My Note
My highlights
348 highlights from Kindle. These are the lines I stopped at.
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.
When it comes to weight loss, 99.99 percent of us need to know only two things: Eat less and exercise more.
The truth is that the vast majority of young people don’t need a financial adviser to help them get rich.
We need to set up accounts at a reliable no-fee bank and then automate savings and bill payment.
We need to know about a few things to invest in, and then we need to let our money grow for thirty years.
Focusing on these details is the easiest way to get nothing done.
People love to argue minor points, partially because they feel it absolves them from actually having to do anything.
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.
too much information, we do nothing.
doing nothing is the worst choice you can make, especially in your twenties.
investing early
is the best thing you can do.
The single most important thing you can do to be rich is to start early.
Personal-finance advice has been geared toward old white men and taught by old white men for far too long.
We want our money to grow automatically, in accounts that don’t nickel-and-dime us with fees. And we don’t want to have to become financial experts to get rich.
The single most important factor to getting rich is getting started, not being the smartest person in the room.
A lot of your financial problems are caused by one person: you.
Frankly, your goal probably isn’t to become a financial expert. It’s to live your life and let money serve you.
“What do I want to do with my life—and how can I use money to do it?” And instead of being driven by fear, you’ll be guided by what history has shown us about investing and growth.
The 85 Percent Solution: Getting started is more important than becoming an expert.
It’s okay to make mistakes. It’s better to make them together now, with a little bit of money, so that when you have more, you’ll know what to avoid.
To be extraordinary, you don’t have to be a genius, but you do need to take some different steps than your folks did (like starting to manage your money and investing early).
investment isn’t about being sexy—it’s about making money, and when you look at investment literature, buy-and-hold investing wins over the long term, every time.
Do some analysis, make your decision, and then reevaluate your investment every six months or so.
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.
it’s easy to want the best of everything: We want to go out all the time, live in a great apartment, buy new clothes, drive a new car, and travel any time we want. The truth is, you have to prioritize.
Before you go further, I encourage you to set your goals today. Why do you want to be rich? What do you want to do with your wealth?
Simple, long-term investing works.
I Will Teach You to Be Rich will help you figure out where your money is going and redirect it to where you want it to go.
There aren’t any secrets to getting rich—it just takes small steps and some discipline, and you can do it with just a little bit of work. Now let’s get started.
(For more about buying a car, see page 244.)
But they often ignore something that is so simple, so basic, that it just doesn’t seem important: their credit.
establishing good credit is the first step in building an infrastructure for getting rich. Think about it: Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchases.
Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.
There are two main components to credit (also known as your credit history): the credit report and the credit score.
CREDIT SCORE VS. CREDIT REPORT
Your credit report gives potential lenders—the people who are considering lending you money for a car or home—basic information about you, your accounts, and your payment history.
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.
It’s ridiculously easy to check your credit score and credit report—and you should do it right now. Once a year, by law, you’re allowed to obtain your credit report for free at www.annualcreditreport.com. It includes basic information about all your accounts and payment history.
Why are your credit report and credit score important? Because a good credit score can save you hundreds of thousands of dollars in interest charges.
One of the key differences between rich people and everyone else is that rich people plan before they need to plan.
It’s fine to be frugal, but you should focus on spending time on the things that matter, the big wins. So, let’s dig into tactics for improving your credit, which is quantifiably worth much more than any advice about frugality.
The truth about credit cards lies somewhere between these two extremes. As long as you manage them well, they’re worth having. But if you don’t completely pay off your bill at the end of the month, you’ll owe an enormous amount of interest on the remainder, usually about 14 percent.
And don’t forget the fees for making a payment even just a day or two late. It’s also easy to overuse credit cards and find yourself in debt, as most American credit card users have done.
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.
In fact, I encourage you to use credit cards responsibly.
get the most out of using credit, you need to optimize your credit card(s) and use them as a spearhead to improve your overall credit.
Avoid those credit card offers you receive in the mail.
Avoid cash-back cards, which don’t actually pay you much cash.
Compare cards online. The best way to find a card that is right for you is by researching different offers online (try www.bankrate.com).
Rewards are important.
Bottom line: If you’re getting a rewards card, find one that gives you something you value.
Two or three is a good rule of thumb.
Your credit score is based on overall sources of credit.
Remember, there are other sources of credit besides credit cards.
