Introduction
Money is often portrayed as the root of all evil, but in reality, it's one of the most powerful tools we have to improve our quality of life. While it's true that you can't buy happiness directly, having financial security and freedom can certainly pave the way for a more fulfilling life. This is the core philosophy behind Kristy Shen's book "Quit Like a Millionaire."
Kristy Shen is not your typical financial advisor. She's a self-made millionaire who managed to retire at the astonishingly young age of 31. In her book, she shares her unconventional wisdom and strategies that allowed her to achieve financial independence at such an early age. Her approach is refreshingly honest, often challenging popular beliefs about money and success.
"Quit Like a Millionaire" isn't just another get-rich-quick scheme or a book filled with vague platitudes about saving money. Instead, it offers a practical, math-based approach to building wealth and achieving financial freedom. Shen's methods may seem counterintuitive at times, but they're backed by solid numbers and real-world experience.
Throughout this summary, we'll explore Shen's key ideas and strategies for achieving financial independence. We'll look at why following your passion might not always be the best career advice, how to tackle debt effectively, and why buying a house isn't always the great investment it's made out to be. We'll also delve into smarter ways to invest your money, how to calculate your path to early retirement, and why geographic arbitrage could be your ticket to a luxurious retirement on a modest budget.
Whether you're just starting your career or you're well into your working years, "Quit Like a Millionaire" offers valuable insights that can help you rethink your approach to money and work towards financial independence. Let's dive in and explore how you too can quit like a millionaire.
Follow the Math, Not Your Heart
One of the most controversial ideas Shen presents is the notion that following your passion isn't always the best career advice. This flies in the face of popular wisdom, exemplified by Steve Jobs' famous Stanford commencement speech where he advised students to "follow your heart." While this advice sounds good and feels right, Shen argues that it's often not the most practical approach, especially when it comes to choosing a career or field of study.
Shen uses her own life as an example. When she was deciding on her college major, she had three options: creative writing, accounting, and computer engineering. Her heart was pulling her towards creative writing - it was her passion, after all. However, when she looked at the numbers, a different picture emerged.
She calculated the potential return on investment for each degree. A four-year program in Canada costs about $40,000. The average income for a professional writer was around $17,000, only slightly above the minimum wage of $14,248 at the time. This meant that a writing degree would only net an additional $2,752 per year over having no degree at all.
In contrast, an accounting degree was worth about $24,000 more than minimum wage annually, and a computer engineering degree could net $40,000 more each year. The math was clear: from a financial perspective, engineering was the best choice.
Shen decided to follow the math and chose computer engineering. This decision, while not aligned with her passion at the time, set her up for financial success later in life. The well-paying job she got as a result of her engineering degree allowed her to save money, invest wisely, and eventually retire early. Ironically, it was this financial freedom that ultimately allowed her to pursue her passion for writing without the pressure of needing to make a living from it.
This doesn't mean that passions are worthless or that we should all choose careers solely based on potential earnings. Rather, Shen's point is that making major life decisions based purely on current passions can be short-sighted. Passions can change over time - a study published in Science found that the dreams of nearly all 19,000 participants had changed significantly over a decade.
Moreover, financial stability can actually enable you to pursue your passions more freely. When you're not constantly worried about making ends meet, you have more mental and emotional bandwidth to explore your interests and develop new skills.
Shen's advice is to strike a balance. Consider both your interests and the financial implications of your choices. Sometimes, choosing a more lucrative career path can provide the foundation you need to eventually pursue your passions on your own terms. It's about playing the long game and setting yourself up for future success and flexibility.
The Danger of Debt
Shen's approach to debt is heavily influenced by her Chinese heritage. In Chinese culture, debt is seen not just as an "IOU," but as an "I own you." This perspective stems from a long history where corruption and lack of official credit channels made personal debts particularly onerous. As a result, Chinese people tend to be more debt-averse, preferring to save up for large purchases rather than borrowing.
While this might seem like an old-fashioned attitude, Shen argues that it's actually a smart financial strategy, regardless of your cultural background. To illustrate why, she introduces the Rule of 72, a mathematical concept first formulated by Italian mathematician Luca Pacioli in the 15th century.
The Rule of 72 is a simple way to estimate how long it will take for an investment to double. You divide 72 by the annual rate of return to get the number of years it will take for the investment to double. For example, if you have an investment earning 6% annually, it will take about 12 years to double (72 ÷ 6 = 12).
