The Book in Three Sentences
In this book summary of Quit Like a Millionaire, you’ll learn an easy-to-reproduce formula for financial independence from two leaders of the FIRE movement. Following the concepts from the book, Kristy Shen was able to retire at the age of thirty-one. Among other things, this book teaches you to build a strong portfolio, save money, and quit your job for good.
Quit Like a Millionaire Summary
Part I: Poverty
Chapter 1: Blood Money
Kristy grew up in Taiping, a city in rural China. As a child, she used to go through medical waste piles to find something to play with. Later on in life, this became an asset, something we now call the scarcity mindset. When you’re deprived of something, you become obsessed with it and everything else is secondary. In the case of Kristy, that obsession was money. Kristy and her family eventually had a chance to move to Canada and even when her life changed drastically, she still saw money as a means to survive. Her number one priority was financial security and thanks to her scarcity mindset, Kristy eventually became a millionaire.
Chapter 2: Peach Syrup, Cardboard Boxes, and a Can of Coke
When Kristy got a can of Coke, she felt rich and it took her weeks to drink it completely. The empty can became her treasure. For some people, the scarcity mindset becomes something that holds them back. The way Kristy sees it though, it enables you to protect luxuries, maximize the enjoyment you get from them, and never waste anything. When your resources are plentiful, you waste them, but when your resources are limited, you treasure them. Having endless possibilities is paralyzing, but constraints give you a clear path toward progress.
Poverty taught the author vital skills. She calls them CRAP: Creativity, Resilience, Adaptability, and Perseverance.
- Creativity: when you can’t afford something you want, you look for an alternative
- Resilience: not caring about what other people think of you
- Adaptability: this is being comfortable in uncomfortable situations
- Perseverance: even when things are tough, you find a way to get going
Most of the things we waste are invisible to us, but we have to make them visible in order to save money. This involves looking at the items in your closet you never wear, for instance.
Chapter 3: Be Educated or Die
Education is one of the most important things in life. For a lot of people, studying and working hard at school is how they’re able to support their families and escape poverty. In a way, education is one thing that has the power to change their lives for the better. Additionally, education can improve your health, it can change how to understand information, and it helps you be more independent.
Chapter 4: Don’t Follow Your Passion (Yet)
The idea of following your passion is relatively new, but it’s incredibly popular. While attractive, this is also dangerous. When you’re in a tough spot financially, you should pursue a career that offers the highest-paying jobs. If you’re not careful, following your passion can lead to unemployment, but the worst part is that passions change and the thing you’re into right now can change dramatically in a few years. Your interests don’t have to become your career. You can work and then have a fulfilling hobby you indulge in your free time.
Chapter 5: IOU = I Own You
In Chinese culture, being in debt means that the other person has power over you. As a consequence, Chinese people have a savings rate of 38 percent on average. There are risks to being in debt regardless of where you live though. Since debt destroys the connection between time and money, this is one of the easiest ways to ruin your finances.
If the compound effect is one of the most beneficial concepts when it comes to money, debt is the worst one. Not getting rid of debt means that it’ll grow bigger and bigger until it destroys you. Getting a credit card is so simple that you forget the importance of money. Money equals time in the sense that to buy something, you have to work a specific number of hours to get it. Debt, on the other hand, lets you get the thing you want now, but you have to pay it later and over a period of time. If you’re not careful though, you might underestimate how this might be a serious problem for your future self.
Consumer depth is the worst kind of debt and you should only use it in case of emergencies. Since it has the highest interest rate, do whatever you can to pay it off. This might mean cutting expenses, getting rid of loans with the highest interest rates first, or redefining your loan.
In terms of interest rates, the next debt on the list is student debt. Finally, one of the most common types of debt is mortgage debt. Mortgages tend to have low-interest rates, but they can still hold a lot of people back financially, so the best option is to avoid them altogether.
Chapter 6: No One’s Coming to Save You
Regardless of what kind of problems you’re experiencing, no one’s coming to save you, so you have to take care of your financial problems. As painful as it is sometimes, the Scarcity Mindset can be a blessing because it teaches you the value of money and how, if you want certain things, you have to earn them.
The opposite is the Entitlement Mindset where people assume that certain privileges are rights. This makes people dependent. The world owes you nothing and there’s nothing special about you. To be “special”, you have to develop highly desirable skills, but you have to learn them yourself. Financially, you should never rely on others to protect you, so we must build our own safety net. This is an extra sum of money we need in case we need food, clothes, or vacations.
