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.”
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.
In 2006, Warren Buffett, one of the three richest men in the world, bought the most expensive car he has ever owned: a $55,00 °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.
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. They told me, “Hey, if Russ ever wants to talk to you