Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required

by Kristy Shen

At the end of the day, it isn’t about money, it’s about time—and how to use it wisely to live the best life possible.

In fact, even though it seems like it’s been around forever, the phrase “follow your passion” is relatively new. According to Benjamin Todd, CEO and founder of 80000Hours.org, the phrase spiked around 2005, when Steve Jobs gave a commencement speech at Stanford, in which he said, “There’s no reason not to follow your heart.”1 Nowadays, we hear that advice over and over again, drawing young graduates like moths to a flame. It’s sexy and empowering. It’s also dangerous.

People change. What lights you up could be very different a few years from now than it is today. One psychology study at Harvard and UVA found that nearly all nineteen thousand participants reported that their passions had changed significantly over the previous ten years.5 Encouraging people to base their career on what they love when they’re eighteen is like encouraging them to exclusively dress like their favorite band from high school. In which case I’d be writing this book while dressed like Scary Spice, and nobody wants that.

There are parts of every passion that, when turned into a full-time job, suck. I love writing, but that doesn’t mean I love rewriting chapters over and over again, or getting rejection letters from agents, or poring over the dense legalese of a publishing contract until my eyes bleed. The only reason I’m able to pursue writing now is because I’m not dependent on it to pay the bills. Work is rarely fun when you have to worry about your next paycheck. Work is even less fun when you’re forced to be creative on a schedule because you have no other choice. And this is all assuming you are lucky enough to be working in a field you love!

Following your passion is a bad way to pick a career. Instead, you should pick a career based on its Pay-over-Tuition (POT) score. POT score = Median Salary Above Minimum Wage / Total Cost of Degree. A high number means money spent on tuition will have a greater effect on your income.

Debt removes the link between time and money. And when that happens, people start making bad decisions that blow up their finances.

I’m sure everyone’s heard that E = MC2. Allow me to introduce you to Luca Pacioli’s Rule of 72. Here’s how it works. If you know the return you’re earning on an investment (say, 6 percent per year), divide 72 by that number (72 / 6 = 12). This gives you the number of years it’ll take for your money to double. If I invest $1,000 with a return of 6 percent a year, it’ll compound into $2,000 in 12 years without my investing another cent. That balance goes up over time, because the money I make makes more money, which in turn makes even more money. When you’re an investor, the Rule of 72 is your friend. It helps your money grow. But if you have debt, the Rule of 72 is your enemy. It works against you to take what little money you have.

The reality is that the world owes you nothing. You only become “special” by developing skills that are in demand, which takes focus, grit, and long-term work. Other people can help along the way, but in the end, we have to save ourselves.

When we buy something special or get a raise, we’re happy because we perceive a positive change in our life. Similarly, when something bad happens, like a blown tire or a health issue, that negative change bums us out. But over time, we get used to the new normal and return to our baseline level of happiness. Psychologists Philip Brickman, Dan Coates, and Ronnie Janoff-Bulman first noticed this phenomenon in a 1978 study in which they tracked the happiness levels of two groups: lottery winners and recently injured paraplegics. As expected, the lottery winners reported a much higher level of happiness than the control group, and the paraplegics a much lower level. But over time, both groups adapted to their circumstances, and after a year their self-reported happiness returned to the levels at which they were before their lives had changed.

The more stuff people owned, the unhappier and more stressed they tended to be. Conversely, the less stuff people owned and the more they spent on experiences like travel or learning new skills, the happier and more content they were. Possessions give you an initial burst of dopamine that fades as your nucleus accumbens acclimatizes, causing you to continuously chase that high. People who spend on experiences get way more bang for their buck.

I have a confession to make. I find personal finance books annoying. They tend to make you feel bad about spending money, berating you for buying a cup of coffee every morning. If only you’d invest it, that $3.50 would be worth a hundred thousand in thirty years! Bull. Shit. While I don’t doubt the math, universal advice like that is idiotic. Some people don’t care about coffee (like me). But other people love it—it truly makes their day better. I’m from Sichuan Province, where all our food is covered in chili oil. If someone told me that not eating spicy foods would extend my life expectancy, I’d respond, “Why would I want to live a longer life without my favorite food?” The secret to budgeting is not to imitate some template but to find the budget that works for you.

