Stevan Popovic'

I Will Teach You To Be Rich – Ramit Sethi

April 29th, 2018

Summary – This is a simple and easy-to-read introduction to personal finance. It introduces you to some key concepts but is mostly a simplistic overview. It acts as a call to arms for young people to be more pro-active about their money management with the emphasis on a start young, learn fast and invest for the long-term philosophy. I would recommend for someone only if they had little to no existing knowledge of personal finance and investing.

Rating – 6/10

View on Amazon here: I Will Teach You To Be Rich: No guilt, no excuses – just a 6-week programme that works

You can view my other book notes, rating and recommendations on my books page.


Notes

There are four tenants of personal finance that will be addressed:

  1. Spending (or budgeting)
  2. Saving
  3. Banking
  4. Investing

People commonly come up with excuses as to why they haven’t got their finances in order. “There is too much information” or “they didn’t teach it in school” – the responsibility is on us to teach ourselves and act.

General principles

Ramit advocates a few simple principles:

  1. Get started. Be pro-action and actually try things out.
  2. Learn early. Make mistakes when your investments are small and learn from them.
  3. Spend on the things you actually value (and let go of the things you don’t. Don’t just follow the crowd).
  4. Invest for the long-term

Optimising Credit

It’s important to have a good credit rating. Why? Because later in life you’ll want to buy things with credit (e.g. car) and having a good credit rating will allow you to do this more cheaply. Saving 1% on a huge ticket item can be very meaningful.

How to get good credit?

  • Have at least two credit cards that you use
  • Pay them off regularly and on time

Sidenote – Should you pay off all credit as soon as possible? What about your student loan for example? Ramit advocates paying this off as quickly as possible1.

Banking

Choose a no-fee current account and a high-yield savings account. Know how to set up direct debits so you can pay off credit cards automatically at the end of each month.

Conscious spending

Being cheap and being frugal is not the same thing. Frugality means making a conscious decision to consider what you actually value and spend on that (not other things).

In general, you might want to spend in the following split:

  1. 50-60% fixed monthly spending.
  2. 10% savings.
  3. 10% long-term investing.
  4. 20%-30% guilt-free spending.

If you genuinely can’t set aside and income for long-term investing or saving then you should put 100% of your effort into getting a better job or negotiating a new salary.

Investing

It’s important to understand the key concept of compound interest. Quoting Albert Einstein: “compounding is mankind’s greatest invention as it allows for the reliable and systematic accumulation of wealth”. Compound interest can be thought of as interest on interest. Interest compounds when we calculate interest on the initial amount plus the interest from the previous year.

Consider an example where someone can invest in an investment portfolio that earns 5% interest year on year or a saving account that earns 3% interest year on year. At twenty-five, if you put £1,000 in the savings account and didn’t touch it until sixty-five, you’d have £3,000. But if you put the same amount, for the same period in the investment account, you’d have £7,000. So a difference of just 2% interest compounded is more than 100% in terms of final gains2.

This is why investing early and investing regularly is your friend.

Investments you might want to consider:

  • Pensions
    • Benefit from employer contributions.
    • Taken pre-tax so your yield is bigger.
    • Taken from salary before you even see it (psychological benefit, as you never had the money to ‘lose’).
  • Stocks & shares ISA
    • Also have tax benefits.
  • Passive Funds or Tracker funds – see next.

The myth of financial expertise

If you look at the performance of financial institutions and wealth managers, very rarely do they beat the average increase in the stock market over long periods of time. Therefore, why pay their high fees? Instead, you can invest in tracker funds or passive funds that take a large pool of stocks and try to match the market over time. They typically delivery decent returns with much smaller fees and require very little management form you.

Importantly, investing like this for the long term requires that you can stomach downturns. Eventually, there will be a crash or correction in the market and you need to keep investing through this.

Investment options:

  • Stocks
    • Can have great returns but any one stock can be risky.
  • Bonds
    • Lower risk, lower returns, less liquid.
  • Cash
    • Least risk.

Two important pillars to consider when choosing investments:

  1. Asset allocation – This means choosing assets to invest in across different levels of risk. For example, cryptocurrencies are very risky and bonds are less risky.
  2. Diversification – This means in individual categories, spreading risk across a few different options. For example, if you’re investing in stocks, it’s better to pick a few different companies, from different industries or different markets.

asset allocation pie chart

diversification pie chart

 

You can also choose between different types of funds:

  • Active managed funds
    • They take care of the investments for you.
    • They diversify for you.
    • Expensive fees.
    • Experts can often be wrong.
    • If you invest in multiple funds, they may invest in the same stock picks, which can mean you’re less diversified.
  • Passive funds/tracker funds
    • Low fees.
    • Convenient and easy for you.
    • Tax efficient.
    • Requires you to rebalance every so often if you find that over time one fund is performing well (and therefore becomes a higher % of your overall investing).
  • Lifestyle funds – A fund of funds which is automatically rebalanced based on your age.
    • Very convenient.
    • Maintains asset allocation over time automatically.
    • But is a one size fits all method and you may have specific preferences.

Alternate investment options (more active, require knowledge)

  • Property – Generally can involve large costs, so consider your asset allocation.
  • Art – Can be hard to pick winners.
  • Venture – Can be difficult to get access to deals.
  • Individual stocks – Again, can be hard to pick winners.

A rich life

Often times people are not good at planning forward for some of life’s big expenses. Some things you may want to consider:

  • Student debt – Debt can be large when you leave college. Consider carefully if you should pay it off straight away or if the debt is cheap enough to invest cash elsewhere.
  • Wedding – Weddings are always more expensive than people think. Save early and often.
  • Homeownership – People often feel strongly about owning their home. But depending where you live, and how much overall income you have, it may not be a wise investment when you consider the alternatives (e.g. rent home and invest elsewhere).

Annotations

  1. The discussion on paying debt early vs servicing debt is also discussed in finance literature at depth. Often the argument revolves around the ‘price of debt’. For example, in the UK, one might argue that student-loan is cheap debt and should, therefore, be paid back slowly. In theory, you could use the cash to invest in something else and get a greater return that more than compensates for the interest you are paying on the loan.
  2. Ramit’s method is to invest in tracker funds which is less active than Robert’s in Rich Dad, Poor Dad. But the principle is the same – to invest in assets that benefit from interest.