, that is chicken feed income compared to most.  The average annual salary in the USA is $32,000 in 2016, so you are under that.  And the 2020 Federal Poverty Guidelines show that someone is 100% of the poverty line with $12,760.

Why are these numbers stupid reference points?  Because of one statement which you know is a core rule of Financial Sustainability:

IT’S NOT WHAT YOU EARN - IT’S WHAT YOU KEEP

Consider different people at different stages in life.  If you have finished your education, have no debt and you are living at home with your parents, your costs are minimal.  Maybe your car (let’s assume you don’t have a car loan or any other debt), so that is petrol, insurance & registration, maybe clothing (which you could get from a Thrift store), and maybe some food - although you probably eat with your parents and they pay for that.

Effectively your overall burn rate in that situation could be as low as $100 a month.

If you earned $2400 a month, you have a net profit of $2300.  Holy cow, that’s good money.   Over the course of a year, that is $27,600 of saved earnings.  Let’s say you have the odd bill here and there and you only can save $20,000 a year.  Well that’s still huge.  If you setup a business (LLC) and you ran your earnings through that, and your expenses were all tax deductible, using the US standard deduction at the minimal level, your taxable income would be down to about $8,000 which probably represents a tax payment on this income of somewhere around 15%, at $1,200 a year.  If you want to get accurate for your situation, talk to a CPA (don’t pay them - find one online you can get free advice, BTW).

So with $20,000 of capital in your hands after 12 months, what can you do with that?

First, don’t buy all the toys that you have been avoiding despite the temptation.  But it is time to start to look at real estate.

If you purchased a $100K condo in a city that rents well (and I’m giving you actual rental numbers of small condos that I have or currently do own), with a 20% down payment to avoid PMI (Private Mortgage Insurance), and let’s say you could get a 4% interest rate (you probably could do be better there), and you are willing to do some work cleaning it up, fixing it yourself, etc. you could be getting in Phoenix, about $900 a month in rents.  Inventory here is very light at the moment, so occupancy rates are very high.  Sure, that is never guaranteed, but we are looking to build up wealth and you are still going to keep living with your parents for another year.

Here’s the cost breakdown on this asset over a 5 year period (and we are going to make the assumption that you raise the rents 5% per year, and property appreciation at 4%):

Year 1:
Income:  $10,800
Mortgage (15 yr mortgage):  $7,101
HOA fees:  $2,400 ($200 a month)
Insurance + Property Taxes: $1,500 (or $125 a month)
Gross Profit:  -$201
Property value:  $100,000 - Net equity $20,000

Year 2:   $11,340
Mortgage (15 yr mortgage):  $7,101
HOA fees:  $2,400 ($200 a month)
Insurance + Property Taxes: $1,500 (or $125 a month)
Gross Profit:  $339
Property value:   $104,00 - Net equity $24,000

Year 3:   $11,907
Mortgage (15 yr mortgage):  $7,101
HOA fees:   $2,500 ($208 a month)
Insurance + Property Taxes: $1,500 (or $125 a month)
Gross Profit:   $806 (or 2.7% of your net earnings)
Property value:    $108,160 - Net equity $28,160

Now I could go on, but from here you can probably see what is going on.

Your original $20,000 investment in the property has risen to $28,160 over 3 years.  That is a 4.08% increase.  If you put the $20K in a savings account, you’d be lucky to get 0.10% interest, so clearly this is a better place to deploy capital.

But more importantly, the income from this situation is starting to get to a percentage of your salary.  You are also paying down the debt on the mortgage - well you are not, your tenants are paying it down for you.

There are a lot of “ifs” with these situations.  But if we simply focus on the income (not the equity) of your capital, your $20K investment is generating you, by year 3, an 4.7% return.  In other words, this is a double whammy.  Your $20K is giving you 4.7% return, month after month, in profits and your investment net worth another 4% or so.

