Ramit Sethi’s I Will Teach You to be Rich is a wildly popular personal finance book,
and for good reason.
These are the key points you need to know to be on your way to financial freedom and
leading a rich life.
Dr. Jubbal, MedSchoolInsiders.com.
Since my last year of medical school, I began a deep dive in personal finance and investing.
I only wish I did so sooner, and that’s why we’re covering I Will Teach You to Be
Rich — so you can get a jump start on your own financial wellbeing.
As with all of my book summaries, which you can find on my book summary playlist, I’ll
be covering the author’s main points, but also adding some of my own commentary.
There’s a lot that I cannot cover in a brief video, so if you’d like to read the entire
book, you can find a link in the description.
For many domains in life, whether weight loss or finance, people focus on the smaller details
and obsess over 1 percent here and 2 percent there, missing the bigger picture of setting
a solid foundation.
In weight loss, people focus on the minutiae of avoiding carbs or the benefits of apple
cider vinegar rather than the bigger picture of caloric intake versus caloric expenditure.
Similarly, with finances, people get caught up with what the experts are predicting or
what’s the hottest stock, rather than the basics like automatic saving and investing
into index funds.
By debating these minor points, people are absolved of responsibility in needing to actually
do anything.
As Ramit says, “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.
I’ll repeat myself: You don’t have to be an expert to get rich.”
As I’ve said before on this channel, facts are more important than your feelings, and
Ramit shares a similar sentiment.
If you feel bad or shameful about your piss poor money management, our job isn’t to
make you feel better, but rather to tell you the truth so you can actually get a handle
on your situation.
I love that he ruthlessly cuts at the rising victim culture.
You know the type — they’re all around.
Rather than actually working on fixing their situation, they find it easier to be cynical
and blame others for their problems.
And if you point out how to help them or the logical fallacies in their self-victimizing
argument, they won’t have it.
They don’t want results, they want an excuse not to take action.
At the end of the day, it’s entirely up to you.
You can be a victim and complain about politics or the economy or boomers, or take control
of your life.
Or as Ramit says,
“Listen up, crybabies: This isn’t your grandma’s house and I’m not going to bake
you cookies and coddle you.
A lot of your financial problems are caused by one person: you.
Instead of blaming circumstances and corporate America for your financial situation, you
need to focus on what you can change yourself.”
Some people think credit cards are inherently evil — but remember, black and white thinking
is rarely correct.
Sure, credit card companies can make a lot of money at your expense, but that’s only
if you let them.
If you use credit cards properly, they actually offer massive benefits, from cash back or
points for travel, to warranty extension, fraud protection, and even helping you automatically
track and categorize your spending.
The key is that you need to pay them off in full every month.
If you don’t, you’re a sucker paying 14% or more in interest.
If you have a balance on your cards right now, work aggressively in paying it off as
soon as possible.
You can even call the company to negotiate a lower APR.
Ramit has a script of how to do so in the book.
Credit cards are about more than just these perks, though.
They’re also a fundamental way to build good credit, meaning a high FICO score, which
essentially tells lenders how risky it would be to lend money to you.
Strong credit can save you boat loads of money in the future by helping you secure better
loans on your future purchases — whether that be a car, a home, or even refinancing
your student loans.
Here are some guidelines to credit card usage: Pay your credit card regularly — not only
to avoid interest, but also to build your credit score.
Try to get fees on your card waived.
For an annual fee on a premium credit card, you may want to downgrade with a product change
to a no-fee credit card.
Keep cards for as long as possible, as a longer history of credit improves your score.
For this reason, set up automatic payments or subscriptions services on old credit cards
you no longer regularly use.
Otherwise, they may be shut down due to inactivity.
Improve your credit utilization ratio.
That means either spending less on your card, or getting more credit.
But only get more credit if you’re debt free.
There are two additional methods of more advanced credit card usage: zero percent transfers
and credit card churning.
The zero percent transfer game is when you open up a credit card that has an introductory
0% APR for balance transfers or cash advances.
People take this money for 6 months, or however long the terms are, stick it in a high yield
savings account, and then plan to return the money that they borrowed and pocket the interest.
This is a silly game with a poor risk profile.
Very minimal upside, but a potential for substantial downside.
As Ramit says, “this is a distraction that gets you only short-term results.
