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.16
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. Thomas Stanley studied a broad cross section of educated professionals in their 40s and 50s. 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 teachers and college professors.17
How Did I Become a Millionaire?
My dad was a mechanic. 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 something I wanted that cost “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.
Confessions of a Former Cheapskate
Today, my wife and I can afford to live well. In 2014, we retired from our teaching jobs. I was 44 years old. I still enjoy writing about investing, and one day I may choose to teach again. But we no longer have to work.
We travel prolifically, having visited more than 55 different countries. While working, we lived in a luxurious condominium with a swimming pool, squash courts, tennis courts, and a weight room. We also enjoyed massages every week, 52 weeks a year.
During the first year of our “retirement” we lived in Mexico, Thailand, Bali, Malaysia, and Vietnam. If our health holds out, we’ll enjoy these fruits and travels 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, 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 who seeks 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 who needed someone to look after their homes because they were escaping to the Sunbelt for winter.
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 with cash. I could have also rented an oceanside 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 got only 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. Instead, 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. That’s when I redirected much of my income straight 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, whom 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 o
dds if you’re frugal, especially when you’re young.
Looking to the Future
Those who want to be rich often overlook responsible spending habits. 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 2025.”
Most people prefer their hobbies to their workplace, their children to their iPhones, and their quiet reflective moments to their office meetings. I’m certainly among them. That’s why I learned to control my spending and invest my money.
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 neighbors do, take lower risks, and still end up with twice as much money as they do. Read on to find out how.
Notes
1Odysseas Papadimitriou, “2015 Credit Card Debt Study: Trends & Insights,” Cardhub.com, March 7, 2016, www.cardhub.com/edu/credit-card-debt-study/.
2Quentin Fottrell, “Underwater American Homeowners Still Drowning in Mortgage Debt,” MarketWatch, June 12, 2015, www.marketwatch.com/story/american-homeowners-still-drowning-in-mortgage-debt-2015–06–12.
3“Property Prices Index Per Country 2016,” Numbeo.com, www.numbeo.com/property-investment/rankings_by_country.jsp.
4Thomas Stanley, Stop Acting Rich (Hoboken, NJ: John Wiley & Sons, 2009), 9.
5Ibid., 45.
6“State Median Income,” U.S. Census Bureau, 2016, www.census.gov/hhes/www/income/data/statemedian/.
7Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, “Portfolio Success Rates: Where to Draw the Line,” Journal of Financial Planning, www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx.
8Andrew Hallam, “Retirement Fortunes That You Can’t Control,” AssetBuilder.com, June 6, 2016, https://assetbuilder.com/knowledge-center/articles/retirement-fortunes-that- you-cant-control.
9Dave Feschuk, “NBA Players’ Financial Security No Slam Dunk,” Toronto Star, January 31, 2008, www.thestar.com/sports/article/299119.
10Stanley, Stop Acting Rich, 204.
11Ibid.
12“Warren Buffett Vouches for GM with Caddy Purchase,” Left-Lane, June 6, 2006, www.leftlanenews.com/warren-buffett-vouches-for-gm-with-caddy-purchase.html.
13Stanley, Stop Acting Rich, 204.
14Dave Ramsey, “Explain How a Car Lease Works,” www.daveramsey.com/askdave/posts/10367.
15Philip Reed, “Comparing Car Costs: Buy New, Buy Used Or Lease?” September 30, 2015, www.edmunds.com/car-buying/compare-the-costs-buying-vs-leasing-vs-buying-a-used-car.html.
16Thomas Stanley and William Danko, The Millionaire Next Door (New York: Simon & Schuster, 1996), 9.
17Ibid., 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 important, you can apply it, too. 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. After having a couple of forerunners to Budweiser beer, I can see him 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 that Noah had 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 an 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 annuall
y 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 an immortal creep to benefit. Someone who starts to invest at 19 (like I did) and who lives until age 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 US 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 United States, 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 United States. 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
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