Millionaire Teacher (3 page)

Whatever money you save on a car (not to mention the savings from interest payments if you can't buy the car outright) can go toward wealth-building investments.

Cars aren't investments. Unlike long-term assets such as real estate, stocks, and bonds, cars depreciate in value with each passing year.

One of the Savviest Guys I Ever Met—And His View on Buying Cars

When I was 20 years old, I took a summer job washing buses at a bus depot to pay for my college tuition. What I learned there from an insightful mechanic was more valuable than anything I learned at college. Russ Perry was a millionaire mechanic raising two kids as a single dad. His financial acumen was revered by the other mechanics who told me: “Hey, if Russ ever wants to talk to you about money, make sure you listen.”

We worked the night shift together, which wasn't particularly busy—especially on weekends—so we had plenty of time to talk.

My job was pretty simple. I washed buses, fueled them, and recorded their mileage at the end of the day. During my free moments at work I alternated between cringing and laughing out loud when Russ sermonized about money and people. Not everything Russ had to say was politically correct, but his crassness always had an element of truth to it.

Russ claimed he could tell how smart someone was by looking at what they drove. He couldn't figure out why anyone would pay a lot of money for something—such as a luxury car—that depreciated in value over time. And if they leased it, or borrowed money to buy it, he was really left scratching his head. Russ believed in investing in assets such as houses or stocks that could appreciate over time. Anything destined to lose money, such as cars, he deemed a liability.

“Andrew,” he said, “if you can go through life without losing money on cars, you're going to have a huge advantage.” He pointed to the guy across the parking lot who worked in management. “You see that guy getting into that BMW?”

I admired the car when I arrived at work that night. It was a beauty. “He bought that car two years ago, brand new,” Russ said. “But he has already lost $17,000 on it from depreciation and loan-interest costs. And in about three years, he's probably going to buy another one.” I wondered what the car would be worth in three years, if it had already depreciated so much in just two.

“If you're truly wealthy,” Russ explained, “then there's nothing wrong with blowing money you can afford to lose on the odd luxury item. But if you're trying to become wealthy,” Russ said in a serious tone, “and you make those kinds of purchases, you'll never get there. Never.”

Russ talked about turning conventional wisdom on its head. Most people expect to lose money on cars, but expecting it becomes a self-fulfilling prophecy. He told me that people don't have to lose money on cars if they're careful, citing himself as proof. I expected that from someone both financially and mechanically inclined. My biggest question at the time was whether it could work for me—a guy about as mechanically gifted as a blind Neanderthal with two left hands.

“When you buy a car,” Russ said, “think about the resale value.” The bulk of the depreciation on a new vehicle occurs in the first year. Russ recommended I never buy new cars, and only buy a car if someone else had covered the bulk of the depreciation.

The best resale value, he figured, came from Japanese cars. He recommended that I look for low-mileage models that had been fastidiously maintained with original paint, great tires, and a great interior.

If I paid the right price for a car, and the bulk of the depreciation was covered by someone else, he preached, I would be able to sell the car a year or two later for the same price I paid, if not a bit more.

A future millionaire's car-buying strategies

Putting Russ's theory to the test, I went out in search of cars that wouldn't put holes in the bottom of my financial bucket.

It didn't take me long to get a feel for the market. I read a few consumer reports on reliable automobiles. One invaluable source was Phil Edmonston's annually updated guide,
Lemon-Aid Used Cars.
Certain cars and models are bona fide lemons while others can be great little workhorses. I would spend a few minutes each morning looking through the classifieds in the local paper and when I saw something interesting at a good price, I would check it out. Over the next few years, I bought several low-mileage, reliable Japanese models, paying between $1,500 to $5,000 for a car and driving it for at least 12 months without putting any extra money into it. My cars were cheap, so my profits didn't amount to much: usually $800 to $1,000 a car.

Unfortunately there are too many people who aren't good with their money, and it's often easy to find desperate people who have overextended themselves financially. Buy from them. Generally, they want money quickly, either to upgrade their cars or to pay off oppressively looming debts. I've bought used vehicles from both types of sellers, put as many as 60,000 miles on the cars, and then sold them two or three years later for the same price I paid.

On one occasion, I bought a low-mileage, 12-year-old Toyota van for $3,000. I drove it 4,000 miles from British Columbia, Canada, down the Mexican Baja peninsula, then on to Guadalajara, before driving back to Canada. After covering more than 8,000 miles in a single trip, I sold it for $3,500. Using prudent purchasing strategies you can turn the savings into a small fortune by investing the money in ways that I'll explain later in this book.

Here's one surprisingly simple strategy for buying used vehicles that can save you loads of time and money.

Imagine wandering onto a car lot. You're not generally given free rein to browse on your own or with a friend. A sharply dressed salesperson will soon be courting you through a variety of makes and models. They could have the very best of intentions, but if you're anything like me, your pulse will race a bit faster as you're shadowed, and the pressure of being shadowed by a slick talker might throw you off. After all, you're on their turf.

A minnow like me needs an effective strategy against big, hungry, experienced fish—and this is mine: First, I identify exactly what I'm looking for. In 2002, I wanted a Japanese car with a stick shift and original paint. I didn't want a new paint job because I'm not skilled enough to determine whether something had been covered up, such as rust or damage from an accident. I also wanted to ensure that the car had fewer than 80,000 miles on it, and I wanted to pay less than $3,000. It really didn't matter how old the car was as long as it had been properly maintained and hadn't been around the block too many times.

Like a secret agent wrapped up in the bravery of anonymity, I pulled out my hit list from the yellow pages to call every car lot within a 20-mile radius. Sticking to my guns, I told them exactly what I was looking for and wouldn't entertain anything that didn't fit all of my criteria.

