Who wins at the end of the day? The self-satisfied people who heatedly debate some obscure details? Or the people who sidestep the entire debate and get started?
“Our education system doesn’t teach this,” people whine. It’s easy for people in their twenties to wish that their colleges had offered some personal-finance training. Guess what? Most colleges do offer those classes. You just didn’t attend!
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.
Getting started is more important than becoming an expert.
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.
As you can imagine, by the time I went to buy my own car, I had been steeped in a rich tradition of negotiating. I knew how to make unreasonable demands with a straight face and never take no for an answer.
It’s ridiculously easy to check your credit score and credit report—and you should do it right now. Once a year, by law, you’re allowed to obtain your credit report for free at www.annualcreditreport.com.
One of the key differences between rich people and everyone else is that rich people plan before they need to plan.
Most people pay their credit card bills online now, but if you haven’t set up automatic payment yet, log on to your credit card’s website to set it up now.
YOU: Thank you! I’m really happy to hear that. Now, about that fee . . . I understand I was late, but I’d like to have it waived. CREDIT CARD REP: Why? YOU: It was a mistake and it won’t happen again, so I’d like to have the fee removed.
Always end your sentence with strength. Don’t say, “Can you remove this?” Say, “I’d like to have this removed.”)
YOU: Hi, I’d like to confirm that I’m not paying any fees on my credit card. CREDIT CARD REP: Well, it looks like you have an annual fee of $50. That’s actually one of our better rates. YOU: I’d rather pay no fees. Which card can you switch me to that doesn’t charge fees? I’d like to make sure my credit score isn’t affected by closing this account, too. Can you confirm?
To avoid having your account shut down, set up an automatic payment on any card that is not your primary card. For example, I set it up so that one of my credit cards pays a $12.95 monthly subscription
This is especially true of credit card companies, whom you should treat just slightly better than you would an armed militia coming after your younger sister.
It’s tempting, when calling, to be really nasty, but because I was raised right, I don’t scream or threaten violence. Instead, when I call to dispute anything, I open a spreadsheet that details the last time I called them, whom I spoke with, and what was resolved. If only all criminals were as diligent as I am.
Whenever you make a call regarding a dispute on your credit card, you wouldn’t believe how powerful it is to refer back to the last time you called—citing the rep’s name, date of conversation, and your call notes. Most credit card reps you talk to will simply give in because they know you came to play in the big leagues.
I request a credit-limit increase every six to twelve months. Remember, 30 percent of your credit score is represented by your credit utilization rate.
In fact, there are lots of tips for people who have very good credit. If you fall in this category, you should call your credit cards and lenders once per year to ask them what advantages you’re eligible for.
Call them up and use this line: “Hi there. I just checked my credit and noticed that I have a 750 credit score, which is pretty good. I’ve been a customer of yours for the last four years, so I’m wondering what special promotions and offers you have for me . . . I’m thinking of fee waivers and special offers that you use for customer retention.”
Many people don’t know that credit cards offer excellent consumer protection. This is one reason I encourage everyone to make major purchases on their credit card (and not use cash or a debit card).
What happens in disputes like this is that the credit card company fights the merchant for you. This works with all credit cards. Keep this in mind for future purchases that go wrong.
Trip-cancellation insurance: If you book tickets for a vacation and then get sick and can’t travel, your airline will charge you hefty fees to re-book your ticket. Just call your credit card and ask for the trip-cancellation insurance to kick in, and they’ll cover those change fees—usually up to $1,000 per year.
When I couldn’t find LA Philharmonic tickets last year, I called my credit card and asked the concierge to try to find some. He called me back in two days with tickets.
The last few times I’ve gone out to dinner, the bill has come, everyone has plopped down cash, and I’ve realized I can just pay on my credit card and earn some miles. Here’s where things go horribly wrong. Don’t wake up the next day and say, “Wow! I have $100 extra cash in my wallet!” NO!!! Put it in the bank!! I forget to do this all the time and end up regretting it.
Apply for more credit if you’re debt-free.
I’m a big fan of online banks like ING Direct and Emigrant Direct because they offer simple banking with great rewards and almost no downsides.