If you limit yourself to opening one card a year, you’ll be doing yourself a favor.”
Whether you’re paying the full amount of your credit card bill or risking my wrath by paying just part of it, pay it on time.
“Paying your bills on time is absolutely critical,” says FICO’s Craig Watts. “It’s by far the most important thing you can do to improve your credit rating.”
If you miss a credit card payment, you might as well just get a shovel and repeatedly beat yourself in the face.
don’t close the account on your old one. That can negatively affect your credit score. As long as there are no fees, keep it open and use it occasionally, because some credit card companies will cancel your account after a certain period of inactivity.
Play it safe: If you have a credit card, keep it active using an automatic payment at least once every three months.
credit utilization rate,
This makes up 30 percent of your credit score.
Lower is preferred because lenders don’t want you regularly spending all the money you have available through credit—it’s too likely that you’ll default and not pay them anything.
Remember, 30 percent of your credit score is represented by your credit utilization rate. To
ones. Call your credit card company and ask them to send you a full list of all their rewards. Then use them!
The bottom line is that it’s usually a bad idea to close your credit card accounts unless you know yourself and you know you’re going to spend any credit you have available.
Think ahead before closing accounts. If
Some of my Type-A readers worry too much about their credit scores. If your credit score suddenly drops, first you should figure out why by getting a copy of your credit report and score (see page 15). Then what’s important is how you deal with it going forward.
Avoid getting sucked in by “Apply Now and Save 10 Percent in Just Five Minutes!” offers.
Stay away from the cards issued by every single retail store.
Don’t make the mistake of paying for your friends with your credit card and keeping the cash—and then spending it all.
Just like with gaining weight, most people don’t get into serious credit card debt overnight.
The key to using credit cards effectively is to pay off your credit card in full every month.
I know I said that prosaically, in the same way someone would ask you to pass the salt, but it is REALLY IMPORTANT.
1. Figure out how much debt you have.
ACTION STEPS: WEEK ONE
One basic way of looking at it is that your savings account is where you deposit money, whereas your checking account is where you withdraw money.
We’re cutting our teeth with small amounts of money, but as our savings accounts increase from $5,000 and $10,000 to $100,000 to $1 million, the habits really start to matter. Start small now so that when you do have a lot of money, you’ll know what to do with it.
of how you want to organize your accounts. I’ll take you through simple and advanced setups for your
checking and savings accounts, but pick the one that works well with your personality.
Basic option + small optimization
a no-fee checking account at your local bank and a high-yield online savings account.
Just call to make sure you’re not paying unnecessary fees.
find a no-fee, no-minimum account.
Remember, even if the accounts have fees or minimums, ask about ways (like direct deposit) to get them waived.
Bank of America: (800) 432-1000 Chase: (877) 682-4273 Citibank: (800) 374-9700 Washington Mutual: (800) 788-7000 Wells Fargo: (800) 869-3557 Emigrant Direct Online Savings Account: (800) 836-1997 HSBC Direct: (888) 404-4050 ING Direct Orange Savings: (800) 464-3473
I strongly recommend that you switch to an online high-interest account, which has no fees and no minimums.
and a vodka tonic in hand, screaming
Sadly, although some people are limited by circumstances, most people will never get rich simply because
they have poor attitudes and behaviors about money.
In fact, most people in their twenties are Bs: not great, but not bad. There’s a lot of time left for them to set aggressive investment goals, but if they don’t take any action, they end up inevitably drifting toward being a C. Don’t let this happen to you!
On average, millionaires invest 20 percent of their
household income each year.
INVESTING IS THE SINGLE MOST EFFECTIVE WAY TO GET RICH
A 401(k) plan is a type of retirement account that many companies offer to their employees.
advantages if you agree not to withdraw your money from the account until your reach the retirement age of 59½.
EVERY PERSON IN THEIR TWENTIES SHOULD HAVE A ROTH IRA, EVEN IF YOU’RE ALSO CONTRIBUTING TO A 401(K).
To start a Roth IRA, you’re first going to open an investment brokerage account with a trusted investment company
Don’t get fooled by smooth-talking salespeople: You can easily manage your investment account by yourself.
If you need your money in fewer than five years, put it in a high-interest savings account. But don’t make the mistake of keeping your money in a savings account just because you’re too lazy to take the time to learn how to invest it. If you’d invested ten years ago, wouldn’t it feel good to have a lot more money right now? Well, the next best time to invest is today.
