What I Told the Kids

This week, I have been lecturing to about 165 students, who range in age between 10 and 18.  This is a very wide age group to keep entertained for 90 minutes a day.  They are in a large auditorium with no desks, so they don’t bother to take notes — not that students take many notes, even in classes with desks.

I did two sessions on personal goal-setting.  Then I offered a special 90-minute seminar, “Who wants to be a Millionaire?”  To get into the seminar, they had to pay. They paid by means of commitment.  They had to agree to do the following:

Donate 10% of their income to their church, permanently

Refuse to do their homework on Sundays

Then came the bargaining: high bids win.  They had to commit to additional measures:

Save ___% of their income to a permanent saving program for as long as they live rent-free in their   parents’ home

Save ___% of their income after they move out.

Watch no more than ___ hours of TV per week, plus one rented movie, with a $2 fine for each extra  hour or extra movie, payable to their church

I set up a formula: combined savings rates minus hours of TV.  The fewer the number of hours, the higher the bid.

Then I factored in age.  I gave preference to younger students.  They subtracted their age from the total.

I told them from the beginning lecture that younger students could profit more from my presentations than the older ones could, assuming they do what I say.  The advantage that older students have over the younger ones is that they are more likely to do what I say.  The younger students’ advantage relates to the compounding process.  I handed out the chart of “Investor A vs. Investor B,” which Richard Russell published in his essay, “Rich Man, Poor Man,” which I referred to in the previous issue.


In teaching these students about setting personal goals, I told them to visualize their 75th birthday.  (I began lecturing to them on my 60th.)  If they were to invite their family to their 75th birthday party, what would they tell the assembled guests about what they, as the party-givers, had accomplished in life that had meant the most to them?

The ability of 10-year-olds to imagine being 75 is remote.  Ben Franklin’s aphorism is correct: “A child thinks that 20 pounds and 20 years can never be spent.”

I challenged them to identify their top five priorities in life.  Then I asked them to identify the most difficult priority to achieve, and the priority that would take the longest to achieve.  I handed out printed forms for all this.  They will not remember the details of my lecture, but the forms are specific.  There were forms for self-evaluation: 90 days and one year.

They had to ask themselves these questions for each of their five priorities:

What do I want to achieve?
Why do I want to achieve it?
When do I want to achieve it?
How much am I willing to pay (give up)?

I told them that they would be able to pay people money at their birthday party — a lot of money.  I told them I would show them how to get a bundle of money to hand out to their heirs at that party.

It was time to present the compound interest example: Investor A vs. Investor B.  I wanted to connect with them emotionally.  That meant that I had to come up with an example that they could identify with.  I came up with this example: the cost of cigarettes.  Teenagers know peers who are already addicted to cigarettes.  What if I could show them what this addiction costs?

I checked with a local convenience store.  Cigarettes in the area are selling for $3.50 a pack.

I then used this example.  A student has just turned 18.  He buys a pack of cigarettes.  He continues to smoke a pack a day until age 75.  The price of cigarettes remains the same.  What will his habit cost him financially, if the interest rate is 3% and he can put the money into a tax- deferred retirement program?  I asked them to guess.

[Do you know?  What is your best guess?  Take a shot at this.]

One student knew.  He obviously had a financial calculator.  No one else came close.

I called for a volunteer to enter the figures into my Texas Instruments BA-35 solar calculator ($20 at Wal-Mart).

Using a volunteer was a teaching tactic to get the class more involved.  There were many volunteers.  I picked one. He came up.  I showed him how to enter the figures: 3.50 x 365 (PMT), 3 (%) and 75-18 = 57 (N).  Then click compute (CPT) and future value (FV).

He got the figure.  It of course amazed them.

I also wanted to prove to them that I could help the younger students more than the older ones.  I asked if there were any 11-year-olds.  There were.  Then I asked if there were any 10-year-olds.  There was one girl.  I called her up to enter the figures into the calculator.

I showed her how to enter the figures.  She entered the same figures as the first student, except for the number of extra years: eight (65).  She did.

For an 18-year-old, the cost of lifetime cigarette addiction — one pack a day — is $187,011.16 (not counting leap years).

For the 10-year-old, the cost is $248,260.10.

I asked the girl which she would prefer: a quarter of a million dollars or lung cancer?  She had the right answer: “I’ll take the money.”

I used 3% because, long term, a 3% return above price inflation is reasonable for the average investor.  In nominal terms, 6% is normal.  That’s what you could get a in late 2000 in a bank CD.

At 6%, the 10-year-old would earn $918,628.35.

Then I showed them the grim reality of Social Security.  I gave an example of a couple that earns $20,000 each, age 21 to 65.  Neither of them ever gets a raise. The government takes 15%: half from the worker.  The other half could go to the worker, but the government takes it instead.  What will the couple forfeit, if they can invest the money in a tax-deferred retirement account paying 6%?

