I Will Teach You to Be Rich – by Ramit Sethi
Date read: 7/22/17. Recommendation: 9/10.
The most accessible, practical book I've read on personal finance. Sethi dismisses trendy advice, such as cutting back on lattes, and instead emphasizes saving on the big purchases that really matter. And he's hilarious. This book is all about optimizing your strategy, prioritizing what matters most, and making money work for you (instead of obsessing over the minute details). This is a must read for anyone in their 20s or 30s, and should be a required reading for all who can still take advantage of the most valuable asset in investing: time.
See my notes below or Amazon for details and reviews.
My Notes:
When it comes to weight loss, 99.99% of us need to know only two things: Eat less and exercise more. Only elite athletes need to do more. But instead of accepting these simple truths and acting on them, we discuss trans fats, diet pills, and Atkins versus South Beach. *Finance similar in debating minutiae and valuing anecdotal over research.
An abundance of information can lead to decision paralysis.
I also often hear the cry that "credit-card companies and banks are out to profit off us." Yes, they are. So stop complaining and learn how to game the companies instead of letting them game you.
The single most important factor to getting rich is getting started, not being the smartest person in the room.
Just as the diet industry has overwhelmed us with too many choices, personal finance is a confusing mess of overblown hype, myths, outright deception.
Frankly, your goal probably isn't to become a financial expert. It's to live your life and let money serve you. So instead of saying, "How much money do I need to make?" you'll say, "What do I want to do with my life–and how can I use money to do it?"
To be extraordinary, you don't have to be a genius, but you do need to take some different steps than your folks did (like starting to manage your money and investing early).
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't.
This book isn't about telling you to stop buying lattes. Instead, it's about being able to actually spend more on the things you love by not spending money on all the knucklehead things you don't care about.
Money is just a small part of being rich...If you don't consciously choose what rich means, it's easy to end up mindlessly trying to keep up with your friends.
Chapter 1: Optimize Your Credit Cards
Establishing good credit is the first step in building an infrastructure for getting rich. Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchase. Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.
It's fine to be frugal, but you should focus on spending time on the things that matter, the big wins.
If you miss even one payment on your credit card:
- Credit can drop more than 100 points
- APR can go up to 30 percent
- Charged a late fee
- Trigger rate increases on other cards
If you miss a credit card payment, you might as well just get a shovel and repeatedly beat yourself in the face.
To improve your credit utilization rate (makes up 30% of your credit score) you have two choices: Stop carry so much debt on your credit cards or increase your total available credit (if you're debt free).
Every year call your credit cards and ask what advantages you're eligible for. Often, they can waive fees, extend credit, and give you private promotions. "Hi there. I just checked my credit and noticed that I have a 750 credit score, which is pretty good. I've been a customer of yours for the last four years, so I'm wondering what special promotions and offers you have for me...I'm thinking of fee waivers and special offers that you use for customer retention."
Although closing an account doesn't technically harm your credit score, it means you then have less available credit...People with zero debt get a free pass. If you have no debt, close as many accounts as you want. It won't affect your credit utilization score.
If you're applying for a major loan (car, home, education) don't close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.
Chapter 3: Get Ready to Invest
Over the twentieth century, the average annual stock-market return was 11 percent, minus 3 percent for inflation, giving us 8 percent.
Of employees age 25 and under:
- Less than one-third participate in a 401(k)
- Less than 4 percent max out their contributions
- Only 16 percent contribute enough to get the full company match (literally free money)
Financial institutions have noticed an interesting phenomenon: When people enter their forties, they suddenly realize that they should have been saving money all along. As a result, the number one financial concern Americans have is not having enough money for retirement.
By opening an investment account, you give yourself access to the biggest moneymaking vehicle in the history of the world: the stock market.
Ladder of Personal Finance:
- Rung 1: 401(k) match, contribute enough to get full match
- Rung 2: Pay off your credit card and any other debt.
- Rung 3: Open up a Roth IRA
- Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it.