This is why you use a discount brokerage.
but more is lost from indecision than bad decisions.
As Benjamin Franklin said, “Don’t put off until tomorrow what you can do today.”
And as Ramit Sethi said, “Let others debate minutiae—all you need to do is open an investment account at a discount brokerage. Sucka.”
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).
This isn’t about creating a fancy budget that you’ll have to maintain every day for the rest of your life. I hate budgeting. Budgeting is the worst word in the history of the world. I
Let’s try something that actually works. 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
Unfortunately, most Americans dismiss frugality because they confuse it with cheapness, thinking that frugality is all-or-nothing: “Frugal people don’t spend money on anything! I’m never going to cut all my spending, so forget it.”
Furthermore, our parents never taught us how to be frugal, so not only have we confused frugality with cheapness, but we never really practiced it in the first place. As a country, we spend more than we make each year and virtually nothing seems to change our behavior.
TOO OFTEN, OUR FRIENDS INVISIBLY PUSH US AWAY FROM BEING FRUGAL AND CONSCIOUS SPENDERS.
Frugality isn’t about cutting your spending on everything. That approach wouldn’t last two days. 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.
Again, frugality 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!
The simple fact is that most young people are not spending consciously. We’re spending on whatever, then reactively feeling good or bad about it. Every time I meet someone who has a Conscious Spending Plan (“I automatically send money to my investment and savings accounts, then just spend the rest”),
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.
They have a plan. Instead of getting caught on a spending treadmill of new phones, new cars, new vacations, and new everything, they plan what’s important to them and save on the rest.
automatically enabling yourself to save, invest, and spend—enjoying it, not feeling guilty about those new jeans, because you’re spending only what you have.
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.
You’ll need to look at your past spending to fill in all the dollar amounts, and to make sure you’ve covered every category. Limit this to the past month to keep things simple.
Finally, once you’ve gotten all your expenses filled in, add 15 percent for expenditures you haven’t counted yet.
(I actually have a “Stupid Mistakes” category in my money system.
$150/month for unexpected expenses.)
Once you’ve got a fairly accurate number here, subtract it from your take-home pay. Now you’ll know how much you’ll have left over to spend in other categories
like investing, saving, and guilt-free spending.
A good rule of thumb is to invest 10 percent of your take-home pay (after taxes, or the amount on your monthly paycheck) for the long term.
The 60 Percent Solution
1. Retirement savings (10 percent) 2. Long-term savings (10 percent) 3. Short-term savings for irregular expenses (10 percent) 4. Fun money (10 percent)
Tools of the Trade
80 percent of what you overspend is used toward only 20 percent of your expenditures.
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.
It’s not a race, but within six months, I’d have cut my eating out budget in half. And it’d be much more likely to be sustainable. The other way to do it is to look at your current spending, freak out, and cut half your total spending. Then you’re suddenly forced to spend in a completely different way, without the means to cope. How long do you think your ambitious spending goal will last?
Whether you’re implementing a change in your personal finances, eating habits, exercise plan, or whatever . . . try making the smallest change today. Something you won’t even notice.
money. In his mind, he was simply “saving.” I, on the other hand, was “saving for a down payment.” Though it might not seem like a big deal, that small distinction makes all the difference in the world. I
MAKE THE TRADEOFFS WORTHWHILE.
SET UP A SPECIFIC ACCOUNT.
Managing money is no different: By investing a little now, we don’t have to invest a lot later.
We dream of having an automated system that handles most of the work for us, something that just works.
In this chapter, we’ll create an Automatic Money Flow to manage your money for you. It will take the accounts you’ve set up—your credit cards, checking, savings, and investment accounts—and create automatic transfers so your money goes where it needs to go.
DO MORE BEFORE DOING LESS
You see, they don’t spend more time on day-to-day money management
than most average people. In fact, they spend less time
thinking about their money because they’ve set up an automated system that frees them from having to worry.
life. By spending a few hours up front, you’ll end up saving huge amounts of time over the long term.
Your money flow will be automatic, and each dollar that comes in will be routed to the right account in your Conscious Spending Plan from Chapter 4 without you really having to think about it.
The key to taking action is, quite simply, making your decisions automatic.
