i will teach you to be rich full pdf
In fact, I just made the largest investment of my life, moving $46,000 in my 401(k) from cash into a Fidelity index fund. The only exception is if you spend enough to justify the extra rewards a fee-charging account offers. And like a dutiful Indian son, I love not having to worry about it breaking down. You value what you pay for. . Make a chart that looks something like this. CHAPTER 2 BEAT THE BANKS Open high-interest, low-hassle accounts and negotiate fees like an Indian Last week, you got your credit cards organized, and now in Week 2 we’re going to get your bank accounts set up right. But Julie proves that the surface data isn’t always enough. Finally, she’s automatically e-mailed a copy of her credit card bill for a five-minute review. 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. The problem is that, as we’ve seen, if you don’t plan ahead, it ends up costing you much more in the end. Always! 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. Here are a few examples you might not know about: Automatic warranty doubling: Most cards extend the warranty on your purchases. Even if you already have these accounts, it’s worth talking to your bank to be sure you’re not paying fees. I like a thirty-year fixed-rate loan. . The vast majority of twentysomethings can earn more than the so-called “experts” by investing on their own. Your system, however, makes this much less painful. But it’s the behind-the-scenes work that really makes you rich. You’ll start noticing the excuses people make to justify not investing, including “I don’t have time” and “Stocks can go down, and I don’t want to lose my money.” Most people don’t know the first thing about how to pick investments—but now you will! BE LIKE WARREN BUFFETT. She was just saying it matter-of-factly: Her wedding could cost anything and that was totally fine. Anyway, the little-known but true fact is that the major predictor of your portfolio’s volatility is not due, as most people think, to the individual stocks you pick, but instead your mix of stocks and bonds. To do this, I use a concept called “The Next $100.” This means, simply, where will the next $100 you make go? When I told friends I had launched a scholarship, they looked at me in disbelief. So although you will certainly save money on your mortgage interest specifically, the net-net is usually a loss. INVEST NOW . It means you’ll need to save for a six-month emergency plan in case you lose your job and can’t pay your mortgage. So it’s not like they’re all bad.) CATEGORIES OF SPENDING MONTHLY FIXED COSTS Fixed costs are the amounts you must pay, like your rent/mortgage, utilities, cell phone, and student loans. They returned a total of $59 to me with one phone call. This is where the all-important concept of asset allocation comes into play. The first, and most intuitive, choice is to split all the bills 50/50. My friend never set aside an account, so his regular checking account was one big pot of money mentally “earmarked” for various things. When he finally got up the courage to ask his boss for a raise, he said it in the most timid way: “Do you think I might possibly ask you about a raise?” If you’re a manager, the first thing you’d think is, “Oh God, not another thing in my day.” My friend’s boss brushed him off, leaving Jamie, who’s still at the company, frustrated and underpaid. Wow!”). RAMIT: BANK REP: I’m sorry, sir, we can’t refund that fee. We spend more on our cell phones than most people in other countries do on their mortgages. Maybe they’re correct, or maybe they’re not, but that’s not really the point. If you simply can’t cut more out of your budget, this spending plan may be a useful theoretical guide, but you have more important concerns: making more money. And Yale’s David Swensen has returned more than 16 percent over twenty-three years. Whatever your card company charges, paying off your debt will give you a significant instant return. I know asset allocation sounds like a B.S. Nobody can get defensive when you’re pointing to a piece of paper (rather than pointing at the other person). That would be cool, though. It might be painful to learn the truth, but you have to bite the bullet. Instead they end up spending it on random things here and there, eventually watching their money trickle away. Raises. You can be flexible with the funds. Working retail for five years I made a goal out of saving up 10K to be able to invest in the stock market. The À La Carte Method takes advantage of psychology to cut our spending. Do they deserve to be put on a pedestal? If he pays off the loan over ten years, his monthly payment will be about $230/month, meaning he’ll pay just over $7,600 in interest. No, he simply pointed out something very gently: “What if you focused on your overdrafts? THE PROBLEM IS THAT HARDLY ANYONE IS DECIDING WHAT’S IMPORTANT AND WHAT’S NOT, DAMMIT! The day I paid off my last credit card bill was surreal. Do you know your earning potential? “Ramit,” they write, “my husband spends way too much money on video games. Basically, I’m always on the lookout for ways to spend less time and get better results. Sure, there will be tough decisions. But when calling, keep in mind that you should have a