If you were smart, you’d be taking that profit and paying down additional principal on the mortgage.  Or you could also be saving it, so that you could use it again for a down payment on a 2nd property and effectively double down.  If you were really smart, now that you have your own “bank” so to speak, you’d take the next year’s $20K earnings and pay down the mortgage further, reducing the length of the 15 year mortgage down to 10 years or so.  With more equity in the property, you could refinance the mortgage later if you can get a decent enough drop in interest rates, but even if you can’t, you are accelerating the time that you become freehold.

Or the other option is to double-down and do this again.  And again.  And again.

The total time required to work with tenants attend to maintenance, etc. is probably going to be 5% of your time.  This is not difficult, and if you setup systems that do most of the work for you, you can scale this easily.

This is what we did.  Over the course of about 10 years, we amassed about 24 properties.  By the end of that period of time, most of the mortgages were paid in full, we removed the cost of the mortgage from the equation, increasing our gross profit, and quickly achieved 100% of similar net earnings.

This concept is very simple and it is about buying assets with other people’s money for 15 years.  That’s your exposure here.  The property isn’t going away.  

I understand that if you are in your 20s and you have entered the “Building Quarter” of the 4 Quarters of Life, you are going to want to move out of your parents place into a place of your own, buy a decent car, get into a decent relationship, party, travel, etc.  But maybe if you can be patient and use the opportunity that you have been given with minimal costs, etc. you can build up some traction in this process.

You see, there are way better methods to accelerate this process using multi-family properties, etc. but you have to start somewhere.  You might want to sell a condo, take the profits and use it to buy a 4 plex.  Maybe from that, you sell it and buy an apartment building.  You have to look at when enough is enough.  But the key part of all of this is that you are focusing on the cashflow income from the property - not the equity.

Because it doesn’t take very long, particularly after the principal balances on the properties are paid off, for you to never have to work another day in your life again.  The properties pay your salary, and if you have been living on minimum wage, you will get that from the cashflow easily.

Now no one wants to live on minimum wage, right?  Well I don’t agree.  Here’s why:

IT’S NOT WHAT YOU EARN - IT’S WHAT YOU KEEP

If you are not earning a lot of money, you can take advantage of government provided or subsidized health insurance and other support mechanisms.  Your taxes are paltry compared to most.  And since your real estate investments are a “business”, you can deduct expenses that the average salaried worker cannot.  You pay the taxes after you have earned it, meaning that you can deduct your expenses before taxes are calculated, whereas a W2 worker has the taxes taken out of their salary check and has to scurry around at the end of the financial year to try and claw back some of it.

Salaried workers are conditioned to invest in 401K or IRA investments, meaning that they take their money and give it to a counter party so it is out of their control, until the age of 60 or so.  You can see that the approach here puts you at or near financial sustainability in 10 years.  If you started this at the age of 22, you would be 32 and never needing to have a job.  Meanwhile the salaried worker is going to be another 30 years away from where you have arrived.

This is an illustration of why our social contract isn’t working.  But why, if you are willing to be the odd one out, you can have it all and have it early.  Being a contrarian is the essence of this - you have to be willing mentally and psychologically to be that odd one out.  You still have your friends, you are still going to have a job for a while.  Maybe you find something you really enjoy and want to have a career at it, and you raise your income to $50K a year or something.  That’s up to you.  But the smart income is coming from your assets - not your labor.

This is about control.  Control that you have over your time.  You get choices - whereas the salaried worker has those choices taken from them.

Maybe you decide you can make a lot of money doing seasonal work in Alaska.  OK, no problem.  You don’t have any commitment to a job here because you can replace minimum wage jobs easily, so you can afford to do that.  Maybe you will make enough in 2-3 months that provides you the 12 months of income.  And the experiences might be incredible.

Time is the goal.  It isn’t about making some 6 figure salary.  And you don’t have to make a 6 figure salary out of the gate to do this.   FI is not something that only those with some software engineer’s salary can take part in.  Smart income is about the basics, and that’s why it is something that anyone can do.