I have done this before to high schoolers.  It always stuns them.

The answer is $1,198,548.19.

At 6%, this would generate passive income of $71,912.90 a year, and then they could bequeath the $1.2 million to their children.

Social Security, if it survives, will pay them a few thousand a year, and then nothing will go to their children.

I left out taxes on the withdrawal of their capital at age 65.  I also left out price inflation (a tax on the value of money).  I wanted to get it across what government costs them.  It costs them plenty.

I recall giving this example in 1985 to about 1,000 high school juniors and seniors during a 90-minute lecture (which was the toughest lecturing challenge in my career). I got to the figure: $1.2 million.  The room was dead silent.  Then one student, in shock, yelled out, “Why does the government do this?”  It was the perfect straight-man’s opening line.  I had the answer: “To get your money.”

I then told them that Social Security and Medicare are both going bankrupt.  They are unfunded programs, and the funding for both programs combined would take 70% of the U.S. government’s budget in fiscal 2002: about $1.3 trillion a year for the next 30 years, the period mandated by the government’s ERISA insurance program for private pensions.

I told them to get one debit card rather than numerous credit cards.  I gave them this example of the cost of credit card debt.  Today, the average credit card debt load is $8,000 per American family that uses credit cards.  At 18%, with a repayment period of 10 years, the debtor will pay repay a total of $41,870.68 for the use of the $8,000.

Of course, he will never stop using that $8,000.  He will roll the debt over, just like the Federal government does.

Students turned in their contracts.  High bidders won.

Some of them promised to save 70%.  A parent co-signed each contract.  A photocopy will go to the parent and the student’s pastor, whose church has been promised 10%. There will be monitoring.

I told them that they had to make a budget — a non- negotiable demand.  If they were unwilling to do this, they had to leave the seminar before it started.  Nobody left. Their budget and spending records must be presented quarterly to parents and pastors.  There has to be proof that they have held up their end of the bargain.

The exercise of making a budget and keeping records will do a great deal for them in building habits favorable to saving and spending.

Will they actually make budgets?  The ones who are likely to become rich will.  Getting rich is mostly a matter of self-discipline over decades.

This seminar was on Wednesday.  I had given the cigarette example on Monday.  I asked them: “How many of you have saved $7 since Monday?”  No hands went up. Remember, these students were the red-hots, the ones who had guaranteed to tithe plus save a large percentage of their income, including even Christmas and birthday money. Not one person had taken my cigarette example seriously enough to save, not even for $187,000 or more.

I told them that in order to become a millionaire, each of them must build a capital base of $5,000 to $10,000 for starting a small business.  At $1,277.50 for cigarettes per year, plus interest, they could do this before they were 25.  The younger ones could do it before age 20.

I told them to open a Roth IRA account for their “cigarette money.”  A Roth IRA allows you to deposit after- tax money, compound the interest free of taxes, and then withdraw the money tax-free upon retirement.  For students, this is ideal: they don’t pay income tax unless they earn more than $4,300, which most won’t do as teenagers.  After- tax income is the same as pre-tax income for them.  The compounding process gets rolling early.

I asked them if they could do odd jobs that would pay $3.50, total, per day.  Most admitted that this was possible.  I told them: “Earn the money during your former TV-watching time.”

I suggested car washing.  A local car wash with rotating brushes costs $8.  They could also do service this for $8, but without damaging the paint with rotating brushes — a selling point.  Use sponges and a chamois.  Do this at the person’s house.  Do one job a day, plus two or three on Saturday.

One young girl (age 11) wanted to know what she could do.  I asked if there were old women in her neighborhood who needed someone to clean their homes or do other physically intensive jobs.  She thought there were a few. I asked the class: “What advantage does she have over the rest of you?”  One person said, “She has a had start on her investing program.”  That was correct: he had understood “Investor A vs. Investor B.”  I asked what else.  “She’s a kid,” said one.  That’s right.  I told them: “Adults don’t like teenagers very much, but they are always happy to give help to a little kid.”  The girl understood; she knew she was younger.

I had already given the assembly this tip: the most powerful word in getting a job is “free.”  To make this word work, you should add “apprentice.”  I told them that it costs money to hire a new worker: paperwork, Social Security taxes, workers’ compensation.  But if a student works as an apprentice for free, he can get an employer to hire him provisionally.  The student can learn on the job. If necessary, work two weeks for free.  “Pick a job where you can learn something valuable.  Avoid a fast-food restaurant job except to build capital.”

I told the girl to go to the older ladies in the neighborhood, say that she wanted to learn how to clean a house, and volunteer to do it for free.  “Show me how you want it done.”  If the lady agrees, the girl should take notes.  “Let her know you are paying attention.”  Then do the job.  Ask her at each stage if the job was done right. If it wasn’t, then do it right.  Then come back the next week.  Do these jobs again, without supervision, for free. Ask the lady at the end of the day if all of the jobs are done the way she wants them done.  If not, do them again. When the lady is satisfied, negotiate a price for a weekly cleaning job.

