I Will Teach You to Be Rich

I Will Teach You To Be Rich
Author:
Published: 3/23/2009
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.

Book Summary - I Will Teach You to be Rich by Ramit Sethi

Key Insights

In this manual of advice, Ramit Sethi explains that good financial health is easier than we think. Money management skills like budgeting and investing seem complicated and difficult, scaring people away from learning them. Sethi shows that these skills are actually extremely straightforward, and can be set-up in a matter of six weeks and then maintained in our sleep for years on end. In arranging a few foolproof lifestyle changes and habits, Sethi argues that any financial dream is achievable, whether that be freedom to retire early, more money to travel, or a cushioned bank account.

Key Points

The first step to financial health is taking responsibility for yourself

When you look at your bank account, which may not be as large as you’d like, and your debt, your first reaction may be to blame others in frustration. Maybe you believe your school should have taught you how to do your taxes correctly or how to budget, or you blame your parents for not helping you understand how to save. You may feel frustrated by the investing market for seeming difficult to understand and therefore feeling inaccessible, or disillusioned by the financial recession which lost people their money and left many unemployed.

Although this reaction is normal, it will not help you get back on your feet. In fact, many of these difficulties are already addressed. For example, most schools teach financial literacy courses but these courses are poorly attended. There are also plenty of tools for understanding different money management skills online which may not have been explored. Drops in the market are normal, and irrelevant in the longterm.

Sethi writes that admitting to our neglect to learn about this part of our lives is crucial to moving forward. By admitting that we haven’t done enough to prepare ourselves, we can transcend the frustration of blame and make peace with reality. Then, we can take a deep breath and take control of our financial future. According to Sethi, every single person is capable of solving their money problems.

The sooner a person does this, the better, says Sethi, who points out that the young are unfortunately the least likely to invest. The younger a person starts making a simple plan for themselves, the more opportunities they will have to grow their wealth and feel more relaxed in the future. That being said, it is never too late to start, even for those close to retirement age, and starting earlier is better than continuing to wait.

Being wealthy doesn’t necessarily mean having millions in the bank

When Sethi claims that his book will make you rich, he does not necessarily mean he will increase your net worth to an arbitrary number. Instead, he explains that wealth can mean different things to different people. For example, wealth could mean being able to work for pleasure rather than working to pay the bills. It can mean buying a house in a remote place where relaxing is easy. It can mean helping to pay your kids through college, or retiring early. Sethi asks you to think about what “rich” means to you specifically and to understand these financial goals in order to work towards what matters.

Setting up credit cards can save you money in the long run

Credit cards may seem intimidating, but developing good credit is an essential part of growing your money since people with good credit save money on the long-term. Credit consists of a credit report and a credit score; the credit report is a record of the borrower’s repayment of debts, whereas a credit score is a number which shows potential lenders how likely you are to pay back your debt on time.

How does a good credit score save you money? When making a large payment, like when buying a car or getting a mortgage, a good credit score can make a big difference by allowing you to take out a loan with a smaller interest rate. A smaller interest rate means that as you pay back your mortgage, for example, you will have to pay less by the end of it. When working with expensive items, like a 500,000 house, for example, this difference in interest can save you hundreds of thousands of dollars. For example, a good credit score could mean you only pay 200,000 of a mortgage versus 300,000– the result of higher interest rate compounding over the years. Therefore, having a good credit score can help you save significant amounts.

Credit card users should also be careful with their cards, which can go from useful financial tools to financial burdens in a flash. Credit cards can be dangerous for a lot of people since it is easy to keep swiping and accumulating debt. The interest rates on credit cards are uniquely high, meaning you will have to pay more than you owed in the first place as time goes on. Credit card debt is never worth taking on; Americans pay nearly 10% of their annual income on interest rates from their debt, money that could have gone towards improving their lives.

To build a good credit score set up a credit card early and keep them for a long time. As time goes on, request higher credit limits. To avoid debt at all costs, automate credit payments, and pay your balance in full every time. These simple steps can prevent future headaches, unnecessary debt, and save you more than you think.