Part 2: The Middle Class
Chapter 7: Confessions of a Former Purse Junkie
Even when you have a Scarcity Mindset, the shock of abundance can lead to bad money habits. Some possessions are considered symbols of power and success. For the author, they came in the form of purses. Shopping gives us dopamine hits, an instant of pleasure that usually lasts a few days. When you make mistakes, what happens isn’t important. What’s important is that you come up with a solution so that you don’t make the same mistake again.
Chapter 8: The Dope on Dopamine
Wasting money on things is a mistake, but we shouldn’t regret it because it teaches us valuable lessons about money and happiness. The hedonic treadmill refers to the phenomenon in which we adjust to what happens in our life. So if you win the lottery, you feel a sense of intense joy that lasts a while. Over time, this becomes your new normal and you’re no longer elated.
Similarly, you get diminishing returns from all the luxuries you buy. Going from no phone to a flip phone felt like a massive change in your life. But as you kept upgrading phones faster and faster, the level of happiness you got started to plateau. In a way, the hedonic treadmill is a way for us to remain stationary regardless of how successful we are. It happens because the constant search for more is what incentivizes humans to look for food and procreate. Without that desire, our ancestors would have perished and we wouldn’t be here.
Whenever we do something right (such as find tasty food or a source of clean water), our brain rewards us with dopamine, a neurotransmitter that’s often called “the pressure chemical”, but it goes beyond that. When you get a large amount of money, that becomes your new baseline and for you to get dopamine again, you’d need a larger sum.
Although spending a lot of money on possessions won’t make you happy, there’s an exception: experiences. So once you cover the basics when it comes to things you want, spending on experiences, such as concerts, learning new skills, or traveling, the happier you’ll be. The problem with possessions is that we get a boost of happiness when we get them. But the more things we get, the more money we spend and the more we worry about them. Ironically, it may get to the point where having too much stuff makes us less happy. Experiences, on the other hand, don’t require any maintenance.
Budgeting is all about finding the budget that works for you:
- Eliminate the costs that don’t make you happy, such as subscriptions, your landline, or cable.
- Eliminate the costs that will affect you but you can get used to, such as walking to work or cooking at home.
- Reduce the expensive things that require maintenance, such as your car and your home.
- Add splurges. This involves adding all the money you’ve saved and this is your “fun money” to spend however you please.
Chapter 9: Your House Is Not an Investment
Housing is one of the reasons that prevent people from becoming rich. Houses are bad investments because they’re an excuse to accumulate debt. Owning a house is expensive because it costs money after you buy it: there are fees, you have to get insurance, there are maintenance costs, and if you ever want to sell it, you have to pay a commission to a broker, as well as land transfer taxes and lawyer fees. The price increases substantially if you borrow money in the form of a mortgage which most people do. If you don’t buy a house, you should do what rich people do with their money: buy investments.
Chapter 10: The Real Bank Robbers
Your bank wants you to invest your retirement money with them because they’ll be able to get a percentage forever. The lower and middle classes want to add to their wealth through education or a job. Rich people, on the other hand, want to grow their wealth in the form of an annual percentage. Buying and selling individual stocks is like gambling, so don’t do it. Instead, index invest. When you invest in index funds there are no fees and you can’t lose all your money.
Chapter 11: How to Survive a Stock Market Crash
According to the Modern Portfolio Theory, assets come down to two variables: expected return and volatility. Expected return is the percentage an asset will give you each year. The volatility is the standard deviation that takes place day-to-day. Thanks to this, you can combine assets so that their growth goes smoother.
This is how it works:
- Pick an equity allocation: this is the first decision you have to make. Higher equity gives you higher returns in the long run, but inconsistent results along the way.
- Choose the indexes to track: while most people have a tendency to invest in their own countries, don’t ignore the rest of the world.
- Pick your investment funds: there are mutual funds and ETFs (or exchange-traded funds). Unlike mutual funds, ETFs trade on the open stock market which means they’re cheaper and that anyone can buy them.
- Rebalance: when your holdings fluctuate too much over time to the point that they steer away from your allocation targets, rebalance. This is a way to prevent you from losing all your money and it involves selling the assets that have gone up. The next rule of rebalancing is that you can only buy assets that have gone down. In other words, buy low, and sell high. For this to work, your portfolio has to be balanced and your assets have to be in index funds.
Chapter 12: Taxes Are for Poor People
Notoriously, rich people don’t pay taxes. They use every trick and loophole they can so that they pay as little as they can. This creates more income inequality and the more money rich people have, the more loopholes they have access to. This becomes a vicious circle of exploiting the system.