- Rung 5: If you still have money left to invest, open a regular non-retirement account and put as much as possible there.
Benefits of 401(k):
Using pretax money means an instant 25 percent accelerator.
Chapter 4: Conscious Spending
Cheap vs. Frugal: Cheap people care about the cost of something. Frugal people care about the value of something.
Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on and then cutting costs mercilessly on the things you don't love. The mind-set of frugal people is the key to being rich.
50% of more than one thousand millionaires surveyed have never paid more than $400 for a suit, $140 for a pair of shoes, and $235 for a wristwatch.
Instead of getting caught on a spending treadmill of new phones, new cars, new vacations, and new everything, they plan what's important to them and save on the rest.
A good rule of thumb is that fixed costs (rent, utilities, debt, etc.) should be 50-60% of your take-home pay.
A good rule of thumb is to invest 10 percent of your take-home pay (after taxes) for the long term.
Another solution is "The 60 Percent Solution" splitting your money into buckets. The largest being basic expenses (60%). The remaining split four ways: Retirement (10%), Long-term savings (10%), Short-term savings (10%), Fun money (10%).
Chapter 6: The Myth of Financial Expertise
Americas love experts....But ultimately, expertise is about results. You can have the fanciest degrees from the fanciest schools, but if you can't perform what you were hired to do, your expertise is meaningless.
More information is not always good, especially when it's not actionable and causes you to make errors in your investing. The key takeaway here is to ignore any predictions that pundits make. They simply do not know what will happen in future.
Recently, Helpburn Capital studied the performance of the S&P 500 from 1983 to 2003, during which time the annualized return of the stock market was 10.01 percent. They noted something amazing: During that twenty-year period. If you missed the best twenty days of investing (the days where the sock market gained the most points), your return would have dropped from 10.01 percent to 5.03 percent. And if you missed the best forty days of investing, your returns would equal only 1.6 percent–a pitiful payback on your money. Lesson: Do not try to time the market, invest regularly and for the long-term.
Ignore the last year or two of a fund's performance. A fund manager may be able to perform very well over the short term. But over the long term he will almost never beat the market–because of expenses, fees, and the growing mathematical difficulty of picking outperforming stocks.
Most people don't actually need a financial adviser–you can do it all on your own and come out ahead.
Many people use financial advisers as a crutch and end up paying tens of thousands of dollars over their lifetime simply because they didn't spend a few hours learning about investing. If you don't learn to manage your money in your twenties, you'll cost yourself a ton one way or another–whether you do nothing, or pay someone exorbitant feeds to "manage" your money.
Mutual funds use something called "active management." This means a portfolio manager actively tries to pick the best stocks and give you the best return. Index funds are run by "passive management." These funds work by replacing portfolio managers with computers. They simply and pick the same stocks that an index holds.
Index funds have lower fees than mutual funds because there's no expensive staff to pay. Vanguard's S&P 500 index fund, for example, has an expense ratio of 0.18 percent.
Passively managed index fund (.18% expense ratio, 8% return on investment of $100/month), after 25 years: $70,542.13
Actively managed index fund (2% expense ratio, 8% return on investment of $100/month), after 25 years: $44,649.70
*Half of actively managed funds between 1993 through 1998 failed to beat the market, and only 2% beat market from 1993 through 2003.
More than 90% of your portfolio's volatility is a result of your asset allocation (your mix of stocks and bonds, not individual stocks).
Your investment plan is more important than your actual investments. Just as the way I organized this book is more important than any given word in it.
1998: US large cap stocks +28.6%, international stocks +20%, REITs -17%
2000: US large cap stocks -9.10%, international stocks -14.7%, REITs +31.04%
If you're 25 and just starting out, your biggest danger isn't having a portfolio that's too risky. It's being lazy and overwhelmed and not doing any investing at all. That's why it's important to understand the basics but not get too wrapped up in all the variables and choices.
