I Will Teach You To Be Rich by Ramit Sethi - A Summary

This is the first personal finance book I ever read and I'm glad I chose this book. Money and finance has always been uncomfortable for many of us to write or speak freely about and that's exactly why I would recommend this book. I found the value and practical tips in this book pretty useful and most importantly actionable. Here we go.

What this book is about

Everybody has a definition of being rich. So getting the definitions out of the way, this book focuses on how to be financially better and reach financial freedom. Here's what to expect from the book:

1. Insights on how to tackle different kinds of debt.
2. A list of actionable steps to plan our daily (or monthly) finances better.
3. This book doesn't rely on tedious budgeting or being frugal as one would normally expect from a personal finance book. Instead, it talks about how to make the money management run on autopilot with minimal intervention and spend freely on what we want.
4. Establish systems and processes on how to manage our finances, so that we don't have to worry on a daily basis on where our money goes or comes from.
5. Helpful insights on how to think about money.
6. The importance of saving and what's the best way to save money.
7. Helps clear some taboos around money and investing.

Target audience of this book

Financial knowledge was not taught to us in school. So we don't get exposed to the financial world until we start making some money on our own or we pursue financial knowledge voluntarily. Some of us maybe in a place where if we could have some guidance or a starting point on how to be better financially, we might be able to do well for ourselves. That's exactly what this book does. The book appeals to anyone who

1. Wants to take control of their finances,
2. Wants to be better at their current financial control,
3. Wants to attain some financial literacy and know some key concepts in personal finance,
4. Wants to be financially free and spend guilt-free,
5. Wants to think about money in the right way.

One important point that I want to get out of the way is that almost all the anecdotes, products, banks and services mentioned in this book are written with respect to the US financial system. Credit cards and credit scores might be used in a different way in different countries. However, the good news is, all of these have their equivalents in all major countries. So the readers from other countries are expected do some research to find the equivalents in their country. Nevertheless, the financial knowledge, concepts and systems provided in this book are applicable to everyone.

The Big idea(s) of the book

1. This is the biggest idea of this book - Saving money is paying yourself out of your paycheck, spending money is paying others for their products or services. So from every paycheck, pay yourself first before paying others. To say it in a conventional way, save before spending money. If there is one thing to take away from this book, it is this idea. I never thought of saving as "paying myself" and that was interesting.
2. Spend extravagantly on the things you love, cut costs mercilessly on the things you don't.
3. There's a difference between being sexy and being rich — When people start talking about the stocks or options they bought, sold or shorted, it sounds cool and sexy. But traditional investment experts talk about the "boring" long term investing and dollar cost averaging on target date funds and index funds which require minimal intervention from us. All we need to do is invest consistently and watch our investments compound over time. Warren Buffett, who is widely regarded as one of the best investors in the world, emphasizes on investing consistently in index funds over and over for decades. And long term investing has proven to be way more profitable in the long run than buying and selling individual stocks constantly (the author explains the stats behind the facts).
4. Focus on the big wins — When trying to save money, focus on optimizing the big expenses like rent/mortgage, loan payments, transportation rather than saving a few dollars on coffee or deciding to buy a cheaper detergent.

Taking control of your finances

Step 1 — Optimize your credit cards and debts.

The whole point of this step is to try to get a bird's eye view of the debts you may have, then try to come up with a payment plan of how you are going to settle the debt. Here's a tentative plan:

1. Figure out how much debt you have.
2. Decide what to pay off first.
3. Negotiate the interest rates down.
4. Decide where the money to pay off your debts come from
5. Get started

One of the main sector of debts is from the credit cards you have and it's important to learn to manage your credit cards effectively. Here are the six commandments of credit cards:

1. Pay off your credit card regularly — Interest accrued on your credit card balances are one of the highest interest percentages in the world of debts. Paying off your credit card regularly helps mitigate this unnecessary loss.
2. Try to get fees on your cards waived — If there are any monthly or yearly fees on your credit cards, it's better to get them waived. A simple conversation with a customer care representative could be like, "I've been a customer for x number of years and I've been making my payments on time. I was wondering if there's a possibility to get any fees on my credit card waived".
3. Negotiate a lower APR — Circling back to point 1, if you do have credit card debts to pay off, it makes sense to make an effort to negotiate a lower APR. You can use the conversation template in point 2 and if that doesn't work, you could show them a few other credit cards offering better interest rates and give it a try.
4. Keep your main cards for a long time, keep them active and simple — If you are satisfied with your current card, there's no need to get a new one. Switching different credit cards based on new perks sends you chasing benefits instead of focusing on building good credit.
5. Get more credit — In the US financial system, credit utilization is a major factor in determining the health of your credit. Credit utilization is the percentage of amount you owe in the overall amount you are allowed to borrow. So, getting more credit balance on your credit card(s) increases your denominator and hence brings down your percentage. P.S. Do this only if you don't have any credit card debt.
6. Use your credit card's secret perks — Most credit cards have secret perks like rental insurance, travel insurance, low balance transfer APR, etc. It's worth getting a list of them and using them as necessary.