Don’t be lazy with your bank accounts— pick the ones with the highest interest rates and no fees

Like with maintaining your credit, choosing bank accounts smartly can save you a ton of money in the long run. Sethi points out that not all banks are created equal, and many people choose mediocre options when deciding on where they store their money. Many people just choose to use their local bank, attaching both their checking and savings to the same account for confidence. Sethi explains that this approach is lazy and with a little poking around, you can use banks to their full advantage.

The first way banks can save you money is by choosing accounts with no fees. Many online banks, unlike in-person banks, offer no fees thanks to a smaller staff— online banks are a great and often overlooked option. There are ways to reduce fees for traditional banks too, however. Call a representative and tell them you are considering switching to a different bank due to the fees. Most banks respond to these calls by waving the fees, as they’d rather lose the money from the fees than an entire customer.

The second and more important step to choosing the best bank account is to look for those that offer the highest interest rates. Again, online banks offer stronger options for most people with interest rates 6 to 10 times higher than traditional banks. Some savings account offer up to 4-6% annual returns. Make sure to look around for these high-interest rates before deciding where to take your money.

By putting your money into a bank with a higher interest rate, you help yourself beat inflation which can lower the value of the money sitting in the bank. With inflation hovering around 1%, choose a bank with an interest rate higher than the inflation rate so you not only preserve the value of your money but watch it grow.

Sethi also recommends opening numerous checking and savings accounts to keep track of your money. By opening multiple accounts with lower fees, it may be easier to separate savings for travel and down payment, for example.

For those interested in putting more effort into this part of their financial life, finding the best savings and checking accounts for these different goals is the best option. But for those who feel this is too much work, the simplest option is opening a checking account with a local bank and a savings account with the highest interest with an online bank.

Investing, rather than leaving money in a savings account, will grow your savings. Open that account.

Investing may seem like the most intimidating concept of the bunch, but it’s the key to growing your wealth over time. The earlier you learn to stash away money into an investment account, the more money you’ll find yourself within the longterm. This is why Sethi stresses that even if you only have 50 dollars on hand, open an account and start the habit of investing. The longer that money sits in the investment account, the more time it has to compound. Commit to any amount no matter how small.

If saving for the long run, like for retirement, Sethi explains that investing is much smarter than keeping your money in a savings account. In the savings account, money grows slowly compared to the upward trend of markets. In a few decades, this money grows in an exponential way, earning you more returns as it compounds.

You may not know where to start with retirement investing. A good first step is looking to see if your company offers a 401k program (most employers in the United States do). A 401k is a retirement account set up by your employer that you can choose to direct some of your paychecks towards.

Over half of the people who have access to a 401k program don’t participate and miss a great opportunity to start growing their money. Many companies offer something called a where they will match a percentage of the money that you put into your 401k. If you have access to this matching, take full advantage— this is free money. Even if you don’t, a 401k is a great way to automatically invest.

The second step to investing for retirement (or the first for those without access to a 401k) is opening up a Roth IRA. Sethi advises that investors have both a 401k and a Roth IRA if possible. This is an easy way to diversify your investments and therefore guarantee different avenues for growth. Additionally, Roth IRA is taxed at the outset meaning when your money grows and you go to collect your earnings, your final amount isn’t taxed. This is opposite to a 401k that taxes upon withdrawal.

There are several Roth IRAs that have minimum deposit amounts, but some have no starting amount at all. This makes it easier to start investing as soon as you feel committed to growing your money.

To spend consciously, automate your money and direct it where you want it

When people picture budgeting, they imagine having to write out all their expenses and rigidly curb their spending across the board. Sethi explains that budgeting can be more intuitive than that and that spending consciously doesn’t have to mean restriction.

The first step to conscious spending is understanding the areas in your life that you want to spend the most resources. For young people, this may be going out to concerts and restaurants with friends. For older people, this may be saving for travel or new furniture. Either way, interests can shift over time so spending should serve these interests.

The next step is to then reduce the amount of money spent on things that feel less important. This could mean cooking meals at home for those who want to spend more money on a rental in a nice neighborhood. It could also mean deciding to spend less on new clothes in order to save for a big trip to a different continent. Sethi recommends cutting the less valuable areas ruthlessly: this may mean forgoing a cable package or a gym membership.

