I Will Teach You To Be Rich

Key idea 1

Take responsibility for your financial difficulties instead of assigning blame to others.

You may have experienced guilt at some point for not saving money or perhaps you believe it’s too late to begin. Reject those feelings! It’s time to eliminate excuses.

The first key point to remember is not to be swayed by the information presented by the media. The world of financial advice is vast and can overwhelm you. Much of this information is dull and not practical, such as suggestions like “cutting back on lattes,” which doesn’t consider the actual lifestyle of a young adult.

When it comes to investment guidance, young individuals may have legitimate reasons to blame the media and others for not providing better education. However, the most effective way for someone to improve their financial outcomes is to take responsibility for their own decisions.

Common excuses, such as the claim that our education system neglects to teach money management, are far from accurate. Many colleges indeed offer financial education courses, but it’s often the students who choose not to attend them.

Another frequently cited excuse is the fear of losing money, yet in reality, it’s actually advantageous to experience losses when you’re young, as your financial exposure is relatively low. These early losses provide valuable lessons for preserving wealth in the future. It’s essential to remember that money can also dwindle if left stagnant in bank accounts.

One more excuse is the perceived inability to set aside $100 per month. In reality, the specific amount isn’t as critical as the habit of saving. Even saving just $1 per day can accumulate over time.

Recall the 2008 financial crisis when many panicked and withdrew their investments from the market. A significant portion of these individuals lacked a diversified portfolio and made the mistake of buying high and selling low. While it was easy to point fingers at the government and banks, most of them had never bothered to educate themselves by reading a single personal finance book.

It’s crucial that we take responsibility for our financial challenges and actively work to address them. Now that you’re aware of these factors, how can you achieve financial prosperity?

Key idea 2

Utilize your credit cards wisely.

The initial step toward saving money and achieving financial prosperity involves mastering the effective use of credit cards.

Many of our most substantial purchases are often made through credit, and individuals with a strong credit history can set aside a significant amount of money. Credit takes various forms, including loans, mortgages, and credit cards, allowing you to make significant purchases even when you don’t have immediate funds available.

It’s crucial to bear in mind two fundamental aspects of credit: a credit report, which documents your credit activities and provides prospective lenders with relevant information, and a credit score, a numerical value ranging from 300 to 850 that indicates your creditworthiness to lenders.

If your credit score is excellent, you become an attractive candidate for lenders, resulting in more favorable loan interest rates. What’s even more advantageous is that a strong credit score can potentially save you hundreds of thousands of dollars in interest payments.

For instance, let’s take a look at the 2009 statistics in the United States. If you had a good credit score (750-850) and were financing a $200,000 mortgage over a 30-year period, your total payment, including interest, would amount to $359,867. On the other hand, if you had a bad credit score (620-639), you’d be facing a bill of $430,427 – a difference of $70,000!

Credit cards play a pivotal role in managing your credit effectively. Here are a couple of intelligent strategies for responsible credit card usage:

1. Tackle your debt: Cut down on your expenses and work on paying off your outstanding balances. Timely debt repayments constitute 35 percent of your credit score, so setting up automatic credit card payments can ensure you never miss a due date.
2. It’s worthwhile to reach out to your credit card provider and inquire about the possibility of having your annual fees and service charges waived, as well as lowering your annual interest rate. Surprisingly, many companies are open to such requests.
3. Don’t forget to explore the best perks and benefits offered by credit card companies. In the author’s case, their credit card concierge even helped secure tickets to the LA Philharmonic when it seemed like none were available!

Key idea 3

Select the optimal financial institution and opt for bank accounts offering the most competitive interest rates.

Zero fees and high interest rates may seem like an impossibility, but in reality, it’s quite the opposite.

Online banks often offer the most competitive interest rates because they operate with minimal overhead costs and don’t incur expenses related to maintaining physical branches or extensive marketing campaigns. As a result, their customer service tends to be superior, and they can sustain narrower profit margins compared to traditional banks. What’s more, their interest rates can be six to ten times higher than those found at conventional banks.

To illustrate this, let’s consider if you were to save $25,000. With a three percent interest rate at an online bank, you’d earn $750 in one year. In contrast, if you opted for a regular bank with a 0.5 percent interest rate, your earnings would amount to a mere $125. Now, envision saving $50,000 – at an online bank, your returns would be $1,500, while at a traditional bank, you’d receive a modest $250.

