I Will Teach You to be Rich Summary
In this post, I will go over the top five takeaways from Ramit Sethi’s book: I will teach you to be rich.
I will teach you to be rich
Becoming rich isn’t something that only happens to Ivy League graduates, elite athletes or lottery winners.
Anyone can become rich. What you need to do is to define what being rich means to you.
You must start today!
Focus on a few areas of your personal finances where you can achieve big wins, instead of clipping coupons and saving from $3 lattes.
Then set up an automated money system.
Lastly, start to invest.
Let’s summarize how to be rich in a stepwise approach.
- Define what rich means to you
- Start today
- Focus on big wins
- Set up an automated money system
- Invest your money
Are you overwhelmed yet? Don’t worry, we will go into more detail on the later parts of this post.
The best part is after the initial set up, you will be spending no more than 90 minutes on your personal finances per month.
Takeaway number 1-What does rich mean to you?
First and foremost, you must decide what being rich means to you and become a conscious spender who prioritizes your expenses accordingly.
It’s 100 percent okay to spend unapologetically on the things you love, as long as you cut down costs on other stuff.
You may have heard that Mike Tyson ran into personal finance trouble because he didn’t spend consciously.
Let’s use him for our mini case study.
During his career, Mike Tyson earned an income exceeding $400 million.
However, because of his excessive spending habits by the age of 39, his net worth is negative $38 million and he had declared bankruptcy.
According to a New York Times article, Mike Tyson reportedly spends $400,000 a month to support his lavish lifestyle.
The lesson here is definitely don’t try to keep up with the Joneses.
It’s all too easy to get lost and try to mindlessly keep up with your friends. It can be a full-time job in itself.
You must remember that there’s always a trade-off!
Sure you may be able to afford that $300,000 house. But then you can longer afford that new Lexus!
For example, Andrew spends $7,000 on suits, is he financially responsible?
The answer is yes because he shares an apartment with a friend and because he uses public transportation.
Therefore, he is able to afford and spend lavishly on his expensive, designer suits.
There’s a power to say no to things we do not like or need and there’s even more power in saying yes to the things we love.
Takeaway number 2-Do not focus on the small things
Benjamin Franklin famously said:
Don’t put off until tomorrow what you can do today.
Do you want to know the single most important thing to get rich?
Sure, the best time to start was probably ten years ago for most of us but the second-best time is today!
Here’s an example of what you can do today! Set up a high-yield savings account with no fees, no restrictions on withdrawals and high-interest rates.
I currently have high-yield savings with Sofi and Betterment and I like both of them. You can certainly opt for others, Capital One 360 is recommended by Ramit or Ally is another popular choice.
You might ask, which account is the best one? Which account offers the highest interest rates?
In reality, it does not matter. Just pick one!
This might just be an excuse to not get started. This phenomenon of indecision is called analysis paralysis.
You can’t go wrong with any of these choices.
Ramit mentions the 85% solution in his book. In essence, you rather get it 85 percent right than do nothing at all.
Want more excuses? A naysayer might say, “I only have $100 dollars, what difference does it make? I will only generate a few dollars in interest anyways!”
It’s important to understand that no amount is too small when it comes to great money habits.
Once again, the perfect time to start is now because the stakes are low.
The reason is simple, you can’t expect to manage millions if you are struggling with hundreds of thousands.
You don’t have to get it right perfectly the first time but know that you must start at some point.
And today is a great day for that!
Takeaway number 3-Swap your attention from micro to macro
Haven’t you heard of this before? Stop spending money on $3 lattes! Ditch your bank that’s paying 0.1 percent interest to a high yield savings account. Clip more coupons.
While these are great advice, according to Ramit, instead of focusing on the small wins, you have to focus on the BIG wins.
You should focus your energy on five to ten things that REALLY matter, which will yield exceptional results and good return on invested energy.
Here’s a list of the big wins you can tackle:
- Automating your money system
- Keeping a great credit score
- Using credit cards to get free cash backs and rewards
- Contributing money to your 401 (k) plan to get the full employer match
- Paying off your credit card debt
- Cancel your subscriptions you’re not using and buy services on an as-needed basis
- Focus on cutting your costs in a few specific problem areas
- Negotiating a raise
- Doing freelance work
- Buy an affordable house
- Buy an affordable car
- Allocating your capital right
According to Ramit, if you can get 5 to 10 of these big wins, then you can buy however many $3 lattes that you want.