Sethi says this becomes foolproof when you decide where you want to send your money and then automate your payments in a way that reinforces these spending habits. By automatically saving and investing, you can feel guilt-free about your spending habits, knowing that money was put towards the things you value.

Sethi recommends splitting your income into basic percentages, though they can vary depending on financial goals. 60% of your money should go to fixed costs (like rent, bills, and healthcare), 10% to investments, 10% to savings (like vacations, an emergency fund, or gifts). The remaining 20% is guilt-free spending for all the indulgences we come across.

One way to automate spending is through the envelope method, where income is divided into different envelopes— when the envelope runs out, there is no more spending that month. Cash can be used in this method, but debit cards can also act as envelopes with money being automatically loaded onto them from a checking account. Once the money is gone, no more spending!

Another way to automate spending is by transferring money from a checking account to various accounts in an intuitive order. This means you won’t waste time and effort trying to decide where to spend and where to save. Once you set up automated transfers, you won’t have to think about it anymore and you can rest easy knowing you’ve saved and invested where needed.

Once the money arrives in your checking account from a paycheck set up a system that automatically splits it. For example, if the money arrives on the first of the month, set up a transfer that pays rent and bills automatically. On the second of the month, automatically transfer money to a 401k and Roth IRA. On the fifth, send money to your savings. By setting up this system, the money will always be where it should be and you can start saving in your sleep.

That being said, make sure to leave a cushion of money in your checking account, around 100-1,000 dollars, to avoid overdraft fees in this process.

Investing is simple. Ignore the noise.

In the media, investing seems extremely complicated. Experts give constantly changing advice on which stocks to invest in, which to avoid. Ignore this noise, says Sethi. Studies show that even experts can’t predict the way the stock market will act in the short term. No one can see the future. The simplest path involves circumventing this chatter.

There are three options that Sethi discusses. First, he talks about how mutual funds are often recommended, but he advises against them. They may beat the market for a few years but because funds are run by managers, they are fallible and may hide the performance of the fund over time. Because of this staffing, mutual funds require hefty fees. He also explains that mutual funds can fail due to underperformance and it is best to avoid this possibility.

Index funds, on the other hand, have no fees because they are run by computer programs. Because of this, they often run parallel to the market and are therefore more predictable. Sethi advises picking a few index funds, the best ones being lifecycle funds. Lifecycle funds, like the Vanguard Target Retirement fund, shift investments from a larger percentage of stocks to a larger percentage of bonds as you age. This is because when we are young, we can afford to take more risks. When we are older, bonds offer more security but slower growth.

Financial change doesn’t happen overnight so don’t get discouraged. Acknowledge that you’re moving in the right direction

The journey to financial health may involve some bumps— in order to achieve your goals, you should stay committed to your progress and forgive yourself for mistakes. Attempting drastic changes, like trying to save too much for retirement quickly, can lead to disappointment.

Forgive yourself for any past mistakes and move slowly and intuitively. This could mean starting with small manageable payments in your investment towards retirement. Though you may wish you could send 200 dollars to retirement if this is unrealistic start with 50. As you adjust, you may find you can cut spending in a way that allows you to send more towards your account. Sethi encourages his readers to work slowly towards his goals and to start today. By building habits, no matter how slowly, it is better to start today.

The Main Take-away

Sethi’s advice boils down to creating a financial plan that allows for as little work as possible in the long run. By putting in a little elbow grease at the outset, Sethi explains how to set yourself up to win through several fundamental changes to how money flows through your life. By automating your money, you can make sure all your bills are paid, your savings are accounted for, and that you are respecting your longterm self. By placing your money in the best accounts, it can grow instead of depreciating. By understanding credit cards, you can save large chunks of money in the long run. Most importantly, Sethi points to basic and smart investing as the key to longterm wealth. Paying attention, understanding goals, and practicing patience make these changes possible.

About the Author

Rami Sethi is a personal finance advisor and entrepreneur. He owns and writes for IWillTeachYouToBeRich.com, co-founder of PBWorks, and founder of GrowthLab.com. He teaches online courses on topics like how to make the most of your money, how to find your dream job, and how to find success in your line of work. He holds a Bachelors's and Master's degree from Stanford University.

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