Step 1: Eliminate Baseline Costs That Don’t Make You Happy First, find the easy stuff. Pore over your monthly expenses and look for spending that can be easily eliminated without any real hit to your quality of life. Bank fees are a good example. By opening accounts at zero-fee online banks or credit unions, you can eliminate bank fees (which will make you feel awesome):

Step 2: Eliminate Baseline Costs That Hurt but You’ll Get Used To Next find ways to make expense cuts that may cause you some amount of discomfort but you’ll get used to. For me, it was jogging to work. For you, it may be cooking at home, biking to work, or buying used things instead of new. There will be an adjustment period, but once your nucleus accumbens kicks in, your happiness level will return to baseline.

The only way to find out is to try it and give it some time. If you find yourself missing that thing too much, undo it! Here are a few items that may fall under this category. Buying lunch at work Eating out Going out with friends Gym membership

Step 3: Reduce the Expensive Things You Own That Cost You Money In this step, we take a hard look at the expensive items you own. Specifically, things that cost you money to maintain, insure, repeatedly fill up with premium gas, etc. The goal is to reduce or eliminate unexpected costs as much as possible. The two most common items people own that contribute to their unexpected costs are their car and their home.

Step 4: Add Splurges By the time you’ve reached this step, you’ve gone through your spending and found what you can cut painlessly. You’ve also realized what you can’t live without and added it back. Finally, you’ve looked at your most expensive items (cars, mainly) and either reduced your reliance on them or eliminated them completely. Now let’s have some fun! Add up all the spending you’ve cut. Then take a part of that and allocate it toward splurges. You don’t have to decide what you’re going to spend it on (in fact, it’s better if you don’t so you can make it spontaneous), but this is “fun money” you can do whatever you want with. For me, this usually means traveling, but it could be anything.

This is where the Rule of 150 comes from. Since the extra ownership costs are approximately equal to the interest of a typical mortgage over nine years, and the interest is approximately 50 percent of your mortgage payment during that time, you have to multiply your monthly mortgage payment by 150 percent. This is how much your house will actually cost per month, once all expenses are factored in. If that Rule of 150 monthly cost is higher than your rent, then it makes sense to rent. If it’s lower, then it makes sense to buy. The moral of the story isn’t to never buy a house, it’s to “math shit up” before you do. At the time that we were looking for a home, my Rule of 150 number was way higher than what I was paying in rent ($850 a month for a one-bedroom apartment). So after “mathing shit up,” I said no thank you to the housing market and kept my money.

The first lesson came from Robert Kiyosaki, in his bestselling book Rich Dad Poor Dad. In it, he claims (and I’m paraphrasing here): Poor people buy stuff. The middle class buys houses. Rich people buy investments.

Percentage points matter. That was one of the first lessons I learned from rich people that helped me to become one of them.

That’s when I learned about index investing. I first heard about it from bestselling author JL Collins, author of The Simple Path to Wealth and founder of JLCollinsNH.com. I’ve since met Jim and had the opportunity to thank him in person for teaching me about this, because it was the first time investing ever made sense to me.

And for all these fees, what value do you get? Turns out, not much. If you were to poll all active managers who are trying to outguess the stock market, you might expect about 50 percent to have beaten the index and 50 percent to have underperformed. But that’s not the case, and the reason is the management fees. Active managers don’t work for free. That means they have to beat the index by 1–2 percent just to make up for their own fees. Would you like to know how many active managers manage to beat the indexes after fees in any given year? Fifteen percent. That’s right. Only 15 percent of active managers manage to beat their benchmark indexes after fees. And because there’s no reliable way to tell which of the active managers will turn out to be among that 15 percent, there’s no reliable way to pick which actively managed mutual funds will outperform—especially if the fund manager won’t even meet with you. That’s when I realized it was really very simple. Index investing beats 85 percent of actively managed mutual funds.

