Key Takeaways from “I will Teach you to be Rich.”

From Ramit Sethi’s book “I will teach you to be rich”

How is weight and health related to money?

“In the ten years since I wrote my book, weight and health have become such controversial topics that I was advised to delete my references to them. But after my own journeys with nutrition, fitness, and money, I now believe even more in the connections between them—and that you can take control. Weight gain doesn’t happen overnight. If it did, it would be easy for us to see it coming—and to take steps to avoid it. Ounce by ounce, it creeps up on us as we’re driving to work and then sitting behind a computer for eight to ten hours a day. It happens when we move into the real world from a college campus populated by bicyclists, runners, and varsity athletes who once inspired us to keep fit. But try talking about post-college weight loss with your friends and see if they say one of these things: “Avoid carbs!” “Don’t eat before you go to bed, because fat doesn’t burn efficiently when you’re sleeping.” “Keto is the only real way to lose weight.” “Drinking apple cider vinegar speeds up your metabolism.” I always laugh when I hear these things. Maybe they’re correct or maybe they’re not, but that’s not really the point. The point is that we love to debate minutiae. When it comes to weight loss, 99.99 percent 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, obscure supplements, and Whole30 versus paleo.” (p. 6)

What are some of the traps people fall into about money?

“Most of us fall into one of two camps regarding our money: We either ignore it and feel guilty, or we obsess over financial details by arguing interest rates and geopolitical risks without taking action. Both options yield the same results—none. The truth is that the vast majority of people don’t need a financial adviser to help them get rich. We need to set up accounts at solid banks, automate our day-to-day money management (including bills, savings, and, if applicable, debt payoff). We need to know about a few things to invest in, and then we need to let our money grow for thirty years. But that’s not as cool or exciting, is it? Instead, we read internet articles from “experts” who make endless predictions about the economy and “this year’s hottest stock” without ever being held accountable for their picks (which are wrong more than 50 percent of the time). “It’s going up!” “No, down.” As long as something is being said, we’re drawn to it. Why? Because we love to debate minutiae.” (p. 7)
“People love to argue minor points, partially because they feel it absolves them from actually having to do anything. You know what? Let the fools debate the details. I decided to learn about money by taking small steps to manage my own spending. Just as you don’t have to be a certified nutritionist to lose weight or an automotive engineer to drive a car, you don’t have to know everything about personal finance to be rich. I’ll repeat myself: You don’t have to be an expert to get rich. You do have to know how to cut through all the information and get started—which, incidentally, also helps reduce the guilt.” (p. 8)
“If you learn only one thing from this book, it should be to turn your attention from the micro to the macro. Stop focusing on picking up pennies and instead focus on the Big Wins to craft your Rich Life. Now that I’ve set up my investing accounts and automated them, the amount I earn from one year of investing is worth more than 500 years of interest in a savings account. You heard that right. Don’t worry about micro-optimizing your bank account interest rates. Just pick great bank accounts and move on.” (p. 77)
“People have peculiar beliefs about risk. We worry about dying from a shark bite (when we should really worry about heart disease). When there’s a sale on eggs or chicken, we’re happy—but when the stock market gets cheaper, we think it’s bad. (Long-term investors should love when the market drops: You can buy more shares for the same price.)” (p. 97)
“Their wealth isn’t measured by the amount they make each year, but by how much they’ve saved and invested over time. In other words, a project manager could earn $50,000 per year and have a higher net worth than a doctor earning $250,000 per year—if the project manager saves and invests more over time.” (p. 101)
“Even higher-income earners don’t handle their money well: About one in four people who make $100,000-plus a year still report living paycheck to paycheck, according to a SunTrust survey.” (p. 101)

Do people invest into their 401k?

“Remember, a 401(k) is just a type of investment account—one that offers huge benefits that I’ll cover here. Here’s what’s stunning: ■ Only one-third of people participate in a 401(k). ■ Among people earning under $50,000 a year, 96 percent fail to contribute the maximum amount into their 401(k). ■ And, astonishingly, only 1 in 5 contributes enough to get the full company match. The company match is literally free money, so 80 percent of people are losing thousands of dollars per year.” (p. 96)

What are the 6 steps to take for investing?

“These are the six systematic steps you should take to invest. Each step builds on the previous one, so when you finish the first, go on to the second. If you can’t get to number 6, don’t worry—do your best for now. In Chapter 5, I’ll show you how to make this automatic so your system can run itself with just a few hours of work per year—but remember, opening these accounts and getting started is the most important step.

Rung 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100 percent of the match. 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, for easy math, let’s assume you make $100,000 and that your employer will 100 percent match your contribution up to 5 percent of your salary. This means that you’ll contribute $5,000 and your company will match it with $5,000. This is free money, and there is, quite simply, no better deal.

Rung 2: Pay off your credit card and any other debt. The average credit card APR is 14 percent, and many APRs are higher. Whatever your card company charges, paying off your debt will give you a significant instant return. For the best ways to do this, see Five Steps to Getting Rid of Credit Card Debt in Chapter 1.

Rung 3: Open up a Roth IRA (see The Beauty of Roth IRAs) and contribute as much money as possible to it. (As long as your income is $120,000 or less, you’re allowed to contribute up to $5,500 in 2018. For current contribution limits, search for “Roth IRA contribution limits.”)

Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match). The current limit is $19,000. For current contribution limits, search for “401(k) contribution limits.”

Rung 5: HSA: If you have access to a Health Savings Account (HSA), it can also double as an investment account with incredible tax features that few people know about. For more on HSAs. If you’ve completed Rung 4 and you still have money left over, take advantage of this account.

Rung 6: If you still have money left to invest, open a regular non-retirement (“taxable”) investment account and put as much as possible there. For more about this, see Chapter 7. Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it’s starting a company or getting an additional degree, there’s often no better investment than your own career.” (p. 104)

401k is great for automatic investing.

“401(k) Benefit #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 an excellent example of using psychology to trick yourself into investing. In fact, there’s an emerging body of literature on how powerful these effects are.” (p. 107)

What about Roth IRA?