In addition to paying more interest and taking a hit on credit score, we also get emotionally affected by the money we owe. This section of the book is very helpful in navigating some of the common "typically unconscious, trans-generational beliefs" about money. This might help us understand our own relationship with money and our behaviors around it.

Step 2 — Beat the banks.

Having the right bank accounts is crucial to saving and growing your money. This section is better read from the book, so I'll try to stick to the essentials. Big banks like Wells Fargo, Bank of America, etc levy a lot of fees (minimum balance fees, maintenance fees, transfer fees, fees for using other ATMs, etc). They also require a minimum balance to be held on the account. However, there are other banks (also well established) which might be smaller in size which don't have any fees, require no minimum balance and give a competitive interest rate in addition to these. Also, I didn't know it was possible to earn interest on checking accounts until I heard about these banks. Yes, you heard it right.

Some recommendations from the author:

Checking accounts:

1. Schwab Bank Investor Checking account with Schwab Brokerage account — No minimum balance required, no annual fees, no fees on using other ATMs (they charge and reimburse the fees every month), 0.03% interest rate on the checking account.
2. Local bank checking accounts with no fees and minimums.
3. The author also talks about credit unions and the pros and cons of them. This is an individual choice.

Savings accounts:

1. Capital One 360 Savings — 0.4% interest rate. No fees or minimums. It lets you open multiple accounts for different savings goals (for travel, emergency funds, etc).
2. Ally Online Savings account — No fees, create multiple accounts, good interest rates.
3. Marcus by Goldman Sachs
4. American Express Personal Savings

This step focuses on doing your own research on banks that provide the best value in your country and opening an account in them. Funneling money into them will be covered in step 5.

Step 3 — Get ready to invest.

The idea to grow our finances is to enable money to make money. In addition to you making money, your money should make money too. That's where compounding comes into picture. Saving in a savings account will take a long long time to give a substantial return (even with the highest interest rates), so saving alone is not enough. To grow your money, you need to start investing. The term investing seems intimidating to everyone and there are a lot of qualms when it comes to investing.

1. Investing is only for the rich and I don't earn enough to invest — Completely untrue. You can start even with $50 and make a monthly investment at this price.
2. I don't know where to get started, I don't know a thing about stock markets or to pick stocks to buy — Investing isn't about picking stocks to buy and sell. More about it in the following sections.
3. I'm scared of losing money — You might be afraid of possibly losing money in the stock market but you will CERTAINLY lose money if you don't invest. If you count in the rate of inflation every year, the more dormant your money is, the less valuable it becomes. Also, a long term investor should be happy when the market drops as you can buy more shares for the same price.

Investing is the single most effective way to grow financially and the author outlines a ladder of personal finance by which this can be done.

Rung 1 — 401(k) or a retirement savings account offered by your employer in your country.

The 401(k) plan is a type of retirement account offered by companies to their employees. It gives you large tax advantages if you agree not to withdraw any money from it until the age of 59.5. Here are the benefits of a 401(k) account:

1. Using pretax money is an instant 25% accelerator: You promise to invest your money for the long term and in exchange, they give you huge tax advantages. A 401(k) account is tax-deferred, meaning you can invest your full allocation of money before paying taxes on it. You will pay taxes when you withdraw your money but you let that extra 25% compound over time.
2. Your employer match means free money: In many cases, companies match their employees' contributions to a certain extent. This literally is free money being invested in your account. You miss all that free money if you don't have a 401(k) account and put money into it.
3. Automatic Investing: With a 401(k), your money is sent into your investment account without you having to do anything. If you don't see the money in your paycheck because it's automatically sent to your 401(k), you'll learn to live without it. This is a great example of using psychology to trick yourself into investing.

Rung 2 — Paying off your debts.

The second step on the ladder of personal finance focuses on addressing your debts. Handling credit card debts is covered in the step 1 section above. Student loans is something that can't be paid quickly as it takes years, so if you have student loans, you have to figure out a way to keep investing while you pay your student loans on the side. If you have non-student loan debts, it's time to pay them off. It's not easy or as interesting as investing, but paying off our loans frees up a huge amount of mental barriers and you can't put a price on that peace of mind.

