The Book In Three Or More Sentences:
You don’t have to be an expert to get rich. No, really. The vast majority of people don’t even need a financial advisor to help them get rich. They simply need to spend less than they earn. To understand the boring truth about financial wellness: control your spendings, invest regularly, stay informed, and take some well-measured risks from time to time.
The Core Idea:
People buy books, subscribe to expensive apps, hope they’ll win the lottery, hire financial coaches thinking these things will magically produce more benjies. Well, the truth is quite different. If you don’t want to learn how money works, don’t want to cut some costs, nothing you’ll read can help you become financially stable. Ramit Sethi, argues with passion and seemingly endless wit that pretty much all of our financial problems boil down to one thing: our emotions, and our inability to understand why we behave the way we do with money.
5 Key Lessons from I Will Teach You to Be Rich, Second Edition:
Lesson #1: You’re Not Good With Money Because of These Five Reasons
Like muscle gain, becoming Donald Duck kind of rich doesn’t happen overnight. But people don’t get that. They love to debate minutiae and forget that doing the simplest things, regularly, is the key to success. For example, people talk for hours about investing sometimes in the future, growth-hacking, how the current economics is messing with their “business,” how they are going to ask for a raise, etc. Unfortunately, they don’t do any of these things in reality. They simply talk and forget about doing the important things which are the following:
Reasons we’re not good with money:
- We don’t track spending;
- We spend more than we realize, or admit;
- Debate minutiae about interest rates and hot stocks;
- Listen to friends, our parents, self-proclaimed gurus who don’t know what they’re talking about;
- We don’t take time to understand why we behave the way we do with money – i.e. we should finally ask ourselves, “Why I’m the first person in the mall when there is a sale?”
But as Ramit Sethi says in the book, you don’t need financial advisers to get more cash. Hell, you probably don’t even need to read this book. According to him, we simply need to set up accounts at banks that don’t suck, keep an eye on our day-to-day spendings, pay off our debt, and automate our investments by forwarding money to a specific savings (or investment) account every month.
That’s it. I know, boooooring…
It’s not cool and exciting as you’ll see in the movies, but in essence, that’s what we need to do if we want to have more money.
Lesson #2: There Are 10 Rules For a Rich Life
Yep, not hundreds, only ten. Here they are in short:
- A Rich Life means spending like crazy on the things you love as long as you’re freakin’ cheep for the things you don’t (love).
- Focus on the Big Wins – the things that have the highest impact on your finances. For example, these two: 1) find a job you love and regularly ask your boss for more money, 2) automate your savings and investments.
- Investing should be boring. Profitable over the long term, but boring.
- There is a limit on how much you can cut, but no limit on how much you can earn. You should be mindful of your spending but focus more on higher earnings.
- Listen to the “tips” you’ll inevitably get from the people around you. Then, stick to your program. Don’t argue with them, there is no point in doing that.
- Create “spending rules” and follow them without wasting time debating. For instance, if buying books is a rule for you, don’t waste time thinking whether or not you should get that book, simply get it and move on with your life.
- Stop searching for “money-saving hacks and tips.” Financial independence comes by doing hard work. Not by reading articles online.
- Nobody is coming to rescue you or hand you a briefcase full of money, except if you’re a prince of some sort. You’re in control of your life. So, start controlling.
- Tip 9 is don’t focus on money. Yeah. Kind of counterintuitive. The idea here is to focus more on creating the life you really want. Be bold. Be different. Don’t do what others are doing only because they’re doing it. Do what pleases you.
- Don’t get addicted to your spreadsheet – waste time constantly updating it with your spendings. Automate your money and learn to enjoy your life.
Lesson #3: Invest Now, You’re Not Getting Younger
Guess how much money would you have had today if you had started investing (saving) $10 per week ten years ago? Don’t have a calculator? Don’t worry, Ramit Sethi already did the calculation for us – the total amount will be $7,836. What about $20 per week? $15,672. And here we’re not even mentioning possible revenue from interest.
I mean, think about it. We’re talking about $10 per week, not thousands. Ten dollars per week is only a fraction of your daily spendings. You can’t even pay your parking in L.A. with ten bucks.
So, besides prompting us to save now, Ramit is also sharing a few easy to execute steps for becoming a bit more wealthy.
- Tip #1: If your employer offers a 401(k) match, invest to take full advantage of this offer. A “401(k) match” means that for every dollar you contribute to your 401(k), your company will “match” your contribution up to a certain amount. For example, if your employer is matching up to 5 percent of your salary, and if you’re making $100,000 a year, by contributing $5,000 your company will match it with an extra $5,000. That’s free money amigo. Don’t lose them!
- Tip #2: Pay off all of your debts. Since the average annual percentage rate (APR) is around 14%, by investing in your debt you’re getting an instant return of cash.
- Tip #3: Open up a Roth IRA. This form of investment is quite complex and the text in the book won’t make it clearer. But since Sethi says it’s worth it, you should check it out (Google it).
- Tip #4: If you have any money left, contribute as much as possible to your 401(k), again. Why? See tip #1.
- Tip #5: HSA: If you have access to a Health Savings Account (HSA), apparently, it can also double as an investment account with incredible tax features that few people know about.
- Tip #6: If you still have money left to invest – probably not – open a regular non-retirement (“taxable”) investment account and put as much as possible there.
- Tip #7: Lastly, invest in yourself. Learn a new skill; Start a business; Pimp up your career. Kind of obvious. I know.
It’s kind of dull that most of the tips mentioned above are primarily for Americans but what we can do about it, the dude is living in the US.