clear goal (to get your fee erased) and should not make it easy for companies to say no to you. YOU CANNOT JUST PICK RANDOM FUNDS AND EXPECT TO HAVE A BALANCED ASSET ALLOCATION. Why are your credit report and credit score important? I invested every month, whether the market was up or down. How Banks Rake It In Fundamentally, banks earn money by lending the money you deposit to other people. “No problem,” they said. As a result, the number one financial concern Americans have is not having enough money for retirement. c. Feel your heart start to race, bite off your fingernails, log in to your account, and scream, “Sell, sell, sell!” while clicking furiously. Active mutual fund managers could not typically beat the market, yet they charged investors maintenance fees and incurred tremendous amounts of taxes on their frequent trading. We trust our doctors to prescribe the right medications, we’re confident that our lawyers will steer us right through legal tangles, and we devour the words of the talking heads in the media. We dream of having an automated system that handles most of the work for us, something that just works. The numbers are markedly different for students. I get e-mails from people wondering what I think about oil, currency markets, or Google every single day. Sometimes I get e-mails from people who say things like, “Ramit! For example, has anyone with an IQ over 42 ever consciously chosen to buy a Chevy Lumina? The point is that now you’ve got a personal-finance system that few others have. Once you start making too much to invest in your Roth IRA, you’ll need more help in this department. He came to talk to me about it one day. They’ll probably be coping with the crushing guilt of having to rely on their son or daughter to help them with their finances, but don’t let them get caught up in feeling bad. Remember, most people who try to manage their own portfolios fail at even matching the market. In my case, I had cash available to put down. It’s one thing to be conservative—if you’re afraid of losing money, you can pick investments that limit your exposure (such as a lifecycle fund that’s geared toward someone a few years older than you, or a heavier emphasis on more stable, large-cap funds in your portfolio). Yes, the return must be at least ten years, because the last five years of any time period are too volatile to matter. When you log in to any of your accounts, you’ll usually find an option called something like “Link Accounts,” “Transfer,” or “Set Up Payments.” These are all the links you need to make: If you haven’t already done this, connect your paycheck to your 401(k), so it’s automatically funded each month. Is your future spouse also thinking like this?) Ask, “What do you think I could be doing better?” And then it’s your partner’s turn. Tallyho!” It’s quite another to spend $1.99 each time you want to buy a TV show—and when you actively think about each charge, you will cut consumption. And sometime after that, you’ll be debtfree! 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. You have a lot of options. Think about Alert to Students If you’re a student, there’s no reason you shouldn’t have an account with no fees and no minimums. I know it’s not sexy—or easy. Also, some government jobs require you to reveal your salary. We want our money to grow automatically, in accounts that don’t nickeland-dime us with fees. REMEMBER THAT GETTING A RAISE IS NOT ABOUT YOU. A couple of years ago, I switched my car insurance because they would not stop sending me mail three times a week. 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. In fact, because he works so hard, he almost never takes vacations. It’s not easy to learn that reliance on so-called “experts” is largely ineffective, but stick with me. It let me ignore the news and enjoy life knowing my long-term plan was in motion. If only all criminals were as diligent as I am. In 1924, mutual funds, which are just baskets filled with different types of investments (usually stocks), were invented. Moves like this don’t bother me as much as they might bother other people (my wife, for example) because my risk tolerance is high. It’s a funny thing: Once people get their first taste of investing, setting up new accounts and learning phrases like asset allocation become way more exciting than paying off tired old debt. When I saw this account, I wanted to marry it. Do a hybrid 50/50 approach, where you pay half toward your student loans (always paying at least the minimum) and send the other half into your investment accounts. Swensen’s theories are great, but how do we make them real and pick funds that match his suggestions? Instead, use your raise to put yourself in a better financial position. Their account generally has the highest or secondhighest interest rates available. (Being a long-term customer increases your value to them, which is one reason you want to pick a bank you can stick with for the long term. I Will Teach You To Be Rich by Ramit Sethi. Think back to the year 2000. We’ll focus on discount brokerages like Vanguard and T. Rowe Price because they charge dramatically smaller fees than full-service brokerages like Morgan Stanley. I also recommend using www.youneedabudget.com as a planning