You’re much better off building a personal finance infrastructure that focuses on long-term
growth, not on getting a few bucks here or there.”
I agree with Ramit on zero percent transfers, but I disagree with him on the topic of credit
card churning.
He writes it off as something that’s too risky and too complex to be worthwhile.
And I actually completely understand why he stated this in his book and I don’t blame
him — after all, he’s writing to a broad audience.
If not carefully executed, credit card churning can leave someone in a much worse off financial
situation.
But the upside is also much greater when executed properly.
I’ve spoken about how credit card churning has saved me tens of thousands of dollars
on my credit card churning playlist on my personal channel.
For the average consumer who likely has credit card debt, Ramit’s advice makes a lot of
sense, and is a great place to start.
But if you’re more financially savvy and have the basics down, there’s much more
to credit card optimization than included in this book.
Next, at which institutions should you put your hard earned money?
Ramit has no issue calling out bad players like Wells Fargo, and highlights companies
and banks he’s enjoyed working with, including Schwab for his checking account and Vanguard
for his investments.
I actually use the exact same.
You’ll see users on Reddit arguing over which savings account is best because of a
few basis points.
If you have $5,000 saved in your bank as an emergency fund and you get a 1.5% versus a
2% rate, that’s the difference between $75 and $100 per year.
A $25 difference over 12 months.
As Ramit says, “turn your attention from the micro to the macro.
Stop focusing on picking up pennies and instead focus on the Big Wins to craft your Rich Life.”
Or maybe you’re on the other end of the spectrum, and you only have $300 saved up.
The interest it spits off each year is negligible.
The interest amount is important here — it’s about building the right habits, particularly
when the amounts are small, so that as your income grows, you already have useful habits
and systems in place.
When people talk about investing, it elicits a wide range of emotions.
Some people are afraid of the stock market because of fears of losing that money, when
in reality holding onto it as cash is a surefire way to lose value through inflation.
Ultimately, wealth and financial freedom doesn’t come from a high income, but rather from how
much you’ve saved and invested over time.
There are doctors living paycheck to paycheck because they never learned to save, despite
making well into the six figures.
Here are the key points from the chapter: * Before investing into taxable accounts,
first maximize your tax-advantaged accounts, meaning your retirement accounts.
This primarily means your 401k and IRA.
* Understand that Roth contributions to retirement accounts are post-tax, and Traditional contributions
to retirement accounts are pre-tax.
Post-tax means you’ve already paid tax on the money, and it will grow and can be withdrawn
in retirement without any additional taxes.
Pre-tax means you’ve contributing the money without paying any taxes on that part of your
income.
It will grow without being taxed, but when you withdraw the money in the future, your
taxes are deferred to that point in time.
If you’re young and have a lower income, Roth contributions are preferred.
If you have a high income and tax bracket, go with Traditional contributions.
* After maxing out your 401k and IRA, max out your Health Savings Account, or HSA.
During orientation week at medical school, we got a talk from a supposed financial expert.
All I remember from the talk is that buying $3 lattes every day from Starbucks adds up
quick so don’t do it.
While this may make sense when you’re a broke student living on loans, too many self
proclaimed financial experts focus on cost cutting in these minor ways.
The problem is, there’s a floor as to how much money you can save.
After a certain point, your quality of life and happiness begins to suffer.
On the other hand, you can always make more money and save more money.
The blanket advice in financial circles to not spend any money is actually a limiting
paradigm.
“We were taught to generically apply the principle of ‘Don’t spend money on that!’
to everything, meaning we try half-heartedly to cut back, fail, then guiltily berate ourselves—and
continue overspending on things we don’t even care about…
Everybody talks about how to save money, but nobody teaches you how to spend.”
Most people spend too much and don’t save enough.
On the other end of the spectrum are the personal finance aficionados who cannot stop saving,
creating their own prison of frugality.
From the financial independence subreddit, one person writes, “Looking back at the
past few years of my life and at my bank account, I would gladly give away a hefty chunk of
it and work longer if it meant I could have experienced more of the world and found more
passions.
I built my savings, but I never built my life.”
To address both overspending and underspending, Ramit suggests Conscious Spending, whereby
you aggressively save and cut costs in the domains in your life that that aren’t a
priority, but you let loose and spend heavily in the areas that make you happy.
Just be careful with this principle as it relates to your hobby.
