How Would I Define Wealth?

It’s important to make the distinction between real wealth and a wealthy pretense so that you don’t get sucked into a lifestyle led by the wealthy pretenders of the world. Wealth itself is always relative. But for people to be considered wealthy, they should meet the following two criteria:

1. They should have enough money to never have to work again, if that’s their choice.
2. They should have investments, a pension, or a trust fund that can provide them with twice the level of their country’s median household income over a lifetime.

According to the US Census Bureau, the median US household income in 2014 was $53,657.⁶ Based on my definition of wealth, if an American’s investments can annually generate twice that amount ($107,314 or more), then that person is rich.

Earning 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.

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.

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 wealth and reduce financial stress when you’re paying far more for a car than an average millionaire? It’s like trying to keep up with a pack of Olympic sprinters but giving them a 50-meter head start.

Image is nothing if you lose your job, can’t make your car payments, or if you’re stuck having to work until you’re 80 years old.

If you want to keep pace with the millionaires, begin on the start line or give yourself the biggest lead you can. It doesn’t make sense to spend more than most rich people do on a set of wheels.

Paying More for a Car than a Decamillionaire

In 2006, Warren Buffett, one of the three richest men in the world, bought the most expensive car he has ever owned: a $55,000 Cadillac.¹² The average decamillionaire—a person with a net worth of more than $10 million—paid $41,997 for his or her latest car.¹³ If you find yourself at an upscale mall, check out the parking lot and you’ll see many vehicles worth a lot more than $41,997.

Many will be worth more than Warren Buffett’s car. But how many of the car owners do you think have $10 million or more? If your answer is “probably none,” then you’re catching on fast. Many have jeopardized their own pursuit of wealth or financial independence for the allusion of looking wealthy instead of being wealthy.

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.

A Future Millionaire’s Car-Buying Strategies

Putting Russ’s theory to the test, I searched for 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 useful resource was Phil Edmonston’s annually updated guide, Lemon-Aid Used Cars. Certain cars and models are bona fide lemons. Others can be great little workhorses. I would spend a few minutes each morning looking through the classifieds in the local paper. 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. I paid between $1,500 to $5,000 for each car. In most cases, I drove them for at least 12 months without putting any extra money into them. 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 money. 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.

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 good 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. A few years ago, 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. I wouldn’t entertain anything that didn’t fit 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. Over the past five years, I’ve become far less extreme. I no longer pinch pennies. But I still buy used cars. Typically, I now sell them for a little less than what I paid. But if I add up all the money that I’ve “lost” on cars over the past five years, it doesn’t amount to much. The typical new car buyer will lose more money in five months than I’ve lost in five years.

If you save more money on cars, you can invest more money in wealth-building assets.

Leasing Cars Instead Of Buying New Could Be A $1 Million Decision

My friend Nathan is a millionaire. But like most millionaires, he won’t ever lease a car. “Leasing a car, instead of buying used,” he says, “is a million-dollar decision.”¹⁴

According to The Millionaire Next Door author Thomas Stanley, 80 percent of millionaires have never leased a car. Finance author Dave Ramsey isn’t a fan of leasing either. He says, “Broke people think ‘how much down and how much a month.’ Rich people think ‘how much.’ If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.”

But How Could Leasing Cars Cost $1 Million?

Nathan has never paid more than $6,000 for a car. Like me, he looks for cars with low mileage. The average American drives 12,000 miles a year. That means the typical 10-year-old car will have about 120,000 miles on it. Such cars may nickel-and-dime their owners as the cost of maintenance creeps up.

Nathan’s most recent car typifies what he likes. It’s a 2006 Honda Accord. He paid $5,500. When he bought it, the car had just 60,000 miles on it. That means it has as much wear and tear as the average five-year-old car. “A well- maintained car with 60,000 miles on it still has plenty of life left,” says Nathan.

He typically drives his cars for three to five years. Then he sells them for a price that’s not much lower than what he paid. “I should be able to get at least $3,500 for this Honda,” he says, “if I sell it in three to five years.”

Many people prefer to lease new cars. It allows them to get behind the wheel of a brand new car without saving a penny. They drive those cars for a few years. They make monthly payments. But they don’t get money back when they return those cars. In many cases, they even pay extra. Many dealers have mileage restrictions of 12,000 miles a year. Those who drive further pay the financial piper when they bring the car back.

According to Edmunds.com, the average midsized leased car costs $294 a month, or $3,528 a year.¹⁵ But most households have two cars. That means leasing two cars costs the typical household about $7,056 per year.

Nathan, like most wealthy people, tracks what he spends. He and his wife’s two cars cost them about $2,200 a year after calculating purchase price, maintenance costs, and resale value. The difference between buying low-cost, low-mileage used models versus leasing is about $4,856 a year for a two-car household.

The US stock market averaged a compound annual return of 9.2 percent from January 1990 through July 2016. If a couple invested $4,856 a year, and if they earned such a return, they would make a lot of money.

As seen in Table 1.1, over 15 years this investment would earn them $158,162. Over 35 years, they would have more than $1 million. That’s why Nathan says that leasing cars is a $1-million decision.

Negative Nellies could find all kinds of reasons this wouldn’t work. Perhaps your investments wouldn’t gain 9.2 percent. Perhaps you couldn’t find well-maintained, low-mileage used cars. Perhaps your used vehicle maintenance costs would exceed an average of $3,000 every five years.

You might pay more than what Nathan pays for a good used car. But a lifetime of buying used cars over leasing cars will win––to the tune of (at least) a few hundred thousand dollars.

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 odds if you’re frugal, especially when you’re young.