Your money management must happen by default.
cool. If you want to build wealth over your lifetime, the only sure way to do it is to get your plan on autopilot and
make everything that’s financially important in your life automatic. . . . I recommend that people automate a handful of things in their financial lives. You can set it up once in less than an hour and then go back to your life. —DAVID BACH, AUTHOR OF THE AUTOMATIC MILLIONAIRE
Well, it gets even better, because once everything is automated, that money will be shunted from your checking account right into the appropriate accounts without you even thinking about it.
focused on two big wins: eating out and spending money on clothes.
To get set up, you’ll need a complete list of all your accounts, their URLs, and the login/passwords. Make a chart that looks something like this.
The easiest way to avoid this is to get all your bills on the same schedule.
To accomplish this, gather all your bills together, call the companies, and ask them to switch your billing dates. Most of these will take five minutes each to do.
GET ALL YOUR BILLS ON THE SAME SCHEDULE
“Set it and forget it” is my guiding personal finance system principle.
Well, not exactly “forget it,” but I set up my accounts to run themselves to the extent they can, and check in on things monthly to make sure all the gears are turning as I intended.
If you’re paid twice a month: I suggest replicating the above system on the 1st and the 15th—with half the money each time. This is easy enough, but the one thing to watch with this is paying your bills.
Once a week, I take five minutes and review all the charges on my card, and once a month I get an e-mail to review my entire bill.
Let’s talk about those weekly reviews for a second. I do like to keep an eye on my credit card charges whenever there’s a human involved, so I keep my receipts whenever I go to restaurants, and store them in a folder on my desk.
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.
Money exists for a reason—to let you do what you want to do.
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.
Saving too much is a good problem to have. Fortunately, there are great solutions, too.
AUTOMATING YOUR MONEY: HOW IT WORKS
Think about that for a second. Fifty-seven wine experts couldn’t even tell they were drinking two identical wines. There’s something we need to talk about when it comes to experts.
“professionals.” But ultimately, expertise is about results.
You can have the fanciest degrees from the fanciest schools, but if you can’t perform what you were hired to do, your expertise is meaningless.
ALL OUR LIVES, WE’VE BEEN
TAUGHT TO DEFER TO EXPERTS... BUT ULTIMATELY, EXPERTISE IS ABOUT RESULTS.
in fact, financial experts—in particular, fund managers and anyone who attempts to predict the market—are often no better than amateurs. They’re often worse.
The vast majority of twentysomethings 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.
But 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.
Experts Can’t Guess Where the Market Is Going
market. But the truth is they simply cannot predict how high, how low, or even which direction the market will go.
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.
another?” More information is not always good, especially when it’s not actionable and causes you to make errors in your investing.
The key takeaway here is to ignore any predictions that pundits make. They simply do not know what will happen in the future.
The problem is that nobody can consistently guess which funds or stocks will outperform, or even match, the market over time. Anyone who claims they can is lying.
DESPITE THEIR ASTRONOMICAL COMPENSATION, FUND MANAGERS FAIL TO BEAT THE MARKET 75 PERCENT OF THE TIME.
The only long-term solution is to invest regularly, putting as much money as possible into low-cost, diversified funds, even in an economic downturn.
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.
If you don’t learn to manage your money in your twenties, you’ll cost yourself a ton one way or another—whether you do nothing, or pay someone exorbitant fees to “manage” your money.
NOT ONLY DO MOST FUND MANAGERS FAIL TO BEAT THE MARKET, THEY CHARGE A FEE TO DO THIS.
What you really want is solid, long-term returns.
So, the safe assumption is that actively managed funds will too often fail to beat or match the market.
The Smartest Investment
Book You’ll Ever Read, Daniel Solin
Bottom line: There’s no reason to pay exorbitant fees for active management when you could do better, for cheaper, on your own.
Do you need your money next year or can you let it grow for a while?
My goal for this chapter is to help you pick the simplest investment to get started—and to make your portfolio easy to maintain.
a.
IF YOU CHOSE MOSTLY (B)S,
I urge you to combine a classic low-cost investing strategy with automation.
the stock market’s decline in 2008. I can’t help but feel sorry for them, but you should learn from their mistakes. Even if the market tanks, you have control over your asset allocation.
Bonds act as a counterweight to stocks, rising when stocks fall and reducing the overall risk of your portfolio.
“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. What if stocks as a whole don’t perform well for a long time? That’s when you need to own other asset classes—to offset the bad times.
And honestly, if you’re twenty-five 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.