Focusing on the basics matters.  Let’s face it - everyone needs a roof over their heads.  With the massive amount of student loan debt out there, more and more are forced to rent.  That drives up rental demand, which keeps the housing market buoyant.   Rents are inflation proof because they go up, so you can keep ahead of rising costs by raising rents.   Yet the cost of borrowing is fixed, so you don’t have to worry about your mortgage going up and spiraling out of control.  When I started doing this, I could only get variable rate interest loans at 8% or so, and I had to do all of this with interest only payments and flipping properties.  You have been given a gift with these super-low interest rates and the ability to afford 15 year mortgages.  If I had that when I started, I’d be 2-3x richer today.  Don’t squander that gift.

Sure, there are times when you get unexpected things.  Tenants abandon, you need to spend money on fixing an A/C unit, tenant moves out and the costs of repainting, new carpets, etc. makes you question your strategy.  But don’t.  Even with the variables of the costs of maintaining your assets, they are your assets.  Maintenance is something you can do for a while.  And if you amass millions in equity at the end of the 10-15 year period, you can always sell them, pay the capital gains taxes and cash out your chips.

But why would you if the goose that is laying the golden eggs, is still laying.  I mean you could have this income for the rest of your life, and that’s when you destroy the entire concept of “retirement”.  You never try to retire, because what are you going to do then?  If your systems are well crafted here, you don’t need to spend a lot of time doing this, and you still get to travel, etc.  You build a team, and take advantage of Google Voice, etc. for international phone calls.  You “train” your tenants in what to expect from your responsiveness and that gives you some freedom.  Sure, you need to attend to emergencies, but you have a maintenance guy on hand who is looking after your collection of properties, so as long as you have some coverage, you can travel.  If you want to travel for extended periods, you might have to put the properties in the hands of a property manager and take a hit on the rental income, but I’ve been able to avoid that for about 25 years.  Just set yourself up with the power of the Internet, VoIP phones, etc. and you can take the business with you.

Of course with all this available time you will have, you will find other opportunities.  And since you have this massive equity built up in the properties, you have the ability to loan against it if you need cash.  Your relationship with the bank manager isn’t about your stable W2 income, but it is about creating a “portfolio lending” relationship, where they allocate millions they are willing to lend to you because they have the entire portfolio of properties in your ledger.  That means you are able to seize opportunities.  If the property market goes down for some reason, you don’t care - you are only interested in rental income because that is your smart income you are sustaining yourself with.

Look over time at the housing market, you will find that even with the massive swings we saw after the 2008 crash, it still shows a boring 4% appreciation rate over a 100 year period.  That’s way better than you will get on your cash, and unlike the stock market you get that on the total property value that you are buying with leverage (ie. you put down a portion to get the mortgage, but you get the 4% on the total property value).  If you bought stocks, you’d have to fund 100% of the shares up front, and if you got 4% on that money, that’s 4% only on the money you brought to the table.  For me, I’d prefer to get 4% on the total property asset value rather than just my downpayment.

These are all the reasons why a minimum wage person, who doesn’t try to live a lifestyle they can’t afford, can get into this quickly at an early age.  It is also why student loan debt is not helping.  Because if you have to work a job that makes $75K but you have to pay for all the trappings of that job - particularly the student loans, again:

IT’S NOT WHAT YOU EARN - IT’S WHAT YOU KEEP

You might want a career as a lawyer, engineer, architect, etc. because you love the law, building things, designing things.  That’s fine - if you motive for that is because you want that career, then you do it.  But how do you know that at 18 years old?  That’s my point - statistics tell us that 65% of most professionals would have chosen a different path at the age of 40 if they look back on their life.  78% of them are in the “pay check to pay check” world because they took on debt before they should have.

Yes, there are many out there that are doing the FI thing by getting a degree, paying off their student loan debts and living with their parents or “house hacking” to save 50-75% of their salary.  They are putting that capital to work in Index funds, but again the fundamentals of those investments IMHO are nothing like what they could be getting in rental real estate investing, and when you look at the path that is open to those that are on minimum wage here, with adjustments of their expenses and living with their parents as long as possible, it is more than reasonable to be a millionaire in your 30s here without a $150K per year salary.