Rung 3 — Roth IRA or it's equivalent in your country.

A Roth IRA is another type of retirement account with tax advantages. It's not employer sponsored but you contribute post-tax money into it. This means that you pay the taxes on the amount you contribute and you don't pay taxes on the gains. A Roth IRA has a wider range of options to invest when compared to a 401(k). Like 401(k), you're expected to treat Roth IRA as a long term investment option and you're penalized if you withdraw your earnings before you are 59.5 years old. Please note that only withdrawing the "earnings" are penalized. The principal you contribute is free to be withdrawn without penalties. The limitations of the Roth IRA is that you can't even open a Roth IRA account if you earn above a certain amount annually.

Rung 4 — Maximizing your retirement accounts.

If you have money left over after contributing to your 401(k), paying off your debt according to your repayment plan and contributing to your Roth IRA, go back to Rung 1 and maximize your contributions into 401(k) to take the full advantage of the employer offered money.

Rung 5 — Health Savings Account (if applicable).

If you're hungry for even more, a HSA is a great way to contribute pre-tax money to pay for qualified medical expenses including deductibles, copayments, coinsurance, etc. You can also invest this money if you want to. So, if you're eligible for a Health Savings Account and if you live in a country that has this option, this is a great way to save money for medical expenses with investment options.

Rung 6 — Other investments and paying off any extra debts.

If you've maximized your contributions to the retirement accounts, paying your debt off regularly, contribute to your HSA and still have money to invest, open a brokerage account in one of the brokerages of your choosing in your country and start putting money into it. This is where we can explore additional investment options like target date funds, index funds, etc.

If you're at this point, you have setup the systems and accounts to start investing. Most importantly, you have gotten into the mindset of learning, saving and investing.

Step 4 — Conscious spending.

Now that we have seen about how to invest and setup investment accounts, it's time to decide how we spend our money effectively. Traditional personal finance experts recommend budgeting and tracking your expenses daily. While it might seem logical, it almost never works and it's stressful. We obsess over every penny we spend and end up living in a spreadsheet. Instead, what if we can save and invest money each month before spending, and spend the rest of the money guilt free without granular tracking and budgeting?

Spending freely on the things we love and cutting back mercilessly on the things we don't like, is what conscious spending means. It's okay to be unapologetic about spending on the things you love. At the same time, saying no to spending on certain things does not make you cheap either. It's just consciously deciding on what to spend.

Here's a tentative outline of how a conscious spending plan may look like on a monthly paycheck:

1. Fixed Costs (Rent, Utilities, Debt payments, fuel, etc) — 50-60% of take-home pay
2. Investments (401k, Roth IRA, etc) — 10%
3. Savings goals (Vacations, emergency funds, car service payments) — 5-10%
4. Guilt-free spending money (Eating out, movies, clothes, etc) — 20-35%

Once you have decided on the percentages on the above 4 categories, you will most likely have an idea about how you can optimize each of these categories to plan your finances better. If you conduct a Pareto analysis, it often reveals that 80% of what you spend is used towards 20% of your categories. So it's important to go for the big wins like optimizing on rent or mortgage payments, finishing off paying debts, etc than to minimize spending on small expenses.

For people who cannot afford to invest on retirement accounts or spend freely on anything, the author also outlines some tips to optimize from your existing budgets and to figure out a way to earn more. Here are some quick suggestions:

1. Be open to make changes and identify areas of improvement.
2. Negotiate a salary raise by taking more responsibility and showing actual progress.
3. Look for a job with a better pay.
4. Do freelance work and look for possibilities of additional streams of income.

Step 5 — Save while sleeping.

One of the best ways to be efficient in managing money is to automate your finances. Not all of us have the time or the discipline to save systematically by ourselves. By doing an initial plan and setup, we can get this financial machine started and keep it running forever.

Based on what we have seen so far, an automated system could look like this (assuming you are paid on the first of every month):

1. Link all your accounts — Your retirement account to your paycheck, your bank accounts to each other so that they are ready to send/receive transfers, your credit cards to your bank accounts for automatic payments, connecting your checking account to investment/Roth IRA account.
2. Most accounts and credit cards allow you to change the payment dates. So it's better to synchronize all your bills to be paid on the first few days of a month. This makes it easy to plan and automate the payments.
3. 1st of the month — Set up autopay for paying your rent.
4. 2nd of the month — Part of your paycheck is automatically sent to your 401(k).
5. 5th of the month — Automatic transfer to the savings, Roth IRA and investment accounts.
6. 7th of the month — Automatic bill pay for any monthly bills you may have (utilities, internet, electricity, credit cards, etc).

