I Will Teach You to Be Rich
BY RAMIT SETHI
I Will Teach You to Be Rich is a practical approach delivered with a non-judgmental style based on the four pillars of personal finance. These four pillars are banking, saving, budgeting and investing. Rami Sethi offers readers the wealth-building ideas of personal entrepreneurship. He also guides readers on automating finance and adopting a plan which enables people to make money even while sleeping. Indeed, the book is about how to earn more, save more, and enjoy the rich life. He explains various concepts about money and finance, e.g. the role of credit, how banks really work, different types of bank and investment accounts, types of asset classes etc. If you’re unfamiliar with such terms, this book provides a useful overview.
About Ramit Sethi:
Ramit Sethi is a Stanford University graduate with a strong internet audience. He currently writes for more than 1 million readers on his websites, including the website that this book is based on. He is also the founder and CEO of GrowthLab, which helps entrepreneurs of all levels start and grow online businesses. He’s been featured on The Wall Street Journal, CNBC, and The New York Times.
Top 20 Insights:
1. Savings and investment accounts will create the backbone of your new rich life.
2. Behavior trumps information. Knowing the perfect right answer is less important than taking action.
3. The book focuses on small, innocuous behaviors. You'll quietly move towards your goal without realizing it. For example, you'll open an investment account, but won’t put money in right away.) Better yet, you'll automate your finances and remove the decision altogether.
4. Focus on getting things 85% right. You don’t need to get it perfect. Get it 85% there. Then move on.
5. Spend on what you love. Cut back on what you don’t. If you love something, spend money (or time) on it. If it’s not important, don’t spend either.
6. Together, your credit cards and bank accounts form the foundation of the rest of your financial system. To make sure that the foundation is solid, look for accounts with low fees. Fees are how banks make a huge portion of their profits, so low fees are a good sign that a particular bank isn’t trying to squeeze more money out of you for their own benefit.
7. Investing is the most powerful way to grow your money because it offers a higher rate of return than even the best savings accounts.
8. On average, the stock market’s annual net return is about 8% (after accounting for inflation). That number is an average from decades worth of data, which means that your money will earn an average of 8% per year over the long term, even if that rate fluctuates in the short term.
9. Your savings and investment accounts are set up, you need to know how much you can afford to contribute to them every month. To do that, you’ll need a system for spending your money in a way that works for your specific goals, values, and lifestyle. That way, you’ll not only be confident that you’re contributing enough to your savings and investment goals, but you’ll also know that any money left over is yours to spend however you want—with zero guilt.
10. There are two ways to get more money. First, you can earn more. Second, you can spend less. Cutting costs is great, but Ramit finds increasing earnings to be more fun.
11. The single most important factor in getting rich is getting started, not being the smartest person in the room.
12. “Paying your bills on time is absolutely critical,” says FICO’s Craig Watts. “It’s by far the most important thing you can do to improve your credit rating.”
13. Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score.
14. On average, millionaires invest 20 percent of their household income each year. Their wealth isn’t measured by the amount they make each year, but by how much they’ve saved and invested over time.
15. A Conscious Spending Plan involves four major buckets where your money will go: Fixed Costs, Investments, Savings, and Guilt-free Spending Money.
16. If you already have a job, it’s a no-brainer to negotiate for a raise. If negotiating for a raise is impossible, try looking for a new job that pays more.
17. Nobody can consistently guess which funds or stocks will outperform, or even match, the market over time. Anyone who claims they can is lying.
18. There’s power in saying no to things we do not like or need. There’s even more power in saying yes to the things we love.
19. You don’t need to be an expert to get rich, but you need to get started early.
20. Buy a car that you can afford and focus on the total cost of ownership rather than the price tag.
“Getting started is more important than becoming an expert”
“Don’t just save, save for a goal”
Top 10 Lessons:
Lesson #1: What Does Rich Mean to You?
