Why are some people successful — financially, socially, and romantically, while others stagnate and never amount to anything?
The Abundance Mindset
Successful people share many traits, but I think one key attribute is the abundance mindset.
The abundance mindset sees the universe as full of opportunity — for friendship, love, and financial success. By contrast, the scarcity mindset sees everything as a fixed pie and leads to hoarding, envy, and stagnation in every aspect of life.
Think of the friend who forms a circle around them a party in any city, the successful serial entrepreneur, the man or woman who fearlessly starts genuine conversations and asks their romantic interests out on a date — what do they have in common? They recognize an opportunity in any form, and they are not afraid of failure because they know that life is full of chance to achieve their goals.
The Scarcity Mindset
By contrast, think of the failures you know. People you met decades ago who ended up in a dead-end career, unable to form or keep romantic relationships, and still living paycheck to paycheck. What do they have in common? In their relationships, they see the value as fixed and scarce. They bicker with their spouses and their coworkers over responsibility, budgets, and commitments because they see relationships as a tit for tat game over a fixed pie. Instead of using their relationships as a foundation to build value, they wear down their romantic and business partners and sabotage their success — yet they are too afraid of finding someone else to move on.
Learning to identify opportunities, and getting the ability and confidence to act on them is a skill, though some of us come by it easier than others. It starts the same way: with the philosophy that the world is full of opportunity if only we can learn to recognize and take advantage of it.
Resources are scarce. Opportunities are not. People hoard resources because they see the world as fixed, and by extension, they see their nature as fixed. Believing that you are incapable of change is a self-fulfilling prophecy.
Abundance and Minimalism
For me, minimalism is an important aspect of an abundance mentality:
The homes of the self-made wealthy people tend to be sparse: they contain only the objects that are necessary for who they are today. Whether it’s an inspirational work of art on the wall or utensils in their kitchen, their possessions serve a practical purpose for who they are now. They do not need to hold on to the objects that embodied who they were yesterday.
Poor people and those who did not earn their wealth, on the other hand, stuff their homes with everything that they ever were. They have no confidence in their ability to find opportunities for either material success or self-growth in the future, so they hoard possessions both in case of material and spiritual shortage. Why spiritual? If you view the world as scarce in spiritual fuel, you must hoard all the symbols that have ever defined you. Think of the middle-aged man with his self-esteem and self-identity still linked to the things he did in high school or college, rather than pursuits he has now.
The same thing happens with romantic relationships and friends: abundant people focus on friends and partners who add value to their lives, whereas scarce people hang out with energy-draining friends and relationships that go nowhere.
Embrace Abundance in All Aspects of Your Life
The abundance vs scarcity mentality applies in many aspects of life: for example, time preference is the preference to enjoy goods sooner rather than later. People with a scarcity mentality have a high time preference and struggle to save their salary for the future. People who save for their future have a low time preference because they can imagine the life of abundance that will result from forgoing current consumption.
Whatever savings they do have, people with a scarcity mentality keep mostly in cash because they attribute their own scarcity mindset to markets and entrepreneurs. Likewise, they vote for politicians who redistribute the wealth of others rather than create an environment that fosters wealth-creation.
The scarcity mentality also causes an unhealthy lifestyle, since the scarcity mindset is unable to visualize the future benefits of a healthy diet, and focus only on the pleasure of immediate consumption.
For one hundred plus years, Americans have been told that owning a home embodies the ideal, an essential life goal. After the housing crash of 2008, that unquestioned ideal is no more. What precisely is wrong with renting? And what is wrong with renting something small?
My ideal home has two rooms: a bedroom to sleep in, and a kitchen to cook in. These days, I live in Atlanta, Georgia. A few days a week, my wife and I take our daughter to the park next door, which is in an upscale neighborhood. Occasionally we strike up conversations with the other parents there. Sooner or later, the question of where we live comes up, and we casually mention that we live in an apartment complex. I still remember the first reaction to my answer – I was instantly branded as a member of the lower-class. At this point, any chance of a play date or further social connection was permanently rejected.
These days, I live in Atlanta, Georgia. A few days a week, my wife and I take our daughter to the park next door, which is in an upscale neighborhood. Occasionally we strike up conversations with the other parents there. Sooner or later, the question of where we live comes up, and we casually mention that we live in an apartment complex. I still remember the first reaction to my answer – I was instantly branded as a member of the lower-class. At this point, any chance of a play date or further social connection was permanently rejected.