“Once you’ve set up your 401(k) and tackled your debt, it’s time to climb to Rung 3 and start funding a Roth IRA. A Roth IRA is another type of retirement account with significant tax advantages. It’s not employer sponsored—you contribute money on your own. Every young person should have a Roth IRA, even if you’re also contributing to a 401(k). It’s simply the best deal I’ve found for long-term investing.” (p. 111)
“Roth IRA Restrictions As with a 401(k), you’re expected to treat a Roth IRA as a long-term investment vehicle, and you’re penalized if you withdraw your earnings before you’re 591/2 years old. Notice that I said “earnings.” Most people don’t know this, but you can withdraw your principal (the amount you actually invested from your pocket) penalty-free. There are also exceptions for down payments on a home, funding education for you or your partner/children/grandchildren, and some other emergency reasons. Important note: You qualify for these exceptions only if your Roth IRA has been open for five years or more. This reason alone is enough for you to open your Roth IRA this week.” (p. 112)

What is the most important decision in investing?

“Your asset allocation is actually one of the most important decisions you’ll make in life—it’s a decision that could be worth hundreds of thousands of dollars to you and for some, millions. But in a peculiar quirk of human nature, we’re more likely to talk about a new restaurant or TV show instead of our asset allocation.” (p. 227)
“Age and risk tolerance matter. If you’re twenty-five years old and have dozens of years to grow your money, a portfolio made up of mostly stock-based funds probably makes sense. But if you’re older, retirement is coming up within a few decades and you’ll want to tamp down your risk. Even if the market tanks, you have control over your asset allocation. If you’re older—especially if you’re in your sixties or older, for god’s sake—a sizable portion of your portfolio should be in stable bonds.” (p. 228)

What is a standard Asset Allocation?

Here’s what typical investors’ asset allocations—remember, that’s the mix of different investments—might look like as they get older. These figures are taken from Vanguard’s target date funds. (p. 232)

35 years old- 90% Stocks, 10% Bonds

45 years old- 90% Stocks, 10% Bonds

55 years old- 69% Stocks, 31% Bonds

65 years old- 53% Stocks, 47% Bonds.
“These allocations are just general rules of thumb. Some people prefer to have 100 percent in stocks until they’re in their thirties or forties. Others are more conservative and want some money in bonds. But the big takeaway here is that if we’re in our twenties and thirties, we can afford to be aggressive about investing in stocks and stock funds—even if they drop temporarily—because time is on our side.

And honestly, if you’re nervous about investing 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. Over time, you can manage your asset allocation to reduce risk and get a fairly predictable return on investments. Thirty years from now, you’re going to need to invest very differently from how you do today. That’s just natural: You invest much more aggressively in your thirties than in your sixties, when you find yourself growing older and telling long-winded stories about how you trudged through three miles of snow (each way) to get to school every morning. The real work in investing comes with creating an investment plan that’s appropriate for your age and comfort level with risk. All of this sounds completely reasonable: “I invest aggressively when I’m younger, and as I get older, I get more conservative.” (p. 232)

Should young people be in mostly Stocks and older people mostly Bonds?

“But Ramit,” you might say, “I’m young and I want to invest aggressively. I don’t need bonds.” I agree. Bonds aren’t really for young people in their twenties. If you’re in your twenties or early thirties and you don’t necessarily need to reduce your risk, you can simply invest in all-stock funds and let time mitigate any risk. But in your thirties and older, you’ll want to begin balancing your portfolio with bonds to reduce risk. And what if stocks as a whole don’t perform well for a long time? That’s when you need to own bonds to offset the bad times.

Another interesting scenario that calls for lower risk via more bonds: If you’ve accumulated a very large portfolio, you have a different risk profile. In one famous example, personal finance expert Suze Orman was asked about her net worth in an interview. She replied, “One journalist estimated my liquid net worth at $25 million. That’s pretty close. My houses are worth another $7 million.” The journalist asked where she puts her money. With the exception of $1 million in the stock market, she said, the rest was in bonds. The personal finance world was horrified. All that money in bonds? But she has approximately 25 million good reasons that most don’t. As a financial adviser once told me, “Once you’ve won the game, there’s no reason to take unnecessary risk.” (p. 228)

Which brokerage company do you recommend for investing?

“I believe Vanguard has the edge, and I invest through them. But realize this: By the time you’ve narrowed down your investing decision to a low-cost provider like Vanguard or a robo-advisor, you’ve already made the most important choice of all: to start growing your money in long-term, low-cost investments. Whether you choose a robo-advisor or Vanguard or another low-fee brokerage is a minor detail. Pick one and move on.” (p. 119)

What is the best fund to invest? Target Date Funds.

“Okay, so index funds are clearly far superior to buying either individual stocks and bonds or mutual funds. With their low fees, they are a great choice if you want to create and control the exact makeup of your portfolio. But what if you’re one of those people who knows you’ll just never get around to doing the necessary research to figure out an appropriate asset allocation and which index funds to buy? Let’s be honest: Most people don’t want to construct a diversified portfolio, and they certainly don’t want to rebalance and monitor their funds, even if it’s just once a year. If you fall into this group, there is the option at the very top of the investment pyramid. It’s an investment option that’s drop-dead easy: target date funds.” (p. 237)
“Let’s assume you’re looking for a target date fund through Vanguard, which I recommend (though there are many other solid companies that offer target date funds). You’ll notice that Vanguard offers funds with names like “Target Retirement 2040,” “Target Retirement 2045,” and “Target Retirement 2050.” The main difference among these funds is how they’re allocated: The larger the number (which represents the year you’ll retire), the more equities (stocks) the fund has. To find the right fund, choose the year you’re likely to retire. If like most people you’re thinking about age sixty-five, look up the fund that’s closest to that year for you (e.g., 2050). You can also search for “Choosing Vanguard target date fund.”” (p. 242)

What if I don’t want to pick a Target Date Fund because I want more control? Which Stocks, Bonds, and Assets should I buy?

