Do you want to become rich?
- Instead of saving on $5 lattes, the ability to buy things you want? Anytime, anywhere?
- Instead of being stuck in a job you hate, the freedom to pursue your passions?
- Instead of worrying about money, the security to live life on your own terms?
Then welcome. You are in the right place.
In this article, I’ll be reviewing one of my favorite personal finance books – “I Will Teach You To Be Rich” by Ramit Sethi. I know, it’s an amazing title.
I’ll share what I believe to be 5 most important lessons from the book to help you become rich.
Lesson #1 – Define What Rich Means To You
When you ask 100 people what rich means to them, I’m sure you’ll get 100 different answers.
- My 8 year old son would say – the money to buy all the legos at Target.
- My wife would say – the freedom to enjoy her coffee quietly, without any interruptions.
- My aging parents would say – the physical health to watch their grandchildren graduate from high school one day,
You must decide what rich means to you so that you can prioritize your spending.
Ramit Sethi says:
“Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.”
Essentially, it’s okay to spend unapologetically on things you love – as long as you cut back mercilessly, on the thing you don’t care about as much.
For my aging parents, their health is their number one priority. They want to live long enough to one day see their grandchildren graduate from high school.
So for them, spending money on gym membership or the healthiest meals is their way to living a rich life.
And in order to do this, they cut costs mercilessly on things they don’t value as much – designer wear clothes, new cars and the biggest item on their list – housing.
They somehow convinced their son and daughter in law to pay for their housing cost!
“NO” is a powerful statement.
Especially when it comes to money.
We are making a statement that we don’t just follow the Joneses when it comes to purchasing things.
Just because my neighbors bought the newest model SUV doesn’t mean I need to get one too – I say NO.
Just because my co-worker is showing off her newest luxury model purse doesn’t mean I need to buy one as well – I say NO.
“NO” empowers you.
However, it becomes even more powerful, when that “NO” against the things we don’t value, allows us to say “YES” to the things that we love.
Lesson #2 – Overcome Analysis Paralysis
We all have a friend or a relative that seems to always be talking about money.
- “Let you tell you why you should invest in cryptocurrency”
- “Did you see how high the CD interest rates are at the new bank down the street?”
- “I just got this new investing app that gives you up to minute stock tips, you should totally get it too”
But when you ask them additional questions regarding what actions they took to improve their finances, they would say,
- I’m waiting for the right moment, or
- I need to do more research.
And this would go on year after year, and you see them still waiting and still researching.
Ramit Sethi teaches something he calls the “85% solution.” He says that he would much rather get it 85% right, than do nothing at all.
There is a lot of information when it comes to personal finance.
- What bank should I hold my savings account in?
- What app should I use to track my expenses?
- Where should I hold my investment.
However, you can wait and wait forever.
Accept the fact that you aren’t going to get it perfectly right the first time. You might try out a bank and realize that it doesn’t work well with you.
However, that is ok because instead of waiting on the sideline, you jumped in and started an account.
You are further ahead because you took action.
If you had waited until you had a 100% solution – which of course never comes, you likely would have never opened that savings account or the investment account.
Beware of analysis paralysis.
You won’t get it perfect the first time, but that is ok.
Once you have a 85% solution, go for it.
You’ll be much further ahead than if you had waited for the perfect solution, that will never come.
Lesson #3 – Go For Big Wins, Not The $5 Lattes
David Bach, the author of “Automatic Millionaire” became famous for the term “The Latte Factor”
He pointed out that if you can save $5 a day on habits like latte, this can add up to nearly $1 million dollars over a 40 year time period.
Well, Ramit Sethi is also famous for his latte comments.
But not for saving on your lattes,
He says – If you love lattes, you should buy as much as you want.
Ramit Sethi emphasizes Big Wins over Small Savings in your finances.
Most people focus a lot on small things, when they first start cutting back on their spending:
- I need to stop buying these $5 lattes.
- I should try to shop at Old Navy for clothes instead of Banana Republic.
- I can get gas 5 cents cheaper at the gas station on the other side of the town.
However, what will really move the needle are 2 or 3 bigs areas:
- Instead of leasing a brand new vehicle, testing out the local public transportation.
- Looking at current home mortgage and refinancing to take advantage of the lower interest rate and thus lowering home payment.
And it’s the same when it comes to saving and investing. People make similar mistakes:
- Instead of chasing interest rates or fees, they should focus on savings rate or getting the 401K employer match.
- Instead of manually trying to put away money each month, automating your money process – we’ll cover more of this in the next lesson.