This rule works great for investments, but it becomes a nightmare when applied to debt. For instance, if you buy a $1,000 TV on a credit card with a 20% interest rate, it will take just 3.6 years for that debt to double (72 ÷ 20 = 3.6). In seven years, it will have nearly quadrupled. This is why Shen views debt, especially high-interest consumer debt, as a financial crisis that needs to be addressed immediately.
Shen provides a step-by-step approach to tackling debt:
Cut expenses to the bone: This might be painful, but it's necessary. With high-interest debt, there's no point in trying to save or invest elsewhere - you need to focus all your resources on killing the debt.
Prioritize debts based on interest rate: List all your debts from highest to lowest interest rate. Focus on paying off the highest-interest debt first while making minimum payments on the others. This strategy, known as the debt avalanche method, will save you the most money in the long run.
Consider refinancing: Look for opportunities to transfer balances to lower-interest cards or loans. Some credit cards offer 0% interest for a limited time on balance transfers. If you're confident you can pay off the debt during this period, it can be a good strategy. However, be cautious - if you don't pay it off in time, you could end up with an even higher interest rate.
Shen emphasizes that trying to build wealth while carrying high-interest debt is like trying to run a marathon with a backpack full of bricks. It's nearly impossible to make progress. By tackling debt aggressively, you're setting yourself up for future financial success.
However, Shen doesn't advocate for avoiding all debt at all costs. Some forms of debt, like student loans or mortgages, can be considered "good debt" if they're used wisely to invest in your future. The key is to be strategic about when and how you take on debt, always considering the long-term implications.
Spending Money Wisely
While Shen advocates for frugality and saving, she doesn't believe in complete deprivation. Instead, she encourages readers to be mindful about their spending and to focus on purchases that truly bring lasting happiness.
To understand why some purchases bring joy while others don't, Shen delves into the neuroscience of pleasure. When we experience something good, our brains release dopamine, often called the "pleasure chemical." This dopamine surge travels through the mesolimbic pathway to the nucleus accumbens, which processes these pleasure signals.
Interestingly, research has shown that the nucleus accumbens doesn't just react to positive stimuli, but also to the expectation of those stimuli. This means that pleasure isn't just about the absolute levels of dopamine, but how much dopamine our brains expect to receive.
This expectation mechanism explains why both drug addicts and shopaholics need increasingly larger "hits" to achieve the same level of pleasure. The brain keeps raising its expectations, leading to a never-ending chase for that initial high.
So, does this mean that money can't buy happiness? Not exactly. Shen argues that it's not about whether you spend money, but how you spend it. Based on feedback from her blog readers, she noticed a trend: people who owned more stuff tended to be less happy, while those who spent their money on experiences were generally more satisfied with their lives.
The reason for this is that material possessions provide an initial burst of dopamine that quickly fades as we get used to them. Experiences, on the other hand, tend to provide more lasting happiness. Learning a new skill, traveling to a new place, or sharing a memorable event with loved ones creates memories and personal growth that continue to bring joy long after the experience itself.
Shen encourages readers to prioritize spending on experiences over material possessions. This doesn't mean never buying things, but rather being more intentional about purchases. Before buying something, ask yourself: Will this bring lasting joy, or just a momentary dopamine hit? Will it enrich my life in meaningful ways?
Some examples of experience-based spending that Shen recommends include:
Travel: Exploring new places broadens your horizons and creates lasting memories.
Learning: Taking classes or workshops to develop new skills can be both enjoyable and beneficial for personal growth.
Shared experiences: Spending money on activities with friends and family often brings more happiness than solo pursuits.
Health and wellness: Investing in your physical and mental health through exercise, healthy food, or therapy can significantly improve your quality of life.
Hobbies: Pursuing interests and passions, whether it's photography, cooking, or playing an instrument, can provide ongoing enjoyment.
By focusing on these types of expenditures, you're more likely to get lasting value and happiness from your money. This approach aligns with Shen's overall philosophy of using money as a tool to improve your quality of life, rather than as an end in itself.
Remember, the goal isn't to never spend money or to live a life of extreme frugality. Instead, it's about being mindful of your spending and ensuring that your money is going towards things that truly enhance your life and bring lasting happiness.
The Myth of Home Ownership
One of the most controversial aspects of Shen's financial advice is her skepticism towards home ownership. In many cultures, buying a house is seen as a rite of passage into adulthood and a wise investment for the future. However, Shen argues that this conventional wisdom doesn't always hold up when you crunch the numbers.