“if you want more control over your investments and you just know you’re disciplined enough to withstand market dips and to take the time to rebalance your asset allocation at least once a year, then choosing your own portfolio of index funds is the right choice for you.” (p. 245)

“To illustrate how to allocate and diversify your portfolio, we’re going to use David Swensen’s recommendation as a model. Swensen is pretty much the Beyoncé of money management. He runs Yale’s fabled endowment, and for more than thirty years he has generated an astonishing 13.5 percent annualized return, whereas most managers can’t even beat 8 percent. That means he has almost doubled Yale’s money every five years from 1985 to today.”

“A significant amount of math went into Swensen’s allocation, but the most important takeaway is that no single choice represents an overwhelming part of the portfolio. As we know, lower risk generally equals lower reward. But the coolest thing about asset allocation is that you can actually reduce your risk while maintaining an equivalent return.” (p. 247)
30 percent—Domestic equities: US stock funds, including small-, mid-, and large-cap stocks

15 percent—Developed-world international equities: funds from developed foreign countries, including the United Kingdom, Germany, and France

5 percent—Emerging-market equities: funds from developing foreign countries, such as China, India, and Brazil. These are riskier than developed-world equities, so don’t go off buying these to fill 95 percent of your portfolio.

20 percent—Real estate investment trusts: also known as REITs. REITs invest in mortgages and residential and commercial real estate, both domestically and internationally.

15 percent—Government bonds: fixed-interest US securities, which provide predictable income and balance risk in your portfolio. As an asset class, bonds generally return less than stocks.

15 percent—Treasury inflation-protected securities: also known as TIPS, these treasury notes protect against inflation. Eventually you’ll want to own these, but they’d be the last ones I’d get after investing in all the better-returning options first.” (p. 246)
“you want to make sure the fund fits into your asset allocation. After all, the reason you’re choosing your own index funds is to have more control over your investments. Use David Swensen’s model as a baseline and tweak as necessary if you want to exclude certain funds or prioritize which are important to you. For example, if you have limited money and you’re in your twenties, you’d probably want to buy the stock funds first so you could get their compounding power, whereas you could wait until you’re older and have more money to buy the bond funds to mitigate your risk. In other words, when you look for various funds, make sure you’re being strategic about your domestic equities, international equities, bonds, and all the rest.” (p. 248)

Which kind of people invest in mostly Bonds?

“With these qualities, what kind of person would invest in bonds? Let’s see: extremely stable, essentially guaranteed rate of return, but relatively small returns . . . Who would it be? In general, rich people and old people like bonds. Old people like them because they want to know exactly how much money they’re getting next month for their medication or whatever it is they need. Also, some of these grannies and grampies can’t withstand the volatility of the stock market because they don’t have much other income to support themselves and/or they have very little time left on this earth to recover from any downturn. Rich people, on the other hand, tend to become more conservative because they have so much money.

Put it this way: When you have $10,000, you want to invest aggressively to grow it because you want to make more money. But when you have $10 million, your goals switch from aggressive growth to preservation of capital. Chuck Jaffe once wrote a CBS Marketwatch column where he shared this old story about Groucho Marx, the famous comedian and avid investor. One trader asked, “Hey Groucho, where do you invest your money?” “I keep my money in treasury bonds,” he replied. “They don’t make you much money,” a trader shouted back. “They do,” Groucho said drolly, “if you have enough of them.” If you have a lot of money, you’ll accept lower investment returns in exchange for security and safety. So a guaranteed bond at 3 percent or 4 percent is attractive to a wealthy person—after all, 3 percent of $10 million is still a lot.” (p. 225)

What if I really want to pick Stocks?

“Life isn’t just about target date funds and index funds. Lots of people understand that, logically, they should create a well-diversified portfolio of low-cost funds. But they also want to have fun investing. If you feel this way, sure, use a small part of your portfolio for “high risk” investing—but treat it as fun money, not as money you need. I set aside about 10 percent of my portfolio for fun money, which includes particular stocks I like, know, and use (companies like Amazon that focus on customer service, which I believe drives shareholder value); sector funds that let me focus on particular industries (I own an index fund that focuses on health care); and even angel investing, which is personal investing for private ultra-early-stage companies. (I occasionally see these angel opportunities because I’ve worked in Silicon Valley and have friends who start companies and look for early friends-and-family money.) All of these are very-high-risk investments, and they’re funded by just-for-fun money that I can afford to lose. Still, there is the potential for great returns. If you have the rest of your portfolio set up and still have money left over, be smart about it, but invest a little in whatever you want.” (p. 253)

Why is HSA great for investing?

“What I am going to show you is a shortcut that can earn you hundreds of thousands of dollars by turning something called a Health Savings Account into a supercharged account for growing your money. HSAs let you set aside pre-tax money to pay for qualified medical expenses, including deductibles, copayments, coinsurance, and some other health-related expenses. The cool thing is you can invest the money you put in it. HSAs get ignored for three reasons: ■ First, anything with the word “insurance” means we want to stop thinking about it as quickly as possible. Nobody ever got excited about cell phone bills. Same for health insurance. ■ Second, HSAs are only available to people with high-deductible insurance plans. Since most of us would rather eat bags of sand for breakfast than figure out what kind of health insurance plan we have, we skip it. ■ Finally, the rare person who has access to an HSA and even uses it still doesn’t understand the intricacies of how to use it to make money. The truth is that an HSA can be an incredibly powerful investment account because you can contribute tax-free money, take a tax deduction, and then grow it tax-free—it’s a triple whammy. If you use this account correctly, you will earn hundreds of thousands of dollars.” (p. 120)
“The real benefit of an HSA comes when you treat it as an investment vehicle. Think about it: If you’re contributing thousands of dollars to your HSA but you’re not actually getting body scans and new glasses every year, then what are you doing with that money? Most people think it just sits there. But you can invest it. You’re taking tax-free money and investing it, and it grows. Tax-free. This is incredible.” (p. 122)
“By the way, you can use the money for any qualified medical expense anytime, tax-free. And after the age of 65, you can spend that money on anything—say, a random trip to Santorini. Here are the things to be aware of: If you withdraw funds for non-qualified medical expenses before you’re 65, you’ll be charged a penalty. If you use your HSA funds for non-qualified medical expenses after age 65, it’s taxable. Finally, some people see HSAs as such a good deal that they pay for as many medical expenses as possible out of pocket, since they prefer to let their HSA investments grow.” (p. 123)