Home Ownership and Social Status
It’s true – my family of three lives in a small one-bedroom apartment. It’s a pretty nice apartment, in a good neighborhood, but that’s irrelevant. The fact that I have not bought a house for my family makes us outcasts, poor, financially irresponsible, or otherwise unsuitable for social company. Wouldn’t any responsible parent get a home for their children?
Most Fridays, some friends of ours come over to our complex so our kids can play in the pool. Having a pool next door is one of the perks of living in an apartment complex. Living next to a big city park is another. Living next to my office, so I can get to work in less than five minutes is a third. I spend less of my life in traffic – and I spend it on my bike.
If the parents at the park bothered to ask, they would learn that living in a small apartment is a lifestyle choice, not something we do out of financial necessity. In fact, chances are good that our financial situation is betterthan theirs — and a big part of that is our decision not to buy a home. I’m won’t rehash the reasons for that here – read theseposts.
What I want to address is the American habit of treating the home as a spaceship — a self-contained ecosystem which is expected to provide for all their needs.
It Takes a Village
When I was a little boy growing up in Ukraine, from the age of six on, I would wander our village all day, coming in only for meals. Often I would have to be found and dragged in. I wandered around the stadium and construction sites, using the frames and air ducts of buildings as makeshift jungle gym, the piles of sand as targets for jumping from the second floor.
When we moved to San Antonio, I spent entire days exploring the city by bike, even in the middle of summer. I dared myself to go as far from our house as possible, limited only by my supply of water in the 100 degree heat, and the need to be back before dark (I was too poor for a bike light).
From the time I was a small child to today, my home has always been a place to eat and sleep, and occasionally work. However, when I want social company, entertainment, play, adventure, a place to concentrate on work, or relax, it is far lower on my list of options.
A Different Ideal
My ideal home is just two rooms: a bedroom to sleep in, and a kitchen to cook in. These are things which I have personal preferences about and am willing to maintain. Everything else, I am quite willing to outsource for someone else to maintain. Every extra square foot or possession is a liability – a square foot I have to spend time maintaining rather than enjoying life.
The other day, our three year old daughter was playing with her rocking horse. She had flipped it over and was pretending that it was a kitchen stove. She asked me if I wanted some eggs and then pantomimed in surprising detail the process of cracking eggs, washing hands, frying eggs over easy, and serving them to me. I remarked to my wife that perhaps Sophie needs a play kitchen. She said no – first, as I just saw, her imagination served her just fine, and second, she knows how to cook many foods because she has helped her mommy many times in a real kitchen. She has her own kitchen utensils, including a sharp knife and a vegetable peeler, and helps out to the best of her physical and mental abilities.
The real world is her playground. When she needs to burn off energy, she goes to the park. When she wants to be creative, she plays with legos and paint. When she wants social company, she plays with us or friends. (We have a maximum of an hour of screen time per day.)
The real world is my playground too. When I want to relax, I meditate in the park. When I want to exercise, I ride my bike around the city. If I want adventure – well, the Appalachian trail starts less than two hours North from here. When I want to concentrate, I go to the office next door. When I want social company, I go to the pool or cafe. When I want entertainment – well, usually I’m too busy living my own life to follow the stories Hollywood comes up with, but my laptop screen works just fine.
There are many examples I could give, but my point is: your house is not a spaceship lost in space. Whether your have a family or live alone, make the whole world your home. It’s far bigger and more wonderful than any poor imitation you could try to recreate on your own. I’m not saying that you should never buy a house. Just don’t make it your life ambition, much less try to fit your entire life inside it.
Furthermore, the lack of good money habits cut across all income levels. I have friends who make far more money than me, but recently complained that they could not take advantage of Amazon Prime Day discounts because pay day was too far away. Friends who amass huge bank accounts, where their money slowly rots from inflation, or gets invested into CD’s, or useless and expensive mutual funds. Friends who panicked when the market crashed, and converted their securities to cash at the worst possible time.
Americans, you can do better! You can save and be a successful investor without becoming an expert or hiring one. By my estimate, a majority of American households would be worth a million dollars by their 40’s if they start early and make a concerted effort. There are three parts to maximizing your net worth: (1) maximize your earnings (2) minimize your cost of living and (3) maximize the return from your investments.