You must decide what being rich means to you and become a conscious spender who prioritizes. It’s 100% okay to spend unapologetically on the things you love as long as you cut down on other stuff. Conscious spending is all about avoiding creating budgets. That said, Sethi does recommend utilizing tracking tools so you can see where your money is going. These tracking tools will raise questions in your mind that may usually be left unaddressed. For example, ask yourself if you would rather buy a coffee or put that money in a savings pot towards an investment. The reality might be that you would enjoy eating food out more than having a house. Sethi recommends doing whatever will make you happier in the long run. If this is buying a sandwich a couple of times a week, keep doing this. If you are tracking your spending, at least you are making an informed decision. Making these informed decisions is what Sethi calls being frugal. Frugality is choosing the things you love enough to spend extravagantly on.
Lesson #2: Start Right Now
The most critical concept for getting rich is starting early. Sethi points out that we should never blame ourselves for not starting earlier. Of course, if you’d started ten years ago you’d be financially better off. But, the second-best time will always be today. Do not wait and hope for the best moment. The right moment to sort out your finances will never be in the future.
Lesson #3: Common Excuses for Avoiding Action
Not Making the Perfect Choice
The first thing that you can do today is set up an online savings account. This account should have no fees, no restrictions on withdrawals, and a high-interest rate. All you have to do is search for high-interest-rate savings accounts on Google. One of the most common excuses is worrying the results may not have the highest interest rate. An even more damaging excuse is believing there will be a savings account that will come out soon with higher interest rates. Both of these are merely excuses that prevent you from getting started on your financial journey. More will always be lost from indecision than from mediocre decisions. To highlight Sethi’s preference for mediocrity over delaying, he speaks about the 85% solution. He says that he would much rather get it 85 percent correct than do nothing at all.
Another common excuse to not set up a savings account today may be worries about insufficient funds. Many people believe the interest received on their limited amount of savings is not worth the hassle of setting up a savings account. But, it is important to notice that no amount is too small when forming great money habits. Having less money actually gives you an even better reason to start as the stakes are low. A recently formed band shouldn’t decline an invitation to a smaller festival just because they dream of filling the Madison Square Garden. The band should view it as an opportunity to practice and get better. You can’t expect to handle millions well if you are struggling with hundreds of pounds.
So, Sethi recommends bewaring the minutiae. You don’t have to get it perfectly right the first time. You just have to start at some point, and today is a great day for that.
Lesson #4: Swap Your Attention from Micro to Macro
Save on three-dollar lattes; get a temporary 0.1% increase on your interest rate by switching to X bank and use clip coupons. These three examples represent micro-decisions. You may feel like you’re automatically a part of the Lean FIRE (Financial Independence Retire Early) movement by involving yourself in such activities. This is not where the battle is won. We should focus our energy on five to ten things that really matter. These pursuits should yield exceptional results and a good return on invested energy.
Here are a few of those big wins:
1. Automate your money system.
2. Keep a great credit score.
3. Use credit cards to get free cashback and rewards.
4. Contribute money towards a 401(k) to get at least the full employer match.
5. Pay off your credit card debt.
6. Cancel your subscriptions and instead buy monthly. If you want to watch a specific series on Netflix, you can pay the subscription for 30 days and then instantly cancel. You’ll have time to watch that series that you created the account for. You also won’t end up paying for a product that you’re not using, say, three months down the line.
7. Focus on cutting your costs in a few problem areas. The areas you often tell people that you have probably spent too much on.
8. Negotiate a raise.
9. Do freelance work.
10. Buy a house that you can afford.
11. Allocate your capital correctly.
Feel free to use this as a checklist. If you can get five of these right, you can buy as many $3 lattes as you want.
Lesson #5: The Fundamentals of Setting up Your Automatic Money System
For your system, you’ll need:
1. A checking account: This is where the money goes first. Think of it kind of like a distribution center. Its primary purpose is to feed your other accounts appropriate amounts by using automatic transfers and to pay off all your bills.
2. A savings account: This is a parking spot for short-term to mid-term savings goals, like vacations or a wedding. Pick one with no fees, no restriction on withdrawals, and a high-interest rate.