How to use Conscious Spending

“We spend more on our cell phones than most people in other countries do on their mortgages. We buy shoes that cost more than our grandparents paid for their cars. Yet we don’t really know how much these individual costs add up to. How many times have you opened your bills, winced, then shrugged and said, “I guess I spent that much”? How often do you feel guilty about buying something—but then do it anyway? In this chapter, the antidote to unconscious spending, we’re going to gently create a new, simple way of spending. It’s time to stop wondering where all your money goes each month. I’m going to help you redirect it to the places you choose, like investing, saving, and even spending more on the things you love (but less on the things you don’t).” (p. 127)
“Because we know that budgets don’t work, I’m going to show you a better way that’s worked for tens of thousands of my readers. Forget budgeting. Instead, let’s create a Conscious Spending Plan. What if you could make sure you were saving and investing enough money each month, and then use the rest of your money guilt-free for whatever you want? Well, you can—with some work. The only catch is that you have to plan where you want your money to go ahead of time (even if it’s on the back of a napkin). Would it be worth taking a couple of hours to get set up so you can spend on the things you love? It will automate your savings and investing and make your spending decisions crystal clear.” (p. 128)
“In reality, I love when people are unapologetic about spending on the things they love. You love fashion and want to buy $400 Brunello Cucinelli T-shirts? Awesome.” (p. 129)
“But I’m not the nagging parent who tells you to stop spending money on lattes. I spend lots of money on eating out and traveling, but I never feel guilty. Instead of taking a simplistic “Don’t spend money on expensive things!!!” view, I believe there’s a more nuanced approach. Let’s first dispense with the idea that saying no to spending on certain things means you’re cheap. If you decide that spending $2.50 on Cokes when you eat out isn’t worth it—and you’d rather save that $15 each week for a movie—that’s not being cheap. That’s consciously deciding what you value. Unfortunately, most Americans were never taught how to consciously spend, which means cutting costs mercilessly on the things you don’t love, but spending extravagantly on the things you do.” (p. 129)
“Conscious spending isn’t just about our own choices. There’s also the social influence to spend. Call it the Sex and the City effect, where your friends’ spending directly affects yours. Next time you go shopping, check out any random group of friends. Chances are, they’re dressed similarly—even though it’s as likely as not that they have wildly different incomes. Keeping up with friends is a full-time job. Too often, our friends invisibly push us away from being conscious spenders. For example, a while back I went to dinner with two friends. One of them was considering getting the new iPhone, and she pulled out her old phone. My other friend stared in disbelief: “You haven’t gotten a new phone in four years? What’s wrong with you?” she asked. “You need to get the iPhone.” Even though it was only three sentences, the message was clear: There’s something wrong with you for not getting a new phone (regardless of whether or not you need it).” (p. 130)
“Conscious spending isn’t about cutting your spending on everything. That approach wouldn’t last two days. It is, quite simply, about choosing the things you love enough to spend extravagantly on—and then cutting costs mercilessly on the things you don’t love. The mindset of conscious spenders is the key to being rich. Indeed, as the researchers behind the landmark book The Millionaire Next Door discovered, 50 percent of the more than 1,000 millionaires surveyed have never paid more than $400 for a suit, $140 for a pair of shoes, or $235 for a wristwatch. Again, conscious spending is not about simply cutting your spending on various things. It’s about making your own decisions about what’s important enough to spend a lot on and what’s not, rather than blindly spending on everything. THE PROBLEM IS THAT HARDLY ANYONE IS DECIDING WHAT’S IMPORTANT AND WHAT’S NOT, DAMMIT! That’s where the idea of conscious spending comes in.” (p. 130)
“I want you to consciously decide what you’re going to spend on. No more “I guess I spent that much” when you see your credit card statements. No. Conscious spending means you decide exactly where you’re going to spend your money—for going out, for saving, for investing, for rent—and you free yourself from feeling guilty about your spending. Along with making you feel comfortable with your spending, a plan keeps you moving toward your goals instead of just treading water.”

Example of Conscious Spending.

“My friend Lisa spends about $5,000/year on shoes. Because the kind of shoes she likes run more than $300, this translates to about fifteen pairs of shoes annually. “THAT’S RIDICULOUS!!!” you might be saying. And on the surface, that number is indeed large. But if you’re reading this book, you can look a little deeper: This young woman makes a very healthy six-figure salary, has a roommate, eats for free at work, and doesn’t spend much on fancy electronics, a gym membership, or fine dining. Lisa loves shoes. A lot. She’s funded her 401(k) and a taxable investment account (she makes too much for a Roth). She’s putting away money each month for vacation and other savings goals, and giving some to charity. And she still has money left over. Now here’s where it’s interesting. “But, Ramit,” you might say, “it doesn’t matter. Three-hundred-dollar shoes are ridiculous. Nobody needs to spend that much on shoes!” Before you chastise her for her extravagance, ask yourself these questions: Have you funded your 401(k) and Roth IRA, and opened additional investment accounts? Are you fully aware of where your spending money is going? And have you made a strategic decision to spend on what you love? Very few people decide how they want to spend their money up front. Instead they end up spending it on random things here and there, eventually watching their money trickle away. Just as important, have you decided what you don’t love? For example, Lisa doesn’t care about living in a fancy place, so she has a tiny room in a tiny apartment. Her decision to live in a small place means she spends $400 less every month than many of her coworkers.” (p. 132)
“The friends I wrote about above are exceptions to most people. They have a plan. Instead of getting caught on a spending treadmill of new phones, new cars, new vacations, and new everything, they plan to spend on what’s important to them and save on the rest. My shoe-loving friend lives in a microscopic room because she’s hardly home, saving her hundreds per month. My partier friend uses public transportation and has exactly zero décor in his apartment. And my nonprofit friend is extraordinarily detailed about every aspect of her spending.” (p. 138)
“For example, I spend a lot on clothes—guilt-free! I have a pair of cashmere sweatpants that are insanely expensive. They also feel like you’re wearing a cloud. When one of my friends found out how much they cost, he was aghast. And taken out of context, as a singular purchase, it’s true: They are “ridiculously” expensive. But taken in the context of a full automation system, which includes saving and investing and contributing to charity, the pants are simply a guilt-free purchase that I love. No more words like “crazy” and “ridiculous.” These are just something I wanted and I could afford, so I bought them. There’s more to money than just extravagance. You can also use it to create memories and experience true joy. When I got married, I sat down with my wife and we decided on the key things that were important to us. We’re fortunate that both sets of our parents are together and healthy. One of our dreams was to invite our parents to join us on our honeymoon—part of it!—and create amazing memories together. We invited them to Italy and took them on food tours, cooking classes, and wine tastings and basically treated them like royalty. We knew we wanted to create the memories. To make it happen, we made a few changes to our Automatic Money Flow, and the money was redirected automatically.” (p. 186)
“To me, this is an enviable position to be in, and it’s a big part of what I Will Teach You to Be Rich is about: automatically enabling yourself to save, invest, and spend—enjoying it, and not feeling guilty about those new jeans, because you’re spending only what you have. You can do it. All it takes is a plan. And it’s really as simple as that.” (p. 138)