As a car enthusiast, cars are something that can become incredibly expensive.
However, if you’re a candle enthusiast, the upper limit on how much you could spend
on candles is much lower.
To be more conscious with your spending, Ramit suggests canceling subscriptions and approaching
these expenses a la carte.
For example, rather than cable, just buy the channels you enjoy.
This makes you more aware of your spending, but it requires more manual input — it works
against automation.
It’s a trade off.
Mindful spending also requires you’re aware of where you money goes.
Mint.com is a great tool that automatically syncs with your credit cards and banks to
categorize your spending and trends.
That and Personal Capital are the two tools I’ve used to be mindful of how I spend,
but You Need a Budget is also a popular choice, although it requires manual entry.
Ramit emphasizes the importance of automation and doing the up front work so that your system
takes care of things moving forward, with minimal intervention from you.
Sound familiar?
Your checking account should be like your email inbox.
All money first comes to your checking account, and from there it’ll be automatically allocated.
Credit card auto-payments, for example, should pay your cards in full and draw from your
checking account, but you need to be sure you never overdraft.
With every paycheck, a certain amount of money should go towards your savings and investing.
By automating this, you never have to remember to save, it just happens in the background.
By keeping this up over the long term, you can work towards financial independence, whereby
your investments kick off enough money that you don’t even need to work anymore.
We call that FIRE — financial independence, retirement early.
When it comes to investing, where should you put your money?
Ramit follows the same philosophy put forth by Warren Buffet and Jack Bogle — low cost
index funds.
Actively managed mutual funds, after accounting for fees and expenses, rarely ever outperform
the market.
For this reason, passive index fund investing is widely accepted as the best means of investing
for us regular folk.
These funds simply mirror various indexes of the stock market, like the S&P 500, and
don’t try to beat it.
And the expense ratios on these funds are tiny.
For example, VTSAX has an expense ratio of 0.04%, whereas actively managed funds are
closer to 1 or even 2%.
While this sounds small, realize your annual returns are generally only 6-10%, so the 1%
adds up quick, and can reduce your returns by 30% in the long term.
That’s the impact of the compounding effect working against you.
“Automatic investing may not seem as sexy as trading in hedge funds and biotech stocks,
but it works a lot better.
Again, would you rather be sexy or rich?”
You may be tempted to pick individual stocks.
After all, what if you had picked Amazon years ago?
Hindsight is 20/20.
This is a losing proposition, as chances are you aren’t a professional investor, and
even they get this wrong all the time.
And if you’re tempted to buy some hot stock pushed by the financial pundits, understand
that they also cannot predict the future and they are wrong all the time.
In terms of what to invest in, that brings up the question of asset allocation.
There are two things you need to know:
First, as Nobel Prize laureate Harry Markowitz famously said, “diversification is the only
free lunch” in investing.
Diversification allows you to maintain similar returns while capping your downside risk.
This is yet another reason broad index funds are better than picking individual stocks.
Second, when you’re younger and have a longer time horizon until you retire, you can afford
to take on greater risk with your investments.
Stocks are associated with higher risk but higher returns.
Bonds, on the other hand, are lower risk but also lower return.
When you’re in your twenties and thirties, going all-stock is fine, but as you get older,
you’ll begin changing your asset allocation to be more conservative as you approach retirement.
Some people get nervous about investing and worry about these details, causing them to
be overwhelmed and not take action.
Whether you have a 70/30 domestic/international stock allocation or a 100% domestic allocation
isn’t as important as simply getting started and building the habit of investing.
Understand the basics, but after that, get out of your own way.
Lastly, don’t try to time the market, meaning putting money in when it’s low and taking
money out when it’s high.
While it sounds simple enough, it’s a losing proposition because you are not able to reliably
and accurately time the highs and lows.
Focus on time in the market, not timing the market.
A rich life isn’t all about optimizing your investment returns.
Rather, getting your finances in check is about living life on your own terms.
For every person, that’s different.
Maybe you want to take international trips twice per year, or not worry about getting
guac on your Chipotle bowl.
If you enjoyed the content here, show Ramit some love and pick up his book.
He does a great job of making something as dull as retirement accounts entertaining,
and he even skillfully dives into other touchy subjects, like prenups.
Hope you guys found this video useful.
Much love, and I’ll see you guys in that next one.