3. A credit card: used correctly, this is a free short-term loan with rewards and perks. Get at least one that gives cash back.
4. A retirement savings account: like a 401k or a Roth IRA. This will be country-specific.
5. An investment account: Get one from an online broker.
Lesson #6: The Benefits of Setting up Your Automatic Money System
Humans are weak at times. We get distracted, bored, and unmotivated. These characteristics endanger our prior investing efforts and saving habits. You think that you care, but this personal interest might only last for a short period. In two weeks, you could easily be back into your old bad habits. So, we must set up an automatic money system that can save us from our worst selves. This system will make sure that we stick to our long-term money plan by allocating our income each month. Creating an automated money system is a way of doing some work right now to reap significant benefits for years and years to come.
Lesson #7: Setting up Money Buckets
Your automated money system must be based on a conscious spending plan which contains four buckets:
1. Fixed costs
4. Guilt-free spending
Here’s an excellent suggestion on what percentage of your take-home pay that these should represent:
· Fixed costs: 50-60%
· Investments: 10%
· Savings: 5-10%
· Guilt-free spending: 20-35%
Don’t go lower than 5% to your savings account and 10% towards investments. These two buckets will be the backbone of your new rich life. If you implement a few of the big wins, you’ll be able to raise these percentages in no time. Automation is crucial because you can then learn to live without money. If you never see it, you will never get the urge to spend it.
Lesson #8: The Schedule for Setting up Your Automatic Money System
Sethi believes that automating your finances requires you to choose specific days of the month for particular financial transactions. Suppose you are paid on the 1st of the month. In this case, you should ensure that your rent or mortgage comes out on this day. This automation will mean you are paying off your essential expenses before you spend in any other areas. Then, set up a direct debit on the 5th of the month. This should be an automatic transfer from your checking account into your savings account. On this same day, also have an automatic transfer that sends money to your Roth IRA. Finally, have an auto-pay set up that pays for any remaining monthly bills on the 7th of the month. This includes paying off your credit card in full from your checking account (not your savings account).
Lesson #9: The Pyramid of Investing Options
Let’s have a look at how to invest your money. Sethi presents three different ways to invest your money:
1. Pick your own stocks and bonds.
2. Pick your own index funds and mutual funds.
3. Invest in target-date funds.
This is the pyramid of investing options. The higher up in the pyramid, the simpler the investing process. Sethi believes that for 99% of people, the second or third levels in the pyramid are the best options. The peak, picking your own stocks and bonds, should only be engaged with by certain individuals. Sethi believes this because it is difficult for the individual investor to beat the market. Time spent trying to beat the market could be spent elsewhere.
Sethi suggests that even index funds and mutual funds are too much of a hassle for most people. With target-date funds, diversification and asset allocation are solved for you. The only thing that you must do is have your automated money system in place. For example, suppose you expect to retire in 2055. In that case, you can set up your investment or retirement account so that you buy “Vanguard’s Target Retirement 2055” each month. Then, that’s that. No more hassle, and your money will experience the wonders of compound interest. This is a perfect example of passive income that can also be used for specific savings goals. If you expect to get married in five years, for example, you can start buying target retirement 2025 for that specific goal.
Lesson #10: Optimize Your Credit Cards
To start this section, Sethi offers a few simple foundational tips that everybody should follow.
· Pay off your credit card automatically.
· Get all fees waived.
· Negotiate a lower APR.
· Keep your cards for a long time and keep them active.
· Get more credit (if you have no debt).
· Use your rewards.
After this, he delves into a bit more detail regarding exactly how you can optimize your credit cards after building this foundation.
Improve Your Credit Utilization Rate
The two approaches you can adopt to improve your credit utilization rate are:
1. Stop carrying debt on your credit cards (even if you pay this off).
2. Increase your total available credit.
Sethi recommends choosing the latter, as there are several benefits of consistently using your credit cards. For example, most credit cards will extend the warranty associated with your purchases.