I will share my financial story so you can see that that I learned these lessons the hard way.
First, I invested my student loans in the stock market – in the early 2000’s
I purchased my first mutual fund at 15, with the first $500 that I earned. That was a smart start, but I followed up with a common setback: I wasted 5 years of my life getting three useless university degrees. A university degree may be necessary for many careers, but in my case, I learned virtually nothing that I used in my career as a software developer. I made university as cheap as possible by going to a state school and applying for tons of scholarships. I saved money by not having a car until I was 24, worked as a student worker, and had summer jobs. Because I lived so cheaply and worked while at school, I was able to invest my student loans in the stock market, which as you may recall did not do very well in the early 2000’s. I sold my stocks and paid off 100% of my student loans when the interest-free period elapsed, and decided to go with a professional advisor from then on.
Then, my broker bet everything on sub-prime mortgages
From 2005 to 2007, I lived cheaply and I sent a significant portion of my income to a broker. Whatever he was doing seemed to be working. What I did not consider is that the market itself did very well – I failed to compare his returns with overall market performance. When the recession hit in 2007, I lost over 60% of my original investment. Only later did I learn that he invested in subprime mortgage REITs that gave him kickbacks in the form of commissions. His incentive was to sell me funds with the highest commission – not those that controlled risk or maximized my return.
So I fired the professionals and make a killing investing on my own
After watching my life savings dwindle away for all of 2008, I created a forum thread with a investment strategy based on Peter Schiff’s Crash Proof in January 2009. I transferred everything to E*Trade and invested almost every penny I had in the markets. My return for 2009 from my investment fund was 58% – I made back everything I lost in 2008. That was a good start, but it was only a start. I invested very little additional capital over the next several years because I started spending most of my money on a nice car, restaurants, a fancy wedding, and an apartment that was soon overflowing with stuff I barely used.
My first year investing on my own. Green is my investment account, blue is S&P 500
Then I got rid of all my possessions, moved to China, and adopted a minimalist lifestyle
In 2010, I was making a good income working for an big-name ad agency in midtown Manhattan. I was making great money, but I was not very happy. I worked crazy hours and never saw my wife. The cost of life and taxes for a NYC resident are crazy high, and my friends and relative rarely had time for a vacation. I wanted to see more of the world while my wife and I were still young.
So, I found a job in Shanghai, China. It paid a fraction of what I was earning, but my wife and I decided that life is short, and if we did not see the world while we could, we would always regret it. We only brought with us what we could fit into the two suitcases allowed by the airline. Once we got to China, we knew we would have the same limitation when moved on, so we decided not to buy anything we could not carry when we moved to our next destination. Over the next five years, we lived in a series of tiny apartments in central Shanghai (one of the most expensive cities in the world). Yet because we had so few possessions, we felt liberated, not constrained. We found that we did not miss the vast majority of our stuff, and we could move anywhere in the world with just our baggage.
After five years, we decided to move back to the USA. We were able to fit all the possessions for three people in standard airline baggage, plus five medium boxes than we shipped via China Post.
I let a robot manage my life savings and worry about the details
When I returned to the USA, I reviewed what my ETrade account had been doing while I was in Asia. I saw that it had grown badly unbalanced – investments that had been successful dominated my portfolio, and moved me away from my intended strategy. To stay true my plan, I would have to re-balance my portfolio multiple times per years, buying and selling many stocks and driving up my costs. That’s when I decided to switch to a robo-advisor, which would implement my strategy automatically, while minimizing taxes by investing funds in the right tax-category and performing tax loss harvesting. After some research, I decided to go with Personal Capital, although there are several cheaper options if you don’t care about having access to a personal advisor when you want it.
Summary: how to make a million bucks by age 40
Here is a summary what I’ve learned over the last 10 years:
Take responsibility for your own career
Develop money-saving habits
Don’t let your possessions control you: adopt a minimal lifestyle
Get rich slowly: select your trading strategy, then automate it
1: Take responsibility for developing your career path
Remember that your career is an enterprise. If you want to increase your compensation, you must increase your value to your employer. Do what employer asks, but also discover what builds value for your employer and focus on that. Keep in mind that making the value you create visible within your company is your responsibility. Stay on the market and explore new opportunities even if you are happy where you are – this will help you understand your value.