Lesson #4: You Need Both a Savings Account and a Checking Bank Account
Why the hell should I complicate my life and keep two different bank accounts, right? Here’s why:
The difference between checking account and savings account:
- Checking account: This is your cash depo. All of your income will stop here first before it’s “filtered” to the other locations. You can also think of it as an email inbox. You receive emails and then you move them to specific folders. Or in our case, other accounts. However, we shouldn’t move them manually, we should set automatic transfers to the other accounts (like email filters). This way we’ll ensure that we won’t spend them before depositing them to the right places.
- Savings account: Obviously, you’ll use your savings account to save money. Use it to save up for things like vacations, bigger purchases, or even longer-term items, like a wedding or the down payment on a house.
But the above two are only the technicalities. The main reason you need the accounts mentioned above is psychological. You want to train your mind to spend less and to save more. The only way you can do this is by forcing money to an account where it’s difficult to withdraw them. That’s why in I Will Teach You to Be Rich Ramit Sethi suggest even having the two accounts in different banks. This will prevent you from doing impulse purchases because you’ll need a couple of business days to transfer funds. Smart, eh?
Lesson #5: Investing Is Not Easy But It’s Worth It
I was hoping for a step-by-step investment plan where I can put my money somewhere and go on with my life but in the book, you’ll only find the basics of investing. Sethi gives us only the theory and it’s up to us to figure out the rest. I know. What a bummer.
Here’s everything you need to know about investing mentioned in the book:
- Investing: This one is simple. Chose where your money will go and then set an automatic forwarder. BAM. You’re rich. Well, not quite but at least you don’t have to do it manually.
- Stocks: When you buy stocks you basically get shares of a company. If the company does well, you celebrate. If not, you curse out loud and you regret reading this summary. But what you need to know about stocks is the following: the average returns of stocks is about 8 percent per year. Not bad. The difficult part is finding a company worth investing in.
- Bonds: If you buy bonds, in essence, you lend money to a bank. For instance, if you “lend” a bank $100, they’ll give you back $103 a year from now. This is a long term, relatively stable way to invest. But precisely because these investments are safe the return is much lower than investing in stocks.
- Cash: Yeah, it doesn’t seem like an investment but you need cash sitting on a side for emergencies. If you don’t have enough money to cover your needs – this also includes emergency situations like going to Bali because your wife insists – you’ll need to take a loan. And we all know what happens then: interest, bank fees, upset partner, etc.
- Asset allocation: As Warren Buffett says, “Don’t put all your eggs in one basket.” You should invest in different stocks and bonds categories. Investing in only one category is dangerous over the long term because if something happens you’ll lose all of your money.
You might be wondering, “I’m broke. I don’t have money to eat, not to mention to invest. Why should I bother?” You’re not alone. But investing it’s not just about your immediate earnings – it’s about developing the right habits. Start small. Over time you’ll learn to cut costs and put money aside. Start now, you’re not getting younger.
Love taking notes? Download the worksheet:
- Recommended banks: Do check out the following banks: Charles Schwab Bank (link) for checking account; Capital One (link) and Ally bank (link) for savings accounts. These are worth considering since the author is using them.
- Bank fees are negotiable: If your bank is charging you fees you need to change that. How to do it? Call them over the phone and go gangsta on them. Yeah, it’s a bit scary. You actually need to talk to a real human but according to the author in 80% of the time, a rep can waive the monthly fee to keep you as a customer. So, call them, say you want no-fee account, ask for a supervisor and threat that you’re going to switch banks if they don’t give you that. It’s worth trying.
- Focus on what you can control: Stop complaining and saying things like, “The world is against me” or “Our education system doesn’t teach us anything.” Focus on what you can control. Your boss won’t increase your salary? Don’t rush home crying. See what else you can do to increase your income.
- Create your own annual financial checklist: Create an annual financial checklist to control your spendings better. Evaluate your spendings for the past year and plan for the year ahead. Once you’re done, check your list every month. You might include or exclude things along the way.
- Start now: No matter what’s your current financial situation, you need to start taking care of your finances now. Tracks your spendings. See how much money you owe. Do what’s necessary to increase your income. Don’t dream about winning the lottery, the chances are slim.
Commentary And My Personal Takeaway
Even though the author is constantly repeating that you should buy as many lattes as you want, that financial independence is not about cutting back on lattes, that he is better than the other self-proclaimed online gurus talking about money, most readers should do exactly the opposite – cut back on the fucking lattes.
I mean, the tips mentioned in the book are nothing new: Cut your costs; Start saving now; Automate your money; Invest… Unfortunately, a great deal of the people reading don’t have enough money to buy stocks or bonds. At least not enough for the investment to be meaningful or profitable enough to lead to financial independence – a state where your investments are earning you enough money to sustain your living. If you’re hardly making the ends meet, you should definitely cut back on the lattes, and not only. You should probably cut back on half of your purchases.
In short, you should be mindful of your finances – that’s my main takeaway from the book. Talk about money with your spouse. Start saving now and pay off your debt as soon as possible. Along with that, you should also consider one of the following two options: 1) start your own business; 2) earn more money by negotiating your salary or learning new skills to get a better job.
The single most important factor to getting rich is getting started, not being the smartest person in the room.” Ramit Sethi
My friend Jim once called to tell me that he’d gotten a raise at work. On the same day, he moved into a smaller apartment. Why? Because he doesn’t care very much about where he lives, but he loves spending money on camping and biking. That’s called conscious spending.” Ramit Sethi
Information alone is not enough—you already “know” about compound interest, and if you simply needed information, you would have already found it. The real problem, and the solution, is you. Your psychology, your emotions, your invisible scripts . . . all of it. Without understanding why you behave the way you do with money—and deciding why you want to change—any information is just meaningless drivel.” Ramit Sethif