I Will Teach You to Be Rich by Ramit Sethi [BOOK SUMMARY & PDF]

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‘I Will Teach You to be Rich‘ helps you identify where your money is going and gets it working for you so that you can save for the things that will bring you true happiness and lead a rich life. The six-week program identifies how to create a system for optimising your bill payments, savings and investments so that your money goes to all the right places with less than an hour of maintenance a month.

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INTRODUCTION

Who is this summary for?

This book is a great read for anyone wanting to get a better handle on personal finances. I Will Teach You to be Rich helps you identify where your money is going and gets it working for you so that you can save for the things that will bring you true happiness and lead a rich life. The book outlines a six-week program which identifies how to create a system for optimising your bill payments, savings and investments so that your money goes to all the right places with less than an hour of maintenance a month.

About the author

Ramit Sethi studied psychology and technology at Stanford University. It was during his time there that he made a few mistakes with money and a bad investment led him to study exactly how money worked and to understand how to make it work for him. Sethi came across the same advice over and over again and found that no-one was following the advice because it didn’t work. This is how I Will Teach You to be Rich. Sethi is committed to sharing his findings and knowledge with as many people as possible, believing that everyone has the opportunity to improve their money habits. His book became an instant best-seller and can claim over 20,000 success stories from his courses.

In this summary

This summary will follow the format laid out in Sethi’s book, taking you through each week of Sethi’s six-week program. The first week will be focussed on optimising your credit cards followed by week two’s lesson on beating the banks. Week three will cover investing and in week four we’ll talk about conscious spending. Saving is covered in week five and finally, week six will discuss myths and the idea that investing is for everyone, not just for the rich. We’ll finish up the summary with a brief discussion on how easy it is to maintain your new money habits.

BOOK SUMMARY

WEEK ONE: CREDIT CARD OPTIMISATION

Sethi explains that the very first step you need to take on your journey to wealth is to build good credit. Personal credit takes into account your credit report and your credit score. The majority of adults own a credit card (or two), but Sethi points out that the majority of people don’t know how to use them properly. When used correctly, credit cards can actually save you thousands of dollars in the long run.

Credit reports and ratings

Sethi explains that a credit report provides information about your credit history, any current and recent transactions and any accounts that you hold. This information is provided to lenders when you apply for a loan or any lending.

Your credit score is slightly different, you are assigned a number between 300 and 850. This number is used to explain to lenders what your risk factor is when it comes to lending. If you have a high credit rating, you are seen as less of a risk, and a low credit rating represents a higher risk. It’s so important that you have a high credit rating for future purchases including houses and loans. Lenders and banks will make a decision on whether or not they will lend you money based on both your credit report and rating.

Use them right

When used correctly, a credit card can be very useful. Sethi emphasises the importance of paying your bills in full and on time. Never ever go late on these payments or you will find yourself facing interest. When this happens, your credit card is essentially loaning you money you don’t have. Paying interest is something you want to avoid at all costs. Sethi explains that if you make a purchase on your credit card, and end up having to pay interest, you are essentially paying more for your purchase than it’s worth.

”Building good credit is the first step in creating an infrastructure for being rich.”Click To Tweet

Week one top tips

The following are a number of tips from Sethi to help you get your credit cards set up and how to avoid common mistakes.

Request your credit report and score. Understand what the numbers mean and what this means for your credit.
If you already have a credit card, check with the bank to see if it’s a no-fee card. If it’s not, request this. And if you don’t already have a card, get one. Request to have all fees waived.
Set up an automatic payment to ensure that your credit card bill is never missed and is always paid in full. Ensure that this is done every month.
If you have some debt, make a plan to start paying it off. Call your lender to restructure your payments to ensure it is paid off as quickly as possible. The aim is to get out of debt as fast as possible so you can start reaping the rewards.

WEEK TWO: BANKS

Sethi emphasises the importance of selecting the right bank and accounts when setting up your finances. Your bank plays a pretty important role and you want to build a good relationship with them to ensure that you don’t waste money on fees that are unnecessary.

Cheque accounts

Most people have a cheque account, this is essentially a standard account that money can go in and out of regularly. Sethi recommends you treat this like an email inbox. If all your money can come into this main account, then you are able to then filter it into the appropriate side accounts, whether that be savings or investments. When deciding upon a cheque account, try and select one that pays interest just like a savings account and is free, you don’t want monthly, yearly or transactional fees.

Savings accounts

Sethi explains that you should open a savings account for short-term to mid-term savings. Think of it as a place to keep your money for anywhere from one month to five years. This is the account you’ll use to save money for Christmas presents, vacations and even larger sums like for a house deposit. A savings account should not be regularly withdrawn from, unlike your cheque account and you should earn decent interest on the money in there.