tool if you have an irregular income. In other words, by diversifying your investments across different asset classes (like stocks and bonds, or, better yet, stock funds and bond funds), you could control the risk in your portfolio—and therefore control how much money, on average, you’d lose due to volatility. This is what’s known as the annual percentage rate, or APR. That means I urge you to stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross pay. • Planning for future purchases • Parting words (cue the violins) Index INTRODUCTION WOULD YOU RATHER BE SEXY OR RICH? It’s about you demonstrating your value to your employer. Instead, they fall victim to the credit card companies’ nefarious practices, which prey on the uninformed—and the undisciplined. One in ten said they weren’t making enough to make ends meet, according to an HSBC Bank report in 2007. They collected their significant wealth through controlling their spending, A FIFTH OF YOUNG PEOPLE THINK THEY’LL GET RICH THROUGH THE LOTTERY regular investing, and in some cases, entrepreneurship. Even if it doesn’t waive any fees, I recommend setting up a monthly automatic transfer so your money will grow without you having to think about it. Because bonds will generally perform better when stocks fall, bonds lower your risk a lot while limiting your returns only a little. I’m really happy to hear that. See below for my story on buying a new car. That’s a costly mistake: Check out the table above to see the tax benefits of choosing a Roth IRA over a regular taxable account—or worse, doing nothing. In fact, this is already built into your spending plan: Under Savings Goals, you allocate money toward goals where you have a general idea of how much it will cost. . The Difference Between Cheap and Frugal A while back, a couple of friends and I were talking about where we want to travel this year, and one of them said something that surprised me: “You probably wouldn’t approve, but I want to go to the Caribbean.” Huh? (Sure, there are some low-cost mutual funds, but because of the way they compensate their own portfolio managers and other employees, it’s virtually impossible for them to compete with the low costs of passively managed index funds, which I’ll talk more about in a minute.) When a friend became obese, a person increased his or her chances of becoming obese by 57 percent. Unfortunately, the fact is that nobody can predict where the market is going. 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 they often ignore something that is so simple, so basic, that it just doesn’t seem important: their credit. 2. It’s also incredibly easy to see where all my money is going. do nothing. Decide how much you want to spend in major categories each month. Since you presumably made a good investment, why not hold it for the long term? Remember, $1 saved per day is $30 saved per month. I figure pay yourself first, then plan to play with what’s left. I’ve decided to be more aggressive about paying off my debt, and that’s why I’d like a lower APR. As an asset class, bonds generally return less than stocks. Now that you’re in the market, you might be tempted by any number of card offers. These questions can be daunting, but don’t let them stop you. And we know that conscious spending can be fun (especially when it’s automated). When she goes out, she spends that money. Get serious about getting out of debt. I’m thinking of fee waivers and special offers that you use for customer retention.” Credit cards also offer rewards programs that give you cash back, airline tickets, and other benefits, but most people don’t take advantage of all the free stuff they can get. If you’re happy with your card, keep it. In order to make this work with the least effort possible, keep one account as your “variable” account and make the others static. You’ll get an email from your card company each month before the payment goes through so that you can adjust your payment as needed. WHO SHOULD BUY A HOUSE? The result is tens of thousands of dollars lost over a lifetime. 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!!!”). Now go back to a normal Conscious Spending Plan where you send money to investing accounts. Then move to the second card on the list. If you get a raise, be realistic: You earned it, and you should enjoy the results of your hard work. In determining where to allocate your assets, one of the most important considerations is the returns each category offers. Then I figured it out. Just as in a job interview, you’ll want to have a list of things in your head that you can use to strengthen your negotiation. Before you can do anything else, you’ve got to figure out how much these add up to. You probably don’t need to buy a bunch of insurance options right now, but you can certainly set up a savings goal so when you do need them, you’ll have money to use. Also, you can choose among many different investment options—some aggressive, some conservative—it depends on how much risk you’re willing to take. Do your homework and then negotiate. 