Summary of "The Big Short" by Michael Lewis

Money and Happiness: A Practical Guide to Financial Independence

The concept that "money can’t buy happiness" is a common saying, but it overlooks a critical aspect: the challenges of living in poverty. While it's true that an obsession with money and possessions won't lead to true happiness, financial stability provides the necessary foundation for a fulfilling life. Money, when managed wisely, can offer time and freedom for the things that truly matter—like family, experiences, and personal growth.

In her book Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required, Kristy Shen shares her journey to financial independence, having retired at the young age of 31. Her story provides valuable lessons on how to achieve financial freedom without relying on luck or a trust fund. Below are three key lessons from her book that can guide anyone looking to follow a similar path.

Lesson 1: Make Decisions Based on Math, Not Emotions

A common piece of advice given by successful people is to "follow your heart" when making career decisions. The idea is that pursuing your passion will lead to both personal and professional fulfillment. However, Kristy Shen argues that this approach can be misguided, especially when financial security is at stake. Instead, she advocates for making decisions based on practical considerations, such as earning potential and long-term financial stability.

Shen’s personal experience is a perfect example. She had to choose between three college majors: creative writing, computer engineering, and accounting. While her passion was creative writing, she decided to evaluate the potential return on investment for each option. The math was clear: a four-year creative writing program would cost $40,000, and the average annual income for a writer was around $17,000—barely above minimum wage. In contrast, computer engineering offered a much higher salary, with a starting income significantly above what she could earn in a low-paying job.

Although pursuing creative writing might have made her happy in the short term, Shen realized that financial worries could undermine that happiness. If basic needs like food and shelter are not met, it’s difficult to focus on creative pursuits. Moreover, she recognized that passions can evolve over time, and it’s not uncommon for people to develop new interests as they progress through life.

By choosing computer engineering, Shen was able to secure a well-paying job that later gave her the financial freedom to pursue writing on her own terms. Her story illustrates the importance of prioritizing financial security, which can provide the flexibility to follow your passions later in life without the burden of financial stress.

Lesson 2: Avoid Consumer Debt and Prioritize Experiences Over Possessions

One of the most significant barriers to financial independence is consumer debt, which often comes with high-interest rates and can trap individuals in a cycle of work and repayment. In her book, Shen emphasizes the importance of eliminating debt as quickly as possible, particularly high-interest consumer debt.

The first step in achieving financial freedom is to get rid of any outstanding debts. This includes credit card debt, personal loans, and other high-interest obligations. Shen advises tackling the debt with the highest interest rate first, throwing as much money at it as possible until it’s paid off. Refinancing loans to lower interest rates can also be a helpful strategy.

Once debt is under control, Shen suggests shifting focus to saving and investing. However, when it comes to discretionary spending, she advocates for spending money on experiences rather than material possessions. This is because the joy derived from buying things, like new clothes or gadgets, is often short-lived. The initial excitement fades, and soon the desire for something new returns, creating a never-ending cycle of consumption.

In contrast, experiences such as travel, learning a new skill, or spending time with loved ones provide lasting satisfaction. These experiences create memories and personal growth that continue to bring joy long after the event has passed. For instance, taking a trip to a new country or learning to play a musical instrument can enrich your life in ways that material possessions cannot.

By prioritizing experiences over things, you not only save money in the long run but also build a life that is rich in meaning and fulfillment.

Lesson 3: Invest Wisely and Save for Early Retirement

When it comes to investing, many people view real estate as a safe and profitable option. The common belief is that buying a home is a sound investment that will appreciate in value over time. However, Kristy Shen challenges this assumption, suggesting that homeownership may not always be the best financial decision.

Shen points out that the costs associated with owning a home—such as mortgage interest, property taxes, maintenance, and transaction fees—can significantly reduce the overall return on investment. While property values may rise over time, the actual profit realized after selling a home can be modest once all expenses are accounted for. In some cases, renting may be a more cost-effective option, allowing for greater financial flexibility and the opportunity to invest in other, potentially more lucrative, assets.

One of the investment vehicles Shen recommends is index funds. These funds offer diversification across a broad market, reducing risk while providing steady returns over time. Unlike individual stocks, which can be volatile, index funds spread risk across many companies, making them a safer choice for long-term investment.

In addition to smart investing, Shen stresses the importance of saving. Saving serves a dual purpose: it reduces the amount needed for retirement and increases the amount available to invest. The key to successful saving is to live below your means, which might involve making sacrifices such as eating out less frequently, buying a used car instead of a new one, or even using public transportation instead of owning a vehicle.

Shen’s approach to early retirement involves building a portfolio that generates enough passive income to cover living expenses. The more you save, the smaller your required portfolio becomes, allowing you to reach financial independence sooner.

Conclusion

Kristy Shen’s journey to financial independence offers practical lessons for anyone seeking to achieve early retirement and financial freedom. By making decisions based on math rather than emotions, avoiding consumer debt, prioritizing experiences over possessions, and investing wisely, it’s possible to build a secure financial future. These principles are not just about accumulating wealth but about creating a life that offers the time and freedom to pursue what truly matters.