Millionaire Teacher. Hallam Andrew

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double the median household in your home country – without having to work – is a dream worth attaining.

How Do Investments Generate Enough Cash?

      Because this book will focus on building investments using the stock and bond markets, let’s use a relative example. If John builds an investment portfolio of $2.5 million, then he could feasibly sell 4 percent of that portfolio each year, equating to roughly $100,000 annually, and never run out of money. (See, “Retiring Early Using The 4 Percent Rule.”) If his investments are able to continue growing by 6 to 7 percent a year, he could likely afford, over time, to sell slightly more of his investment portfolio each year to cover the rising costs of living.

      Retiring Early Using The 4 Percent Rule

      Billy and Akaisha Kaderli retired when they were just 38 years old. They have been retired for more than 25 years. They live off their investments. In fact, they have pulled more money out of their investment portfolio than their portfolio was worth when they first retired.

      Does that mean they’re almost broke? Not even close. Compound interest worked its magic. When they retired in 1991, they had $500,000. Today, they have a lot more money. How did they do it? They live frugally, in low-cost locations. They also followed the 4 percent rule.

      In 2010, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz published a research paper in the Journal of Financial Planning.7 They back-tested a variety of portfolio allocations between January 1926 and December 2009. They found that if investors withdrew an inflation-adjusted 4 percent per year, their money stood an excellent chance of lasting more than 30 years.

      I wanted to see how it would have worked for Billy and Akaisha. They own an S&P 500 index. That means they invest the way that I describe in this book. They withdraw less than 4 percent from their investments in a year. But let’s see what would have happened if they had taken out exactly 4 percent annually.

      Over the past 25 years, their money would have kept growing. So if they took out 4 percent of their portfolio every year, they would have taken a total of $1,325,394 from their initial $500,000 portfolio. Yes, you read that right. They would also have plenty left. By April 30, 2016, despite those annual withdrawals, their portfolio would be valued at $1,855,686.

      Frugal living, compound interest, and the 4 percent rule are powerful combinations.8

      If John were in this position, I would consider him wealthy. If he also owned a Ferrari and a million-dollar home, then I’d consider him extremely wealthy.

      But if John had an investment portfolio of $400,000, owned a million-dollar home with the help of a large mortgage, and leased a Ferrari, then John wouldn’t be rich – even if his take-home pay exceeded $600,000 a year.

      I’m not suggesting that we live like misers and save every penny we earn. I’ve tried that already (as I’ll share with you) and it’s not much fun. But if we want to grow rich we need a purposeful plan. Watching what we spend, so we can invest our money, is an important first step. If wealth building were a course that everyone took and if we were graded on it every year (even after high school), do you know who would fail? Professional basketball players.

      Most National Basketball Association (NBA) players make millions of dollars a year. But are they rich? Most seem to be. But it’s not how much money you make that counts: it’s what you do with what you make. According to a 2008 Toronto Star article, a NBA Players’ Association representative visiting the Toronto Raptors team once warned the players to temper their spending. He reminded them that 60 percent of retired NBA players go broke five years after they stop collecting their enormous NBA paychecks.9 How can that happen? Sadly, the average NBA basketball player has very little (if any) financial common sense. Why would he? High schools don’t prepare us for the financial world.

      By following the concepts of wealth in this book, you can work your way toward financial independence. With a strong commitment to the rules, you could even grow wealthy – truly wealthy. This starts by following the first of my nine wealth rules: spend like you want to be rich. By minimizing the purchases that you don’t really need, you can maximize your money for investment purposes.

      Of course, that’s easier said than done when you see so many others purchasing things that you would like to have as well. Instead of looking where you think the grass is greener, admire your own yard, and compare it, if you must, to my father’s old car. Doing so can build a foundation of wealth. Let me explain how it worked for me.

      Can You See the Road When You’re Driving?

      Riding shotgun as a 15-year-old in my dad’s 1975 Datsun, I thought we were traveling a bit fast. I leaned over to look at the speedometer and noticed that it didn’t work. “Dad,” I asked, “how do you know how fast you’re going if your speedometer doesn’t work?”

      My dad asked me to lift up the floor mat beneath my feet. “Fold it back,” he grinned. There was a fist-sized hole in the floor beneath my feet, and I could see the rushing road below. “Who needs a speedometer when you can get a better feel for speed by looking at the road,” he told me.

      The following year, I turned 16. I bought my own car with cash that I had saved from working at a supermarket. It was a six-year-old 1980 Honda Civic. The speedometer worked, and best of all, there wasn’t a draft at my feet. Because it was the nicest car in the family, I always felt like I was riding in style, which leads me to one of the greatest secrets of wealth building: your perceptions dictate your spending habits.

      The surest way to grow rich over time is to start by spending a lot less than you make. If you can alter your perspective to be satisfied with what you have, then you won’t be as tempted to blow your earnings. You’ll be able to invest money over long periods of time, and thanks to the compounding miracles of the stock market, even middle-class wage earners eventually can amass sizable investment accounts. Thanks to my dad’s car (which also leaked), I felt rich because I had a road-worthy steed that didn’t leak from the roof and windows when it rained. Instead of comparing my car with those that were newer, faster, and cooler, I viewed my dad’s car (which you could start with a screwdriver in the ignition slot) as the comparative benchmark.

      Buddhists believe that “wanting” leads to suffering. In the case of the boy I tutored in Singapore, the family’s insatiable appetite for fine things will only lead to pain. Their suffering will accelerate if the head of the family loses his job or wants to retire. It reminds me of a bumper sticker I once saw, parodying the infamous line of Snow White’s dwarves: “I owe, I owe, it’s off to work I go.”

Why the Aspiring Rich Should Drive Rich People’s Cars

      If you want to improve your odds of growing rich, you don’t have to drive a piece of junk. Where’s the fun in that? How about driving the sort of car driven by the average US millionaire? At first it might sound counterproductive to dole out many tens of thousands of dollars for a BMW, Mercedes-Benz, or Ferrari while expecting to grow rich. But most millionaires might surprise you with their taste in cars. In 2009, the median price paid for a car by US millionaires was US$31,367.10 In 2016, they would have paid a bit more as a result of inflation. But one thing is clear. If you want to grow rich, forget about expensive European darlings such as BMW, Mercedes-Benz, and Jaguar. When Thomas Stanley polled US millionaires, the most popular brand of car was the humdrum Toyota.11

      Many of the wanna-be rich try to outdo their peers in the car-spending department, easily parting with $40,000 and upward on a luxury vehicle. But how can you build

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