If you’re struggling to get your finances in order, don’t worry; you’re not alone. Finances can be a tricky topic, but resources are available to help. One excellent resource is the New York Times Bestseller, “I Will Teach You To Be Rich,” by finance expert Ramit Sethi. His book offers practical and actionable advice to help you take charge of your finances and set yourself up for a bright financial future. In this blog post, we’ll summarize the book and its key takeaways, along with some additional comments and suggestions.
I have added some of my thoughts, where appropriate, under the heading “Personal insights:”
What may sound like a boastful puff piece is a well-researched and intelligently presented financial planning guidebook. Ramit departs from the typical “never buy lattes” crowd to offer some viable alternative. In a nutshell, he gives these encompassing messages:
- The 85 percent solution: Getting started is more important than becoming an expert. Take it one step at a time.
- It’s okay to make mistakes. Make them now, learn, and avoid them in the future.
- Spend extravagantly on the things you love and cut costs mercilessly on the things you don’t. He refers to this as conscious spending.
- There’s a difference between being sexy and being rich. In investing, for example, buy and hold won’t win raptured interest; it’s boring, but it works.
- Don’t live in the spreadsheet. Automate your money and ignore the daily noise.
- Play offense, not a defense. Get aggressive and make things happen, or you will continue to get pushed around.
- Take action!
Maximizing Credit Cards
- Used correctly, credit cards are free short-term (30-day) loans. To benefit from this, you must pay off your monthly credit balance.
- Personal insights: instead of paying your bills from your checking account, auto-deposit or lump sum transfer a chunk of your salary, etc., to your credit card. Since not all companies accept credit card payments, transfer enough other funds to your savings account to pay these bills. This separates expenses, pays off your credit card balances, and generates income from any cards offering cash-back rewards. It will also positively help your credit score.
- Your credit score (FICO) is impacted 35% by payment history, 30% by the amount owed (keep total credit at 30% or less of total credit available), 15% by the history of your credit, 10% based on hard credit pulls and new credit, and 10% by types of credit (varied is better).
- Avoid free credit scores like CreditKarma, which are often erroneous; buy the FICO scores from MyFico.com.
- Personal insights: You can get a free Experian FICO score from Experian.com.
- Pick a card for travel and entertainment and another for cash-back rewards. Ramit recommends the Chase Sapphire Reserve card for travel and Alliant for cash-back rewards. Also, a Capital One cash back for business. He also recommends an Amex Platinum card for the various benefits. Link your cards and bank accounts.
- Don’t open a store or gas station credit card.
- Personal insights: Be aware that MasterCard is more expensive to the merchant than Visa. Costco, for example, and some other merchants, won’t accept MasterCard.
- Keep any older credit cards, and ensure some expenses go through to keep them active to enhance your credit score due to your longevity of credit.
- Pay off your credit cards, request that any fees be waived, and even negotiate for lower rates.
- Either pay off your credit card and other debt by eliminating the smallest amounts or largest interest rate balances – both techniques have their benefits.
- Periodically request higher credit limits. Again, your credit score is partially based on credit card debt as a percentage of total available credit.
Optimizing your Bank Accounts
- Avoid big banks like BankAmerica and Wells Fargo, which charge fees for everything. He also doesn’t like credit unions, which have yet to offer tangible benefits over other types of financial institutions except for the hype of being member-owned.
- Ramit recommends Charles Schwab, a no-fee checking account that requires a linked Schwab brokerage account, and Capital One 360 (capitalone.com) as a savings account since it offers sub-accounts for any specific need you may want to specify – home or car purchase, vacations, etc.
- Other recommended savings banks are Ally Bank (ally.com), Goldman Sachs Marcus (marcus.com), and American Express Personal Savings.
- Personal insights: Fidelity Bank (Fidelity.com) is the only bank offering free wire transfers. A few other institutions do offer free wire transfers, but they come with significant strings attached.
Investing Basics
- Ramit’s ladder of personal finance includes:
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- Contribute to your employer’s 401(k) plan at least up to your employer’s match.
- Pay off all credit card and other debt.
- Set up and fund a Roth IRA.
- If you have leftover funds, invest more into the 401(k) plan.
- Set up an HSA plan if eligible. (This is a medical savings account where investments grow tax-free but require a high deductible medical insurance policy.)
- If you have leftover funds, invest in a regular taxable investment account.
- Personal insights: 401(k) plan allow tax-free contributions, but any distribution is taxed as ordinary income. Roths use post-taxed contributions, but all distributions are tax-free and do not have the onerous distribution requirements as do 401(k) plans.