Week two top tips

If you don’t already have one, open a cheque account. Double check and make sure there are no fees.
If you find that your current account has monthly or yearly fees, call the bank and negotiate to have the fee waived. Other things to look out for a minimum amount fees and transactional fees.
Open a savings account with high-interest. Ensure that you split up your spending money from your savings.
Ensure that you have one-and-a-half months worth of expenses in your cheque account and transfer any remaining money into your savings.

WEEK THREE: INVESTING

Investing can be a really overwhelming subject and for this reason, many people tend to avoid it altogether. Sethi wants to educate and empower people so that everyone feels confident to make investments. Sethi explains that after the Global Financial Crisis a lot of people were put off investing, but really times like this are actually when investing is a wise move.

”By opening an investment account, you give yourself access to the biggest moneymaking vehicle in the history of the world: the stock market.”Click To Tweet

5 simple steps

Sethi has 5 steps to follow in order to begin the process of investing.

Sit down with your employer and set up automatic payments into a 401(k) account. Each country will have an equivalent, for example here in NZ it’s called KiwiSaver, but essentially this is a long-term savings account specifically for retirement. A lot of these accounts will have a system that requires your employer to match whatever your contribution is, so it’s important to contribute the maximum account. Sethi explains that there is no better investment than one where you have a 100% return so this is a no-brainer. This is also automatically done every pay cheque and therefore requires almost no input from you other than the initial set-up.
Pay off your credit card debt. Once this is done, you will have more available money to invest. Take the time to come up with an achievable plan in paying this off quickly.
Sethi recommends also opening up an Individual Retirement Account or an Investment Fund. The aim is to contribute as much post-tax income as possible. This account is designed to be more accessible than any 401(k) account.
If there’s any money left, put more into your 401(k).
Once the 4 previous steps are completed, you’re left with some money to play with. Either consider a non-retirement fund investment to invest the money in yourself to start a business.

Note: if your employer isn’t going to match your contributions, then Sethi recommends opening the account but not contributing. There’s little point without the match initially.

WEEK FOUR: CONSCIOUS SPENDING

Sethi has spent a lot of time researching different advice from financial experts. He explains that the one piece of advice he heard the most regularly was that all you need to do is create a budget. However, Sethi believes that this is easier said than done, nobody has the time or will to track every penny going in and out and budgets quickly become unstuck. For this reason, Sethi recommends what he calls conscious spending/

Conscious spending is easy enough to do. When money comes in, your first priority is going to be looking after your savings and investment accounts. Once those have been replenished you can consider all of the remaining money yours to spend guilt-free.

The best way to handle the remaining money is to make decisions about where you want to spend your money ahead of time. Sethi explains that you should have a frugal approach (not a cheap approach). Frugality is preferred over being cheap with everything because you can save money on most of your purchases but have the freedom to spend more money in a few areas. Consider your priorities, Sethi explains that if you want to go to the movies every week as your splurge, the consider not buying a $2.50 coke every lunchtime. Prioritise the movie over the coke, it’s up to you to decide where you are willing to make sacrifices and where you want to splurge.

Week four top tips

When you get your next pay-check try and itemise your spending and figure out where most of it goes.
Break up your income into fixed costs, long-term investments, saving goals and guilt-free spending.
Have a look at some of your fixed costs, are you getting the best deal on insurance? Consider shopping around on these costs to see what you can minimise.
Determine what your own conscious spending plan will look like. Where are you going to save and where are you going to spend.
Stick to your plan and update it every week. When you receive receipts enter them into your plan to ensure you understand what’s going on.
Sethi emphasises the importance of ensuring your system is as straightforward and quick as possible, you need to be able to maintain this long-term.

WEEK FIVE: SAVE

The next stage in Sethi’s plan is all about automating your systems for savings, investing and spending. The aim is to have your income automatically filtered into the appropriate accounts without any intervention from you. Sethi explains that by spending some time setting it up initially will save you plenty of time further down the track. It means that all of your bills will get paid automatically and you no longer have to worry about things like the overdraft.

Once a week/fortnight/month you’ll receive your income.
Your workplace should automatically deduct a portion for your 401(k).
The remainder will go straight into your cheque account.
Automate a portion of this to go to savings and investments.
Have your credit card bill paid automatically via direct debit. (This covers all of your fixed costs such as utilities, internet etc.)
Whatever is left can be considered guilt-free spending.

Week five top tips

You should aim to link all of your accounts. Sethi recommends ensuring that you have all of your login information in one place, otherwise you’ll waste time figuring various passwords and usernames out.
Now spend time setting up your ‘automatic money flow’. Once the accounts have all been linked this should be simple. Set up individual automatic payments to each of your accounts.

WEEK SIX: FINANCIAL EXPERTISE MYTHS

Sethi explains that most people are extremely intimidated by the finance industry, financial advisers, and fund managers. However, he believes that the majority of people are completely capable of making their own investments and making just as much if not more than the ‘experts’.

