I Will Teach You to Be Rich

• Set up accounts at solid banks.
• Automate day-to-day money management (bills, savings, debt payoff, etc.).
• Learn a bit about investing.
• Let your money grow for thirty years.

“The single most important thing you can do to be rich is to start early.”

10 Rules for a Rich Life

1. Spend on the things you love and cut costs mercilessly on the things you don’t.
2. Focus on Big Wins, Like automating savings and investing, finding a job you love, and negotiating your salary.
3. Investing should be very boring—and very profitable—over the long term.
4. There’s a limit to how much you can cut, but no limit to how much you can earn.
5. Politely listen to unwanted advice. But stick to your plan.
6. Build a collection of “spending frameworks” to use when deciding on buying something
7. Beware of the endless search for “advanced” tips. Focus on improving step by step. Do the basics, consistently.
8. You’re in control. Nobody’s coming to rescue you.
9. Once money isn’t a primary constraint, you’ll have the freedom to design your own Rich Life, which will almost certainly be different from the average person’s. Embrace it. This is the fun part!
10. Live life outside the spreadsheet. Once you automate your money using the system in this book, you’ll see that the most important part of a Rich Life is outside the spreadsheet—it involves relationships, new experiences, and giving back.

Credit Cards

• If you pay your bill on time, they’re a free short-term loan.
• Can 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.
• Many offer rewards and points worth hundreds or even thousands of dollars.
• As long as you manage them well, they’re worth having.
• Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchases.

Two main components to your credit (also known as your credit history): your credit report and your credit score.

credit report

• Gives potential lenders basic information about you, your accounts, and your payment history.
• Tracks all credit-related activities (e.g., credit cards and loans), although recent activities are given higher weight.

credit score (often called your FICO score because it was created by the Fair Isaac Corporation

Single, easy-to-read number between 300 and 850 that represents your credit risk to lenders. It’s like an SAT score for the credit industry (higher is better). The lenders take this number and, with a few other pieces of information, such as your salary and age, decide if they’ll lend you money for credit like a credit card, mortgage, or car loan.

They’ll charge you more or less for the loan depending on your score, which signifies how risky you are.

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 annualcreditreport.com.

Lots of people use Credit Karma (creditkarma.com) to get a free credit score, but I prefer the official credit score from MyFico (myfico.com), which is more accurate even though it has a small fee.

If you have good credit, it makes you less risky to lenders, meaning they can offer you a better interest rate on loans.

Credit Score vs. Credit Report

What your credit score is based on:

What your credit report includes:

35% payment history (How reliable you are. Late payments hurt you.)

■  Basic identification information

30% amounts owed (How much you owe and how much credit you have available, aka your credit utilization rate)

■  A list of all your credit accounts 15% length of history (How long you’ve had credit)

■  Your credit history, or whom you’ve paid, how consistently, and any late payments

10% new credit

(Older accounts are better, because they show you’re reliable.)

■  Amount of loans

10% types of credit

(For example, credit cards, student loans. Varied is better.)

■  Credit inquiries, or who else has requested your credit info (other lenders)

Get your credit score at myfico.com for a small fee.

■  Get your free credit report once a year at annualcreditreport.com

How Credit Scores Affect What You Pay

Building Credit with Credit Cards

start with credit cards

fastest and most concrete way to optimize your credit.

Let’s say you buy this . . .

Paying minimum payments, it will take this long to pay it off . . .

You’ll pay this much in interest

$1,000 iPhone

9 years, 2 months

$732.76

$1,500 computer

13 years, 3 months

$1,432.19

$10,000 furniture

32 years, 2 months

$13,332.06

Try calculating how much your own purchases really cost at bankrate.com/brm/calc/minpayment.asp.

• Don’t accept credit card offers that come in the mail or from retail stores like Gap or Nordstrom.
• Squeeze every reward you can out of your credit cards.
• Pick a good one, then move on with your life.

Credit Card Rewards

First, decide what you want to get rewarded with—cash back or travel. I recommend cash back because it’s straightforward, there are excellent cash back cards.

Once you decide on the primary reward you want, use a site like bankrate.com to sort through your options.

Most of the best rewards cards have fees. Are they worth it? You should run the numbers to decide, which takes less than 5 minutes. Here’s a quick rule of thumb: If you spend thousands per month on your credit card, the rewards are usually worth it. But if you spend more modestly or you’re not sure whether you want to pay a fee, spend a few minutes doing a quick analysis by searching for “credit card rewards calculator.” Plug in your numbers and you’ll quickly see which rewards cards are worth it for you.

