This book was a key building block in learning about personal finance, and I still recommend it for folks looking for tactical, step-by-step advice on getting their finances today. When my siblings needed a book on personal finance, I bought them this one. Strong recommend.
THREE KEY TAKEAWAYS TO BECOME RICH
If you pause to extrapolate the lessons on personal finance away from money and just look at them as life principles, I’d distill them down to these three lessons:
- Behavior Trumps Information. Knowing the perfect right answer is less important than taking action. That’s why the book focuses on small, sometimes innocuous behaviors, to slowly move you towards your goal (e.g. open an investment account, but don’t put any money in it.) Or better yet, automating your finances and removing the need to make a decision at all.
- Focus on Getting Things 85% Right. You don’t need to get things perfect. Get it 85% there and then move on.
- Spend On What You Love, Cut Back on What You Don’t. If you love something, spend money (or time) on it. Conversely, if it’s not important to you, you shouldn’t spend any money (or time) on it.
YOUR SIX WEEK PLAN TO BECOME RICH
Ramit breaks down your plan to become rich into six steps that can be followed over the course of six weeks. I’ll dive into each of those steps below. The steps are:
1. Optimize Your Credit Cards
2. Open high-interest, low-maintenance bank accounts
3. Open Investing Accounts
4. Start Your Conscious Spending Plan
5. Automate Everything
6. Start Investing
1. 6 STEPS TO OPTIMIZE YOUR CREDIT CARDS
- Pay off your credit card automatically
- Get all fees waived
- Negotiate a lower APR
- Keep your cards for a long time and keep them active
- Get more credit (if you have no debt)
- Use your rewards
To improve your credit utilization rate, you have two choices: Stop carrying so much debt on your credit cards (even if you pay it off each month) or increase your total available credit.
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Automatic warranty doubling: Most cards extend the warranty on your purchases. So if you buy an iPod and it breaks after Apple’s warranty expires, your credit card will still cover it up to an additional year. This is true for nearly every credit card for nearly every purchase, automatically.
Car rental insurance: If you rent a car, don’t let them bully you into getting the extra collision insurance. It’s completely worthless! You already have coverage through your car insurance, plus your credit card will usually back you up to $50,000.
Trip-cancellation insurance: If you book tickets for a vacation and then get sick and can’t travel, your airline will charge you hefty fees to re-book your ticket. Just call your credit card and ask for the trip-cancellation insurance to kick in, and they’ll cover those change fees—usually up to $1,000 per year.
Concierge services: When I couldn’t find LA Philharmonic tickets last year, I called my credit card and asked the concierge to try to find some. He called me back in two days with tickets. They charged me (a lot, actually), but he was able to get them when nobody else could.
2. OPEN HIGH-INTEREST, LOW-MAINTENANCE BANK ACCOUNTS
- Avoid brick n’ mortars banks.
- At the time of writing, Ramit recommended Capital One. Personally, today I’d recommend Ally Bank (2.20% yield for savings accounts). It’s still not a lot but it’s better than most.
Banks will also try to trick you by demanding “minimums,” which refer to minimum amounts you must have in your account to avoid fees or to get “free” services like bill pay. These are B.S. Imagine if a bank required you to keep $1,000 sitting in its low-interest account. You could be earning twenty times that much by investing it.
3. OPEN INVESTING ACCOUNTS
- Open a 401K account and investment account
These are the five systematic steps you should take to invest.
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. A “100 percent match up to 5 percent of your contribution” 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 page 40 in Chapter 1.
Rung 3: Open up a Roth IRA (see page 83) and contribute as much money as possible to it. (As long as your income is $101,000 or less, you’re allowed to contribute up to $5,000 in 2009.)
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 $15,500.
Rung 5: If you still have money left to invest, open a regular non-retirement account and put as much as possible there. For more about this, see the next page. 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.
4. START YOUR CONSCIOUS SPENDING PLAN
- Don’t create a budget
- Use a tracking tool to see where your money is going, e.g. Mint
Think about your goals. Ask yourself if you’d rather spend $10 on lunch or save $10 toward a house or a car. If you would rather spend the money on lunch, by all means enjoy lunch! You save money so that you can spend it later on the things that make you happy.
What is frugality? Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on— and then cutting costs mercilessly on the things you don’t love.”
5. AUTOMATE EVERYTHING
If you’re paid on the 1st of the month, I suggest switching all your bills to arrive on or around that time, too. Call and say this: “Hi, I’m currently being billed on the 17th of each month, and I’d like to change that to the 1st of the month. Do I need to do anything besides ask right here on the phone?”
5th of the month: Automatic transfer to your savings account. Log in to your savings account and set up an automatic transfer from your checking account to your savings account on the 5th of every month.
5th of the month: Automatic transfer to your Roth IRA.
7th of the month: Auto-pay for any monthly bills you have. Log in to any regular payments you have, like cable, utilities, car payments, or student loans, and set up automatic payments to occur on the 7th of each month.
7th of the month: Automatic transfer to pay off your credit card. Log in to your credit card account and instruct it to draw money from your checking account and pay the credit card bill on the 7th of every month—in full.
By the way, while you’re logged in to your credit card account, also set up an e-mail notification (this is typically under “Notifications” or “Bills”) to send you a monthly link to your bill, so you can review it before the money is automatically transferred out of your checking account.
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.
Add a savings goal of three months of bare-bones income before you do any investing. For example, if you need at least $1,500/month to live on, you’ll need to have $4,500 in a savings buffer. The buffer should exist as a sub-account in your savings account. To fund it, use money from two places: First, forget about investing while you’re setting up the buffer, and instead take any money you would have invested and send it to your savings account. Second, in good months, any extra dollar you make should go into your buffer savings.
6. START INVESTING
- Use Index funds, not individual stocks
- In the book, Ramit advises against advisors. He talks about when it’s appropriate to use an advisor in his program, Advanced Personal Finance
- The Dreaded “DTR” Conversation with Your Boyfriend or Girlfriend
- THE KEY IS TO START BY ASKING THEIR ADVICE. YES, EVEN IF YOU DON’T NEED IT!
- There are two ways to get more money. You can earn more or you can spend less. Cutting costs is great, but I personally find increasing earnings to be a lot more fun
- Maintain your car. I know that keeping your car well maintained doesn’t sound sexy, but it will make you rich when you eventually sell your car. So take your car’s maintenance as seriously as your retirement savings.
- Buying a House. Make sure you’re buying for the right reasons (see: The 6 Things I Wish I Knew Before Buying a House)
- Marriage. Don’t kid yourself. You will spend more than you think.
Books to Read
Think and Grow Rich | Buy on Amazon
The little book of common sense investing | Buy on Amazon
I Will Teach You To Be Rich | Buy on Amazon
The Intelligent Investor | Buy on Amazon
A Wealth of Common Sense | Buy on Amazon