I did have to hold my ground with aggressive sales staff. But it was a lot easier to do over the telephone than it would have been in person. Most of the dealers told me that they had something I would be interested in, but they couldn't go as low as $3,000. Some tried tempting me into their lairs with alternatives; others referred to my price ceiling as delusional. But I wasn't bothered. My strategy was a knight's sword and the phone, my trusty shield. I also practiced chivalry—knowing that I might end up calling on them again.

Because my first round of phone calls didn't pan out, I called the dealers back when it got closer to the end of the month. I hoped the salespeople would be hungrier by then to meet their monthly quotas. As fortune would have it, at one dealership an elderly couple had traded in an older Toyota Tercel with 30,000 miles on it. The car hadn't been cleaned or inspected, but the dealership was willing to do a quick turnaround sale for $3,000.

This strategy doesn't have to be limited to a $3,000 purchase. The process makes sense for any make or model and it saves time. What's more, the money you save can be effectively invested to build wealth.

Careful Home Purchases

Most people realize that expensive automobile purchases can hinder wealth. But the global financial crisis of 2008–2009 taught us important lessons about homes as well.

One of the lessons aspiring rich people have to learn is that the banks aren't really their friends. They're out to make money for their shareholders. To do so, they often hire the kindest or most convincing salespeople they can to persuade you to buy lousy investment products (which I'll discuss in Chapter 3) while sugarcoating bloated house loans to keep you paying too many years of interest.

What caused the financial crisis of 2008–2009? The greed of the banks not looking after the best interests of their customers, coupled with the ignorance of those who bought homes they couldn't afford.

Caught up in the housing boom, buyers purchased homes they couldn't really pay for, and when the dangerously enticing, low interest rates finally rose, they couldn't make their mortgage payments. Unsurprisingly, many were forced to sell their homes, creating a surplus in the housing market. When there's a surplus of anything, people aren't willing to pay as much for those items—so they fall in price. Houses were no exception.

The banks had sold these mortgage loans to other institutions around the world. But when the original holders of the mortgages (the home purchasers) couldn't afford their mortgage payments, the financial institutions repossessed their houses—but at a significant loss, because housing prices were falling like a skydiver without a chute.

The banks had also bundled the loans up and sold them to other global institutions, which were then on the hook when the homeowners couldn't pay their mortgages, putting many of the world's most respected financial institutions in peril. With dwindling financial resources, the banks didn't loan as readily to other businesses, which in turn didn't have the funds to cover their day-to-day operations. The snowball effect resulted in a global slowdown and mass layoffs. Don't believe those who sugarcoat housing loans. The effects can be devastating.

It reminds me of a lesson my mom taught me when I took out my first mortgage on a piece of oceanfront land. She asked me: “If the interest rate doubled, could you still afford to make the payment?” According to the terms of the mortgage, I was being charged seven percent in interest a year. She knew at the time, that a seven percent mortgage was historically cheap, especially compared with mortgage rates in the late 1970s and 1980s. As far as she was concerned, if I couldn't afford to pay double, or 14 percent interest, then rising interest rates could expose me. I would be one of those unfortunate guys caught swimming naked when the tide goes out.

Her advice is a good rule of thumb if you don't want to be stripped of your real estate. If you're considering purchasing a home, double the interest rate and figure out if you could still afford the payments. If you can, then you can afford the home.

Millionaire Handouts

There's a Chinese proverb suggesting that wealth doesn't last more than three generations. There's a generation that builds wealth, a generation that maintains it, and a generation that squanders it.

U.S. studies suggest that—contrary to what we might think—most millionaires didn't inherit their wealth. More than 80 percent of those surveyed are first-generation rich.
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I teach at a private school in Singapore where most of the expat students come from affluent families. I tell my students (only half-jokingly) that they're on the financial endangered species list. It's natural for parents to want to help their children. But the Chinese have known for thousands of years what happens to money that's given to youngsters who had no hand in building that wealth. It gets squandered.

In Thomas Stanley's classic book,
The Millionaire Next Door,
he explains that adults who receive “helpful” financial gifts from their parents (stocks, cash, real estate) typically end up with lower levels of wealth than people in the same income bracket who don't receive financial assistance.
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It's a tough concept for many parents to grasp. They feel they can give their kids a strong financial head start by giving them money. Statistically speaking, easy money is wasted money. Stanley studied a broad cross section of educated professionals in their 40s and 50s, and he categorized them by vocation. Then he split them up into two groups: those who had received financial assistance from their parents, and those who hadn't. That assistance included cash gifts, help in paying off loans, help in buying a car, or help with a down payment on a home. He found that those who received help were more likely to have less wealth during their peak earning years than those who had not received financial help from their parents. Receiving financial handouts hinders a person's ability to create wealth.

For example, the average accountant who received financial help from his or her parents was 43 percent less wealthy than an average accountant who didn't receive handouts. In sharp contrast, the only two professional groups studied that became wealthier after receiving financial assistance were school teachers and college professors.
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How Did I Become a Millionaire?

My dad was a mechanic, and I was one of four kids being raised on his salary, so we didn't have a lot of money to throw around when I was growing up. From the age of 15, I bought my own clothes. At 16, I bought my own car with earnings from a part-time job at a supermarket. I had to work for what I wanted, but I didn't enjoy working. Like most kids, I would have preferred hanging out on a beach.

So for me, money was equated with work. I would see a desired object costing “just” $10, but then I would ask myself if I wanted to mop the supermarket floor and stack 50-pound sacks of potatoes to pay for it. If the answer was no, then I wouldn't buy it. Never receiving “free” money allowed me to adopt responsible spending habits.