All of this sounds completely reasonable: “I invest more aggressively when I’m younger, and as I get older, I get more and more conservative.” There’s just one problem. How the hell are you actually supposed to do it? What specific investments should you choose? Should you invest in individual stocks? (No.) Most
When you’re investing in index funds, you typically have to invest in multiple funds to create a comprehensive asset allocation
If you do purchase multiple index funds, you’ll have to rebalance (or adjust your investments to maintain your target asset allocation) regularly,
usually every twelve to eighteen months.
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.
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.
lifecycle funds.
Lifecycle funds are simple funds that automatically diversify your investments for you based on age.
Luckily, lifecycle funds automatically pick a blend of investments for you based on your approximate age. They start you off with aggressive investments in your twenties and then shift investments to become more conservative as you get older.
However, lifecycle funds are designed to appeal to people who are lazy.
One thing to note is that you’ll need
between $1,000 and $3,000 as a minimum to buy in to a fund. If you don’t have it, go to page 106 and add a savings goal for “lifecycle fund.”
Think about it. Who sells their house for profit and keeps the money?
You want to keep each part of your portfolio balanced so no one area overshadows the rest. If you’re spending $2,000 per month on your
mortgage and don’t have enough left over to diversify into other areas, that’s not a balanced portfolio.
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.
You should pay special attention to the minimum initial investment (it matters
the asset allocation, which will help you determine which fund most suits your risk tolerance.
The major benefit to a lifecycle fund is that you set it and forget it.
When you send money to your Roth IRA account, it just sits there. You’ll need to invest the money to start making good returns.
The Rule of 72
(Think of all the people who sold off their 401(k)s in late 2008, not really understanding that there were bargains to be had by simply continuing their consistent investing. It was fear—not strategy.)
THE KEY TO CONSTRUCTING A PORTFOLIO IS NOT PICKING KILLER STOCKS! IT’S FIGURING OUT A BALANCED ASSET ALLOCATION THAT WILL LET YOU
RIDE OUT STORMS AND SLOWLY GROW OVER TIME.
Anyway, dollar-cost averaging is a fancy phrase that refers to investing regular amounts over time, rather than investing all your money into a fund at once.
Buying low can be intimidating. Suppose the markets never go back up?
getting started was the hardest and most important step.
years to have $100,000? If not, feed your system as much money as possible now.
Your first goal was to aim for those percentages. Now it’s time to move beyond those amounts so you can save and invest as much as possible. I can hear you screaming, “Are you kidding? I can’t squeeze out another cent. I hate you, Ramit!” This is not about me wanting to deprive you. Actually, quite the opposite: Because compounding works so effectively, the more you save now, the more you’ll have later (by a huge amount).
Optimizing your plan might involve doing some serious bargaining when you make major purchases like a car or house
Or you might need to cut your expenses as ruthlessly as possible.
be sure that you’re shoveling the maximum amount possible into your system every month.
Remember, it’s never easier to do this than when you’re in your twenties and thirties—and the more you feed into your system now, the sooner you’ll be rich.
The day-to-day movements of the market shouldn’t concern you. If you have a long time horizon, you’re automatically investing each month. When the market is going up, your system will automatically buy fewer shares. When the market is going down, it will buy more shares. Over time, you’ll do far better than speculators who try to predict where the market will go.
It doesn’t matter what happened last year, it matters what happens in the next ten to twenty years. Plus, if a fund goes up, it can also go down. That’s why asset allocation is more important—and less risky—than a superstar fund.
Renting is actually an excellent decision in certain markets—and real estate is generally a poor financial investment, which I cover on
Ignore it all.
the benefit of Automatic Investing is that you don’t have to focus on these heart-pounding stock reports from pundits and magazines every day!
UNLIKE OTHER PEOPLE, WHO WORRY ABOUT MONEY (BECAUSE THEY NEVER LEARNED HOW IT WORKS), YOU GET TO FOCUS ON THE THINGS YOU LOVE.
People worry about taxes too much, and they make all kinds of bad decisions to avoid them. Listen to me: You pay taxes only if you make money.
Plus, it’s your damned civic duty.
department. But for now, follow that old adage: “Don’t let Uncle Sam make your investment decisions.”
Invest as much as possible into tax-deferred accounts like your 401(k) and Roth IRA.
your Roth IRA earnings won’t be taxed at all. More important, you won’t have to worry about the minutiae, including picking tax-efficient funds or knowing when to sell to beat end-of-year distributions. By taking this one step of investing in tax-advantaged retirement accounts, you’ll sidestep the vast majority of tax concerns.