Instead of complaining about the unfair nature of the economy, learn these loopholes so that you can use them too. First, you should know that there is legal and illegal tax avoidance and you should never do anything illegal. Tax Sheltering refers to putting your money where it’s safe from taxes. For instance, you don’t get taxes when you invest in an ETF index. Tax Deferment is selecting a part of your income and not paying taxes for that sum of money that year. When you withdraw that money from the account though it becomes taxable income again.
These are the loopholes the author was alluding to:
- Double contributing to your retirement accounts: some companies let you qualify for two accounts. Examples include hospitals, universities, and government contracts.
- Back door Roth IRA: while those that make too much money can’t contribute to a Roth IRA, you can shelter funds in it.
Chapter 13: Never Pay Taxes Again
What legal techniques do rich people use that allow them to avoid taxes? First, we have to understand that different types of income are taxed accordingly. Property, is the worst, for instance. Employment income is better. Qualified dividends and capital gains are the best. By having most of their wealth in the form of investments, rich people avoid the majority of taxes.
Chapter 14: The Magical Number That Saved Me
Money is important, but it’s not worth dying for. The Scarcity Mindset tells you to sacrifice time and health in exchange for money. The problem is that there are no clear goals and this means you’ll probably never stop working and start living. The author argues that by flipping the idea of Time = Money so that it becomes Money = Time, you can figure out ways in which money helps you buy back time. She calls this the Freedom Mindset. In the Scarcity Mindset, money’s the most important thing, but in the Freedom Mindset, freedom’s the most important thing.
The core idea behind the Freedom Mindset is that once the basic needs are covered, you don’t spend money on useless things, but on getting back your time. This involves investing so that the surplus money you get in return covers your living expenses. This gives you the freedom to keep your job if you want or to just quit.
When it comes to retirement, it all comes down to a magical number. The 4 Percent Rule says that if your withdrawal rate (this is the money you use to cover your basic expenses) is four percent or less you’ll be able to become financially independent and you’ll never run out of money. The 4 Percent Rule gives you a clear goal. The time it’ll take you to retire doesn’t depend on the money you make, but on the money you save.
Part III: Becoming Wealthy
Chapter 15: The Cash Cushion and the Yield Shield
The author started thinking about all the potential problems that come up if she retired early. The 4 Percent Rule isn’t perfect and there have been cases when people ran out of money during their retirement. To mitigate this, you could have a Cash Cushion, which is cash that’s kept in a high-interest savings account in case the stock market crashes. Ideally, your cash cushion should have enough money to support you for two years. But in order to need less money, there’s something called the Yield Shield.
ETFs have a Yield which is extra money you get every month or quarter. To maximize it even more, you can raise the Yield Shield by moving your portfolio into higher-yielding assets, but only temporarily. Additionally, you could own real estate in the form of real estate investment trusts, or REITs. As a shareholder, you will get income regularly. Other investment options include corporate bonds and dividend stocks.
Chapter 16: Getting Paid to Travel
Using the strategies described in the book, the author had a million-dollar portfolio. So the 4 Percent Rule allowed her to withdraw $40,000 per year to cover all of her expenses. To celebrate, she started a trip around the world. When she came back home, she realized she had spent $40,000, the same amount of money it cost to stay home. Most people assume that traveling’s expensive, but that’s not the case. Additionally, you can use your credit card’s reward system or use Airbnb to save even more. In case of emergency, always buy travel insurance before you leave.
Chapter 17: Buckets and Backups
The Bucket System refers to placing your money in different accounts or “buckets”. Each account fulfills a different job: there’s a Portfolio bucket, a Cash Cushion bucket, and a Current-Year Spending bucket. At the beginning of each year, you allocate money from one bucket to another depending on how well the market performed.
In case this method fails, these are some additional backup plans:
- Yield Shield: this means that you’re getting dividends and interest when the market underperforms.
- Cash Cushion: this is when you have to withdraw money from your cash cushion in cases where there’s a crash that lasts a few years.
- Travel More: depending on where you live, traveling can be less expensive than living in your home country.
- The Side Hustle: start a business to fund your Current-Year Spending.
- Return to Work Part-Time: the skillset you’ve amassed throughout your career can come in handy even after you’ve retired. You can work part-time or consult.
Chapter 18: Inflation, Insurance, and Health Care: Scary Things That Aren’t That Scary
When someone retires to travel around the world, other people stress about three main issues: inflation, insurance, and health care. Inflation refers to how the cost of living increases over time. This explains why certain products and services become more expensive over time. Luckily for those investing their money as inflation increases so does the money that comes from your portfolio. Also, inflation affects different regions in different ways. Should your cost of living increase substantially in a place, you can always move somewhere else.
