The story appeared a month ago and I read it, scratched my head, wondered if it was true and moved on.  The headline “A 27-year-old millionaire reveals how he built his wealth” made for effective “click bait” given the public’s fascination with millionaires.  Well, it turns out it wasn’t true.  I thought it might be fun to have your students play forensic accountants to see if they could find the errors in the story.  This case study is a good one because it incorporates concepts such as investing, net worth, mortgages, rental property, savings rates and “you can’t always believe what you read.”

Here is a summary of the financial facts presented:

• First job at 15; worked three years at Subway and saved 100% of his earnings; had saved about $10,000 when he graduated high school.
• Worked from 18-20 in administrative jobs; unsure how much he earned or saved.
• At age 20 (say 2007) joined Navy earning $55,000/year as electronics technician
• Saved 60% of his earnings at Navy and did freelance jobs for $15,000 – $20,000/year saving $40,000 – $45,000 per year
• Didn’t sell during downturn
• 2009:  put down $80,000 on $400,000 condo in San Diego which he rents at $3,000/month; says he saves $12,000/year after paying mortgage ($320,000)
• 2014:  purchased $430,000 duplex which he rents out at $21,000/year and earns $12,000 net after the mortgage is taken into account.
• 2013-14:  Earns $100,000/year and saves 50% in addition to his rental income

—————————–

See how your students do in coming up with the problems with his “story:”

• $55,000 seems high pay for high school graduate in entry level navy position; Payscale provides median pay for this position in the Navy as $43,326 so that seems high as a starting salary so may just be his ending pay after 6 years.

• If you incorporate federal payroll taxes of 22.5% (average tax rate on his reported income of $80,000) that leaves after-tax income of $62,000 so to save $45,000-$50,000 would require spending just $12,000-$17,000 per year; seems difficult to live on but military life may make it possible.

• Navy:  The bulk of his savings came during his period in the Navy from 2007-13.  Let’s assume he saved $45,000 per year for six years and invested in what he described as a “lazy portfolio:”  “Ivanov decided to invest in seven asset classes: domestic, large-, mid-, and small-cap funds, emerging market funds, commodity funds, with a small chunk in bonds. Then he let it ride. He rebalances his portfolio once a year, if at all.

• “Students could create a spreadsheet to see if they can replicate his investment results.  Since we don’t know his asset allocation, I will simplify by just assuming he achieved a return equal to the S&P500 for that year (Yahoo Finance has this data).  Since he bought a house in 2009 with $80,000 down payment we will withdraw that amount in 2009.  Also, needed to cover downpayment of $86,000 for the $430,000 duplex.  I created an answer sheet here:  MillionaireClaim.  Using the assumptions above, the value of his investment portfolio would be about $246,000 at the end of 2013

• So, what is the value of his real estate?
  • Condo 1:  $600,000 value – $320,000 mortgage = $280,000 equity (Note that mortgage would likely be lower, so equity would be higher since he had been paying it off for 4-5 years).
  • Duplex:  $430,000 purchase price – $344,000 mortgage (assume 20% down payment) = $86,000 equity
  • Note that I didn’t incorporate the rental income form Condo 1 that he has received since 2009, which would have amounted to $12,000 per year for 5 years or $60,000.

• Net worth:
  • Investment portfolio:  $246,000
  • Condo 1 Equity:         $280,000
  • Duplex equity:            $  86,000

TOTAL                          $612,000

• The results show him coming up about 40% short of the $1,000,000 that he professed to have in 2014.  Good lesson:  don’t believe everything you read.  The reporter later wrote a correction on how she had been hoodwinked.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.