Loophole Alert #1: Double-Contributing to Your Retirement Accounts Depending on how your company is structured, it may be possible to qualify for two employer-sponsored retirement accounts. For example, if your employer is both a nonprofit and is paid by state funds, you could qualify for both a 403(b) and a 457. Hospitals tend to be both; universities, too. Government contractors, including lawyers, architects, and defense workers, can also double-qualify, depending on how their businesses are structured. Amazingly, the contribution limits stack up, meaning you’d be able to tax-defer $19,000 in the 403(b) and $19,000 in the 457, for a total $38,000 deduction! And if you’re fifty or above, the extra $6,000 you can contribute also stacks up, for a total of $50,000! Here’s the sneaky part: this is almost never openly advertised to the employees. If you suspect you may be eligible, go to your HR department and ask point-blank whether you qualify to open up another retirement account. Many of our readers have been surprised to find out they could double their contributions!

standard deduction is the tax-free amount everyone qualifies for on their tax return. As of 2019, it’s $12,200 per person, or $24,400 per married couple. (If your situation allows you to itemize deductions in excess of the standard deduction, go ahead and do that, but for the purposes of this chapter, we’ll assume everyone uses the standard deduction.) If you were to, say, leave your job, your earned income would drop to $0. So, if you were to withdraw from your 401(k) an amount equal to your standard deduction, that amount would be tax-free! You could do this once a year, saving taxes on the way in and paying nothing on the way out!

After you quit a job, you’d call each of your 401(k) providers and ask to have your accounts merged into a single traditional IRA you control. The IRS allows this to protect people who leave their jobs on bad terms or when their company dissolves after they leave so they can still manage their own retirement funds. Most financial institutions will know how to do a 401(k) rollover, and this transfer is not taxed since you’re consolidating your tax-deferred accounts into one place.

Next is a Roth IRA conversion, in which you take a chunk of money and transfer it from a traditional IRA into a Roth IRA. Since you’re moving deductible contributions from a tax-deferred account to a tax-sheltered account, these Roth IRA conversions are taxable, so after you retire and your earned income drops to zero, you want to transfer your standard deduction and not a penny more.

Loophole Alert! 457 Accounts Don’t Have Age Penalties! I’ve been using 401(k)s to represent all retirement accounts, including 403(b)s, since they generally play by the same rules. The exception is the 457, which is for state employees. These suckers don’t have that early withdrawal penalty, so if you have a 457, you don’t have to do any of this Roth IRA ladder business; just withdraw your standard deduction directly into your investment account.

So, what just happened here? The number of units didn’t change, nor did the market value. From your portfolio’s perspective, you didn’t do anything at all. But you were able to take part of that unrealized capital gain, which would have been a future tax bill, and deliberately realize part of it for free inside your 0 percent capital gains tax bracket. And then, by immediately rebuying the same units, you were able to restore your original portfolio, only now with a much lower unrealized capital gain. Do that a few times and after a couple of years, you’ll be able to get your basis to catch up to the market value, making your capital gains tax bill $0 going forward.

After you retire early, you can access the money in your 401(k) without paying a penalty by building a five-year Roth IRA conversion ladder. First, consolidate all your 401(k) accounts into a traditional IRA. Then perform a Roth IRA conversion equal to your standard deduction. Keep doing this every year. After five years, you’ll be able to access the first converted amount penalty-free.

Capital gains harvesting can be used to eliminate capital gains taxes. Every year, realize as many capital gains as you can inside your 0 percent tax bracket by selling some ETF units. Shortly thereafter, rebuy those units back to reset your cost basis.

Looking at my mentor’s empty chair the next day, I remembered a story I’d once read in the newspaper about a man who worked hard for decades so that he would be able to retire at sixty-five and travel the world like he always wanted. But he never ended up retiring because he was scared he didn’t have enough money, so he kept working “just one more year”—year after year. Then his heart gave out, he died at his desk, and his kids had him cremated and ended up traveling around the world with his ashes in a tin can.

My million-dollar idea was based on a book called One Red Paperclip, which told the story of how someone bartered their way from a single red paperclip through a series of increasingly valuable trades until they managed to get a house. I decided to build a trading marketplace called SwapIt.com. I registered the domain and roped Bryce into helping me code it, and within a few months, we were ready to launch.

The Freedom Mind-set shifts your thinking, from money being the most important to freedom being the most important. Once your needs are taken care of, the next step shouldn’t be hoarding. It should be getting your time back.

The 4 Percent Rule, also known as the Rule of 25, comes from a study at Trinity University into retirement planning and economic theory.1 The authors took price data from the stock and bond markets through all of recorded history. Pretending there was a retiree starting with a bucket of cash, they simulated what would happen if she withdrew a certain percentage of her portfolio every year, leaving the rest invested. They counted how many retirees made it to the end of their retirement with their cash intact, and how many ended up broke and dying alone in an alley surrounded by empty cat food canisters (okay, it wasn’t quite that detailed).

