Optimizing your personal finance is one of the most important things to do. The reason is that your financial situation affects other parts of your life. If you had financial problems then it would be difficult for you to live life to the fullest.
That’s why I was glad to receive a review copy of I Will Teach You To Be Rich by Ramit Sethi. The book aims to help you optimize your personal finance. Though the word “rich” in the title might mean different things for different people, here is what it means for the author:
What does rich mean to you? For me, 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.
I agree completely. Being rich is not about having a lot of money. It’s about having the freedom to enjoy life without financial worries.
Inside I Will Teach You To Be Rich
The book starts with an introduction followed by nine chapters.
When it comes to personal finance, the worst thing you can do is not taking action. Don’t wait until you get the perfect solution before you act. Instead, use what the author calls The 85 Percent Solution: a solution that isn’t perfect but is good enough to get you started.
To help you keep the balance between enjoying your life and controlling your expenses, here is a principle you might find useful:
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.
1. Optimize Your Credit Card
In the long term, having good credit can help you save thousands of dollars on large purchases because it can get you lower interest rate. So it’s essential that you improve your credit. The most important thing you should do to improve your credit is paying off your credit card bills each month.
2. Beat the Banks
The next thing you should do is setting up the right bank accounts. You need to have two different accounts: a checking account and a saving account. Having these two accounts makes managing your money easier.
When setting up your accounts, one important thing you should pay attention to is the fees. Fees are often more important than interest rates because they could easily wipe out the interest you earn. Get yourself accounts that have the lowest fees possible.
For saving accounts, find one with high interest rate. An online saving account usually meets this requirement.
3. Get Ready to Invest
Investing is essential to get rich. In fact, the author said that investing is the single most effective way to get rich. Through proper investing you can achieve your financial goals and have enough money for retirement.
This chapter outlines five steps you should take to invest. The first step is contributing to your 401(k) to get your employer’s match. Then you can do the next steps to bring your investing to the next level.
4. Conscious Spending
Conscious spending means you make the decision of where you are going to spend your money. A Conscious Spending Plan has four major categories where your money can go to:
- Fixed costs
- Guilt-free spending money
One way to implement your plan is by using an envelope system in which you allocate money for each category. Once you spend the money in a category you can’t spend more, but you can transfer money from one category to another.
5. Save While Sleeping
You should automate your finances as much as possible so that you can spend your time on other things. For that, the first thing you should do is linking your accounts together. Then you should set up automatic payments and automatic transfers between those accounts.
6. The Myth of Financial Expertise
Financial expertise is a myth because the so-called financial “experts” don’t know what will happen in the future. You can often earn more by investing yourself because that way you minimize the fees.
7. Investing Isn’t Only for Rich People
Above anything else, the volatility of your portfolio depends on your asset allocation. So make sure that you have the proper allocation between different asset classes. You can do this by picking a portfolio of low-cost funds but you should remember that you should rebalance it regularly. If you don’t want to rebalance then pick a lifecycle fund where it is done automatically for you.
8. Easy Maintenance
This chapter gives you tips to on how to properly maintain your investments. It discusses how to rebalance your portfolio and when to sell your investments, among others.
9. A Rich Life
Here you can find many specific topics in personal finance such as student loans, wedding, salary negotiation, buying car, and buying house. It also gives you a summary of what it takes to get rich:
Getting rich isn’t about one silver bullet or secret strategy. It happens through regular, boring, disciplined action.
I Will Teach You To Be Rich is full of practical advice to improve your personal finance. Rather than giving you abstract ideas of what you need to do, it tells you exactly what you need to do and why. The book especially targets people in their 20s and 30s but its advice is applicable to other age brackets as well.
One differentiating characteristic of the book is its focus on the “big wins”. Instead of focusing on cutting small expenses, it focuses on cutting big expenses like the interest you pay for major loans. The author argues that many people save three dollars on latte but forget to improve their credit and that costs them thousands of dollars.
In my case, since I don’t live in the U.S. I need to adapt some of the advice given. But I get a lot of ideas to implement.