Millionaire Teacher (4 page)

Confessions of a former cheapskate

Today, my wife and I can afford to live well. We own a classic Mercedes-Benz and a utilitarian Mazda. We travel prolifically, having visited more than 25 different countries. We live in a luxurious condominium with a swimming pool, squash courts, tennis courts, and a weight room. We enjoy massages every week, 52 weeks a year. If our health holds out, we'll enjoy these fruits for the next 40 years.

But an early aversion to debt put us in this position. I hate debt. It's going to sound extreme to most people, but for me, owing money is like making a deal with the devil. Always thinking of the worst-case scenario, I would worry what would happen if I lost my job and couldn't meet my debt-obligation payments.

I'm not recommending that a young person seeking early retirement should live the way I did in my early 20s. But thinking of debt as a life-threatening, contagious disease served me pretty well. Whether you find it inspirational or delusional, I think you'll get a kick out of my story.

I began teaching seventh grade a few months after graduating from university. Paying low rent and low food costs, I figured, were like roadmaps to student-loan obliteration. Sure, it sounds like a reasonable idea, but there are big-city panhandlers who might cringe at my form of minimalism.

Potatoes, pasta, and clams were the cheapest forms of sustenance I could find. Clams simply represented free protein. With a bucket in hand, I would wander to the beach with a retired fellow named Oscar, and we would load up on clams. While Oscar turned his catch into delicacies, my efforts were spartan: microwave some spuds or boil pasta, and toss in the clams with a bit of olive oil.
Voila!
Dinner for less than a dollar. It doesn't matter how well you can initially tolerate a bland meal. Keeping that diet up day after day is about as enticing as eating dog food. But my debt burden lessened as I lived on just 30 percent of my teacher's salary—allowing me to allocate 70 percent of my salary toward debt reduction.

Sharing accommodation with roommates also cut costs. I preferred, however, not paying rent at all, so I looked for people escaping to the Sunbelt for winter and needed someone to look after their homes for the season.

No matter how cold the rent-free homes got during the winter, I never turned on the heat. Wanting to keep costs down, I would walk around the house wearing layers of shirts and sweaters while the winter's snow piled up outside. If there was a fireplace, I used it. At night, I would make a roaring fire and then drag blankets in front of it to sleep. Waking up during winter mornings, I often saw my breath.

One December week, my father was in town on business, so I invited him to stay with me. Typically boisterous, he was uncharacteristically quiet when I told him: “No Dad, I'm not going to turn on the heat.” I figured that snuggling up together at night next to a fireplace in a frosty living room would be a great father-son bonding moment. I guess he didn't think so. The next time he was in town, he stayed at a hotel.

Eventually, I craved the freedom of my own place, so I moved into a basement suite where the landlord charged $350 a month. But low rents can come with inconveniences. In this case, I was a long way from the school where I taught—35 miles door to door.

If I had been smart enough to drive a car to work, it wouldn't have been so bad. I owned a rusting, 20-year-old Volkswagen that I bought for $1,200 (which I sold two years later for $1,800), but I wasn't prepared to pay fuel prices for the 70-mile round-trip commute. So . . . I rode my bike.

Riding an old mountain bike 70 miles a day through rain and sleet on my way to work and back gave me a frontrunner's edge for the bonehead award. At the time, I had an investment portfolio that would have allowed me to buy a brand-new sports car in cash, if I had wanted to, and I could have rented an ocean-side apartment. But the people I worked with probably thought I was broke.

One of my fellow teachers saw me at a gas station on my way home from work. We were both picking up fuel—but mine was of the edible kind. Rushing up to me as I straddled my bike and stuffed a PowerBar into my mouth she said: “We should really start a collection for you at the school, Andrew.” If I thought she was kidding, I would have laughed.

After a while, even I decided my lifestyle was a little extreme. To make things easier, I moved closer to work after placing an advertisement in the local paper:
Teacher looking for accommodation for no more than $450 a month
. It was far below the going rate, but I reasoned an advertisement selling myself as employed and responsible—while leaving out a few other adjectives—might attract someone looking for a dependable tenant.

I only got a couple of calls but one of the places was perfect, so I took it.

Because I had been investing money since I was 19, I already had a growing nest egg. But I wasn't willing to sell any of my investments to pay down my loans. I threw every extra income dollar I could toward reducing my student loans. One year after working full-time and living like a monk, I paid off my debts. Then I redirected the money enthusiastically into my investments.

Six years after paying off my student loans, I bought a piece of oceanfront property and calculated how to aggressively pay down the mortgage. I even took a higher interest rate to increase my flexibility of mortgage payments.