Here’s the funny thing: Try to get your parents to open one of these high-interest accounts, and they’ll stop and stare at you like you just backhanded Grandma at the family picnic.
there’s something profoundly different about having two accounts: If your friends want to go out on Friday night, you’re not going to say, “Hold on, guys, I need three business days to transfer money to my checking account.” If you don’t have the money available in your discretionary (checking) account because you’ve spent your “going out” money, you’re staying in that night.
Having a separate savings account forces you to keep your long-term goals in mind instead of just blowing them off to have a few rounds of drinks.
But it’s not just about your immediate earnings—being young is about developing the right habits.
Imagine walking into a strip club in Vegas where you can see everyone lined up and take your pick. I am really hesitant to go further into this analogy because my mom is going to read this book, but suffice it to say that both strippers and banks want your money. Also, there are a lot of choices.
Banks will resist giving you a nofee, no-minimum account at first, but if you’re firm, they’ll give you the account you want. If they don’t, threaten to go to another bank. If they still don’t, walk out and find one that will. There are many, many choices and it’s a buyer’s market.
But there are a lot of dorks who spend every waking hour online digging up the best interest rate and switching to it immediately. “OMG!!!!” they say. “Emigrant Direct increased its rate from 2.25 percent to 2.75 percent!! Now it’s 0.02 percent higher than ING Direct! I must switch accounts right away!! Onward!!!” If you do this, you are a moron.
Schwab Bank Investor Checking with Schwab One Brokerage Account (www.schwab.com/public/schwab/home/account_types/brokerage/schwab_one_with_ic.html, or just Google it: If you’ve decided an online checking account is right for you, Schwab offers a stunningly good account with 3 to 5 percent interest on money in your checking account, no fees, no minimums, no-fee overdraft protection, free bill pay, free checks, an ATM card, automatic transfers, and unlimited reimbursement of any ATM usage.
ING Direct Orange Savings (http://home.ingdirect.com/products/products.asp): I use ING Direct for my online savings account. This excellent bank lets you keep virtual sub-accounts
You’re in a customer group that’s very profitable for banks: ING Direct and the American Bankers Association put the cost of acquiring a new customer between $100 and $3,500—including all of their advertising, personnel, and technology costs. They don’t want to lose you over something as small as a $5 monthly fee.
“Okay.” Don’t give up here. Despite what you learned in sex ed, “no” does not mean “no” when it comes from a bank.
Try this instead: RAMIT: Well, I see the fee here and I’d really like to get it waived. What else can you do to help me? (Repeat your complaint and ask them how to constructively fix it.)
BANK REP: I’m sorry, sir, we can’t refund that fee. RAMIT: I understand it’s difficult, but take a look at my history. I’ve been a customer for more than three years, and I’d like to keep the relationship going. Now, I’d like to get this waived—it was a mistake and it won’t happen again. What can you do to help?
I just talked to a friend who recently moved to New York for a few months. She didn’t want to open a bank account for such a short time either, but instead of just shrugging and saying “Oh, well,” she actually called her bank. She just asked them if they would waive the ATM fees while she was there. “No problem,” they said.
My favorite checking account: Schwab Investor Checking.
Leave one and a half months of living expenses in your checking account, or as close to it as you can manage.
Although it’s easy to “plan” on winning the lottery to get rich, the real way to do it is actually much simpler: Of America’s millionaires, 80 percent are first-generation affluent, meaning their parents weren’t rich. They collected their significant wealth through controlling their spending,
INVESTING IS THE SINGLE MOST EFFECTIVE WAY TO GET RICH
Rung 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100 percent of the match.
Rung 3: Open up a Roth IRA (see page 83) and contribute as much money as possible to it.
Every person in their twenties should have a Roth IRA, even if you’re also contributing to a 401(k).
Remember how your 401(k) uses pretax dollars and you pay taxes only when you withdraw money at retirement? Well, a Roth IRA uses after-tax dollars to give you an even better deal. With a Roth, you invest already-taxed income and you don’t pay any tax when you withdraw it.
open your Roth IRA by the end of the week.
If you need your money in fewer than five years, put it in a high-interest savings account. But don’t make the mistake of keeping your money in a savings account just because you’re too lazy to take the time to learn how to invest it. If you’d invested ten years ago, wouldn’t it feel good to have a lot more money right now? Well, the next best time to invest is today.
We’ll focus on discount brokerages like Vanguard and T. Rowe Price because they charge dramatically smaller fees than full-service brokerages
Full-service brokerages offer so-called “comprehensive services,” but they basically just charge you a lot of money to sell you useless research and let you talk to salesmen.
Frankly, most discount-brokerage investment accounts are pretty much the same. It’s sort of like having the choice between two hot blonde twins—either one will do.
As Benjamin Franklin said, “Don’t put off until tomorrow what you can do today.” And as Ramit Sethi said, “Let others debate minutiae—all you need to do is open an investment account at a discount brokerage. Sucka.”
To help me manage all my accounts, I set up a free PBwiki (www.pbwiki.com) to store my account numbers and passwords on a private page.
Remember, the maximum amount you can invest in a 401(k) is $15,500 per year.
Your employer match isn’t counted toward your contribution limit, so if you invest $5,000 and your employer matches $5,000, you can still invest $10,500 more for a total of $20,500 annually in your 401(k).
When your friends say, “I never have any money,” you’re going to wonder why they don’t just spend a couple of hours to set things up right—like you did.
The mind-set of frugal people is key to being rich.
as the researchers behind the landmark book The Millionaire Next Door discovered, 50 percent of the more than one thousand millionaires surveyed have never paid more than $400 for a suit, $140 for a pair of shoes, and $235 for a wristwatch.
buy what you need à la carte: Instead of paying for a ton of channels you never watch on cable, buy only the episodes you watch for $1.99 each off iTunes. Buy a day pass for the gym each time you go (around $5–$10). Buy songs you want for $0.99 each from Amazon or iTunes.
To run an 80/20 analysis yourself, do a Google search for “conducting a Pareto analysis.”
Last year, a friend of mine started getting really into fitness. I think it was because of his laudable goal of “getting some girls.”
DON’T JUST SAVE—SAVE FOR A GOAL It’s Hard to Save Unless There’s a Reason
call your bank and tell them you don’t want them to allow you to spend more than you have in your account. Tell them, “If I have only thirty dollars in my account and I try to charge thirty-five dollars on my debit card, I don’t want your system to let me.” Some banks can handle this request. (Schwab Checking can do this by turning off overdraft/margin protection, whereas Wells Fargo can’t because they are useless.)
Remember that getting a raise is not about you. It’s about you demonstrating your value to your employer. You can’t tell them you need more money because your expenses are higher. Nobody cares.
Three months before you ask for a raise, start tracking everything you do at work and the results you get.
At the same time, ask your boss if you can sit down and discuss ways you can excel at work. Make it clear you want to exceed expectations, and ask what that would entail. If you’re really clever, you can hint about discussing compensation in the future.
Two months before you ask for a raise, meet with your boss again and show him your tracking from the previous month. Ask what you could do better. You want to know if you’re on the right track with your work and, more important, the way you’re communicating it.
One month before the big event, mention to your boss that because you’ve been doing so well, you’d like to discuss compensation at a meeting the next month. Ask what you’ll need to bring to make it a fruitful discussion. Listen very carefully to what he says.
If you have free time at home (or don’t have a car), you can sign up to be a virtual assistant on sites like www.elance.com and www.odesk.com.
If you have expertise in something, reach out to companies who’d need someone like you. For example, when I was in high school, I e-mailed fifty websites from all different industries that looked interesting but had poor marketing and copywriting. I offered to help them rewrite their websites. About fifteen responded,
don’t flip out if you miss tracking a few dollars here or there—the minute your system becomes too oppressive for you to use is the minute you stop using it.
whenever I make money I didn’t expect, I use 50 percent of it for fun—usually buying something I’ve been eyeing for a long time. Always! This way, I keep motivating myself to pursue weird, offbeat ideas that may result in some kind of reward.
After buying a Mercedes, can you ever drive a Toyota Corolla again?
I decided everything I saved before the age of twenty-eight was available for me to fiddle with stocks; everything after twenty-eight was to be put in a blend of investment funds safe from my amateur investing styles.
I want to be clear about something: I plan to do less and less work as I go through my life.
Some people just seem to have a magical ability to manage money. They enrolled in their 401(k) years ago, they always know how much money they have, and they seem to relish tweaking their system to optimize it. Usually, these people are extremely annoying and unattractive.
You can become one of these people (only you’ll be very attractive and not at all annoying) if you follow my advice
Once it’s set up, this system is so hands-off that if you got eaten alive by a Komodo dragon, your money system would continue transferring money from account to account by default, a ghostlike reminder of your financial prescience. Haunting, but cool. If
I call it my “finance assembly line.” Before I even see a paycheck I automatically give the maximum amount to my company’s 401(k). The remainder of my pay is direct-deposited into a checking account. Then part of it is automatically transferred to a high-interest online savings account, and another part goes to my discount brokerage account. My rent is paid automatically on the 1st of every month and I pay my credit card bill online on the 15th. I never miss the money I invest because I never see it. In total I spend about thirty minutes a month on my finances.
To review these figure in its PDF format, please visit this webpage: www.iwillteachyoutoberich.com/kit
LINK YOUR ACCOUNTS First, you’ll need to log in to each account and link your accounts together so you can set up automatic transfers from one account to another. When you log in to any of your accounts, you’ll usually find an option called something like “Link Accounts,” “Transfer,” or “Set Up Payments.” These are all the links you need to make:
If you haven’t already done this, connect your paycheck to your 401(k), so it’s automatically funded each month. (I cover this on page 82.).
Connect your checking account to your savings account.
Connect your checking account to your investment account/Roth IRA. (Do this from your investment account.)
Connect your credit card to any bills you’ve been paying by using your checking account. (If you’ve actually been paying bills by writing checks with a pen, please understand that man has discovered fire and combustible engines and join our modern times.) For example, if you’ve been paying your cable bill by check each month, log in and switch it so that the bill is paid by your credit card instead.
Some bills can’t be paid using a credit card, like rent and loans. For these regular bills, link them to your checking account. (Do this by logging in to the company’s website, and initiating the transfer there.)
Set it up so that all your credit card accounts are paid from your checking account. (This is set up from your credit card’s “Transfer” or “Link Accounts” page.)
you can still automate payment using your checking account’s bill-pay feature, which is free with nearly every account. Example: If you pay rent by writing a check and sticking it in an envelope each month, log in to your checking account and set up automatic bill pay for your rent. Your bank will then write a check for you each month and mail it to your landlord. Just make sure you schedule it so that it has enough time to reach your landlord in the mail.
Being a personal productivity obsessive, I’m big on having goals and using checkpoints along the way to get there. I use Google Calendar to set twelve savings goals throughout the year, with an e-mail reminder for each one.
The easiest way to avoid this is to get all your bills on the same schedule. To accomplish this, gather all your bills together, call the companies, and ask them to switch your billing dates.
2nd of the month: Part of your paycheck is automatically sent to your 401(k). The remainder (your “take-home pay”) is direct-deposited into your checking account. Even though you’re paid on the 1st, the money may not show up in your account until the 2nd, so be sure to account for that.
5th of the month: Automatic transfer to your savings account. Log in to your savings account and set up an automatic transfer from your checking account to your savings account on the 5th of every month. Waiting until the 5th of the month gives you some leeway. If, for some reason, your paycheck doesn’t show up on the 1st of the month, you’ll have four days to correct things or cancel that month’s automatic transfer.
Don’t just set up the transfer. Remember to set the amount, too. Use the percentage of your monthly income that you established for savings in your Conscious Spending Plan (typically 5 to 10 percent).
5th of the month: Automatic transfer to your Roth IRA. To set this up, log in to your investment account and create an automatic transfer from your checking account to your investment account. Refer to your Conscious Spending Plan to calculate the amount of the transfer. It should be approximately 10 percent of your take-home pay, minus the amount you send to your 401(k).
7th of the month: Auto-pay for any monthly bills you have. Log in to any regular payments you have, like cable, utilities, car payments, or student loans, and set up automatic payments to occur on the 7th of each month. I prefer to pay my bills using my credit card, because I earn points, I get automatic consumer protection, and I can easily track my spending on online sites like www.mint.com, www.quicken.com, or www.wesabe.com. But if your merchant doesn’t accept credit cards, they should let you pay the bill directly from your checking account, so set up an automatic payment from there if needed.
7th of the month: Automatic transfer to pay off your credit card. Log in to your credit card account and instruct it to draw money from your checking account and pay the credit card bill on the 7th of every month—in full. (Because your bill arrived on the 1st of the month, you’ll never incur late fees using this system.)
By the way, while you’re logged in to your credit card account, also set up an e-mail notification (this is typically under “Notifications” or “Bills”) to send you a monthly link to your bill, so you can review it before the money is automatically transferred out of your checking account. This is helpful in case your bill unexpectedly exceeds the amount available in your checking account—that way you can adjust the amount you pay that month.
If you’re paid twice a month: I suggest replicating the above system on the 1st and the 15th—with half the money each time.
Every Sunday night, I open the folder and spend about five minutes comparing my receipts with what my credit card’s website says. I just do a “ctrl-f” for the amount (for example, $43.35) and confirm that it’s correct. If I wrote down $43.35 as the full amount, but instead saw that the restaurant had charged me $50, someone’s trying to make a quick buck off me. And in that case, you need to ask yourself one question: WWAID? (What would an Indian do?)
The most important thing is keeping your receipt folder on your desk. If you have to get up to get it—even a few steps away—that’s a huge barrier to getting this done consistently.
My friend Paul has a specific “networking budget” that he uses to travel to meet interesting people each year. If you invest in yourself, the potential return is limitless.
Now, back to the Conscious Spending Plan. Add a savings goal of three months of bare-bones income before you do any investing.
ACTION STEPS WEEK FIVE
1 List all your accounts in one place (one hour). As you start linking accounts to one another, you’ll need to log in to all of them. Make your life easier by getting all the login information in one place. You’ll be tweaking your accounts over the next few months, so save all the login information somewhere that you can access from home and work.
How rich you are depends on the amount you’re able to save and on your investment plan. But acknowledging this fact takes guts, because it means admitting that there’s no one else to blame if you’re not rich—no advisers, no complicated investment strategy, no “market conditions.”
As I’ve shown, the “experts” are often wrong and fail to beat the market, but even more irritatingly, they know how to cover their tracks so we don’t catch on to their failures.
Forty-seven of the fifty [advisory] firms continued to advise investors to buy or hold shares in the companies up to the date the companies filed for bankruptcy.
Vanguard’s S&P 500 index fund, for example, has an expense ratio of 0.18 percent.
Actually, I don’t hate saying that. I’ll say that to their faces again and again. Yeah, I’m a frail Indian man throwing verbal punches here on page 165 of a personal-finance book. This is how battles should be fought.
Your investment plan is more important than your actual investments.
In Chapter 6, I demonstrated that even professionals whose livelihoods depend on it can’t predict stock returns. And remember, these are highly trained analysts who can read stock prospectuses like I can read an Indian restaurant menu—flawlessly.
See, the only way you’d lose money on a government bond is if the government defaulted on its loans—and it doesn’t do that. If it runs low on money, it just prints more of it. Now that’s gangsta.
Although it may seem counterintuitive, your portfolio will actually have better overall performance if you add bonds to the mix. Because bonds will generally perform better when stocks fall, bonds lower your risk a lot while limiting your returns only a little.
“But Ramit,” you might say, “I’m young and I want to invest aggressively. I don’t need bonds.” I agree. Bonds aren’t really for young people in their twenties. If you’re in your twenties or early thirties, and you don’t necessarily need to reduce your risk, you can simply invest in all-stock funds and let time mitigate any risk.
And honestly, if you’re twenty-five and just starting out, your biggest danger isn’t having a portfolio that’s too risky. It’s being lazy and overwhelmed and not doing any investing at all. That’s why it’s important to understand the basics but not get too wrapped up in all the variables and choices.
=The major benefit to a lifecycle fund is that you set it and forget it. You just keep sending money and your fund will handle the allocation, trading, and maintenance, automatically diversifying for you. If you invest in a lifecycle fund, you could literally spend minutes per year on your investments. You may not agree with the exact allocation of the fund, but frankly it’s close enough. As you know, 85 percent correct is way better than nothing at all.
Stay away from “money market funds,” which is just another way of saying your money is sitting, uninvested, in cash. You want to get your money working for you.
When you send money to your Roth IRA account, it just sits there. You’ll need to invest the money to start making good returns. The easiest investment is a lifecycle fund. You can just buy it, set up automatic monthly contributions, and forget about it.
we’re going to use David Swensen’s recommendation as a model. Swensen is pretty much the Warren G of money management.
You cannot just pick random funds and expect to have a balanced asset allocation. I use the Instant X-Ray tool (www.morningstar.com/cover/tools.html), which lets me compare various funds’ asset allocations to see how well they cover domestic investments, foreign investments, bonds, and more. It’s a great tool to help drill into your asset allocation and make sure your funds are well diversified.
But if you have the cash, why would you invest at regular intervals instead of all at once? Imagine if you invest $10,000 tomorrow and the stock drops 20 percent. At $8,000, it will need to increase 25 percent (not 20 percent) to get back to $10,000. By investing over time, you hedge against any drops in the price—and if your fund does drop, you’ll pick up shares at a discount price. In other words, by investing over a regular period of time, you don’t try to time the market. Instead, you use time to your advantage.
In fact, I just made the largest investment of my life, moving $46,000 in my 401(k) from cash into a Fidelity index fund. Am I scared? You bet. $46,000 is a hell of a lot of money. But I’m taking my cues from Warren Buffett, the world’s richest man, who in 2004 gave this advice: “Be fearful when others are greedy and greedy when others are fearful.”
2 Research your investments (3 hours to 1 week). If you’ve decided on a lifecycle fund, research the funds from Vanguard, T. Rowe Price, and Schwab (see page 87 for contact info). This should take a few hours. If you’re constructing your own portfolio, it will take more time (and more money to meet the minimums of each fund). Use the Swensen model as a basic template and prioritize which funds you’ll buy today and which you’ll get later. Once you decide on an asset allocation, research funds using a fund screener like the one in your investing account, Morningstar X-Ray, or the great one on www.etrade.com.
Remember, if your goal is less than five years away, you should set up a savings goal in your savings account.
just as Roth IRAs are great retirement accounts, 529s—educational savings plans with significant tax advantages—are great for children’s education. If you’ve got kids (or know that one day you will) and some spare cash, pour it into a 529.
chances are good that after reading this book you know more than your parents do about managing money anyway.
GOD, IF I HEAR THIS ONE MORE TIME, I AM GOING TO JUMP UP AND BEAT SOMEONE WITH AN ONION. (That way it’s unclear why they’re crying.)
The specific tactics aren’t as important as your attitude going in. The key is to start by asking their advice. Yes, even if you don’t need it!
Negotiating is 90 percent about mind-set and 10 percent about tactics. Most people don’t believe they should negotiate. They’re afraid of being “rude” or of having the employer rescind their offer. That almost never happens, especially because the company may have already spent up to $5,000 recruiting you. If you negotiate, you explicitly communicate that you value yourself more highly than the average employee. Are you average? If not, why would you settle for an average salary?
NEGOTIATING TACTIC: Call over your toughest, most grizzled friend and have him grill you. Don’t laugh during the role play—treat it like it’s a real negotiation. Better yet, videotape it—you’ll be surprised how much you learn from this. If it sounds ridiculous, think about the benefits of not only the additional money, but the respect you’ll get from your boss for a polished, professional negotiation.
NEGOTIATING TACTIC: Your line here is “I understand you can’t offer me what I’m looking for right now. But let’s assume I do an excellent job over the next six months. Assuming my performance is just extraordinary, I’d like to talk about renegotiating then. I think that’s fair, right?” (Get him to agree.) “Great. Let’s put that in writing and we’ll be good to go.”
If you want to learn more about negotiation, I’ve put together a package of in-depth negotiation videos and tips. Check out www.iwillteachyoutoberich.com/negotiate-like-an-Indian
I have never seen as many people make bad purchasing decisions as when they’re in a car dealer’s office. If you’re not a hardball negotiator, take someone with you who is.
If possible, buy a car at the end of the year, when dealers are salivating to beat their quotas and are far more willing to negotiate. Their saliva is your salvation!