Takeaway number 4-Set up your automatic money system
We humans are weak at times, we get easily distracted, bored, and unmotivated.
All of which endangers our investing and saving habits.
You think that you have what it takes and can focus but in reality, in two weeks it will be back to watching cat videos and Netflix again.
For this reason, we must set up a money system that can save us from our worst version of ourselves.
This system will ensure that we stick to our long-term money plan by allocating our income each month automatically for us.
Essentially, this system will help you reap the benefits for years and years to come from a minimal setup effort.
For your system, you’ll need:
- A checking account (think of this as like a distribution center, its main purpose is to feed your other accounts by using automatic transfers and to pay off all your bills)
- A savings account (this will satisfy your short-term to midterm goals i.e. vacations, gifts, your wedding, down payment on a house, etc..) pick one with no fees, no restrictions on withdrawals and a high-interest rate
- Credit card (used correctly this is a free short-term loan with rewards and perks, get at least one that gives cashback)
- A retirement savings account (401 (k) or a Roth IRA)
- An investment account (get one from an online broker, Vanguard anyone?)
Your money system must be based on a conscious spending plan which contains four buckets.
- Fixed costs (50 to 60%)
- Investments (10%)
- Savings (5 to 10%)
- Guilt-free spending (20-35%)
You’ll set up your money system by linking up the various different accounts and set up automatic bill pay and transfers so most of this will happen automatically each month.
Don’t go lower than 5% of your savings, and 10% of your investments because these will be the backbone of your new rich life.
These percentages are just a starting point if you were able to score a few of the BIG wins discussed above you will have no problem raising the percentages of your savings and investments.
Automation is great because we will learn to live without the money, if we never see it we’ll never get the urge to spend it!
Takeaway number 5-The pyramid of investment options
How do I invest money in my investment bucket?
Let’s discuss some options.
Pick your own stocks and bonds
Pick your own index funds and mutual funds
Invest in target-date funds
According to Ramit Sethi, this is the “Pyramid of Investment Options.”
The top of the pyramid is the third option followed by the second option and lastly, the base of the pyramid, the first option (picking individual stocks and bonds).
Why is the first option at the bottom of the pyramid? It’s difficult to beat the market!
Time spent trying to beat the market can be spent on other activities.
For the majority of the people, Ramit thinks that index funds are too much of a hassle.
With target-date funds, nuances such as diversification and asset allocation are done for you!
The only thing you have to do is have your automated money system in place.
For example, if you are expected to retire in 2055, you can set your retirement account so that you buy Vanguard’s target-date retirement 2055.
That’s it! It’s just as simple as that. Your money will then experience the wonders of compound interest and generating passive income!
Target-date funds can also be used for short goals such as a wedding for example. You can choose to set up a target retirement 2025 for example if you’re getting married in 2025.
I Will Teach You to be Rich Recap
There are always trade-offs so you must decide what a rich life means to you and become a conscious spender.
Follow the 85% solution, it’s better to get it 85% right than to do nothing at all.
Focus on the big wins, getting rich is not about saving money on $3 lattes.
Set up your automatic money system to protect you from yourself.
Investing in a target-date fund is a great way of achieving your savings goal with minimal effort.
The actual I will teach you to be rich book goes into more detail and other actional tips and guides.
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Overall, I Will Teach You to be Rich is a good read. It is well organized and provided great actional advice! I highly recommend it.
I Will Teach You to be Rich is most helpful for investors who wants a passive investment approach and a guide on how to systemize and automate your money.
Automating your money is also a system recommended by David Bach in his book, “The Automatic Millionaire.” Although I dare say that Ramit and David will disagree on one thing-lattes!
I also just finished reading, “A Simple Path to Wealth” by JL Collins. In his book, Collins also highly recommended target-date funds from Vanguard.
Although his strategy of a two-fund portfolio consisting of the U.S. total stock market fund (VTSAX) and the total bond fund VBTLX is more aligned with my preferred investing strategy of the three-fund portfolio.
One knock off for target-date funds is its higher expense ratios. Most of the Vanguard target-date funds have an expense ratio of 0.15% compare to 0.04% of VTSAX.
For additional comparison, my company’s target-date funds from JP Morgan has an expense ratio of 0.49%!