- He recommends against Robo advisors such as Wealthfront, which charges a fee to manage risk-adjusted diversified investment funds because he feels there’s a cheaper and better way, however, at 25 basis points, Wealthfront is an option that should be considered if you are unable or unwilling to manage your own account. See more on investing below.
- Personal insights: The cost to an investment fund, even when the fee is slight, such as 1% or less, is much greater than it appears because not only is the 1% reduced from the investment pool, but any earnings on the 1% are also eliminated. For example, an investment earning 8% over ten years with a 1% annual fee would lose $20,643 compared to the same investment without the fee.
- Ramit recommends using Vanguard as your investment account.
- Personal insights: Although Vanguard is one of the best index fund families available and boasts low fees, my experience with Vanguard has been that many transactions, because of compliance requirements, require more signed and mailed paperwork than other brokerage firms, which are much more Internet automated. If you want Vanguard index funds, these are available at other firms which avoids the paperwork issues that Vanguard seems to require.
- Personal insights: An easy brokerage setup is Robinhood, and the best available brokerage is Interactive Brokerage (interactivebrokers.com). Interactive Brokerage has access to more securities than almost any other brokerage, has no fees, and boasts an excellent reputation.
Conscious Spending
- Ramit is a big proponent of guilt-free spending on what you love after you’ve met all your other budget requirements. This is essentially his recommended mindset.
- He suggests the following budget:
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- 50-60%: Fixed costs – rent, mortgage, utilities, debt, etc.
- 10%: on the investment ladder discussed above.
- 5-10%: on specific saving goals – vacation, emergency fund, house down payment, etc.
- 20-35%: Guilt-free spending – dining out, movies, clothes, etc.
- Youneedabudget.com is the recommended app to keep your budget.
- Again, this is a mindset; you may want to adjust your categories. To make room in your budget, cut expenses or increase your revenue.
- Set up these categories with your checking, savings, and credit cards to automate this system.
- To better manage your expenses, ask vendors for specific pay dates that sync better with your income stream and other expenses.
More on Investing
- Ramit recommends using Vanguard target date mutual funds asset allocation portfolios based on your projected retirement date. Essentially, this employs a risk adjustment based on age using an allocation of bonds to stock. You never have to do anything else using this technique since rebalancing is handled automatically.
- An example target date fund is VTTHX which is the Vanguard fund for those retiring around 2035.
- Avoid ESG funds which are just woke type funds.
- A comprehensive listing of ETFs is available here.
- An alternative to this is to use the David Swensen Model of Asset Allocation, in which you identify the best index funds from Vanguard, Schwab, etc. David has run Yale’s fabled endowment for over 30 years, generating a 13.5% annualized return.
- Personal insights: You can read an analysis of the Swensen portfolio as well as some recommended ETFs here.
- The following Swensen allocation uses examples of Vanguard funds.
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- 30% – domestic equities, including small, mid, and large-cap stocks (like VTSMX)
- 15% – developed-world international equities (VGTSX for developed and emerging)
- 5% – emerging-market equities, such as China, India, and Brazil
- 20% – REITS (VGTSX)
- 15% – Government bonds (5% each VSBSX, VSIGX, VLGSX)
- 15% – Treasury inflation-protected securities (TIPS) (VTAPX)
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- Over time, the allocations must be rebalanced by either selling and buying, which will be taxable in taxable accounts, or by investing new funds in under-allocated categories to rebalance.
- Personal insights: I recommend using ETFs versus mutual funds. Similar low-cost index-type funds are available; however, you can take out margin loans on your portfolio with ETFs. For example, if you are going to borrow for a car, it’s better to borrow from your own portfolio than from a third party, and ETFs allow for this option. I do not recommend buying on margin. Another issue is that Vanguard requires a minimum purchase (for example, $1000) where ETF do not have such impediments.
- Vanguard, Fidelity, Schwab, and IShares all have index fund ETFs which would be suitable investment choices with very low fees.
- His primary investment focus is on the benefit of time vs. stock picks and tricks. Here, he’s probably absolutely correct.
- Ramit is not a proponent of investing in art and crypto.
Other suggestions
- Ramit has several suggestions on pre-nuptials, helping parents, and dealing with differences in partners’ revenue.
- He suggests buying vs. leasing a reliable car and retaining it for as long as possible.
- He also suggests that renting is often preferable to buying a home and that many real estate investments are not wise because the actual cost is often understated. It’s not an automatic magic investment solution and must be addressed with open eyes.
Summary
Ramit’s system is straightforward and simple. There is a mindset that enjoys spending on what one loves and cutting everything else to the bone and a financial institutional network and investment strategy that is essentially a set it and forget it. Some of the more helpful suggestions are the exact companies that work to put this system together.
