By Paula Pant
Updated April 11, 2017
Do you think a high school English teacher can become a millionaire?
Andrew Hallam did. He's a teacher who became a self-made millionaire by age 38. And he says that you can be one, too -- even if you make a modest salary.
Hallam is the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School. It's a cleverly-titled book, since Hallam himself is a millionaire teacher and he also, through his writing, teaches people how to become millionaires.
What are his nine rules of wealth?
Rule 1: Spend Like You Want to Grow Rich
Plenty of people spend like they want to appear rich. They drive fancy cars which are often financed or leased. They carry expensive handbags, wear designer clothing and take 5-star vacations.
This might make them feel rich, but it won't help them become rich. In fact, it will have the opposite effect.
When Hallam was in his early 20s, he caught his own clams to eat free protein. He lived with roommates and often house-sat for vacationers to get free rent. He never turned on the heat. "I would walk around the house wearing layers of shirts and sweaters while the snow piled up outside," he said.
Sound like a millionaire-in-the-making? Of course!
Rule 2: Use the greatest investment ally you have.
Legendary investor Warren Buffet bought his first stock at age 11 and jokes that he started too late.
That joke underscores the importance of time.
Time is essential when it comes to building a million-dollar portfolio, because each year that passes allows your interest to compound, or grow, upon itself. And compound interest is your greatest investment ally.
Imagine that you invest $50 at at 10 percent interest rate. After one year you earn $5 in interest, for a total of $55.
At the beginning of your second year, you have $55 invested -- the original $50 plus the additional $5 that you earned in interest. You'll earn 10 percent on that investment of $55, which equals $5.50
Notice that in Year 1, you only earned $5 in interest. But in Year 2, you earned $5.50 in interest. The "compounding interest" is that extra 50 cents, which is interest that you earned on your interest.
The longer you let interest compound upon itself, the more dramatic your gains will be. That's why compounding interest is your biggest investment ally.
Rule 3: Small percentages pack big punches.
If you invest in an actively-managed mutual fund, you're most likely paying high fees. Active funds charge higher "expense ratios" (a fancy word for "fees") than passively-managed index funds. Some also charge 12B1 fees, trading costs, sales loads and a bevy of other fees.
These fees may sound small, but they pack a big punch. Stick with low-fee funds like index funds or commission-free broad-market exchange traded funds.
Rule 4: Conquer the enemy in the mirror.
Quick quiz: would you rather pay full-price for a pair of jeans, or get a 20 percent discount for the exact same pair of jeans?
That's an easy question.
Assuming that all else is equal (e.g. the jeans are sold at the same store location, they offer the same return policy, etc.), you'd rather buy at a discount.
So why don't you do the same thing when it comes to buying stocks?
Here's the harsh truth: when the stock market drops, people tend to buy less. In fact, they tend to sell. When the market rises, people tend to buy more. They're "buying high and selling low" -- the opposite of what they should do.
That's a natural human tendency. It's also one we should fight.
Rule 5: Build mountains of money with a responsible portfolio.
Brussels sprouts are good for you. But if they're the only food you eat, you're missing out on protein, calcium and lots of other vitamins and minerals found in other foods.
We need a balanced diet, and we also need a balanced portfolio.
He recommends diversifying your money into a domestic stock index fund, an international stock index fund, and a domestic short-term bond fund. That's pretty simple -- you only need three funds to start with.
Keep your age in bonds, with the rest in stocks, he says. A 30-year-old American, for instance, would keep 30 percent in short-term U.S. government bonds and 70 percent in stocks, divided evenly between U.S. stocks and international stocks. He rebalanced yearly.
Rule 6: Sample a "round-the-world" ticket to indexing.
Retirement vehicles like 401(k) plans and Roth IRA plans, tax planning and Social Security benefits are, after all, important parts of your financial plan. And these elements are specific to the U.S. Other nations have different laws, plans and investment vehicles.
But if you're living in Canada, Singapore or Australia, you'll love this chapter in Hallam's book. He shows how people living across the world can build index funds.
Rule 7: Peek inside a pilferer's playbook.
In this chapter, Hallam discusses the most-commonly-used sales pitch tactics that advisors use when they're trying to convince you to keep your money in active funds instead of passive funds. He lists the arguments that brokers make -- and knocks each one down. He also shows you how brokers have a strong financial incentive to get you to buy into higher-fee funds.
Rule 8: Avoid seduction.
In 1998, a friend came to Hallam with a too-good-to-be-true investment, a company that was paying a whopping 54 percent per year. Hallam was dubious, but he watched his friend collect this interest over the span of the next five years. By 2003, Hallam was convinced, so he invested $7,000 into the company and some of his friends joined in. The company later turned out the be a Ponzi scheme, and the investors lost everything.
Don't be tempted by easy money, Hallam warns. Stick to index funds.
Rule 9: The 10 percent stock-picking solution -- if you really can't help yourself.
What should you do if you really, really want to invest in individual stocks? Limit your exposure to no more than 10 percent of your total portfolio and study the stocks well.