Forget net worth

I recently came across a number of people that are bragging about their net worth.  This is a stupid number.  I’ll tell you why.

Most people include their principal residence (at least the equity they have in it) into their net worth value.  Stupid idea.  Your principal residence is not an asset - it is a liability.  We all need the physiological needs of Food, Shelter, Clothing, etc. and we can’t exist without it.  So you need a residence.  If you sold yours today, you would have to get another.  You could rent from someone and keep the equity, but isn’t that why you bought your own place originally - to get out of the control the landlord had to your dwelling, and because you wanted a nice home?  Unless you are willing to downgrade to something cheaper, you won’t free up that equity, so basically the home you live in is a cost of doing business here - it is not an asset.

If you take that out of your real net worth calculations, then your actual net worth are the assets you have.  Most people think of their 401K or IRA retirement in that, but again, you can’t touch it until you are old.  Therefore it is also not YOUR net worth.  It is deferred value, so you can’t calculate it.  What is left?  Well your rental real estate, your other smart income assets like capital equipment (such as vending machines, technology assets generating you income, etc.) and finally your liquid investments in stocks, bonds, precious metals, etc.  

The entire concept of smart income is to make your choices of capital assets able to generate cashflow.  Many call that passive income, but that’s not really telling the story very well.  You need smart income - where your entire focus is on the dividends and rents that are paid to you from the assets you own.  Not anything to do with income generated from labor expended.

So before you high five yourself over your millionaire net worth, deduct your home from it, deduct any investments you have no control over, and let’s see what is left.  If what is left has more than $1 million in asset value, then sure - you are a millionaire.

But who cares.  The only way you can have that money is to liquidate the assets.  If you have to sell them under duress you will get 50-75c on the dollar for the asset value.  And the asset no longer gives you a dividend and your rent.  So you wouldn’t want to sell them, unless you would go to and put the capital back into other income producing assets.

You see “net worth” is a death sentence.  Most of us only ever realize our net worth when we die.  And since we don’t get to see that money - as it goes to our heirs, why are you sitting all high & mighty on the number now, if you won’t ever get to see it?

It’s nice to be rich, but when you liquidate assets, you no longer have the asset.  This is my #1 criticism.  Those that have more money than they can spend are few, and they still go through the exact same mental and psychological challenge that the minimum wage person goes through - “What do I do now I sold everything?”.

If your goal is “retirement” you are thinking like a victim.  Because retirement isn’t ever something that should be your goal.  Retirement is the end point of a failed paradigm.  If you don’t have a failed paradigm, then you don’t ever retire because you are living a great life now, and the only end to that is your death.  Don’t make that something you prematurely do because I can tell you from personal experience, it doesn’t end well.  You don’t need to be working 70 hours a week either.  The key here is to find balance where you work only when you want to, and you earn money as if you had a full-time job.

It is all about keeping your burn rate down for the early period.  After that, then you adjust your burn rate to the cashflow income you have coming in.  Most FIRE planning is based on frugality, but with Financial Sustainability, you control the level of income you want.  Once your assets are generating you the income you want, you can live up to that point (well I believe you should generate 150% of your burn rate, to give you a safe buffer here).  That means if you have $100K of income per year from your assets, then you can live as if you have a $75K salary.  That’s 2x the national average of salaries in the USA as I record this.  If you want some lavish lifestyle, then increase the assets to $150K per year of income, or $200K per year.  But you don’t have to.  You can take this to the point where it doesn’t threaten your time and flexibility.   

Real estate is not the only asset class that works here either.  If you start to learn about technology and can build a website (or pay someone to do it), you have the tools and experience - if applied correctly, to build a persistent cashflow from those assets as well.  Now they are not as stable as real estate - technology assets have a limited shelf life but you can generate substantial income from the asset you build and deploy here for a shorter period of time.  Maybe that is something that your new found free time could help you learn or embrace.

Try doing that and keeping the full-time job as well, and have a family you can spend time with.  It isn’t easy - not impossible, but there are sacrifices and those on financial sustainability don’t like sacrifices.

We’ll see you on the next episode.