2. I think we actually ate breakfast at a dealership once. But that doesn’t mean we can’t learn something from them. As a result, the pundits were out in full force, making all sorts of absurd claims. You don’t want to own only U.S. small-cap stocks, for example, or funds that own only small-cap stocks. Good answer: Brian decides to pick his three biggest expenses and optimize them. INVESTING IS THE SINGLE MOST EFFECTIVE WAY TO GET RICH By opening an investment account, you give yourself access to the biggest moneymaking vehicle in the history of the world: the stock market. Even waiting two Growth Vs. Access Q: I don’t want to lock my money up in a retirement account—I might need it soon. My other friend stared in disbelief: “You haven’t gotten a new phone in four years? On a happier note, all of my debt is now on cards with APRs between 0 and 4.99 percent. Note that there may be a time limit on transferring the money to a new provider, so when you change jobs, you need to call your discount broker and ask them how to handle a rollover. 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 opened additional investment accounts? Remember, your bank’s fees are often more important than the interest rate it offers: If you have $1,000 and another bank has a 1 percent higher interest rate, that’s a difference of $10 per year. I see three choices: Cut costs and have a simpler wedding. www.creditkarma.com. Second, your credit score suffers—30 percent of your credit score is based on how much debt you have—putting you into a downward spiral of trying to get credit to get a house, car, or apartment, and having to pay even more because of your poor credit. The Investment Most Americans Have: Your 401(k) As we discussed in Chapter 3, if you get a 401(k) match from your employer, you need to pay into in your 401(k) before you do any other investing. Just a 6-Week Program That Works. Tell them, “If I have only thirty dollars in my account and I try to charge thirty-five dollars on my debit card, I don’t want your system to let me.” Some banks can handle this request. If you have irregular income: Irregular incomes, like those of freelancers, are difficult to plan for. The only real drawback to this strategy is that, in an extremely turbulent market, your allocation might get so far out of line that you can’t correct it by rebalancing your overall holdings across accounts. Unfortunately, leverage can also work against you if the price goes down. Yet, like a gold digger clasping on to her soon-to-be ex-husband, Wall Street has resisted killing its cash cow of activity managed mutual funds. The major benefit to a lifecycle fund is that you set it and forget it. For easy math, let’s pretend you make $100,000 per year. She saved more than $250 just by making a phone call! Anyway, I told her to get a credit card and start building her credit. Don’t say, “Can you remove this?” Say, “I’d like to have this removed.”) At this point, you have a better-than-50-percent chance of getting the fee credited to your account. HOW MANY TIMES HAVE YOU OPENED YOUR BILLS, WINCED, THEN SHRUGGED AND SAID, “I GUESS I SPENT THAT MUCH”? Astonishingly, of the 115 million Americans who carry a monthly credit card balance, half of them pay only their minimum monthly payments. Now we’re going to automate this system so each new dollar that comes into your system gets instantly sent to the right area, whether it’s investments, savings, fixed costs, or guilt-free spending. I know I have, and most of the time I just bought it anyway because I was already psychologically set on it. To be honest, I thought reducing the number of guests would produce the biggest result. These people are worthless, and I quickly distance myself from them. Congratulations! INTEREST RATE. Whereas a 401(k) has an array of funds that you must choose among, a Roth IRA lets you invest in anything you want: index funds, individual stocks, anything. 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). For something as important as your credit, make the effort and pick a good card. Over time, you can manage your asset allocation to reduce risk and get a fairly predictable return on investments. “Vijay, this is very good! Because both my sisters had recently gotten married, I suggested she check out a nearby stationery store for her invitations. I have $100 extra cash in my wallet!” NO!!! That’s $60,000, so if you want to buy a house in five years, you should be saving $1,000/month. Tough to hear, but true. 1. However, notice I said technically. GET YOUR CREDIT CARD TO EMAIL YOU A MONTHLY LINK TO YOUR BILL, SO YOU CAN REVIEW IT BEFORE THE MONEY IS AUTOMATICALLY TRANSFERRED OUT OF YOUR CHECKING ACOUNT. With each fund you buy, you’ll be able to set up automatic contributions so you don’t have to contribute manually each month. The truth is that the vast majority of young people don’t need a financial adviser to help them get rich. Here’s how I negotiated my way out of a $20 overdraft fee and a $27.10 finance charge from Wells Fargo. If you can avoid the unreasonable fees and tricks, credit cards offer exceptional benefits (more on this later). It starts by managing your own. Mutual funds—which are simply collections of stocks (and sometimes bonds, but usually just stocks)—are often considered the simplest and best way for most people to invest. And I don’t believe for a second that because times are tough, Americans are going to buckle down