Investing in tax-advantaged retirement accounts is the 85 Percent Solution for taxes.
Investing as much as possible in tax-deferred accounts is the answer to 85 percent of your tax questions.
If you sell an investment that you’ve held for less than a year, you’ll be subject to ordinary income tax, which is usually 25 to 35 percent. Most
If, however, you hold your investment for more than a year, you’ll pay only a capital-gains tax, which in most cases is currently 15 percent (depending on your income, it could
Bottom line: Invest in retirement accounts and hold your investments for the long term. Until your portfolio swells to roughly $100,000, that’s about all you need to know.
In your twenties and thirties, there are only three reasons to sell your investments: You need the money for an emergency, you made a terrible investment and it’s consistently underperforming the market, or you’ve achieved your specific goal for investing.
1. Use your savings account.
Sell any valuables
Ask your family
Use the money in your retirement accounts.
Use your credit card only as a last resort. I can’t emphasize this enough: The chances are very good that your credit card will gouge you when you repay it, so don’t do this unless you’re truly desperate.
YOU ACHIEVED YOUR SPECIFIC GOAL
I believe that part of getting rich is giving back to the community that helped you flourish.
could never have enough money to launch a scholarship.” They said this while wearing $150 jeans and eating a $40 dinner.
my scholarship is for $1,000.
But, as with managing their money, people over-complicate things and create artificial barriers to prevent themselves from giving back. You don’t have to be rich to be a philanthropist, just as you don’t have to be rich to invest.
The point is that now you’ve got a personal-finance system that few others have.
1. CREATE AN EMERGENCY FUND.
savings goal that is a way to protect against job loss, disability, or simple bad luck.
goals. Eventually, your emergency fund should contain six months of spending money (which includes everything: your mortgage, other loans,
food, transportation, taxes, gifts, and
anything else you would conceivably
spend on).
2. INSURANCE.
home-owner insurance (fire, flood, and earthquake) and life insurance. If you own a home, you
“life insurance”
So use it as protection from downside risk—like for fires or accidental death when you have a family—but don’t think of it as a growth investment. 3. CHILDREN’S EDUCATION.
That said, just as Roth IRAs are great retirement accounts, 529s—educational savings plans with significant tax advantages—are great for children’s education. If you’ve got kids (or know that one day you will) and some spare cash, pour it into a 529.
The best way to prepare yourself is to talk to successful people who are somewhat older than you and have their act together.
Their advice can be invaluable—and can give you an edge on planning for the next decade.
it’s 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 my budget, asset allocation, or how I’ll ever be able to afford a house.
Do a hybrid 50/50 approach,
Technically, your decision comes down to interest rates. If your student loan had 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 having any debt at all 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.
I want to spend some time talking about how to handle money in your different relationships—your relationship with your parents, your boyfriend or girlfriend, your future spouse.
Letting Your parents Manage Your Money Is Dumb
investing is largely hands off once you do the initial research. Buy and hold means buy something and . . . hold it!
IT’S TIME TO GROW UP. AT OUR AGE, WE SHOULD BE LEARNING HOW TO MANAGE OUR MONEY OURSELVES. NO FINANCIAL ADVISERS, NO B.S.
How to Help Parents Who Are in Severe Debt
house
Every situation is different, but here are some questions you can ask. (Remember: Tread gently. Nobody likes talking about money—especially if it means having to admit to their kids
they need help.)
other—it’s important to spend some time talking about
your money and your financial goals.
things go well during your first conversation, ask if your boyfriend or girlfriend would be willing to sit down again to go over both of your finances together. Remember, it’s not about criticizing or noting things that are being done wrong—it’s about figuring out ways to help each other so you can grow together. Some phrases you can use: • “You’re really good at [X] and I
THE KEY IS TO START BY ASKING THEIR ADVICE. YES, EVEN IF YOU DON’T NEED IT!
THE BIG MEETING
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.
The most important goal of this conversation is to set up a plan to manage your money, including your credit cards, bank accounts, budget, and investment accounts.