Shen uses a hypothetical example to illustrate her point. Let's say a family - we'll call them the Smiths - buys a house for $500,000. They plan to stay in the house for 9 years, which is the average duration of homeownership according to the US Census Bureau. Assuming property values increase by 6% each year (which is actually quite optimistic), the house would be worth $844,739 after 9 years. At first glance, this looks like a healthy profit of $344,739.
However, Shen then breaks down all the hidden costs associated with buying, owning, and selling a house:
Buying costs: These include title search ($1,000), title recording fee ($150), and lawyer fees ($1,000).
Insurance: At 0.5% of the house's value per year, this amounts to $22,500 over 9 years.
Property tax: At 1% per year, this comes to $45,000 over 9 years.
Maintenance: Following the common advice to set aside 1% of the home's value each year for maintenance, this is another $45,000.
Selling costs: These include realtor commission (6% of sale price, or $50,684), land transfer tax (1.2% or $10,137), and another $1,000 in lawyer fees.
Mortgage interest: Assuming a 10% down payment and borrowing the rest, the Smiths would pay $162,033 in interest over 9 years.
When you add all these costs up, they amount to $338,504 - a whopping 98% of the supposed "profit" from selling the house. And remember, this scenario assumes a very optimistic 6% annual increase in property value. In reality, with more modest property value increases, the Smiths could easily end up losing money on this transaction.
This doesn't mean that buying a house is always a bad idea. Shen introduces the "Rule of 150" to help readers decide whether buying or renting makes more sense in their situation. Here's how it works:
- Take your potential monthly mortgage payment.
- Multiply it by 150%.
- Compare this number to your current rent.
If the result of step 2 is higher than your current rent, you're probably better off renting. If it's lower, buying might make sense.
The reasoning behind this rule is that in the first 9 years of a standard 30-year mortgage, only about 50% of your payments go towards the actual loan. The other 50% goes to interest. Additionally, other ownership costs like maintenance and insurance typically equal about 50% of your mortgage payment. So, to get a true picture of your monthly costs, you need to add another 50% to your mortgage payment.
Shen's point isn't that you should never buy a house. Rather, she wants readers to challenge the assumption that buying is always better than renting. In some cases, particularly in expensive real estate markets, renting and investing the money you save can lead to greater wealth in the long run.
Moreover, Shen argues that tying up a large portion of your net worth in a single, illiquid asset (your house) can limit your financial flexibility. Renting allows you to be more mobile, potentially taking advantage of job opportunities in different locations. It also frees up capital that can be invested in more diverse and potentially more profitable ways.
Ultimately, the decision to buy or rent should be based on a careful analysis of your specific financial situation, the local real estate market, and your long-term goals. Don't let societal pressure or misconceptions about the "American Dream" push you into a major financial decision that might not be right for you.
Smart Investing: The Power of Index Funds
If you're not going to put your money into a house, what should you do with it? Shen's answer is clear: invest in the stock market. However, she doesn't advocate for trying to pick individual winning stocks. Instead, she recommends a strategy called index investing.
Index investing is based on the idea of investing in a broad cross-section of the market rather than trying to pick individual winners. An index is essentially a list of companies, usually ranked by their market capitalization (the total value of their publicly traded shares). When you invest in an index fund, you're essentially buying a small piece of every company in that index.
Shen likens this to betting on the casino rather than individual horses in a race. It doesn't matter which specific horse wins - as long as people keep betting, the casino (in this case, the overall market) makes money.
There are several advantages to this approach:
Reduced Risk: Because you're invested in a wide range of companies, the failure of any single company won't wipe out your investment. The only way you could lose everything is if every company in the index went bankrupt simultaneously, which is extremely unlikely.
Automatic Adjustment: Indexes are self-correcting. If a company's value increases, it automatically becomes a larger part of the index. If a company's value decreases, its share in the index shrinks. Companies that fall too far drop out of the index entirely and are replaced by rising companies.
Low Fees: Because index funds don't require active management (deciding which stocks to buy and sell), they typically have much lower fees than actively managed funds. In the US, a typical index fund might charge fees of just 0.04%, compared to 1% or more for actively managed funds.
Proven Performance: Over the long term, index funds have consistently outperformed the majority of actively managed funds. Even professional fund managers struggle to beat the market consistently.
Shen recommends investing in broad-based index funds that track major indexes like the S&P 500 (which includes the 500 largest publicly traded companies in the US) or total market indexes that include even more companies.
Here's a step-by-step guide to getting started with index investing:
Choose a brokerage: Look for one with low fees and a user-friendly interface. Some popular options include Vanguard, Fidelity, and Charles Schwab.
Open an account: This process is usually straightforward and can often be done online.