Sethi explains that you really don’t need to pay people to do your investing for you. Fund managers aren’t magical and they can’t foresee what the markets going to do. Sethi points out that fund managers fail with 75% of investments. Mutual funds often have significant fees that are unnecessary and paid out to the fund manager.

”Index funds (similar to mutual funds but it's managed by a computer which matches what the markets doing) can provide better returns with much lower fees. So ignore the pundits’ predictions. Ignore the last year or two of a fund’s performance.”

Sethi believes that although in the short term, a fund manager may seem to perform well, they will never beat the market long-term. This is based on fees, expenses and the mathematical probabilities that come into play when selecting stocks.

Is investing only for the rich?

Sethi believes that everyone is capable of investing, it’s certainly not only for the rich. Sethi explains that it is completely possible to have a straightforward and low-maintenance investment portfolio. He emphasises the importance of diversification when it comes to your investments. You should consider diversifying not only by buying a few different stocks but also by having different assets, consider stocks and bonds.

Sethi explains that the time to take moderate risks when it comes to investing is when you are younger, you have more time and are more likely to be able to rebound from a considerable loss. As you get older you want to be more conservative with your investments and take a few less risks.

Where should you invest?

Sethi recommends index funds as a good first option. He explains that the are less expensive than mutual funds. However, the downside it that you need to invest in a few different funds to ensure that you are diversifying. This will involve a little more time and research on your behalf than a mutual fund would.

”Multiple funds mean you have to rebalance your funds regularly, usually every year, which is a laborious process of redistributing your money to different investments so you get back to your target asset allocation.”

Another low-cost option is a lifecycle fund. Sethi explains that lifecycle funds take your age into consideration and will automatically diversify your investments for you. He explains that lifecycle funds are really ‘funds-of-funds’.

”For example, a lifecycle fund might include large-cap, mid-cap, small-cap, and international funds. (And those funds, in turn, will hold stocks from each of those areas.) In other words, your lifecycle fund will own many funds, which all own stocks and bonds.”

Week six top tips

It’s important to decide on your investing style before you get started. Remember that a lifecycle fund is simple and requires little input from you but you have less control. Otherwise, index funds are a good option if you are confident in diversifying your own portfolio.
Spend time investigating your investments. Do plenty of research and understand what you are investing in. If you choose to go with index funds, this will obviously take a lot longer and require more research on your behalf.
Once you’ve decided on investments, purchase your chosen funds.
If you don’t have enough money to invest right away, start dedicating some money to your investment account and set a savings goal. Once you reach your goal you can make your purchases.

WHERE TO FROM HERE?

Sethi explains that once your accounts are all in order and investments under control it’s easy to maintain your systems. He recommends returning to your conscious spending plan and trying to squeeze any extra money out that can be distributed between savings and investments. This is where your money is going to have the most value.

Sethi recommends that you don’t log into your investment accounts every day, this only causes extra stress and you’ve set up an automatic system for a reason. Commit to checking once a month and wait for the money to grow over time. Remember, if you’ve chosen to go with an index fund, you’ll need to spend time once a year rebalancing the asset allocations.

”Be careful about selling out of your investments too soon. 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 under-performing the market, or you’ve achieved your specific goal for investing.”

CONCLUSION

Key takeaways

Learn how to use your credit card appropriately.
Never miss bill payments, you don’t want to ever pay interest.
Automate bill payments so you don’t have to worry.
Request no fee accounts with your bank.
Open a high-interest savings account and standard cheque account.
Ensure that you have one-and-a-half months worth of expenses in your cheque account and transfer any remaining money into your savings.
Pay of all debt.
Sit down with your employer and set up automatic payments into a 401(k) account (or equivalent).
Also open up an Individual Retirement Account or an Investment Fund.
When you get your next paycheck try and itemise your spending and figure out where most of it goes.
Break up your income into fixed costs, long-term investments, saving goals and guilt-free spending.
Have a look at some of your fixed costs, are you getting the best deal on insurance? Consider shopping around on these costs to see what you can minimise.
Determine what your own conscious spending plan will look like. Where are you going to save and where are you going to spend.
Spend time setting up your ‘automatic money flow’. Set up individual automatic payments to each of your savings and investment accounts.
Decide on your investing style before you get started.
Spend time investigating your investments. Do plenty of research and understand what you are investing in.
If you don’t have enough money to invest right away, start dedicating some money to your investment account and set a savings goal. Once you reach your goal you can make your purchases.

Action steps

Take the quiz on iwillteachyoutoberich.com to figure out your earning potential and discover how you could be making some extra money.
Follow Sethi’s six week plan and see where your savings can take you!
For more detailed advice, download the complete book on Amazon.

This summary is not intended as a replacement for the original book and all quotes are credited to the above-mentioned author and publisher.

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