“Will you do an exercise with me? It will take about thirty seconds. Imagine a pie chart that represents the money you earn every year. If you could wave a magic wand and divide that pie into the things you need and want to spend your money on, what would it look like? Don’t worry about the exact percentages. Just think about the major categories: rent, food, transportation, maybe student loans. What about savings and investing? Remember, for this exercise, you have a magic wand. And how about that once-in-a-lifetime trip you’ve always wanted to take? Put that in too. Some readers told me this was the most challenging part of the book. But I believe it’s also the most rewarding, because you get to consciously choose how you want to spend your money—and therefore, how you want to live your Rich Life. So let’s get on with the specifics of how you can make your own Conscious Spending Plan. Don’t get overwhelmed by the idea that you need to create a massive budgeting system. All you need is to just get a simple version ready today and work to improve it over time. Here’s the idea: A Conscious Spending Plan involves four major buckets where your money will go: fixed costs, investments, savings, and guilt-free spending money.” (p. 139)

How do I make a plan for Conscious Spending?

“Finally, once you’ve gotten all your expenses filled in, add 15 percent for expenditures you haven’t counted yet. Yes, really. For example, you probably didn’t capture “car repair,” which can cost $400 each time (that’s $33/month). Or dry cleaning or emergency medical care or charitable donations. A flat 15 percent will likely cover you for things you haven’t figured in, and you can get more accurate as time goes on.” (p. 141)
“Gifts for friends and family. Life used to be simple. The holidays meant presents for my parents and siblings. Then my family grew with nieces, nephews, and new in-laws. Suddenly I need to buy a lot more gifts every year. Don’t let things like gifts surprise you. You already know the common gifts you’ll buy: holiday and birthday presents. What about anniversaries? Or special gifts like graduations? For me, a Rich Life includes preparing for predictable expenses so they don’t surprise me. Planning ahead isn’t “weird,” it’s smart. You already know you’re going to buy Christmas gifts every December! Plan for it in January. Now let me show you how to apply this principle to even bigger expenses.” (p. 143)
“Optimizing your spending can seem overwhelming, but it doesn’t have to be. You can do an 80/20 analysis, which often reveals that 80 percent of what you overspend is used toward only 20 percent of your expenditures. That’s why I prefer to focus on one or two big problem areas and solve those instead of trying to cut 5 percent out of a bunch of smaller areas. Here’s how I do this with my own spending. Over time, I’ve found that most of my expenses are predictable. I spend the same amount on rent every month, roughly the same on my subway pass, and even basically the same monthly amount on gifts (averaged out over a year). Since I know the annual average, I don’t need to waste time agonizing over a $12 movie ticket I buy here or there. But I do want to zoom in on those two or three spending areas that vary wildly—and that I want to control. For me, it’s eating out, travel, and clothes. Depending on the time of year—or how nice a cashmere sweater I found—those numbers can vary by thousands of dollars a month.” (p. 147)

Focus on the big wins, not the small stuff.

“Brian was smart to focus on changing the things that mattered. Instead of promising that he’d stop spending money on Cokes every time he ate out, he picked the Big Wins that would really make an impact on his total dollar amount. You’ll see this a lot: People will get really inspired to budget and decide to stop spending on things like appetizers with dinner. Or they’ll buy generic cookies. That’s nice—and I definitely encourage you to do that—but those small changes will have very little effect on your total spending. They serve more to make people feel good about themselves, which lasts only a few weeks once they realize they still don’t have any more money. Try focusing on Big Wins that will make a large, measurable change. I focus on my critical two or three Big Wins each month: eating out, clothes, and travel. You probably know what your Big Wins are. They’re the expenses you cringe at, the ones you shrug and roll your eyes at, and say, “Yeah, I probably spend too much on _______.” (p. 150)
“This idea of sustainable change is central to personal finance. Sometimes I get emails from people who say things like, “Ramit! I started managing my money! Before, I was spending $500 a week! Now I only spend $5 and I save the rest!” I read this and just sigh. Although you might expect me to get really excited about someone contributing $495/month to their savings, I’ve come to realize that when a person goes from one extreme to another, the behavioral change rarely lasts. This is why I just shake my head when I see personal finance pundits giving families advice to go from a zero percent savings rate to a 25 percent savings rate (“You can do it!!!”). Giving that kind of advice is not useful. Habits don’t change overnight, and if they do, chances are they won’t be sustainable. When I make a change, I almost always make it a bite-sized one in an area that matters (see my discussion of Big Wins) and work in increments from there.” (p. 152)
“Whether you’re implementing a change in your personal finances, eating habits, exercise plan, or whatever . . . try making the smallest change today. Something you’ll hardly notice. And follow your own plan for gradually increasing it. In this way, time is your friend, because each month gets better than the one before it, and it adds up to a lot in the end.” (p. 153)

What’s the Envelope System of spending?