Don’t sign up for retail store credit cards.

high fees, near-extortionate interest rates, and terrible rewards?

Don’t go card crazy.

Two or three is a good rule of thumb

If you’re booking travel or eating out, use a travel card to maximize rewards. For everything else, use a cash back card.

The card I use for travel and eating out is the Chase Sapphire Reserve. For everything else, I use an Alliant cash back card. And for business, I use a Capital One cash back business card. For extra benefits, I have an Amex Platinum card.

1. Pay off your credit card regularly.

Try to get fees on your cards waived.

Negotiate a lower APR.

4. Keep your main cards for a long time, and keep them active—but also keep them simple

What to Do If You Miss a Payment

. I understand I was late, but I’d like to have it waived.

Credit card rep: Why?

You: It was a mistake. It won’t happen again, so I’d like to have the fee removed.

Get more credit. (Warning! Do this only if you have no debt.)

Use your credit card’s secret perks!

 Automatic warranty doubling

Car rental insurance

Trip-cancellation insurance:

 Concierge services:

Always Track Your Calls to Financial Companies

Think ahead before closing accounts. If you’re applying for a major loan—for a car, home, or education—don’t close any accounts within six months of filing the loan application.

to inspire you to take action on paying off your student debt, play with the financial calculators at bankrate.com. You’ll be able to see how paying different amounts changes the total amount you’ll owe.

Second, I want to encourage you to put at least $50 more each month toward any debt you have.

Figure out how much debt you have.

. Decide what to pay off first.

Prioritizing Your Debt

Snowball method: lowest balance first

Standard method: highest APR first

How it works

Pay the minimum on all cards, but pay more on the card with the lowest balance. Once you pay off the first card, repeat with the next-lowest balance.

Pay the minimum on all cards, but pay more on the card with the highest interest. Once you pay off the first card, repeat with the next-highest-APR card.

Why it works

This is all about psychology and small wins. Once you pay off the first card, you’re more motivated to pay off the next one.

Mathematically, you want to pay off the credit card that’s costing you the most first.

. Negotiate down the APR.

: Hi. I’m going to be paying off my credit card debt more aggressively beginning next week, and I’d like a lower APR.

Credit card rep: Uh, why?

You: I’ve decided to be more aggressive about paying off my debt, and that’s why I’d like a lower APR. Other cards are offering me rates at half of what you’re offering. Can you lower my rate by 50 percent, or only 40 percent?

Credit card rep: Hmm . . . After reviewing your account, I’m afraid we can’t offer you a lower APR. We can offer you a credit limit increase, however.

You: No, that won’t work for me. Like I mentioned, other credit cards are offering me zero percent introductory rates for twelve months, as well as APRs of half what you’re offering. I’ve been a customer for X years, and I’d prefer not to switch my balance over to a low-interest card. Can you match the other credit card rates, or can you go lower?

Credit card rep: I see . . . Hmm, let me pull something up here. Fortunately, the system is suddenly letting me offer you a reduced APR. That is effective immediately.

It doesn’t work every time, but when it does, you can save a significant amount of money with a five-minute conversation. Make the call, and if you’re successful, don’t forget to recalculate the figures in your debt spreadsheet.

Decide where the money to pay off your credit cards will come from.

Reducing spending and prioritizing debt. The most sustainable way to pay off credit card debt is also the least sexy. Unlike balance transfers or HELOC borrowing, it’s not very exciting to tell people you decided to spend less on other things so you could pay off your debt. But it works.

Pay special attention to these discussions:

■ “The Next $100” concept here.

■ Figuring out how much you can afford to put toward your debt using the Conscious Spending Plan.

■ The “Save $1,000 in 30 Days” Challenge.

■ Setting up automatic payments.

■ My bonus resources at iwillteachyoutoberich.com/bonus

paying off debt just takes a plan and the patience to execute it

magine the relief you’ll feel when you see your debt growing smaller and smaller with each passing month.

Being in debt means giving up choices, means staying at a job you hate because it pays good money, means not being able to build a decent savings account.

week ONE

1 Get your credit score and credit report (one hour).

t myfico.com. (As I mentioned, lots of people use Credit Karma to get a free credit score, but I prefer the official credit score from MyFico, which is more accurate even though it has a small fee.) In addition to your credit score, get your free credit report from annualcreditreport.com.

Set up your credit card (two hours). If you already have one, call and make sure it’s a no-fee card. If you want to get a new credit card, check out bankrate.com to find the best one for you.