Choose your index funds: Start with broad-based funds that track the entire market. As you become more comfortable, you might consider adding some international index funds for further diversification.
Set up regular investments: Many brokerages allow you to set up automatic monthly investments. This strategy, known as dollar-cost averaging, can help smooth out the ups and downs of the market over time.
Reinvest dividends: Many companies pay dividends to shareholders. Set your account to automatically reinvest these dividends to buy more shares, helping your investment grow faster.
Stay the course: The stock market will go up and down, sometimes dramatically. The key to successful index investing is to stay invested for the long term, riding out the short-term fluctuations.
Shen emphasizes that successful investing is about playing the long game. The stock market has historically trended upward over long periods, despite short-term volatility. By consistently investing in low-cost index funds and staying the course through market ups and downs, you can harness the power of compound interest to grow your wealth over time.
Remember, while past performance doesn't guarantee future results, index investing has proven to be a reliable strategy for building wealth over the long term. It's a simple, low-cost way for average investors to participate in the growth of the overall economy.
The Path to Early Retirement
One of the most compelling aspects of Shen's book is her roadmap to early retirement. Many people assume that early retirement is only possible for high earners or those who inherit wealth. However, Shen argues that it's not about how much you make, but how much you save.
The key to early retirement, according to Shen, is your savings rate - the percentage of your income that you're able to save and invest. Here's why it's so powerful:
It reduces your expenses: The more you save, the less you're spending. This means you need less money overall to maintain your lifestyle in retirement.
It increases your investments: The more you save, the more you can invest, allowing your money to grow faster through compound interest.
It accelerates your timeline: A higher savings rate means you're moving towards your retirement goal faster on both fronts - you need less to retire, and you're saving more to get there.
Shen provides a striking example: If you save 5-10% of your income (which is typical for many people), it will take you 40-45 years to retire. But if you can increase your savings rate to 50% or more, you could potentially retire in just 15-20 years.
To illustrate this, Shen introduces a fictional couple, Paul and Jillian, who earn the median US family income of $62,175. After taxes, they have about $52,724 to work with. By living frugally - renting a small apartment in an affordable city, cooking at home, and using car-sharing services instead of owning a car - they manage to live on $40,000 a year and save $12,724 annually.
Assuming a conservative 6% return on their investments, Paul and Jillian could accumulate $1 million in 30 years. If they started at age 24, they could potentially retire at 54 - 11 years ahead of the typical retirement age.
But how do you know when you have enough to retire? Shen introduces the concept of the "safe withdrawal rate." Based on historical market data, researchers have found that you can safely withdraw 4% of your portfolio each year in retirement without running out of money. This is known as the "4% rule."
Using this rule, you can calculate your target retirement portfolio by multiplying your annual expenses by 25. So if you need $40,000 a year to live, you'd need a $1 million portfolio ($40,000 x 25 = $1,000,000).
However, Shen also introduces some strategies to make early retirement more achievable:
Partial Financial Independence: Instead of fully retiring, you could work part-time or in a less stressful job once you've saved enough to cover part of your expenses. This allows you to enjoy many of the benefits of financial independence with a smaller portfolio.
Geographic Arbitrage: This involves earning money in a country with a strong currency and retiring to a country with a lower cost of living. Shen gives the example of Vietnam, where $1,130 a month can provide a luxurious lifestyle. Using the 4% rule, you'd only need a portfolio of $339,000 to sustain this.
Reduce Your Expenses: The less you need to live on, the less you need to save. By adopting a more frugal lifestyle, you can dramatically reduce the size of the portfolio you need to retire.
Shen emphasizes that the path to early retirement isn't about deprivation. It's about being intentional with your spending, focusing on what truly brings you joy, and eliminating unnecessary expenses. It's also about redefining what retirement means to you. It doesn't have to mean never working again - it could mean having the freedom to work on projects you're passionate about, without worrying about the paycheck.
The key takeaway is that early retirement is achievable for many people, regardless of their income level. It requires discipline, smart financial decisions, and a willingness to go against the grain of consumer culture. But for those who are willing to make these changes, the reward is the freedom to live life on your own terms, potentially decades earlier than most people.
Practical Tips for Implementing Shen's Strategies
While Shen's book is full of big ideas about wealth and retirement, she also provides plenty of practical advice for implementing her strategies in your daily life. Here are some key tips:
Track Your Spending: Before you can increase your savings rate, you need to know where your money is going. Shen recommends using apps or spreadsheets to track every dollar you spend for at least a month. This will give you a clear picture of your spending habits and help you identify areas where you can cut back.