“Use the Envelope System to Target Your Big Wins All this conscious spending and optimizing sounds nice in theory, but how do you do it? I recommend the envelope system, in which you allocate money for certain categories like eating out, shopping, rent, and so on. Once you spend the money for that month, that’s it: You can’t spend more. If it’s really an emergency, you can dip into other envelopes—like your “eating out” envelope—but you’ll have to cut back until you replenish that envelope. These “envelopes” can be figurative (like in YNAB or even Excel) or literally envelopes that you put cash in. This is the best system I’ve found for keeping spending simple and sustainable. One of my friends, for example, has been carefully watching her spending for the last few months. When she started tracking it, she noticed that she was spending an unbelievable amount going out every week. So she came up with a clever solution to control her discretionary spending. She set up a separate bank account with a debit card. At the beginning of each month, she transfers, let’s say, $200 into it. When she goes out, she spends that money. And when it’s gone, it’s gone. These are training wheels. Build the habit first. Systematize it later.” (p. 153)
“I try to minimize cash spending altogether. After years of tracking my spending, I know how much I spend in cash every month, on average. I record the average monthly amount in my Conscious Spending Plan and move on. Like anything, this takes time in the beginning, but it gets much easier. Make tracking your spending a weekly priority. For example, set aside thirty minutes for it every Sunday afternoon.” (p. 162)

What’s your advice for people who save too much?

“What a great question. The only people who’ve ever asked me this are actually concerned about saving too much. The answer is simple: Once you’ve gotten your money under control and you’re hitting your targets, you absolutely should spend your leftover money. Look to your savings goals. If you don’t have something in there for “vacation” or “new snowboard,” maybe you should. Otherwise, what is all this money for? Money exists for a reason—to let you do what you want to do. Yes, it’s true, every dollar you spend now would be worth more later. But living only for tomorrow is no way to live. Consider one investment that most people overlook: yourself. Think about traveling—how much will that be worth to you later? Or attending that conference that will expose you to the top people in your field? My friend Paul has a specific “networking budget” that he uses to travel to meet interesting people each year. If you invest in yourself, the potential return is limitless.” (p. 184)
“If you’re meeting your goals, another route you could take is to start saving less and increase the amount you allocate to your guilt-free spending money. One final thing: I hope this doesn’t sound too cheesy, but one of the best returns I’ve ever gotten has been with philanthropy. Whether it’s your time or your money, I can’t emphasize enough how important it is to give back, be it to your own community or to the global community.” (p. 184)
“”Sometimes financial advice just blindly encourages people to do “more, more, more” without stopping to ask, “Is this enough?” The concept of winning becomes the goal instead of knowing why you’re playing in the first place. When do you get to stop and enjoy all the hard work you’ve done? I’ve seen too many people decide to take control of their finances (good), then change their lives to save money (good), then continue saving and become increasingly aggressive (not so good), and finally end up “living in the spreadsheet,” where they spend each day counting how much their money has grown (very bad). They’ve become obsessed with the game without realizing why they’re playing. You do not want to live in the spreadsheet. Life is more than tweaking your asset allocation and running Monte Carlo simulations on your investments. At this level, you’ve already won the introductory game. Now it’s time to ask why you want to keep going. If the answer is, “I want to take a lavish vacation every year and splurge on first-class tickets,” great! If your answer is, “I’m saving aggressively for the next three years so we can afford to move into our dream neighborhood,” awesome. I can show you how to achieve both of those goals even faster. To do that, let’s go through an exercise I call “Taking It From the Clouds to the Street.” (p. 261)

Do I need a financial advisor?

“This is a maddening question because, in fact, financial experts—in particular, fund managers and anyone who attempts to predict the market—are often no better at the job than amateurs. In fact, they’re often worse. The vast majority of people can earn more than the so-called “experts” by investing on their own. No financial adviser. No fund manager. Just automatic investments in low-cost funds (which I’ll get to in the next chapter). So, for the average investor, the value of financial expertise is a myth.” (p. 189)
“Most young people don’t need a financial adviser. We have such simple needs that with a little bit of time (a few hours a week over the course of, say, six weeks) we can get an automatic personal finance infrastructure working for us. Plus, financial advisers don’t always look out for your interests. They’re supposed to help you make the right decisions about your money, but keep in mind that they’re actually not obligated to do what’s best for you. Some of them will give you very good advice, but many of them are pretty useless. If they’re paid on commission, they usually will direct you to expensive, bloated funds to earn their commissions.” (p. 197)
“”So, if you’re thinking about using a broker or actively managed fund, call them and ask them a simple, point-blank question: “What were your after-tax, after-fee returns for the last ten, fifteen, and twenty years?” Yes, their response must include all fees and taxes. Yes, the return period must be at least ten years, because the last five years of any time period are too volatile to matter. And yes, I promise they won’t give you a straight answer, because that would be admitting that they didn’t beat the market consistently. It’s that hard to do.” (p. 209)
“In truth, being rich is within your control, not some expert’s. How rich you are depends on the amount you’re able to save and on your investment plan. Acknowledging this fact takes guts, because it means admitting that there’s no one else to blame if you’re not rich—no advisers, no complicated investment strategy, no “market conditions.” But it also means that you control exactly what happens to you and your money over the long term.” (p. 190)

Can people predict what the market will do?

“But the truth is they simply cannot predict how high, how low, or even in which direction the market will go. I get emails from people wondering what I think about the energy sector, currency markets, or Google every single day. Who knows about those things? I certainly don’t, especially in the short term. Unfortunately, the fact is that nobody can predict where the market is going. Still, the talking heads on TV make grandiose predictions every day, and whether they’re right or wrong, they’re never held accountable for them.” (p. 191)
“The key takeaway here is to completely ignore any predictions that pundits make. They simply do not know what will happen in the future.” (p. 191)

What if I have a complex financial situation?