and stop consuming over the long term. Financial institutions have noticed an interesting phenomenon: When people enter their forties, they suddenly realize that they should have been saving money all along. You place a higher premium on the things you pay for out of your pocket than those that come via subscripton. To illustrate how to allocate and diversify your portfolio, we’re going to use David Swensen’s recommendation as a model. Same with bonds. My friend grew up there, and he told me what he and his buddies used to use as a gang sign: two hands clasping in friendship. But remember, keep an open mind. This method will get you there quickly as long as you stick to it diligently. Try focusing on big wins that will make a large, measurable change. You can wrestle with him and come out ahead. Sure, it’s tempting to think that you can buy something and pay it off little by little, but because of credit cards’ insanely high interest rates, that’s a critical mistake. . I’ll bet you their answer is, simply, “money.” Yet we’re not paying much more attention to our finances than our parents did. Once your credit cards are ranked properly, pay the minimum amount due listed on the statement for every card except the one at the top of the list. —MARK LAURENZ, 22 DO MORE BEFORE DOING LESS Some people just seem to have a magical ability to manage money. Yes, really. We can offer you a credit limit increase, however. The study found the following: Forty-seven of the fifty [advisory] firms continued to advise investors to buy or hold shares in the companies up to the date the companies filed for bankruptcy. The important thing to remember here is you have options. That’s because money management isn’t always rational. If you can’t even save 10 percent, how will you afford an expensive mortgage payment, plus maintenance and taxes and insurance and furniture and renovations and . Congratulations! One last thing: Insurance is almost never a good investment, despite what financial salespeople (or clueless parents) will tell you. Who knew? RENTING: THE SURPRISING NUMBERS I want to show you why renting is actually a smart decision for many people, especially if you live in an expensive area like New York or San Francisco. Think about your strong points and figure out ways you might be able to bring them to the hiring manager’s attention. What happened?” they said. Guess what? Anyway, he started working out a lot: going to the gym in the morning, running during the day, then hitting the gym again at night. Don’t get suckered by introductory offers and low APRs. But if you’re a Type A nerd like me who wants to learn how it works—and maybe even customize your own portfolio for more control—read on. “Well,” he said, “it looks like you have great credit, but not enough credit sources.” The bottom line, he told me, was that they couldn’t offer me the lowinterest option we had talked about. Highly recommended.” —SETH GODIN, AUTHOR OF TRIBES “You’ve probably never bought a book on personal finance, but this one could be the best $13.95 you ever spent. This was a horrible mistake. Cool thing to note: Your employer match isn’t counted toward your contribution limit, so if you invest $5,000 and your employer matches $5,000, you can still invest $10,500 more for a total of $20,500 annually in your 401(k). Answer: A quick call to my credit card company will resolve this. From talking to Julie at a party or over dinner, you would never know that she saves more than most Americans. This is called diversifying, and it essentially means digging in to each asset class—stocks and bonds—and investing in all their subcategories. Is the online interface easy to use? Unfortunately, although they’re not obvious, credit card charges are some of the largest unnecessary fees you’ll ever pay—much more than the costs of eating out once a week or buying that nice outfit you’ve been eyeing. But there are a lot of dorks who spend every waking hour online digging up the best interest rate and switching to it immediately. It’s figuring out a balanced asset allocation that will let you ride out storms and slowly grow, over time, to gargantuan proportions. 80 YEARS OF AVERAGE ANNUAL RETURNS FOR STOCK AND BONDS The group at Vanguard Investment Counseling & Research recently analyzed eighty years of investment returns to help individual investors understand how to allocate their money. Instead, let’s create a Conscious Spending Plan. They’ve built an infrastructure to do this automatically so that by the time money ends up in their checking account, they know they can spend it guilt-free. hold it! . IF SOMEONE ASKED YOU WHEN YOU’D NEED THE MONEY YOU’RE INVESTING, YOU’D SAY . If you have free time at home (or don’t have a car), you can sign up to be a virtual assistant on sites like www.elance.com and www.odesk.com. I don’t like this.” Well, investing may sound hot, but you want to focus on being rich, which involves being debt-free. It’s not employer sponsored—you contribute money on your own. Or you might need to cut your expenses as ruthlessly as possible. . REAL ESTATE. Your credit score (often called your FICO score because it was created by the Fair Isaac Corporation) is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders.