I Will Teach You To Be Rich

I Will Teach You To Be Rich

No Guilt. No Excuses. No B.S. Just a 6-Week Program That Works

Ramit Sethi

Summary in 100 words or less

Establishing good credit is essential for getting rich. Create a spending plan with four major buckets: Fixed Costs, Investments, Savings, and Guilt-free Spending. Open an investment account and start dollar-cost-averaging 20% of your income into diversified, low-cost index funds. Automate your money flow, so your money gets into different accounts without you having to think about it. To feed your system, find ways to earn more. Spend extravagantly on what you love, cut on what you don’t, and plan for big purchases.


My Highlights

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.

The single most important factor in getting rich is getting started, not being the smartest person in the room.

Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.

Credit is one of the most vital factors in getting rich, but because it’s hard to wrap our minds around it, we often overlook it entirely.

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.

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. In general, it tracks all credit-related activities, although recent activities are given higher weight.

Your credit score is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders.

Credit cards are like a delightful gift from heaven. If you pay your bill on time, they’re actually a free short-term loan. They help you keep track of your spending much more easily than cash, and they let you download your transaction history for free. Most offer free warranty extensions on your purchases and free rental car insurance.

As long as you manage your credit cards 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.

To 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. This is all the more important in the wake of the credit crisis; if you don’t have good credit, it may be difficult to get an affordable home loan—even if you have a high income.

“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.”

Most people should switch from a for-fee card to a free card, so ask your credit card company what they’ll do for you. If they waive your fees, great! If not, switch to a no-fee credit card.

Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score.

If you’ve found yourself in credit card debt—whether it’s a lot or a little—you have a triple whammy working against you: First, you’re paying tons of high interest on the balance you’re carrying. Second, your credit score suffers. Third, and potentially most damaging, debt can affect you emotionally.

To pay off your credit card debt: First, know how much you owe. Second, you need the cash flow. Third, prioritize your credit cards. Next, pay the minimum on everything except the top card. Lastly, stop using your cards.

Having your money in two separate saving and checking accounts makes money management easy. 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.

On average, millionaires invest 20 percent of their household income each year. Their wealth isn’t measured by the amount they make each year, but by how much they’ve saved and invested over time.

By opening an investment account, you give yourself access to the biggest money making vehicle in the history of the world: the stock market. Setting up an account is an excellent first step toward actually investing, and you don’t have to be rich to open one.

401(k)s are great because with virtually no effort on your part you get to put pre-tax money to work. What this means is that since you haven’t paid taxes on the money yet, there’s more of it to compound over time. On top of this, your company might offer a very lucrative 401(k) match, which amounts to free money that you’d be insane not to take. Remember to be aggressive with how much you contribute to your 401(k), because every dollar you invest now will likely be worth many more times that in the future.

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.

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.

A Conscious Spending Plan involves four major buckets where your money will go: Fixed Costs, Investments, Savings, and Guilt-free Spending Money.

Fixed costs are the amounts you must pay, like your rent/mortgage, utilities, cell phone, and student loans. A good rule of thumb is that fixed costs should be 50–60 percent of your take-home pay. Before you can do anything else, you’ve got to figure out how much these add up to.

Investments bucket includes the amount you’ll send to your 401(k) and Roth IRA each month. 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.

Savings bucket includes short-term savings goals (like Christmas gifts and vacation), mid-term savings goals (a wedding in a few years), and larger, longer-term goals (like a down payment on a house).

After all that spending, investing, and saving, Guilt-free Spending bucket contains the fun money—the stuff you can use for anything you want, guilt-free. Money here covers things like going out to restaurants and bars, taxis, movies, and vacations.

People will get really inspired to budget and decide to stop spending on things like appetizers with dinner. Or they’ll buy generic cookies. That’s nice but those small changes will have very little effect on your total 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.

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. And follow your own plan for gradually increasing it. In this way, time is your friend because each month gets better than the one before it, and it adds up to a lot in the end.

If you simply can’t cut more out of your budget, this spending plan may be a useful theoretical guide, but you have more important concerns: making more money. Once you increase your earnings, you can use the Conscious Spending Plan as your guide.

If you already have a job, it’s a no-brainer to negotiate for a raise. If negotiating for a raise is impossible, try looking for a new job that pays more.

Freelancing can be a relatively easy way to earn some extra money. Think about what skills or interests you have that others could use. You don’t necessarily have to have a technical skill. Babysitting is freelancing. If you have free time at home, you can sign up to be a virtual assistant online.

We know people are incredibly lazy and will do whatever requires no work—often at their own financial expense. Think about how many people lose thousands of dollars per year by not taking advantage of 401(k) matches alone. How much more money do we lose from inaction overall? The key to taking action is, quite simply, making your decisions automatic.

Setting up an Automatic Money Flow will take you a few hours. It would be easier to do nothing—but that would mean you’ll have to manage your money constantly for the rest of your 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 without you really having to think about it.

Nobody can consistently guess which funds or stocks will outperform, or even match, the market over time. Anyone who claims they can is lying.

When it comes to fund ratings, companies rely on something called survivorship bias to obscure the picture of how well a company is doing. Survivorship bias exists because funds that fail are not included in any future studies of fund performance for the simple reason that they don’t exist anymore.

Financial advisers don’t always look out for your interests. They’re supposed to help you make the right decisions about your money, but keep in mind that they’re actually not obligated to do what’s best for you. Some of them will give you very good advice, but many of them are pretty useless. If they’re paid on commission, they usually will direct you to expensive, bloated funds to earn their commissions. By contrast, fee-based financial advisers simply charge a flat fee and are much more reputable.

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.

Automatic Investing is not some revolutionary technique. It’s a simple way of investing in low-cost funds that is recommended by Nobel laureates, billionaire investors such as Warren Buffett, and most academics. It involves spending most of your time choosing how your money will be distributed in your portfolio, picking the investments (this actually takes the least amount of time), and then automating your regular investments.

Your investment plan is more important than your actual investments.

Stocks have been a good way to earn significant returns over the long term, but I discourage you from picking individual stocks, because it’s extremely difficult to choose winning ones on your own. The tricky thing about stocks is you never know what will happen.

Bonds are essentially IOUs from companies or the government. The advantages of bonds are that you can choose the term, or length of time, you want the loan to last (two years, five years, ten years, and so on), and you know exactly how much you’ll get when they “mature” or payout. Also, bonds, especially government bonds, are generally stable and let you decrease the risk in your portfolio.

Cash is the safest part of your portfolio, but it offers the lowest reward. If you factor inflation, you actually lose money by holding cash in most accounts.

It is important to diversify within stocks, but it’s even more important to allocate across the different asset classes—like stocks and bonds. Investing in only one category is dangerous over the long term.

Diversification is D for going deep into a category (for example, buying different types of stocks: large-cap, small-cap, international, and so on), and asset allocation is A for going across all categories (for example, stocks and bonds).

Mutual funds are incredibly useful financial tools—over the past eighty-five years, they have proven to be very popular and extremely profitable. Compared with other investments, they’ve been a cash cow for Wall Street. That’s because in exchange for “active management” (having an expert choose a fund’s stocks), the financial companies charge big fat fees (also known as expense ratios). These fees eat a hole in your returns. Sure, there are some low-fee funds out there, but most mutual funds have high expense ratios.

Index funds reflect the market, which is going through tough times but, as history has shown, will climb back up.

Lifecycle funds are simple funds that automatically diversify your investments for you based on age. Instead of having to rebalance stocks and bonds, lifecycle funds do it for you.

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.

The first thing you want to do when picking index funds is to minimize fees. Look for the management fees (“expense ratios”) to be low, around 0.2 percent, and you’ll be fine. Really, anything lower than 0.75 percent is okay.

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. This is the essence of Automatic Investing, which lets you consistently invest in a fund so you don’t have to guess when the market is up or down.

Investing isn’t a race—you don’t need a perfect asset allocation tomorrow.

If you have a diversified portfolio, some of your investments may outperform others. To keep your asset allocation on track, you’ll want to rebalance once a year so they don’t become a larger part of your portfolio than you intended.

People worry about taxes too much, and they make all kinds of bad decisions to avoid them. Listen: You pay taxes only if you make money. If you’re paying 30 percent in taxes on something, it means you made 70 percent elsewhere, so do not freak out about taxes. Plus, it’s your damned civic duty.

It’s time to grow up. Even though parents have good intentions, offering to handle money management is one of the worst things they can do for their kids. At our age, we should be learning how to manage our money ourselves.

Most new employees come to the table talking about how much they want to make. To be totally honest, as a hiring manager, I don’t really care what you want to make. When it comes to you, your manager cares about two things—how you’re going to make him look better, and how you’re going to help the company do well.

When it comes to saving money, big purchases are your chance to shine—and to dominate your clueless friends who are so proud of not ordering Cokes when they eat out, yet waste thousands when they buy large items like furniture, a car, or a house. When you buy something major, you can save massive amounts of money—$2,000 on a car or $40,000 on a house—that will make your other attempts to save money pale in comparison.

Keeping your car well maintained doesn’t sound sexy, but it will make you rich when you eventually sell your car. Take your car’s maintenance as seriously as your retirement savings: As soon as you buy your car, enter the major maintenance checkpoints into your calendar so you remember them.

Buying a house is the most complicated and significant purchase you’ll make, so it pays to understand everything about it beforehand.

The bottom line: Buy only if you’re planning to live in the same place for ten years or more.

If you don’t have enough money to make a down payment and cover your total monthly costs for a house, 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.

More book notes

The 4-Hour Work Week
The Richest Man in Babylon
Just Keep Buying
Rich Dad Poor Dad
The Psychology of Money

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