“By contrast, fee-only financial advisers simply charge a flat fee and are much more reputable. (Neither is necessarily better at providing good investment returns, or your top line; they simply charge differently, affecting your bottom line.) The key takeaway is that most people don’t actually need a financial adviser—you can do it all on your own and come out ahead. But if your choice is between hiring a financial adviser or not investing at all, then sure, hire one. People with really complex financial situations, those who have inherited or accumulated substantial amounts of money (i.e., over $2 million), and those who are truly too busy to learn about investing for themselves also should consider seeking an adviser’s help. It’s better to pay a little and get started investing than to not start at all.” (p. 199)

“The way I described automatic investing was basically the same as saying “Puppies are cute.” Nobody would ever disagree with it. Automatic investing sounds perfect, but what happens when the market goes down? It’s not as easy to go along for the ride then. For example, I know several people who had automatic investment plans, and when the stock market incurred huge losses in late 2008, they immediately canceled their investments and took their money out of the market. Big mistake. The test of a real automatic investor is not when things are going up, but when they are going down. For example, in October 2018, the stock market dropped and one of my investment accounts decreased by more than $100,000. I did what I always do—kept investing, automatically, every single month. It takes strength to know that you’re basically getting shares on sale—and, if you’re investing for the long term, the best time to make money is when everyone else is getting out of the market.” (p. 214)

Should I pay off school loans?

“Technically, your decision comes down to interest rates. If your student loan has a super-low interest rate of, say, 2 percent, you’d want to pursue option one: Pay your student loans off as slowly as possible, because you can make an average of 8 percent by investing in low-cost funds. However, notice I said “technically.” That’s because money management isn’t always rational. Some people aren’t comfortable with debt and want to get rid of it as quickly as possible. If having debt keeps you awake at night, follow option two and pay it off as soon as possible—but understand that you could be losing lots of growth potential just so you can be more comfortable.” (p. 285)

“I recommend you take a close look at option three, and here’s why: The interest rate on most student loans these days is similar to what you’d get in the stock market, so frankly your decision will be a toss-up. All things being equal, the money you stand to make by investing is about the same amount that you’ll pay out in interest on your student loan, so basically it’s a wash. It won’t really matter whether you pay off your student loans or invest, because you’ll get roughly the same return. Except for two things: compound interest and tax-advantaged retirement accounts. When you invest in your twenties and early thirties, you get huge benefits from compound interest. If you wait until you’re older to invest, you’ll never be able to catch up on those earnings. Plus, if you’re investing in tax-advantaged accounts like 401(k)s and Roth IRAs (see Chapter 3), you’re getting gains from tax benefits. That’s why I would consider a hybrid split, paying off your debt with part of your money and investing with the rest. The exact split depends on your risk tolerance. You could choose a fifty-fifty split to keep things simple, but if you’re more aggressive, you’ll probably want to invest more.” (p. 285)

Is a home a good investment?

“For most Americans, their home is their biggest “investment,” and yet, as investments go, your primary residence is not a very good one for individual investors. Why? Because the returns are generally poor, especially when you factor in costs like maintenance and property taxes—which renters don’t pay for, but homeowners do. I’ll cover real estate more in Chapter 9, but in general, most people confuse their house with an investment that they buy and sell for profit. Think about it. Who sells their house for profit and keeps the money? If your parents ever sold their house, did they move into a smaller house and enjoy the rest of that money? No! They rolled it over to the down payment for their next, more expensive house.” (p. 252)

Is Art a good investment?

“Art advisers report annual returns for the index of fine art sales to be around 10 percent. However, as research done by Stanford analysts in 2013 found, “The returns of fine art have been significantly overestimated, and the risk, underestimated.” They found that the real annual return of art over the past four decades is closer to 6.5 percent versus the 10 percent that is claimed. The main reason for the overestimation is due to selection bias, in which the repeat sale of popular pieces isn’t taken into account. Also, by choosing particular art pieces as investments, you’re doing essentially the same thing as trying to predict winning stocks, and after reading Chapter 6, you know how difficult that is to do. In aggregate, art investments may be quite profitable, but the trick is choosing which individual pieces will appreciate—and as you can imagine, that isn’t easy. To show you how hard it is to select art as an investment, the Wall Street Journal wrote about John Maynard Keynes’s massive art collection: In 2018 dollars, he spent $840,000 to amass an art collection that is now worth $99 million. That return works out to 10.9 percent per year—an excellent return, except for one thing: Two pieces of art account for half the value of the collection. Think about that: One of the world’s best art collectors carefully bought 135 pieces, and just two generated half the value of the entire collection. Could you predict which two would be worth that much? For most people, the answer is no.” (p. 253)

How should I split bills with my spouse?

“Once you and your significant other start sharing expenses, questions will invariably come up about how to handle money on a daily basis—especially if one of you has a higher income than the other. When it comes to splitting bills, there are a few options. The first, and most intuitive, choice is to split all the bills fifty-fifty. But is that really fair to the person who earns less? They’re spending disproportionately more, which can lead to resentment and, often, bad money situations. As an alternative, how about this idea from Suze Orman? She encourages dividing expenses based proportionately on income. For example, if your monthly rent is $3,000 and you earn more than your partner, here’s how you might split it up:” (p. 294)
“There are lots of other options. You can each contribute a proportional amount into a joint household account and pay bills out of that. Or one person can cover certain expenses, like groceries, while the other handles rent. The key takeaway here is to discuss it, come to an agreement that feels fair (remember, fifty-fifty is not the only definition of “fair”), and then check in every six to twelve months to make sure your agreement is still working for both of you.” (p. 295)
“If you do this, the next time you have an argument about spending, you can steer it away from you and your partner and instead refocus on the plan. Nobody can get defensive when you’re pointing to a piece of paper (rather than pointing at the other person). It’s not about you deciding to splurge on a fancy dinner or them paying extra for a direct flight. It’s about your plan. Note that you and your partner will almost certainly have different approaches to reaching your savings and investing goals. For example, you might want to prioritize spending on organic food, while your partner might prioritize travel. As long as you both reach the goal, be flexible on how you arrive there. By focusing on the plan, not the person, you’re more likely to be able to sidestep the perception of being judgmental and work on bringing spending in line with your goals. This is the way handling money is supposed to work.” (p. 296)

What about a prenup?