If you get in a rut, be entrepreneurial: there were several times in my career when I felt stuck in a job or a position that either didn’t have the career path that I wanted or did not pay what I was worth. I took on several freelance projects that boosted my income or helped me leverage into a career shift. It’s not hard to find these opportunities if you’re always looking for them.
To visualize my financial status, I use mint.com and personalcapital.com to track all my expenses and investments. (Mint.com is better at tracking personal expenses and keeping a budget, while Personal Capital is better at more complex situations and investments.) I can quickly identify if a spending category is out of normal range, and I don’t forget about recurring expenses and subscriptions. Mint.com also gives me a nice graph of my net worth from 2008 to today, which helps keep me motivated.
I understand that my possessions can be replaced. Someone recently asked me what I would grab if my apartment caught fire. “Nothing,” I responded. “Everything I own is replaceable.”
Minimalism is not a radical lifestyle. Minimalism is a tool I use to get rid of unnecessary stuff and live a meaningful life—a life filled with happiness, freedom, and conscious awareness. Because I strip away life’s excess, I’m able to focus on the important parts of life: health, relationships, passions, growth, and contribution.
Here are some ways that a minimalist lifestyle saves us money:
By keeping possessions to a minimum and owning only what we use, we avoid the need to use a garage or spare room for storage. We can easily fit everything we need to live in a small apartment
If we really need something we don’t have, we borrow it.
We buy very little prepared food. We (well, mostly my wife) can make just about anything from a small set of ingredients. Raw food is cheaper and the result is healthier.
We visit our library to borrow books, e-books, and movies, as well as passes to local parks & zoos
We work out at home using body-weight exercises and swim at the apartment’s pool – no gym memberships needed.
We buy our daughter’s clothes from resale shops and sell them back when she grows out of them.
We have a capsule wardrobe. Everything hanging in my closet right now is for use during this summer. Clothes for other seasons are in storage. I don’t own anything I won’t wear over the course of a year.
When we moved to China, I digitized all my books by sending them to 1DollarScan.
I can fix shoes, furniture, and most electronics. (It’s not hard to learn.) I buy nice shoes and resole them many times before I wear out the upper. I know how to replace a fuse in a microwave, change the air filter in my car, and I own a glue for every material in the house. I know how to Google repairs — and I know when to let the experts handle them!
Don’t buy a home:
The New York Times has a great calculator for whether buying or renting makes sense, but if you’re working hard for that million, it generally does not. Yes, buying will generally save you money over renting in the long term, but consider this:
Even if you could buy a new house with cash, chances are that your investments will appreciate far more than your home. So you have to take out a mortgage. Now you have to worry about the costs of buying the home, paying the mortgage, performing maintenance, and big hassle if you want to move somewhere else. It’s better for you to stay flexible, focus on your family and career and let someone else take care of all the maintenance. (Another great perspective on this.)
4: Get rich slowly
After maximizing the spread between your income and your expenses, you need to leverage the magic of compound returns by investing it in the market.
So my suggestion is: just invest in the market. The whole market, not just the S&P 500. You can either invest in an index fund like VTI (USA) + VEU (not USA) or use a robo-trader which buys individual stocks (this can lower costs and save on taxes). I use Personal Capital. I can’t speak for other robo-traders, but Personal Capital re-balances my portfolio not only by asset class, but also by market sector, so I’m positioned to benefit from growth in any industry.
The only two questions you need to decide are: how to split domestic versus international stocks, and what to invest in alternative investments (such as gold, REITs, and Bitcoin). If you have trouble with these questions, use the default from a robo-trader, or use my strategy:
My portfolio asset allocation:
Allocation by sector (industry):
An aggressive portfolio can “beat the market” while controlling risk but that’s not the primary goal:
Can I really make a million by 40?
The average historical market return is about 10.7%.* A 10.7% return means your money will double every 6.5 years. If you start investing at age 20, and invest $16,300 each year, you can expect just over a million dollars by 40. Saving $1360 per month is not possible for a typical American, but becomes doable if you follow the career and lifestyle principles mentioned above. (Delaying the start of your career with a college degree would push your million into your mid 40’s.)