Your credit card will cover your Apple products for up to an additional year after your Apple warranty has expired. You do not need to worry about enabling this, as this process occurs automatically with all credit cards and for all purchases. Credit cards also protect you in a way that means you sometimes don’t have to be insured. For example, Sethi argues that car insurance is never worth it. Your car insurance will already provide some coverage. Your credit card will likely cover you for up to $50,000 worth of damages. Credit card providers will also usually cover you for up to $1,000 a year for travel cancellations.
The Six-Week Plan
It is possible to gain financial fitness in just six weeks, by focusing on the following steps:
Manage your credit: Credit should be used wisely, especially while buying high-value items which cannot be afforded in ready cash. Avoid spending more than you earn and learn to use credit as an interest-free loan by paying off your bills on time.
Optimize your bank accounts: Optimizing your bank accounts involves picking the best banks and accounts, limiting bank fees, and maximizing bank interest.
Prepare to invest: Now it is time to move on to investments. Focus on growing your money and on retirement planning.
Apply conscious spending: In the fourth week of the six-week plan, practice and then adopt conscious spending by lavishing money on things you love while cutting costs elsewhere.
Automate your money transfers: The fifth week should revolve around automating your money transfers to avoid wasting time or spending over your limit.
Know what to invest in and how: Finally, in the last week, figure out how and where you wish to invest by analyzing all your options and deciding wisely on the plan of action. Investment is not about picking “hot stocks” or trying to beat the market. The best investment strategies are actually very simple. Learn them and set aside an afternoon to set up your investments. The earlier you start investing, the better.
The six-week plan forms 85% of your financial wellness journey while the rest is all about maintaining your investments. This can be done by:
Keeping a check on your investing and rebalancing your funds in response to changes in circumstances or the market environment. Further, if you choose to invest in index funds then you should consider rebalancing every 12-18 months.
Achieving your targeted percentage of conscious spending and building your investment portfolio is not an overnight process. It needs to be built gradually over time. You should treat the first 6 weeks as setting the stage. They are like the platform from which you can take off. However, you will still need time to achieve your financial goals.
Having a rich life is not just about acquiring more money. In fact, it goes beyond just money. While money can give us the freedom to do what we love and give back to others, you can’t just focus on growing your wealth. By having a conscious spending plan and establishing a system that can help you automate your savings and investments, you can spend on things that matter the most to you and still achieve your financial goals.
At last, for a generation that's materially ambitious yet financially clueless comes I Will Teach You To Be Rich, Ramit Sethi's 6-week personal finance program for 20-to-35-year-olds. A completely practical approach delivered with a nonjudgmental style that makes readers want to do what Sethi says, it is based around the four pillars of personal finance— banking, saving, budgeting, and investing—and the wealth-building ideas of personal entrepreneurship.
Sethi covers how to save time by not wasting it managing money; the guns and cars myth of credit cards; how to negotiate like an Indian—the conversation begins with "no"; why "Budgeting Doesn't Have to Suck!"; how to get things rolling—for real—with only $20; what most people don't understand about taxes; how to get a CEO to take you out to lunch; how to avoid the Super Mario Brothers trap by making your savings work harder than you do; the difference between cheap and frugal; the hidden relationship between money and food. Not to mention his first key lesson: Getting started is more important than being the smartest person in the room. Integrated with his website, where readers can use interactive charts, follow up on the latest information, and join the community, it is a hip blueprint for building wealth and financial security.
Every month, 175,000 unique visitors come to Ramit Sethi's website, Iwillteachyoutoberich.com, to discover the path to financial freedom. They praise him thoughtfully ("Your site summarizes everything I want with my life—to be rich in finances, rich in experience, rich in family blessings," --Dan Esparza) and effusively ("Dude, you rock. I love this site!" --Richard Wu). The press has caught on, too: "Ramit Sethi is a rising star in the world of personal finance writing . . . one singularly attuned to the sensibilities of his generation. his style is part frat boy and part silicon Valley geek, with a little bit of San Francisco hipster thrown in" (San Francisco Chronicle). His writing is smart, his voice is full of attitude, and his ideas are uncommonly sound and refreshingly hype-free