“As the months went on, things got really tough. I felt resentful; she felt misunderstood. We both felt stuck—and this is when Cass brought up the idea of getting help. The minute she suggested it, I agreed: We ended up seeing a counselor who helped us navigate the tricky emotional issues of money. Imagine getting new conversational tools to talk about your hopes for money, your fear of money, your pride in money, and ultimately what your marriage will be about. This was immensely useful. We should have done it earlier. I’ve heard there are counselors who specialize in financial counseling, but we were in a rush and we found our counselor on Yelp. In retrospect, I would have talked through how to manage our lawyers. Your lawyer naturally wants to protect you from every contingency, while your partner’s lawyer wants to protect them. But ultimately, you need to manage them, not let the lawyers lead the process.” (p. 305)

What mistakes did Ramit make in his first edition of “I Will Teach You to be Rich”

“My first mistake was that I didn’t cover the emotions around money. I spent time covering the nuts and bolts of personal finance—I gave you the perfect word-for-word scripts to get late fees waived, the exact asset allocation I use for investing, and even how to manage money with your partner—but if you don’t tackle your invisible money scripts, none of it matters. Invisible scripts are the messages you’ve absorbed from your parents and society that guide your decisions for decades—and often without even being aware of it. Do any of these sound familiar?” (p. 3)
“The second mistake I made was being too overbearing. The truth is, you can choose what your Rich Life is and how you get there. In the original book, I did write about the different definitions of a Rich Life, but I didn’t acknowledge that we might take different routes to get there. For example, your Rich Life might be to live in Manhattan. It might be to ski forty days a year in Utah, or to save and buy a house with a huge yard for your kids, or to fund an elementary school in Croatia. That’s your choice. But how you get there is also your choice. Some people choose the traditional route of saving 10 percent, investing 10 percent, and slowly working their way to a comfortable Rich Life. Others save 50 percent of their income and quickly reach the “crossover point” where their investments pay for their life—forever. (This is called “FIRE,” or Financial Independence, Retire Early.) You choose your Rich Life. And in this edition, I want to show you different ways to get there. To do that, I’ve included lots of examples of people who took unconventional routes to create their Rich Lives.” (p. 4)

Other good ideas from Ramit:

“Living a Rich Life happens outside the spreadsheet. It’s tempting to tinker with online calculators and asset allocations for years and years, but at a certain point—especially for my readers who have followed my lessons and automated their money—there’s a point where you got it right. You won the game. Now it just takes time, patience, and feeding the system. The next layer of a Rich Life isn’t about recalculating your returns from compound interest. It’s about designing the lifestyle you want. Kids? Taking a two-month vacation every year? Flying your parents out to meet you? Increasing your savings rate so you can retire in your forties? I’m writing this from a safari lodge in Kenya—part of a six-week honeymoon that Cass and I are taking. One of our dreams was to invite our parents for the first part of the trip in Italy—to treat them and create new memories together. It was truly an unforgettable Rich Life experience. For me, a Rich Life 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 taking a taxi or ordering what I want at a restaurant or how I’ll ever be able to afford a house. That’s just me. Being rich probably means something different to you.” (p. 283)

“Ultimately, I realized that I wanted my parents to know I was doing fine—that they’d prepared me for life, that I’d learned their lessons, and that they didn’t need to worry. Chris pointed out that I’d been thinking a single number would communicate all of this, but in reality, I could assure my parents in lots of different ways. I could simply tell them my business was doing well. I could thank them for teaching me the discipline to grow a business. And I could do the thing that’s most meaningful to parents: spend time with them. Chris was right. He taught me that my intention was right, but I didn’t have to get into exact dollar figures to communicate that I was secure. In reality, my parents don’t care about the number in my bank account—they just want to know that I’m happy (and of course that I’m married and having kids—these are Indian parents I’m talking about). The next time I spoke to my parents and they asked how things were going, I took extra time to thank them for everything they’d taught me and told them that, thanks to them, I was fortunate enough to have a dream business that let me live an incredible life.” (p. 291)

“You might be tempted to share specific numbers. If it’s with your spouse or a very close friend or family member, okay. But beyond those people, ask yourself why: Is it to communicate that you’re doing well? Or is it to subtly show off? Are there other ways of communicating this? Remember, sharing numbers without context is a bad move. Your intention might be good, but to someone who earns $60,000, telling them you’re on track to have a $1 million portfolio (or much more) doesn’t communicate safety and security. It communicates arrogance.” (p. 291)

“My wife and I did this with our finances. We started with the big picture—how much we earned and how much we’d saved—and over the course of many months, we went deeper into our accounts and our attitudes toward money. (It probably won’t take you that long to explore your accounts, but to fully understand each other’s money attitudes can take years.) When you sit down, put the paper aside and start by talking about goals. From a financial perspective, what do you want? What kind of lifestyle do you expect? What about vacations in the next year? Does either of you need to support your parents? Then look at your monthly spending. This will be a sensitive conversation, because nobody wants to be judged. But remember, keep an open mind. Show yours first. Ask, “What do you think I could be doing better?” And then it’s your partner’s turn. Spend some time talking about your attitudes toward money. How do you treat money? Do you spend more than you make? Why? How did your parents talk about money? How did they manage it? (One of my friends has horrible money management skills, which is confusing because she’s so disciplined and smart. After years of knowing her, one day she told me that her dad had declared bankruptcy twice, which helped me understand the way she approached her finances.)” (p. 293)

Key Takeaways from “I will Teach you to be Rich.”

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