Every month at the end of the first 7 days, you are done with all savings and investments for the month — You have paid yourself. All the extra money you may have based on your conscious spending plan, you can spend guilt-free or choose to invest more as you wish. The beauty of this automated system is that you get to spend freely while the money is saved and invested without your intervention.

"This system is so hands off that even if you get eaten by a Komodo dragon, your money system would continue transferring money from account to account by default, a ghostlike reminder of your financial prescience. Haunting, but cool."

Step 6 — The Myth of Financial Expertise.

This chapter has a lot of stats and I would strongly recommend to read the book to get the full idea and the data, but here are the bullet points.

1. Myth: Investing is about picking the next best stock and selling before it falls down. Reality: It's not. It's much more than that.
2. Myth: Financial "experts" like financial advisers or fund managers of mutual funds can predict and beat the market. Reality: No, they are not that better than the amateurs. No financial expert have showed consistent returns over the long term. It is possible for common people to outperform the financial pundits by sidestepping their "expertise". There are some exceptions to this — people like Warren Buffett, Peter Lynch of Fidelity and Yale's David Swensen have consistently beat the market over the long term but hey, if you can somehow convince Warren Buffet to be your financial adviser, please tell me how you did it.
3. The only long-term solution is to invest regularly, putting as much money as possible into low-cost, diversified funds, even in an economic downturn. This is why long-term investors have a phrase they use: "Focus on time in the market, not timing the market".
4. Diversification (Deep) — going deep in a category which is buying different stocks in different industries, etc.
5. Asset Allocation (Across) — going across different investment categories like stocks, bonds, etc.
6. Asset allocation is the most important part of growing your money long term. In your twenties or early thirties, you would want to invest aggressively but as you grow older, you would want to balance your portfolio with bonds and such to mitigate the risks. This is why target date funds are a great way for your retirement accounts like 401(k) and Roth IRA. A target date fund is a fund based on when you want to retire. If you see a name like "TRP 2055B", it means that this fund is meant for somebody who is planning to retire by 2055. So the company who manages the fund, will automatically try to adjust the investment strategy — they will invest aggressively during your twenties, and move towards more conservative investments as you grow older.
7. Mutual funds are actively managed funds that are run by financial experts who constantly try to beat the market. Mutual funds are convenient in a way that somebody manages your money for you and tries to beat the market but the downside is that they never beat the market consistently and they charge exorbitant fees.
8. Here's the reality about fees: A 1% fee can reduce your return by around 30%. A 2% fee can reduce by 63%. This math is extremely counterintuitive but it's true. Here's a link from the SEC that I found useful: How Fees and Expenses Affect your investment portfolio. So if a mutual fund advisor ever pitches you with a 1% fee, turn away and start running. This percentage is called the "Expense Ratio" of a fund. The ideal expense ratio that you can pay is around 0.1% to 0.3%.
9. Index funds on the other hand, set a lower bar. No experts, no attempts to beat the market, just a computer that tries to match the market and keep costs low for its investors. Long term investors like John Bogle, the founder of Vanguard, Warren Buffett have always advocated individual investors to keep investing in index funds no matter the status of the market. Your investments will take a hit periodically but the economy grows over time. Plus you get to keep all of the fees charged by the financial experts to yourself and perhaps invest them too.
10. The term "Dollar Cost Averaging" gets thrown about in the investing domain a lot. It's not as fancy as it sounds. It's the term for investing consistently in small chunks over a period of time instead of investing all your money at once. By investing over time, you get to avoid timing the market and you use time to your advantage. It's also a way to invest consistently and develop a healthy money habit.

Other valuable topics in the book

The author describes a number of scenarios that is met by the average person and gives some tips in the book.

1. Buying a car.
2. Negotiating your salary.
3. Buying your first home.
4. Real Estate investments.
5. Cryptocurrency.
6. Student loans.
7. Conversations with parents, partner and friends about money.
8. Planning and saving for a wedding.
9. Signing a prenup.
10. Navigating taxes.

Final thoughts

None of the contents of this blog post is financial advice. This is a summary of the contents of the book mentioned in the title. More information about this book can be found at the book's official website. This book provides a good set of guidelines for saving and investing for normal people from the working class for achieving financial freedom. If you have any useful personal finance tips, hit me up. I'm always looking to learn. As always, thanks for reading. Peace out!