Notes from: I will Teach You to Be Rich, by Ramit Sethi
Central Thesis: 99% of people spend too much time worrying about the absolute perfect ideals with regard to money management, and do nothing. If you just shoot for the 85% solution, then you’re miles ahead of the rest of the crowd. Get out of credit card debt, set up some automatic withdrawals with your paycheck, and set up an automatic investment system, and you’ll be set.
1)Getting started is more important than becoming an expert – Lots of people worry too much about the details. Focus on getting off the ground, adjust as needed.
2)It’s ok to make mistakes. There is a possibility of losing everything, but it’s better to do it earlier than later, plus you are gaining skills.
3)Ordinary actions will get ordinary results – No need to follow the crowd.
4)There’s a difference between being sexy and being rich – Being rich doesn’t need to be flashy or fancy.
5)Spend on things you love, cut on things you don’t. – Some things are worth the value to you, some things are not. Marginal utility!
Power of compounding early:
If you start at 25 years and invest $100/month for 10 years, at 8%/yr. you’ll be at $200,000 at age 65.
If you start at 35 years and invest $100/month for 30 years, at 8%/yr. you’ll be at $150,000 at age 65.
So we should start early! No excuses.
Ch. 1 – Optimize your credit cards.
Having great credit helps with future loans, making a huge difference with just a few percentage points.
What’s in your credit score?
1) Have reliable payments
2) Minimize amount owed (pay off debt in full!)
3) Length of history
4) New credit
5) Types of credit (varied is better)
Don’t put things on the credit card! If you buy a $250 ipod and pay minimum payments, you’ll pay $47 in interest (1/5!) and it’ll take 2.5 years1
Getting a new card – get one with good benefits, without yearly fees. Compare online. Make sure the rewards are good. Cashback cards aren’t that great. Free flights are better.
Don’t go card crazy.
Be willing to ask for refund of fees. Don’t let the rep easily turn you down!
Track your calls to financial companies
Be ok with disputing charges if they’re not what you wanted! Credit cards are on your side.
Credit cards have amazing protection: Automatic warranty doubling. Car rental insurance. Trip cancellation insurance Look into the benefits you can get.
Pay off the debt aggressively. Do the calculations on how much the loan is costing you. See how much you can reduce it by increasing the payment. You’d be surprised at how much of a difference it can make!
If you’re paying off debt aggressively, ask for lower interest rates to help.
Ch. 2 Beat the Banks
Call to ask for the fees refunded. One overdraft wipes out your interest for the entire year.
Online banks like ING Direct and Emigrant Direct are good, high interest and good service with low fees.
Best to split checking and savings. Checking is where you write checks out. Savings are for that. Savings are way better for savings. You should be able to get a much higher rate than checking.
It’s about developing the habits. Start early
Credit unions are generally better than big name banks. Better loan rates and more personalized service.
Don’t go for teaser rates or minimum balances or bundling with a credit card.
Ask to have fees waived! Say you’re a long time customer. Generally that will do it.
Ch. 3 Ready to invest
Investing is the beginning. Compounding is amazing.
Investing is not about picking stocks! Contribute to 401k, Roth IRA, it’s basically free money if you have a company match. Start early! If you just sit on your butt and do nothing, you’re going to have a harder time catching up.
Investing is the best way to get rich. Set up an automatic money transfer.
Max out 401K match
Pay off credit card debt
Open Roth IRA
No retirement account.
401k – money goes in pretax. You’ll get taxed on it coming out.
Roth IRA – money goes in post-tax, but no taxes coming out.
Roth IRA are better than IRA if you think about it.
Generally places have minimums
Vanguard – 3000 (lots of low cost funds)
T. Rowe Price 1000 (minimum waived with $50/month auto contribution)
Schwab 1000 (minimum waived with 100 auto contribution)
Ch. 4 Conscious spending
Don’t worry about budgeting. Set up a system that works. You have to do some thinking ahead of time though. Be frugal, spend money on what’s valuable. This is different than being cheap.
Conscious spending plan.
Allocate where your money is going to go before getting it. Set up automatic withdrawals for each category. The rest of the money is guilt free.
Fixed Cost – rent, utilities, debt 50-60%
Investments – IRA – 10%
Savings – vacations, gifts, house down payment, unexpected expenses 10%
Spending money – guilt free! 10%
(I would also add tithing) 10%
Make sure you include savings goals!
When cutting, go for the big wins. Where are you spending most of your money? Cut there and don’t worry about the rest.
Focus on one or two big wins each month. Set realistic goals!
Use envelope system to target your big wins:
Negotiate a raise – Take the research and prove your value to your company. Discuss ways you can excel at work. Track your results. Role play your interview.
Get a higher paying job
Do some free-lance work.
If you have known irregular expenses, then you can put those into your “savings” accounts.
Unexpected income – spend some of it, but save a good amount.
Ch. 5 – Save while sleeping
Set up automatic withdrawals at the first of the month so you never see the money go. Defaults are your friend.
1st of month – pay
2nd of month – 401K
5th of month – automatic transfer to savings account
5th of month IRA
7th of month – pay monthly bills.
Tweak the system
Review the credit card bill.
Ch. 6 Myth of Financial expertise
Go with index funds that are low cost. Don’t need to trust the experts. Experts can’t time the market.
Passive management is worth it.
Dollar cost averaging – buying the same amount of fund ($100) each month, averages out highs and lows.
Expense ratio should be less than .2%
Ch. 7 Investing isn’t only for rich people
We make too many excuses, “I don’t have time”, “stock can go down” “etc”
Make automatic investments. That makes it so much easier.
Go with lifecycle funds – simple plans. It takes care of everything for you and you don’t need to rebalance.
Asset allocation is responsible for 90% of your returns.
Stocks are higher risk and bonds lower risk. Early on go with stock, later transition to bonds.
Don’t go with mutual funds!
Ch. 8 – Easy maintenance
Make sure you’re rebalancing. (not necessary with lifecycle funds).
Renting can be a good decision.
Don’t worry too much about taxes as long as you’re giving to 401k and Roth ira. They are tax deferred. Think twice about selling. There are strong incentives to holding.
To figure out what you want to do, ask people who are 10 years older what they wish they could have done when they were your age.
Emergency fund, buy insurance. Start children’s education.
Ch. 9 Rich life
Make a plan! What are you going to do regarding renting or home ownership? About a wedding? Run the numbers and come up with something.
Negotiating salary. Crunch the numbers and see what you can do. Do the research and preparation for a job!
Buying a car – do the research! Figure out the total cost of ownership.
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