Insurance also scares people. There are three main types of insurance: homeowner’s, car, and life insurance. If you own a house, insurance is a must, but renting usually makes more sense. Car insurance is mandatory since you can’t drive a car without insurance, but feel free to explore alternatives such as public transport or car-sharing services. Those who retire early, don’t have to worry about life insurance since they have a portfolio to support their loved ones once they’re gone.
Finally, health care. This is absolutely necessary, especially for those living in the United States. When you retire, you should look for different ways to reduce costs, such as Obamacare, moving to a different state to qualify for Obamacare, considering having enough money to pay for health care out-of-pocket in case of emergencies or catastrophic expenses or opening an HSA account. Americans who retire abroad qualify for expat insurance which is less expensive than domestic insurance.
Chapter 19: What About Kids?
A lot of people think that the financial principles from this book don’t apply to families or people with kids, but that’s not the case. Raising children is expensive, but not as expensive as most people think. For a kid to grow up happy and healthy, you don’t have to spend a lot of money.
Housing is expensive and requires paying for a mortgage, maintenance, taxes, and insurance, but you can always rent, get a small house, or get a house you have to renovate yourself. For food, you can buy discounted items, plan your meals, and still buy good quality ingredients. Child care is nonexistent if you retire early. For transportation, there are alternatives to owning a brand new car, such as used vehicles, car sharing, public transportation, and getting a bike. Health care was addressed in the previous chapter, so get ACA or rely on expat insurance. Clothing depends on where you buy them from.
Now how do you educate your children if you plan to travel around the world? A lot of digital nomads travel with their families and they use nontraditional education methods. This is often referred to as world schooling. Despite their unconventional upbringing, these kids are intelligent, social, and entrepreneurial.
Chapter 20: The Dark Side of Early Retirement
A lot of people from the FIRE movement worry about everything that could go wrong instead of feeling excited about the adventures ahead. In part, this is due to our jobs becoming part of our identity. The most common concerns are:
- Running out of money: to run out of money you’d have to sell into a down market, have unexpected health care costs, or there would have to be inflation, but all of those potential issues have been discussed in the book.
- Loss of community: as part of our jobs, our colleagues become our social circle. The people who criticize your decision of retiring do so because your actions make them question their own lives.
- Loss of identity: when you become financially independent, you can finally follow your passion. By losing your old identity, you can create a new one.
Chapter 21: You Don’t Need a Million to Break Free
Many people from the FIRE movement have high-paying jobs, but you don’t need one to retire early. People with average salaries can still retire, they just have to optimize their spending. This involves using the strategies suggested in the book, such as car-sharing, moving to less expensive cities, preparing meals at home, or living in small places. You can also develop skills to improve your salary or switch jobs. But what if you don’t want to wait decades to retire? There are some solutions to this in the form of Side FIRE, Partial FI, and geographic arbitrage.
- SideFIRE involves having a side hustle while you’re “retired”. In a sense, this means you aren’t fully retired because you’re working on your dream job, but you still experience the benefits of financial independence by having a portfolio. Using this method, you can cover half of your expenses with your side hustle and half of your expenses with your portfolio.
- Partial FI involves covering half of your expenses with your portfolio and the other half with your part-time job or money from contracting. Of course, some careers lend themselves better to partial FI since they give you more flexibility and freedom.
- Geographic arbitrage involves moving to a country that has a strong currency to earn income but retiring in a country with a weak currency.
Chapter 22: Go Your Own Way
Reading about personal finance can be overwhelming, but the worst part about it is the conflicting advice. This often leads to analysis paralysis. There are so many options that you freeze and choose none. At their core, most personal finance books have the same core concepts, but their methods vary. Depending on the type of person that wrote the books, their strategies will change.
- The hustler makes most of their money from their income. They are often entrepreneurs who work for themselves and find opportunities to make money everywhere. They can risk everything in new ventures.
- The investor turns money into money using different strategies, such as stocks or real estate.
- The optimizer makes a lot of money by controlling their spending. These are normal people who track everything they spend. Since they’re risk-averse, they don’t try new things because they’re afraid they might lose money.
This book is for optimizers and the best part about it is that its strategies are easy to reproduce. People who lived in poverty growing up have a lot of chances of improving their finances because they are creative, resilient, adaptable, and perseverant. This is a strength, so start seeing it as such.
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