Now, it’s time to secure the most suitable bank accounts. At a minimum, you should have one checking account and one savings account.

Checking accounts are essential for everyday transactions and frequent withdrawals, while savings accounts are designed for achieving specific goals like vacations or special events.

You have several options here: you can maintain both your checking and savings accounts at the same bank (the straightforward choice); you can choose to have your checking account at a local bank and your savings account at an online bank (a commonly preferred option); or you can opt for multiple checking and savings accounts, which is the ideal approach for those who are willing to put in some effort to tailor their accounts to various objectives.

Alternatively, you can decide to keep one and a half months’ worth of living expenses in your checking account and allocate the rest to your savings account. If managing multiple accounts appears overwhelming, a simpler approach would be to select a no-fee checking account at a local bank and a high-interest savings account at an online bank.

Key idea 4

Initiate investment accounts, even with an initial sum as modest as $50.

While being thrifty and saving a portion of your income is commendable, it can only take you so far. To truly maximize the potential of your money, you should consider investing.

One excellent starting point is to open a 401(k) retirement account, which many US companies offer to their employees. Setting it up is straightforward – you just need to authorize a portion of your salary to be automatically diverted from your employer to your 401(k). After that, you can relax and watch your money grow.

There are numerous advantages associated with having a 401(k), including tax benefits due to its long-term investment nature, the potential for employer contributions matching your 401(k) contributions, and its relatively low-effort, hands-off investment approach.

Following your 401(k), you should consider opening a Roth IRA, another type of retirement account. Unlike a 401(k) sponsored by your employer, a Roth IRA is funded using your personal funds.

It is highly recommended that everyone should possess both a 401(k) and a Roth IRA because unlike a 401(k), a Roth IRA offers the flexibility to invest in a wide range of options, including individual stocks and index funds.

Furthermore, whereas a 401(k) uses pre-tax dollars, subjecting you to taxation upon withdrawal during retirement, a Roth IRA utilizes after-tax dollars. This means you won’t be taxed on the interest you earn or when you withdraw funds in retirement.

So, how should you initiate your IRA?

One student encountered difficulty in saving $1,000 to open a Roth IRA account. Instead, she opted for a management firm like T. Rowe Price, which provided an account with no minimum initial deposit requirement. She chose to make automatic monthly contributions of $50, a more manageable commitment for her. Even this amount represents a commendable starting point.

Key idea 5

Determine your expenditures, then allocate your funds according to your priorities.

Recall the last instance when you experienced remorse after a purchase but proceeded with it anyway? You can avoid such situations in the future by acquiring the knowledge of mindful spending.

Conscious spending revolves around trimming expenses on less essential items and allocating more resources to matters that hold genuine significance to you.

All that’s required is the adoption of a Conscious Spending Plan. You’ll automatically save and invest a predetermined amount each month, allowing you to freely spend the remainder without any feelings of guilt.

This approach divides your expenditures into specific categories:

– 60 percent for fixed expenses (like rent, utilities, and debt)

– 10 percent for investments (such as a 401(k) or Roth IRA)

– 10 percent for savings (covering vacations, gifts, and unexpected costs)

– 20 percent for guilt-free spending

Conscious spending involves thoughtful consideration of your priorities. For instance, the author’s friend Jim, upon receiving a salary increase, downsized to a smaller apartment. Why? Because his living space held little importance to him, but he had a deep passion for camping, so he directed his funds towards that pursuit.

Following this, it’s essential to learn how to adjust your spending habits.

One method to try is “the envelope system,” wherein you determine your desired allocation for the four categories mentioned earlier and place that money into designated envelopes. Once these envelopes are empty, you refrain from further spending in those areas for the month.

The concept of “envelopes” can also be figurative. As an example, the author’s friend established a bank account with a debit card serving as a virtual envelope. Each month, she loads a set amount onto the card for socializing, and once the funds are depleted, she abstains from going out.

Transitioning from one extreme spending habit to another takes time, so instead of making a drastic change like saving $495 a week when you used to spend $500, consider making gradual adjustments. Focus on addressing one or two significant areas of concern rather than attempting to trim 5 percent from multiple areas.

Take overdraft fees as an example; they can accumulate to more than $1,000 annually. Eliminating this expense alone can have a substantial impact on your financial situation.

Key idea 6

Set up automated bill payments to free yourself from the need to actively manage them.

