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

by Kristy Shen

When you don’t have enough of something, it becomes the most important thing in your life. Everything else is secondary. The experiment changed the subjects not only physically, but mentally as well. This is the Scarcity Mind-set. When someone’s starving, their brain ignores almost everything—except that one thing it doesn’t have.

Ernest Hemingway supposedly bet his friends he could write a story in just six words. They laughed at him: how could a handful of words possibly convey the depth of a full narrative? You wouldn’t even have space to describe a single eyelash, never mind an entire character. But Hemingway did just that. Not only did he write that story, he even gave it emotional impact. Don’t believe me? “For sale: baby shoes. Never worn.”1 See how much oomph you can pack into a tiny space? That’s what constraints do.

Education was how my dad got out from under the thumb of a totalitarian government. So, he wasn’t overly sympathetic whenever I complained that a subject was too hard or I was too tired to go to school—or the school was closed because a gunman was on the loose. You tough it out. Because your entire family is depending on you.

These are extreme cases, I know, but around the world, education often remains the only way out of poverty. Even in the United States, getting an undergraduate degree increases your average salary by 70 percent. No matter where you are, education has the power to change your life by improving your earning power. Not only that, one longitudinal study demonstrated that a lack of education can be as harmful to your health as smoking. Education improves your ability to process and understand information. Education also helps you become more curious and self-sufficient and teaches you how to trade short-term pain for long-term gain. People who drop out of high school die, on average, a decade earlier than their peers who have a bachelor’s degree. But more than 10 percent of Americans ages twenty-four to thirty-five (over eight million people) don’t have a high school degree.

Statistically, following your passion will lead to unemployment or underemployment.

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.

Sometimes your entire life turns upside down through no fault of your own, and you have to learn how to tough it out and survive. No one is coming to save you.

According to business and economics professor Paul Harvey, “a great source of frustration for people with a strong sense of entitlement is unmet expectations.”1 If you believe that you’re special, and all you have to do is find your singular passion and turn it into a perfect job, that’s a recipe for disaster. 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 things don’t go according to plan, you won’t always have a backup. Given our economic reality of declining job stability and disappearing pensions, you can no longer rely on the government or your company to take care of you in retirement. My readers frequently write in with stories about how they were able to escape their bad circumstances. Some had help along the way, others had to struggle alone, but ultimately, they all saved themselves.

The Scarcity Mind-set teaches us that money is precious. The Entitlement Mind-set enables us to kick the can of personal responsibility down the road. But we all need to learn to protect ourselves from those scary inevitabilities like layoffs and outsourcing. We need to learn how to save ourselves. To do that, we build our own safety net. Your safety net needs to feed you, clothe you, and pay for the occasional kick-ass vacation to Aruba, all without relying on a job or the government—neither of which is as reliable as it used to be. If you become your own safety net, it won’t matter whether you started off with a Scarcity Mind-set or an Entitlement Mind-set. You’ll win either way.

“The past doesn’t matter. What do we do now?”

There is always a way out. The key is to remember: The past doesn’t matter. What do we do now?

The nucleus accumbens reacts to both the presence of a positive stimulus and also the expectation of that stimulus. In other words, pleasure isn’t based on an absolute level of dopamine in the brain, but rather on the relative level versus the expected level of dopamine in the nucleus accumbens. Relative, not absolute.

Once I figured out what was happening, I realized that this diminishing-happiness effect only applied to possessions—not to experiences.

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.

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

Step 2: Eliminate Baseline Costs That Hurt but You’ll Get Used To

Step 3: Reduce the Expensive Things You Own That Cost You Money

Step 4: Add Splurges

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

Index investing takes the guesswork out of trying to predict which company will rise or fall, and instead bets on the total growth of the stock market. That, I could get behind. In any given race, I’d have no idea which horse is going to win or lose, so I’d never bet on any individual horse. But would I bet on the casino? Absolutely. Because no matter which horse wins or loses, the casino makes money. Index investing allows you to bet on the casino.

Harry Markowitz in the 1950s: Modern Portfolio Theory.

Modern Portfolio Theory says that assets boil down to two measurements: expected return and volatility. Expected return, measured as a percentage, is the expected annualized return of an asset. Volatility, measured as a standard deviation, is the day-to-day gyration of said asset. The higher the standard deviation, the more volatile the asset.

This is the second key to Modern Portfolio Theory: every asset can be scored in terms of expected return and volatility, and you can control how much volatility you’re willing to take on by adjusting the percentages you allocate to each asset class. A higher equity allocation will result in higher long-term gains but a bumpier ride. A higher bond allocation will result in lower long-term gains but a smoother ride.

Modern Portfolio Theory allowed Bryce and me to build an investment portfolio that worked for us. I now had a blueprint I could actually follow, and it went like this. Step 1: Pick an Equity Allocation

Step 2: Choose the Indexes to Track

Home Country Bias is the well-documented tendency of investors to overweight their domestic market.

Step 3: Pick Your Investment Funds

Step 4: Rebalance

The only way to permanently lose money would be to sell during a dip and miss out on the recovery. Rebalancing prevents you from doing this; you only sell an asset when that asset’s allocation is above target. In other words, you can only sell things that have gone up. You can’t sell things that have gone down.

Now, let’s go through the (totally legal) loopholes that rich people use to minimize their taxes. Loophole Alert #1: Double-Contributing to Your Retirement Accounts

Loophole Alert #2: Back-Door Roth IRA

Whatever I was going to do, I wanted it to be 100 percent aboveboard. Everything had to be legal, with no sleazy tricks. Every strategy or tax break I employed needed to be an intentional one provided by the government. I did not want to escape my cubicle prison only to land in a real one. This “no sneaky tricks” restriction had the benefit of eliminating 90 percent of my reading material, and once the noise was gone, the answer was simple. I could eliminate my tax burden, using legal tools available to everyone: tax-deferred accounts like 401(k)s, tax-sheltered accounts like Roth IRAs, the standard deduction, and the stock market. Fit these puzzle pieces together in just the right way and you can kiss taxes good-bye—forever.

It’s a game, and the rules are out in the open. The government wants you to play. The most surprising difference that I’ve found between rich people and middle-class people is that the rich understand the rules while the middle-class people don’t.

What was the point of this money if all it meant was the shiniest coffin in the graveyard?

The Scarcity Mind-set teaches you to sacrifice your time and your health for money, because money is life. And that works when all you care about is survival. But the problem with the Scarcity Mind-set is that it doesn’t have an end goal. Once survival is no longer in jeopardy, there’s no off switch. You continue to sacrifice needlessly, forever. It only ends once you use up all your life energy and die in a cubicle somewhere. The Scarcity Mind-set trades life energy for survival. The Hoarding Mind-set trades life energy for nothing. I had seen it almost claim one victim, and I didn’t want it to claim me as well.

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.

This means when 4 percent of your portfolio matches your living expenses, you have a 95 percent chance of making it thirty years without running out of money!

(Dividing your living expenses by 4 percent is the same as multiplying them by twenty-five. That’s why the 4 Percent Rule is also called the Rule of 25.)

The biggest problem with the 4 Percent Rule is that it’s not a guarantee. In fact, the formal definition of the 4 Percent Rule states that withdrawing 4 percent of your starting portfolio each year, adjusted for inflation, yields a 95 percent success rate over thirty-year retirement periods. That still means 5 percent of people who retire according to the 4 Percent Rule fail, meaning they run out of money at some point during their retirement. It all comes down to luck.

To fix this problem, we developed a system made up of two parts: the Cash Cushion and the Yield Shield.

The Cash Cushion is a pile of cash stored in a high-interest savings account.