This is where the Cash Cushion comes in. The Cash Cushion is a pile of cash stored in a high-interest savings account. In the event of a stock market downturn, this cash can be used as a cushion (see what I did there?) so you don’t have to rely on selling assets to pay for your living expenses. It’s a reserve fund. To figure out how big a Cash Cushion we needed, I went back and studied the amount of time it takes for a stock market to recover from a big crash. It turns out the median length is two years. During the Great Depression—the worst-case example—it took about five years after accounting for dividends. After the 2008 crash, it took two. So a five-year Cash Cushion should be sufficient to weather any storm. If someone were trying to retire early with living expenses of $40,000 a year, you’d think the math would be straightforward, if daunting: $40,000 × 5 = $200,000. That’s a big chunk of change to have at the ready. Here’s the good news: you actually need much less than that. This is because of the second part of this system, which I call the Yield Shield.

Since each ETF has a yield, and your investment portfolio is made up of ETFs, your portfolio has a yield as well. This yield accumulates as your ETFs spin off distributions every month, and assuming you haven’t set up your brokerage account to automatically reinvest those distributions, this yield will show up as spare cash. This gets generated regardless of whether the stock market is rising or falling. To harvest it, simply withdraw it into your checking account. The reason this is so valuable is because unlike the capital value of your portfolio, which goes up and down with every move on the stock market, the yield gets determined when you buy. Even if the overall portfolio later goes down in value, the yield it generates remains mostly unchanged (see appendix C for caveats). So if your portfolio yield on a million dollars is 3.5 percent or $35,000 and you hit a bad year that causes you to go down to $900,000, it’s still yielding $35,000.

And this brings me to a process I like to call raising the Yield Shield. Raising the Yield Shield is the process of temporarily pivoting your portfolio into higher-yielding assets. Note the key word “temporarily.” Long-term, your investment portfolio should be a low-cost, index-tracking portfolio. Why? Because those are the conditions under which the Trinity study was conducted. If you stray too far, the 4 Percent Rule no longer applies. But creating a Yield Shield for the first five years of retirement can counteract the biggest problem with the 4 Percent Rule. First, pick higher-yielding assets that are similar to the assets that are already in your portfolio. Then, strategically swap them out to increase your portfolio yield. This will have the effect of increasing your portfolio’s volatility, and I’ll explain why, but what we’re doing here is taking on higher volatility for higher yield.

In exchange for this downside, preferred shares offer a much higher yield. While an equity index might have a yield of 2 percent, preferred shares tend to pay 4 to 6 percent. They are more volatile than bonds but less volatile than stocks, so they are a way to increase yield without massively spiking volatility. Another upside is that unlike bonds, which pay interest, preferred shares pay qualified dividends. This means preferred shares are favorably taxed, as we talked about in chapter 13. I’ve advised against buying individual stocks, and this goes for preferred shares. Preferred shares are complicated to own individually. Even issues from the same company can behave differently. Some are cumulative, some are noncumulative, some are convertible to common stock, some aren’t, some are fixed-rate, and some float with prevailing interest rates. It’s beyond the scope of the text to define all of the terms here, but I advocate owning preferred shares in an index ETF, the same way I own stocks. That way, you can own the entire market without having to pore over the details of each individual issue.

iShares Core US REIT USA USRT

In young, high-growth companies like tech startups, any income usually gets reinvested in expanding the business, hiring more people, and building more factories. But mature companies like Coca-Cola often run into the problem of having more money than they know what to do with. So rather than invest in something risky and speculative, they tend to distribute that money back to their shareholders. You want to be one of those shareholders.

Vanguard High Dividend Yield USA VYM

We had managed to travel the world for the same cost as staying at home. Let that sink in. We had visited twenty countries on three continents. We had flown the entire circumference of the globe. We had done something very few people on Earth have the privilege of doing. And it cost as much as staying in one place. Bryce was wide awake all of a sudden. The gears were turning in his head, just as they were in mine. “You realize what this means, don’t you?” he asked. I nodded. I knew. We could travel the world—forever.