Managing finances and paying bills can be inconvenient and frustrating. If you find money management to be a less enjoyable task, consider implementing an automated system to handle it on your behalf.

You can take the Conscious Spending Plan from the previous key concept and streamline it using your bank’s services and your preferred tools for tracking expenses.

To begin, get in touch with your bank to establish automatic transfers and payments. For instance, you can arrange for automated payments for your fixed expenses and set up automatic withdrawals from your checking account to fund your Roth IRA.

After completing these steps, allocate the remaining funds for your expenses and schedule mid-month calendar notifications to alert you if you’re surpassing your spending targets. It’s advisable to maintain a $1,000 reserve in your checking account.

If your spending remains on course, that’s fantastic! However, if you find yourself deviating from the plan, utilize the following 15 days to realign with your goals.

An additional valuable strategy is to establish an Automatic Money Flow by linking all your accounts and initiating automatic transfers.

You can arrange the transfers as follows:

Your salary should be allocated to your 401(k) and checking account, while your checking account should cover expenses related to your Roth IRA, savings account, credit card, necessary non-credit card expenses (e.g., rent), and any remaining discretionary spending money. Your credit card should be used to manage other fixed costs and guilt-free spending.

To establish these links among your accounts, simply automate all transfers and payments:

For instance, if you receive your pay on the first day of the month, on the second day, set up an automatic transfer to channel a portion of your paycheck into your 401(k) and transfer the remainder into your checking account. On the fifth day, schedule automated transfers from your checking account to your savings account and Roth IRA. Finally, on the seventh day, automate payments for your bills and credit card.

Key idea 7

Disregard specialists and opt for straightforward investment strategies.

Professionals often emphasize the importance of stock selection, but there exists a far more straightforward approach to investing.

It’s essential not to place unwavering faith in experts. None of them can consistently forecast the performance of funds or stocks in the market over extended periods.

Similar to Frederic Brochet’s 2001 research, which revealed that wine experts struggled to differentiate between wines, financial experts may not always be reliable. This is primarily because they lack the ability to foresee the future. In truth, regardless of their assertions, experts frequently make erroneous predictions.

Daniel Solin, the author of “The Smartest Investment Book You’ll Ever Read,” shared findings from research indicating that 47 out of 50 advisory firms consistently recommended investing in companies’ stocks right up to the point when those companies declared bankruptcy!

Therefore, instead of relying on expert advice, consider taking the most straightforward route to investing.

Visualize an investment pyramid where each level corresponds to an asset class. At the base, you have stocks, bonds, and cash. In the middle, you find index and mutual funds, while lifecycle funds are positioned at the top.

Investing becomes progressively intricate as you descend the pyramid. Thus, the most straightforward method involves utilizing automatic lifecycle funds, often referred to as age-based funds. Your investment allocation within the pyramid varies according to your age.

For example, if you are 25 years old, Vanguard Target Retirement 2050 allocates 90 percent to stocks and 10 percent to bonds. However, if you are 55 years old, the allocation shifts to 63 percent in stocks and 37 percent in bonds.

As evident, when you’re in your twenties, a larger portion of your investments is allocated to stocks. This is because, at this stage, you can accommodate the associated risk. As you age, the allocation shifts accordingly, and lifecycle funds simplify the process by making automatic adjustments on your behalf.

The wonderful aspect of these funds is that you only need to possess a single fund. Then, your task is simply to determine where to direct the fund’s investments, such as into a 401(k) or a Roth IRA.

Final Overview

The central message conveyed in this book is as follows:

Efficiently saving and investing money should not be restricted to professionals, and it need not be a source of stress. Simplify your personal finances by establishing fee-free accounts, automating savings and bill settlements, and making modest investments. This approach will enable you to alleviate money-related worries and watch your finances grow effortlessly.

Practical guidance:

Exercise prudence when it comes to unexpected windfalls.

When you receive an unforeseen financial gift or bonus, like a salary increase, consider setting aside 50 percent for savings and freely spend the remaining portion. This approach prevents you from becoming accustomed to spending beyond your means.

Don’t allow others to dictate your financial choices and how you allocate your money.

There’s no need to economize and pinch pennies across every “recommended” or socially approved expenditure. Instead, prioritize where you genuinely want to indulge or economize. For example, if amassing a collection of exclusive sneakers holds greater importance to you than dining out regularly, cut back on dining expenses and allocate more funds toward your shoe collection!