"I believe that 98 or 99 percent–maybe more than 99 percent–of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs." -Warren Buffet
"When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long-term index fund investor." -Mark Hulbert
Lifecycle funds, also known as target-date funds, automatically pick a blend of investments for you based on your approximate age. The 85% percent solution, not perfect, but easy enough for anyone to get started.
If you're picking your own index funds, as a general guideline, you can create a great asset allocation using anywhere from three to seven funds. The goal isn't to be exhaustive and own every single aspect of the market. It's to create an effective asset allocation and move on with your life.
Dollar Cost Averaging: Investing regular amounts over time, rather than investing all your money into a fund at once, so you don't have to guess when the market is up or down. *Set up automatic investing at regular intervals so you don't have to think about it.
Chapter 8: Easy Maintenance
Ignore the noise: It doesn't matter what happened last year, it matters what happens in the next ten to twenty years.
Renting is actually an excellent decision in certain markets–and real estate is generally a poor financial investment.
Tax inefficient (i.e. income-generating) assets such as bonds should go into a tax advantaged account like an IRS or a 401(k). Conversely, taxable accounts should only hold tax-efficient investments like equity index funds.
Invest as much as possible into tax-deferred accounts like your 401(k) and Roth IRA. Because retirement accounts are tax advantaged, you'll enjoy significant rewards.
If you sell an investment that you've held for less than a year, you'll be subject to ordinary income tax, which is usually 25-35 percent.
If you hold your investment for more than a year, you'll only pay a capital-gains tax, which in most cases is currently 15 percent. This is a strong incentive to buy and hold for the long term.
Chapter 9: A Rich Life
Being rich is about freedom–it's about not having to think about money all the time and being able to travel and work on the things that interest me. It's about being able to use money to do whatever I want–and not having to worry about my budget, asset allocation, or how I'll ever be able to afford a house.
Raises:
When you receive a raise, don't feel bad about celebrating–but do it modestly...A mere increase in your income is not a call to change your standard of living.
Big Purchases:
When it comes to saving money, big purchases are your chance to shine–and to dominate your clueless friends who are so proud of not ordering Cokes when they eat out, yet waste thousands when they buy large items like furniture, a car, or a house. When you buy something major, you can save massive amounts of money–$2000 on a car or $40,000 on a house–that will make your other attempts to save money pale in comparison.
Buying a Car:
Let me first tell you that the single most important decision associated with buying a car is not the brand or the mileage or the rims (please jump off a bridge if you buy specialty rims)...Most important factor is how long you keep the car before selling it. You could get the best deal in the world, but if you sell car after four years, you've lost money. Instead, understand how much you can afford, pick a reliable car, maintain it well, and drive it for as long as humanly possible. Yes, that means you need to drive it for more than ten years, because it's only once you finish the payments that the real savings start.
Buying a House:
Can you afford at least a 10 percent down payment for the house? If not, set a savings goal and don't even think about buying until you reach it.
I have to emphasize that buying a house is not just a natural step in getting older. Too many people assume this then get in over their heads. Buying a house changes your lifestyle forever.
If you can afford it and you're sure you'll be staying in the same area for a long time, buying a house can be a great way to make a significant purchase, build equity, and create a stable place to raise a family.
Real estate is the most overrated investment in America. It's a purchase first–a very expensive one–and an investment second.
As an investment, real estate provides mediocre returns at best. Risk: If your house is your biggest investment, how diversified is your portfolio? Poor returns: From 1890 to through 1990, the return on residential real estate was just about zero after inflation.
If someone buys a house for $250,000 and sells it for $400,000 twenty years later, they think, "Great! I made $150,000! But actually, they've forgotten to factor in important costs like property taxes, maintenance, and the opportunity cost of not having that money in the stock market.
The truth is that, over time, investing in the stock market has trumped real estate quite handily–even now–which is why renting isn't always a bad idea.
When you rent, you're not paying all those other assorted fees, which effectively frees up tons of cash that you would have been spending on a mortgage. The key is investing that extra money.
I urge you to stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross pay. If you can't do that, wait until you've saved more.