Once I paid it off, I shoveled money, once again, into my investments.

Admittedly, few people despise debt as much as I do. But once you're debt-free, there's no feeling like it.

Don't get me wrong. This part of my financial history isn't a “how to” manual for a young person to follow. It was a fun challenge at the time, but it wouldn't appeal to me today. And my wife, who I married much later, admits it wouldn't have appealed to her—ever. That said, if you want to be wealthy, you dramatically increase your odds if you're frugal, especially when you're young.

Looking to the Future

Responsible spending habits are often overlooked by people who want to be rich. It's one of the reasons many people nearing retirement age have to work when they would rather be traveling the world or spending time with their grandchildren. Naturally, not everyone has the same philosophy about work. But how many people on their deathbeds ever lament: “Gosh, I wish I had spent more time at the office,” or “Geez, I really wish they had given me that promotion back in 2015.”

Most people prefer their hobbies to their workplace, their children to their BlackBerries, and their quiet reflective moments to their office meetings. I'm certainly among them—which is the reason I learned to control my spending and invest my money effectively.

If you're a young person starting out and you see someone with the latest expensive toys, think about how they might have acquired them. Too many of those items were probably bought on credit—with sleepless nights as a complementary accessory. Many of those people will never truly be rich. Instead, they will be stressed.

By learning how to spend like a rich person, you can eventually build wealth (and material possessions) without the added anxiety. You don't have to live like a pauper to do it either. Apply the investment rules that I'm willing to share, and you could feasibly invest half of what your neighbor does, take lower risks, and still end up with twice as much money as they do. Read on to find out how.

Notes

1.
Kelli B. Grant, “The New Best Credit Cards,”
The Wall Street Journal
, April 1, 2011, accessed April 2, 2011,
http://www.marketwatch.com/story/the-new-best-credit-cards-1301520786753
.

2.
Derek Kravitz, “Number of Underwater Mortgages Rise as More Homeowners Fall Behind,”
The Huffington Post
, March 8, 2011, accessed April 2, 2011,
http://www.huffingtonpost.com/2011/03/08/number-of-underwater-mort_n_833000.html
.

3.
Thomas Stanley,
Stop Acting Rich
(Hoboken, New Jersey: John Wiley & Sons, 2009), 9.

4.
Ibid., 45.

5.
“Household Income for States: 2008 and 2009,” U.S. Census Bureau, accessed April 2, 2011,
http://www.census.gov/prod/2010pubs/acsbr09–2.pdf
.

6.
Dave Feschuk, “NBA Players' Financial Security No Slam Dunk,”
Toronto Star,
January 31, 2008, accessed April 2, 2011,
http://www.thestar.com/sports/article/299119
.

7.
Stanley,
Stop Acting Rich
, 204.

8.
Ibid.

9.
“Warren Buffett Vouches for GM with Caddy Purchase,” LeftLane, June 6, 2006, accessed October 2010,
http://www.leftlanenews.com/warren-buffett-vouches-for-gm-with-caddy-purchase.html
.

10.
Stanley,
Stop Acting Rich
, 204.

11.
Thomas Stanley and William Danko,
The Millionaire Next Door
(New York, New York: Simon & Schuster, 1996), 9.

12.
Ibid., 151.

RULE 2

Use the Greatest Investment Ally You Have

So much of what schools teach in a traditional mathematics class is . . . hmm, let me word this diplomatically, not likely to affect our day-to-day lives. Sure, learning the formulas for quadratic equations (and their abstract family members) might jazz the odd engineering student. But let's be honest. Few people get aroused by quadratic equations.

Perhaps I'm committing heresy in the eyes of the world's math teachers, but I think quadratic equations (a polynomial equation of the second degree, if that clears things up) are about as useful to most people as ingrown toenails and just as painful for some. Having said that, buried in the dull pages of most school math books is something that's actually useful: the magical premise of compound interest.

Warren Buffett applied it to become a billionaire. More importantly, so can you and I'll show you how.

Buffett has long jockeyed with Microsoft Chairman Bill Gates for the title of “World's Richest Man.” He lives like a typical millionaire (he doesn't spend much on material things) and he mastered the secret of investing his money early. He bought his first stock when he was 11 years old, and the multibillionaire jokes that he started too late.
1

Starting early is the greatest gift you can give yourself. If you start early and if you invest efficiently (in a manner that I'll explain in this book) you can build a fortune over time, while spending just 60 minutes a year monitoring your investments.