So if you’re planning a world trip and find it difficult to balance your budget, add Southeast Asia into the mix. The more time you spend there, the less chance you’ll break your budget. Remember how we talked about bonds’ smoothing out the ride in your portfolio? Well, Southeast Asia is like the bonds of your travel portfolio; it evens out your costs. And you could do the same thing with other lower-cost places, like Mexico, Central America, South America, Eastern Europe, or Portugal.

Another trick that helps keep costs down is known as “travel hacking.” If you accumulate enough frequent-flyer miles, you can use them toward flights and hotels, hacking your way to free travel! Normally, this is a luxury reserved for businesspeople, entrepreneurs, flight attendants, or anyone who flies a significant number of times a year. But you can do it even if you’ve never set foot on a plane before. All you need is good credit and a spreadsheet. The trick is to apply for credit cards with big sign-up bonuses, match the required spending, then cancel the cards. Wait for three to six months and do it again. For example, the Chase Sapphire Preferred card offers 60,000 points if you spend $4,000 within the first three months, and waives the annual fee for the first year. That’s worth over $750 of free travel! So, if you and your spouse apply for this card and meet the required minimum spending, you can both travel to Europe or Asia for free. In addition to the sign-up bonuses, many credit cards offer other goodies like no foreign transaction fees, auto rental insurance, and entrance to airport lounges that offer free food and drinks—just make sure you’re not so busy stuffing your face that you miss your flight (like we almost did).

Before we left for our victory lap around the world, we applied for enough credit cards to rack up 200,000 points each. As a result, we were able fly the long-haul routes and pay only the $80 to $100 in taxes. This ended up saving us around $6,000 per year. If we’d had to pay that amount out of pocket, we would’ve needed $6,000 × 25 = $150,000 more in our portfolio. Yikes! Travel hacking saved us from having to work an extra two years. Which is good, because I wouldn’t have been able to stop myself from firing my boss for that long.

How Much You Need − How Much You Have = Your Life Insurance Benefit

An HSA is a type of investment account that’s used for health expenses. Unlike a 401(k), it’s not tied to your employer, so you can open one at any bank or brokerage account. Here’s how an HSA works (as of 2019): To be eligible, your health insurance plan must have a deductible of at least $1,350, or $2,700 for a family. You can contribute up to $3,500 per year, or $7,000 for a family. Your contributions are pretax, similar to a 401(k) or a traditional IRA, meaning that you will get a tax deduction. Investment growth is tax-free. You can withdraw your money tax-free for qualified medical expenses. So an HSA combines the best of the 401(k) and the Roth IRA, in that it allows tax-deductible contributions, tax-free growth, and tax-free withdrawals, but only for medical expenses.

So according to the USDA, having a kid costs $233,610. This is what our experts’ actual costs have been: Justin’s total is around $2,600 per kid per year, or $46,800 total, less than a quarter of the USDA estimate. As he pointed out, if he were to factor in the tax credits he gets back from the government, his net cost is closer to $500 per child. In fact, Jeremy reported that after taxes, he actually made a profit from his kid! Pete estimates the cost of raising a kid to be $8,340 per year or $100,080 total, less than half the USDA estimate.

After becoming an author, I quickly realized the sheer amount of competition out there. Nielsen BookScan reports that of the 1.2 million books it tracks, only 25,000—barely more than 2 percent—have sold more than 5,000 copies. Publishers Weekly reports that the average book sells only 500 copies. And this is out of the writers who got published! For each of those lucky ones, there are thousands of writers still struggling to find a publisher. That’s why I like to think of financial independence as a suit of armor. It protects you from those common worries I listed earlier, because it allows you to follow your dreams without needing to make a single cent. You’ve become financially invincible.

Check out Grant Sabatier’s book Financial Freedom and Chris Guillebeau’s The $100 Startup for ideas on how to make money on side hustles.

Hustlers see the world as endlessly full of opportunities to make money, and if given the chance they will talk your ear off about their next venture (or ventures). They tend not to put much emphasis on controlling their spending, as they view money as an infinitely renewable resource. After all, if they run out of money, they can make more! Hustlers also tend to be very comfortable with risk and are willing to bet everything if they believe in a business they’re creating. This tendency to risk it all is the source of much of their success—but also their failures. Elon Musk, after selling PayPal to eBay, at one point had over $200 million in cash. He invested all of it in Tesla, and in a divorce filing in 2010 was forced to publicly admit he was broke.