Create a Budget: Once you know your spending patterns, create a budget that prioritizes saving. Shen recommends the "pay yourself first" method - set aside your savings as soon as you get paid, before you spend on anything else.
Optimize Your Big Three Expenses: Housing, transportation, and food typically make up the bulk of most people's expenses. Look for ways to reduce these costs, such as getting a roommate, using public transportation, or cooking more meals at home.
Avoid Lifestyle Inflation: As your income increases over time, resist the urge to increase your spending proportionally. Instead, funnel those raises and bonuses into your savings and investments.
Use Tax-Advantaged Accounts: Make full use of retirement accounts like 401(k)s and IRAs. These can provide significant tax benefits, effectively giving you "free money" towards your retirement goals.
Automate Your Finances: Set up automatic transfers to your savings and investment accounts. This removes the temptation to spend that money and ensures you're consistently working towards your goals.
Continuously Educate Yourself: The world of finance is always changing. Stay informed about personal finance topics, investment strategies, and economic trends. This knowledge will help you make better financial decisions over time.
Find Free or Low-Cost Entertainment: Look for ways to enjoy life without spending a lot of money. This might include free community events, hiking, reading books from the library, or having potluck dinners with friends instead of eating out.
Consider Side Hustles: If you're struggling to increase your savings rate through cutting expenses alone, look for ways to increase your income. This could be freelancing, starting a small business, or taking on part-time work.
Regularly Review and Rebalance Your Investments: While index investing is largely passive, you should still review your portfolio periodically (perhaps once a year) and rebalance if necessary to maintain your desired asset allocation.
Plan for Healthcare Costs: Healthcare can be a major expense, especially in retirement. Consider options like high-deductible health plans paired with health savings accounts (HSAs) to save for future medical expenses tax-free.
Build an Emergency Fund: Before investing heavily, make sure you have an emergency fund to cover 3-6 months of expenses. This will prevent you from having to sell investments or go into debt if unexpected expenses arise.
Be Patient and Persistent: Building wealth takes time. There will be setbacks and challenges along the way. Stay focused on your long-term goals and don't get discouraged by short-term fluctuations in the market or temporary financial setbacks.
Conclusion: Redefining Success and Freedom
"Quit Like a Millionaire" is more than just a guide to saving money and retiring early. At its core, it's about redefining what success and freedom mean in our lives.
Kristy Shen challenges many of society's deeply ingrained beliefs about money, work, and happiness. She argues that true wealth isn't about having the biggest house or the fanciest car. It's about having the freedom to live life on your own terms, to pursue your passions without being constrained by financial worries.
The strategies Shen presents - from following the math in career decisions to embracing index investing and geographic arbitrage - are all tools to achieve this ultimate goal of freedom. By focusing on increasing your savings rate, making smart investment choices, and being mindful about your spending, you can potentially achieve financial independence much earlier than traditional retirement age.
However, Shen's approach isn't about sacrificing the present for the future. Instead, it's about being intentional with your money and your life choices. It's about understanding what truly brings you joy and fulfillment, and structuring your finances to support those priorities.
For some, this might mean retiring early to travel the world. For others, it might mean having the flexibility to switch to a lower-paying but more fulfilling career, or to start a business without worrying about making ends meet. The beauty of financial independence is that it gives you options.
Shen's journey from a childhood in poverty to early retirement and financial freedom is inspiring, but she's clear that her path isn't the only way. The principles she outlines can be adapted to fit different life circumstances and goals. The key is to start thinking critically about your relationship with money and to take control of your financial future.
In a world where consumer culture often equates spending with happiness and success is often measured by job titles or material possessions, Shen's message is revolutionary. She encourages readers to step off the treadmill of working to spend, and instead to work towards true financial freedom.
Ultimately, "Quit Like a Millionaire" is a call to action. It's an invitation to reimagine what's possible in your financial life and to take concrete steps towards achieving those possibilities. Whether you dream of early retirement, changing careers, or simply having more financial security, Shen's strategies provide a roadmap to get there.
The journey to financial independence isn't always easy. It requires discipline, patience, and often, a willingness to go against societal norms. But for those who are willing to embrace this path, the potential rewards are immense: the freedom to live life on your own terms, the security of knowing you're prepared for the future, and the satisfaction of taking control of your financial destiny.
As you close this book, the question isn't whether you can afford to follow Shen's advice - it's whether you can afford not to. In a world of increasing economic uncertainty, the ability to "quit like a millionaire" - to achieve financial independence and the freedom it brings - might just be the ultimate form of security and success.