Warren Buffett famously quips: “Preparation is everything. Noah did not start building the Ark when it was raining.”
2

Most of us are aware of the Biblical story about Noah's Ark. God told him to build an Ark and to collect a variety of animals, and eventually, when the rains came, they would sail off to a new beginning. Luckily for the animals, Noah started building that Ark right away. He didn't procrastinate.

But let's imagine Noah for a second. The guy probably had a similar nature to you and me, so even if God told him to keep the upcoming flood a secret, he might not have. After all, he was human too. So I can imagine him wandering down to the local watering hole and after having a couple of forerunners to Budweiser beer, whispering to a friend: “Hey listen, God is saying that the rains are going to come and that I have to build an Ark and sail away once the land is flooded.” Some of his buddies (maybe even all of them) might have figured Noah had accidently eaten some kind of naturally grown narcotic. A crazy story they would think.

Yet, someone must have believed him. As far-fetched as Noah's flood story might have sounded to his buddies, it would have inspired at least one of his friends to build his own Ark—or at least a decent-sized boat.

Despite the best of intentions, though, that person obviously never got around to it. Maybe he planned to build it when he acquired more money to pay for the materials. Maybe he wanted to be sure, waiting to see if the clouds grew dark and it started sprinkling. English naturalist Charles Darwin might call this guy's procrastination “natural selection.” Needless to say, he wasn't selected.

For the best odds of amassing wealth in the stock and bond markets, it's best to start early.

Thankfully your friends—if they procrastinate—won't meet the same fate as Noah's friends, but your metaphorical ship will sail off into the distance while others scramble in the rain to assemble their own boats.

Starting early is more than just getting a head start. It's about using magic. You can sail away slowly, and your friends can come after you with racing boats. But thanks to the force described by Albert Einstein (some say) as more powerful than splitting the atom, they aren't likely to catch you.

In William Shakespeare's
Hamlet
, the protagonist says to his friend: “There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy.”

Hamlet was referring to ghosts. Einstein was referring to the magic of compound interest.

Compound Interest—The World's Most Powerful Financial Concept

Compound interest might sound like a complicated process, but it's simple.

If $100 attracts 10 percent interest in one year, then we know that it gained $10, turning $100 into $110.

You would start the second year with $110, and if it increases 10 percent, it would gain $11, turning $110 into $121.

You will go into the third year with $121 in your pocket, and if it increases 10 percent, it would gain $12.10, turning $121 into $133.10.

It isn't long before a snowball effect takes place. Have a look at what $100 invested at 10 percent annually can do.

$100 at 10 percent compounding interest a year turns into—

• $161.05 after 5 years
  
• $259.37 after 10 years
  
• $417.72 after 15 years
  
• $672.74 after 20 years
  
• $1,744.94 after 30 years
  
• $4,525.92 after 40 years
  
• $11,739.08 after 50 years
  
• $78,974.69 after 70 years
  
• $204,840.02 after 80 years
  
• $1,378,061.23 after 100 years
  

Some of the lengthier periods above might look dramatically unrealistic. But you don't have to be a creepy, ageless character in the
Twilight
series to benefit. Someone who starts investing at 19 (like I did) and who lives until they're 90 (which I hope to!) will have money compounding in the markets for 71 years. They will spend some of it along the way, but they'll always want to keep a portion of their money compounding in case they live to 100.

The inspirational realities of starting early

After paying off your high-interest loans (whether they are car loans or credit-card loans) you will be ready to put Buffett's Noah Principle to work. The earlier you start, the better—so if you're 18 years old, start now. If you're 50 years old, and you haven't begun, there's no better time than the present. You'll never be younger than you are right now.

The money that doesn't go toward expensive cars, the latest tech gadgets, and credit-card payments (assuming you have paid off your credit debts) can compound dramatically in the stock market if you're patient. And the longer your money is invested in the stock market, the lower the risk.

We know that stock markets can fluctuate dramatically. They can even move sideways for many years. But over the past 90 years, the U.S. stock market has generated returns exceeding nine percent annually.
3
This includes the crashes of 1929, 1973–1974, 1987, and 2008–2009. In
Stocks for the Long Run
, University of Pennsylvania's Wharton School finance professor Jeremy Siegel suggests a dominant historical market, such as the U.S., isn't the only source of impressive long-term returns. Despite the shrinking global importance of England, its stock market returns since 1926 have been very similar to that of the U.S. Meanwhile, not even two devastating world wars for Germany have hurt its long-term stock market performance, which also rivals that of the United States.
4

My suggestion isn't going to be to choose one country's stock market over another. Some stock markets will do better than others, but without mythical crystal balls we're not going to know ahead of time. Instead, to ensure the best chances of success, owning an interest in all of the world's stock markets is a good idea. And you can benefit exponentially by investing as early as you can. The younger you are when you start investing, the better.