Focus on cutting your costs or saving money in a few core areas rather than a little bit here and there.
If you can get 2 or 3 of these big wins rights, you can buy as many $5 lattes as you want
Lesson #4 – Automate Your Money System
Do you know the key difference between very fit people and the rest of the population?
- Is it a better workout routine?
- More motivation to eat healthier?
- Do they have better genes?
The key difference is that most of them have systemized their way to health.
They’ve built a regular workout and healthy food into their daily routine.
They don’t think about working out, but rather do it based on a scheduled system and preset exercises.
They don’t think about eating healthy, rather they often have pre-made meals and eat at pre-established times.
In the same way, people who are rich and have wealth, most often have systemized their money, so they don’t have to actively think about saving or investing.
They are not dependent on their day’s mood to either live frugally or put away money in their 401K.
They’ve created systems to save themselves from their worst selves.
For Ramit, this means creating a system that automates our income to various accounts so we stick to our long-term money plan.
Few accounts you will need to setup this system
This works like an email inbox where all the money goes first. Then it distributes money to the various accounts like investments and bills.
This is a place for short-term to midterm savings. Think of vacations, gifts, wedding or downpayment for a house
Make sure you have good spending habits before you actively start using credit card as a tool. But this is a great tool to accrue cash back or travel miles. I use it to pay most of my bills and have used the travel miles to take my family to places like Hawaii and Korea for a fraction of the cost.
Retirement and Investment Accounts
If you have a traditional job that offer 401K, you can open one via your HR department. Outside of 401K, you can open up Roth IRA to supplement your retirement account. After you’ve maxed out all your retirement accounts, open up a brokerage account if you’d like to invest additional money in the market.
If you aren’t sure what to invest in, I have an article where I talk about Vanguard and VTSAX you can check out.
Once you have these accounts, the key to automating your system is to connect them to each other and set up automatic transfers.
From your checking account, set up an amount and time when you want money to go to your Savings, Retirement and Investment Accounts.
Setup automatic payments for your credit cards to be paid from your checking account before the due date, so you never get charged late fees.
The key outcome here is that you never have to think about actively saving, investing or paying your bills again.
All the savings and spending happens on autopilot based on your preset amounts, time and triggers.
This money system isn’t going to give you ripped abs and big biceps, but you’ll definitely have some fat investment accounts.
Lesson #5 – Simplify Investing
For many people I’ve spoken to about money, the common area of personal finance that scare them the most, is the area of investing.
- Isn’t investing for rich people?
- I don’t know how to pick stocks.
- I don’t understand all these financial terms – stocks, bonds, funds, etc.
Ramit Sethi and I share the belief that investing should be simple and easy to maintain.
The fear of investing keeps people from tapping into the amazing growth of the stock market and therefore, the opportunity to grow their wealth.
Ramit Sethi presents what he calls the pyramid of investing options.
At the bottom, you have individual stocks and bonds – you research individual stocks to invest in.
Next up, you have Index Funds and Mutual Funds – you research what index funds or mutual funds to invest in.
And then at the top, you have Lifecycle Funds or also known as Target Date Funds.
The concept is that, as you move up the pyramid, the simpler the investing process.
Both Ramit and I firmly believe that you should stay away from individual stocks and bonds unless you are a professional investor.
So you should either be in the Index Fund or Lifecycle Fund category.
Ramit suggests that if you best want to simplify your investment and not want to think about things such as diversification and asset allocation, Lifecycle Fund is your way to go.
You just need to regularly put money into the investment using your automatic money system.
These Lifecycle Funds are not only invested in diverse index funds, but also automatically readjust allocation for you as you get older and your risk profile changes.
I personally believe that, once you better develop your financial literacy, you can invest in index funds and do the asset allocation yourself.
But either way, if you are investing in either of these two methods, you are doing better than the majority of people out there.
If you aren’t investing yet, pick one of these two simple investing options and start investing now.
- Define what rich life means to you. It’s different for everyone and you can decide where you are willing to spend money on, so you can cut mercilessly on things that you don’t care about.
- Don’t get caught in analysis paralysis – always waiting and researching because the conditions aren’t perfect. If there is a 85% solution, go for it.
- Focus on big wins, not the $5 lattes. In the long run, big wins like managing your housing expense or negotiating your salary will move the needle, not the $5 latte.
- Automate your money system. Best athletes automate their workouts and so can we with our finances, so we aren’t dependent on our mood of the day to become rich.
- There are simple investing options – Lifecycle Funds or Index Funds. Pick one and start investing!
The book is amazing and has many more lessons.
Support Ramit and this channel by getting the book.