Probably the lady will offer something pretty good, after she has seen the girl work hard for free.  She knows that this girl is unique.  This work ethic always impresses older people.

If she can get six jobs per week, she has her cigarette retirement money, her “build up a small business money,” and her spending money.

The same is true of the car wash jobs.

I told them that the idea is to create a small business.  A small business can produce steady income. Trust gained is an asset.

Car washing is good because it’s year-round.  If this doesn’t work, then in summer they can mow lawns.  Two lawns a day for six days will make a person $300 a week, or $3,600 per summer.

Line up even more mowing jobs, get buddies to do the work, provide lawn mowers, and keep 20% for lining up the jobs.

The school is in New Hampshire.  Summers are short here.  They will need a winter job.

Buy items on eBay.  Don’t pay retail, I told them.

I asked how many boys liked to repair cars.  Several hands went up.  I told them to get jobs doing part-time repair work, so that they can learn how to run a car repair business.

Get into car-restoration work.  Start investing in old cars.  Which old cars?  The car that were the most popular model with teenage boys 17 years ago.  That was the car that high school seniors dreamed of owning, but could not afford.  Some of them are still dreaming about that car. Find out which ones were the favorites by reading 17-year old car magazines.  In my day, it was a Ford Thunderbird, 1955, ’56, or ’57, preferably in “hello, officer” red.  An alternative: the 1958 Chevy Impala.  Seven or eight years later, it was the Ford Mustang.  Since then, I have no idea.  The booms in those models have long since cooled, I suppose.

Buy the car about 17 years after the senior class has graduated.  That model is now forgotten.  Locate a cheap one.  Find it in a junk yard or advertised in a newspaper. Restore it in your spare time.  A decade later, those high school seniors will be 45 years old.  A few of them are getting their hands on some serious money.  It’s youth- revisitation time!  The market for that model will begin to heat up.  You will have about five years to sell it.

I told them: “If you buy the clunker cheap enough and restore it cheap enough in your spare time, you will do quite well.”

If you don’t know what color to paint it, red will do just fine.

None of this will make a person into a millionaire. But the experience is crucial.  A person who opens a business bank account has made the mental jump from salaried worker to business owner.  This can make all the difference.

Where is the easiest big money?  Commercial real estate that houses a person’s business.  I did my best to show them how a small business generates money that can pay rent.  It can therefore pay off a mortgage.  Set up a real estate investment company, secure a long-term lease from your own separately incorporated business, and get a bank to issue a loan on the property.  Pay off the loan in 15 years.  Then the rent money will flow into your real estate investment corporation.

I know a man who has a non-profit, tax-free retail service that requires a 5,500 square foot building on an acre of land.  He gets a builder to buy the land and build a building to his specifications.  He does this with no money down.  The non-profit service organization, which he and his wife manage for upper-middle-class but fully legal joint salaries, then leases the property from his family- held real estate management corporation, which pays off each building in 15 years.  Each separate operation generates $60,000 a year in rental income.  After 15 years, his family-held corporation will collect this rent.

He opens a new unit every three years.  Beginning when he is 65, his corporation’s income will increase by $60,000 a year in 3-year jumps.  Pocketa-pocketa-pocketa: every 36 months he does this.  His adult children own shares in the corporation, so there will be no inheritance taxes at his death or his wife’s death.  This was Sam Walton’s strategy.

It forced the Feds to wait another generation for the estate taxes on the $10 billion or so of Wal-Mart that Sam didn’t own.

I asked them: “How much would you have to invest at 6% to earn $60,000 a year?”  There were blank stares.  Someone said, “a million dollars.”  Bingo.

Every three years, once my friend reaches age 65, his corporation will appreciate in value by a million dollars.

But, unlike a bond that pays 6%, if price inflation hits, he will raise the rents on the occupants — his non- profit entities.  The leases are for 36 months.  He knows that the organizations leasing the property — his non- profit entities — will renew their leases at the new, inflation-driven, higher price.  The real estate appreciates.  His corporation gets richer.

How to become a millionaire?  Simple.  Follow Jack Miller’s rule: “Borrow a million dollars and have someone else pay it off.”

My friend borrows half a million dollars every three years, but the high rental income that his non-profit entity generates puts the property into the million dollar class.  He is generous — and stays within the law — by paying a high rent to get the mortgage paid off in 15 years.  After this, his family will get this cash flow.


In that room of 30 students, about six will take this strategy seriously (Pareto’s 20-80 rule), and maybe three really will become millionaires (10-90).

Was this worth three 90-minute sessions?  To make three millionaires out of 165 junior high and high schoolers?  Sure.  I even got this newsletter out of it.

One more time: “Borrow a million dollars and have someone else pay it off.”