Grow wealthier than your neighbor while investing less

The question below showcases how powerful the “Noah Principle” of starting early really is.

Sure it's a dumb question. Anyone who can fog a mirror would choose A. But because most people haven't had a strong financial education, the vast majority would be lucky to face scenario B—never mind scenario A.

If you know anyone who's really young, they can benefit from your knowledge. They can feasibly turn $32,400 into more than a million dollars. But don't weaken them by giving them money.
Make them earn it
. Here's how it can be done.

The Bohemian Millionaire—The Best of Historical-Based Fiction

A five-year-old girl named Star is raised by her mother, Autumn, and brought up on a Bohemian island where the locals make their own clothes, where neither men nor women use razors to shave, and where no one tries to mask the aphrodisiac quality of good old-fashioned sweat.

Unfortunately, despite how appealing this might sound (especially at tightly congested town hall meetings) it isn't paradise. Islanders and locals alike often throw empty aluminum beverage cans into ditches. Autumn convinces Star that collecting those cans and recycling them can help the environment and eventually make her a millionaire. Autumn takes Star to the local recycling depot where Star collects an average of $1.45 a day from refunded cans and bottles. Although a Bohemian at heart, Autumn's no provincial bumpkin. She recognizes that if she persuades Star to earn $1.45 a day from can returns, she can invest the daily $1.45 to make Star a millionaire.

Putting it into the U.S. stock market, Star earns an average of nine percent a year (which is slightly less than what the stock market has averaged over the past 90 years). Autumn also understands what most parents do not: If she teaches Star to save, her daughter will become a financial powerhouse. But if she “gifts” Star money, rather than coaching her to earn it, then her daughter may become financially inept.

Fast forward 20 years. Star is now 25 years old, and although she no longer collects cans from ditches, her mother insists Star sends her a $45 monthly check (roughly $1.45 per day). Autumn continues to invest Star's money while Star hawks her handmade Dream Catchers at the local farmer's market.

Living in New York City, Star's best friend Lucy works as an investment banker. (I know you're wondering how these two hooked up, but roll with it. It's my story.) Living the “good life,” Lucy drives a BMW, dines at gourmet restaurants and blows the rest of her significant income on clothing, theater shows, expensive shoes, and flashy jewelry.

At age 40, Lucy begins to save $800 a month, and she gets on Star's case, via e-mail, about Star's limited $45-a-month contribution to her financial future.

Star doesn't want to brag but she needs to set Lucy straight.

“Lucy,” she writes, “you're the one in financial trouble, not me. It's true that you're investing far more money than I am, but you'll need to invest more than $800 a month if you want as much as I'll have when I retire.”

The e-mail puzzles Lucy, who assumes that Star must have ingested some very Bohemian mushrooms to write such cryptic nonsense.

Twenty-five years later, both women are 65 years old, and they decide to rent a retirement home together in Lake Chapala, Mexico, where their money would go a lot further.

“Well, inquires Star, “Did you invest more than $800 a month like I suggested?”

“This is coming from someone investing $45 a month?” asks Lucy with surprise.

“But Lucy, you ignored the Noah principle, so despite investing far more money, you ended up with a lot less than I did because you started investing so much later.”

Both women achieved the same return in the stock market. Some years they gained money, other years they lost money, but overall, they each averaged nine percent.

Figure 2.1
shows that because Star started early, she was able to invest a total of $32,400 and turn it into more than $1 million. Lucy started later, invested nearly eight times more, but ended up with $237,052 less than Star.

Figure 2.1
Turning Less into More

I didn't start investing until I was 19, so Star would have had the jump on me. But I started far earlier than most, so I have had more time to let the Noah Principle work its magic. I put money in U.S. and international stock markets that, from 1990 to 2011, have averaged more than 10 percent annually. The money I put in the market in 1990 is now seven times its original value.

When I tell young parents about the power of compounding money, they're often inspired to set aside money for their children's future. “Setting aside” money for a child, however, is very different from encouraging a child to earn, save, and invest.

Giving money promotes weakness and dependence.

Teaching money lessons and cheerleading the struggle promotes strength, independence, and pride.

Gifting Money to Yourself

In 2005, I was having dinner with a couple of school teachers, and the topic of savings came up. They wanted to know how much they should save for their retirement. Unlike most public school teachers, who can look forward to pensions when they retire, these friends are in the same boat that I'm in: as private school teachers, they're responsible for their own retirement money.