Essentially, you want to work through this book with your partner. Your immediate goal should be to set up a few short- and long-term savings goals,
As an alternative, how about this fresh idea from Suze Orman? She encourages dividing expenses based proportionately on
DIVIDING EXPENSES BASED ON INCOME
The solution to this is to elevate the conversation beyond you and your partner.
about weddings. The average American wedding costs almost $28,000, which, The Wall Street Journal notes, is “well over half the median annual income in U.S. households.”
wedding, you’re going to want everything to be perfect. Yes, you. So will I. It’ll be your special day, so why not spend the money to get the extra-long-stemmed roses or the filet mignon? My point isn’t to
Quite the opposite: The very same people who spend $28,000 on their weddings are the ones who, a few years earlier, said the same thing you’re saying right now: “I just want a simple wedding.
And yet, little by little, they spend more than they planned—more than they can afford—on their special day.
If you think about it, we actually have all the information we need. The average age at marriage is about twenty-seven for
know that the average amount of a wedding is about $28,000.
Interestingly, changing the number of guests doesn’t change the cost as much as you’d imagine.
In Chapter 4, I encouraged you to pick the one or two biggest problem areas in your spending and address them.
Chances are, it’s better to optimize the three biggest cost areas by 30 percent
fundamentally, there are two ways to get more money. You can earn more or you can spend less.
Your starting salary is even more important than you think because it sets the bar for future raises and, in all likelihood, your starting salary at future jobs.
Come prepared (99 percent of people don’t).
NEVER LIE.
It’s strange how many people make an effort to save on things like clothes and eating out, but when it comes to large purchases like cars, make poor decisions and erase any savings they’ve accumulated along the way.
from a financial perspective, the most important factor is how long you keep the car before selling it.
Instead, understand how
much you can afford, pick a reliable car, maintain it well, and drive it for as long as humanly possible.
BORING BUT PROFITABLE: MAINTAINING YOUR CAR
And you should understand that houses are primarily for living in, not for making huge cash gains.
First and foremost, you should buy a
house only if it makes financial sense.
Things are a little different now, but that doesn’t explain the stupidity of people who purchase houses for ten times their salaries with zero money down. Sure, you can stretch those traditional
guidelines a little, but if you buy something you simply can’t afford, it will come around and bite you in the ass.
Let me be crystal clear: Can you afford at least a 10 percent down payment for the house?
when you buy a house, you’ll owe property taxes, insurance, and maintenance fees that will add hundreds per month.
THE BOTTOM LINE: BUY ONLY IF YOU’RE PLANNING TO LIVE IN THE SAME PLACE FOR TEN YEARS OR MORE.
Bottom line: If you don’t have enough money to make a down payment and cover your total monthly costs, you need to set up a savings goal and defer buying until you’ve proven that you can hit your goal consistently, month after month.
Next thing to think about: Are the houses you’re looking at within your price range?
Finally, will you be able to stay in the house for at least ten years? Buying a house means you’re staying put for a long time.
taxes. The bottom line here: Buy only if you’re planning to live in the same place for ten years or more.
In short, you really need to be sure you’re ready for the responsibility of being a home owner.
Of course, there are certainly benefits to buying a house and, like I said, most Americans will purchase one in their lifetime. If you can afford it and you’re sure you’ll be staying in the same area for a long time, buying a house can be a great way to make a significant purchase, build equity, and create a stable place to raise a family.
Americans’ biggest “investments” are their houses, but real estate is also the place where Americans lose the most money.
real estate is the most overrated investment in America.
It’s a purchase first—a very expensive one—and an investment second.
“from 1890 through 1990, the return on residential real estate was just about zero after inflation.”
The truth is that, over time, investing in the stock market has trumped real estate quite
handily—even now—which is why renting isn’t always a bad idea.
I’m not saying buying a house is always a bad decision. It’s just that you should think of it as a purchase, rather than as an investment.
to use The New York Times’s excellent online calculator “Is It Better to Rent or Buy?”
If you make a good financial decision when buying, you’ll be in an excellent position.
“PRICES ALWAYS GO UP IN REAL ESTATE” (OR, “THE VALUE OF A HOUSE DOUBLES EVERY TEN YEARS”). Not true.
1. Acknowledge that you’re probably not being realistic about how much things will cost—then force yourself to be.
Do it on a napkin—it doesn’t have to be perfect! Just spend twenty minutes and see what you come up with.
Not enough people know about being rich. It’s not some mythical
thing that happens only to Ivy League grads and lottery winners. Anyone can be rich—it’s just a question of what rich means to you.