Make sure you’re handling your credit cards effectively (three hours). Set up automatic payments so your credit card bill is paid off in full every month. (If you’re in debt, set up an automatic payment for the largest amount you can afford.) Get your fees waived. Apply for more credit, if you’re debt-free. Make sure you’re getting the most out of your cards.

If you have debt, start paying it off (one week to plan, then start paying more). Not tomorrow, not next week, today: Give yourself one week to figure out how much you owe, call the lender to negotiate down the APR or restructure your payments (in the case of student loans), and set up your automatic payment with more money than you’re paying now. Getting out of debt quickly will be the best financial decision you ever make.

get your bank accounts set up right.

picking the right ones, optimizing them, and making sure you’re not paying unnecessary fees

your bank’s fees can be more important than the interest rate it offers:

Don’t worry about micro-optimizing your bank account interest rates. Just pick great bank accounts and move on.

You might think I’d encourage you to have your checking account and savings account at the same place. Surprisingly, I recommend two different accounts at two separate banks. Here’s why: Having your money in two separate accounts—and banks—uses psychology to keep your savings growing.

If you don’t have the money available in your discretionary (checking) account because you’ve spent your “going out” money, you’ll know it. 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. Finally, in my experience, banks that try to offer checking and saving and investing tend to be mediocre at all of them.

not just about your immediate earnings—it’s about developing the right habits.

the perfect time to start: when the stakes are low. Build the right habits when the amounts are small—with the right accounts, with automatic saving and investing—so that when your income increases, your habits are rock-solid.

Most basic option (good for lazy people): A checking account and a savings account at any local bank. This is the bare minimum. Even if you already have these accounts, it’s worth talking to your bank to be sure you’re not paying fees.

Basic option + small optimization (recommended for most people): This option means opening accounts at two separate institutions: a no-fee checking account at your local bank and a high-yield online savings account.

Advanced setup + full optimization (perfect for people who read things like Lifehacker and The 4-Hour Workweek):

This setup consists of maintaining several checking accounts and savings accounts at different banks, usually to eke out the most interest and services that various banks have to offer. For example, I have an interest-bearing checking account at an online bank and a savings account at a different online bank.

My Accounts. All of my money goes through my interest-bearing Schwab online checking account. Deposits happen through direct deposit or by taking a photo of a check and depositing it through the Schwab app.

My System. My finances work on a monthly cycle, and my system automatically disburses money where it needs to go. I’ve set up accounts to draw from my checking account. For example, my Capital One 360 savings account automatically withdraws a certain amount every month from my checking account, as does my investment account (more about these in Chapter 3). For rewards, tracking, and consumer protection, I pay my bills using my credit card. The credit card is automatically paid in full every month by my online checking account. For cash expenses, I use the Schwab ATM card to withdraw money at any ATM nationwide. All ATM charges are automatically reimbursed at the end of the month. Generally, I use my Capital One 360 account as a receiver, not a sender: I rarely transfer money out of there unless I need to cover a temporary shortage in my checking account or want to spend savings money on something important, like a vacation . . 

I look for three things: trust, convenience, and features.

Trust.

don’t trust Big Banks anymore.

filthy double charges for using another bank’s ATM, then count on our inaction to make money off us.

ask friends if they have a bank they love.

browse the major bank websites. Within about five minutes, you should be able to tell which banks are trustworthy and which are not by seeing how straightforward they are with their accounts and fees.

our bank shouldn’t nickel-and-dime you through minimums and fees. It should have a website with clear descriptions of different services, an easy setup process, and 24/7 customer service available by phone. Another thing: Ask them if they send you promotional material every damn week. I don’t want more junk mail! I don’t need more cross-sells!

Convenience.

needs to be easy to put money in, get money out, and transfer money around. This means its website has to work, and you need to be able to get help when you need it—whether by email or by phone.

Features.

The bank’s interest rate should be competitive. Transferring money around should be easy and free, because you’ll be doing a lot of it, and you should have free bill paying. Their app or website should be something you enjoy using.

Schwab Bank Investor Checking with Schwab One Brokerage Account (schwab.com/banking): This is the checking account I use

no fees, no minimums, no-fee overdraft protection, free bill pay, free checks, an ATM card, automatic transfers, and—best of all—unlimited reimbursement of any ATM usage. That means you can withdraw from any ATM and you’ll pay no fees. When I saw this account, I wanted to marry it.

you need to open a Schwab brokerage (investment) account to get all fees waived, you don’t actually need to use the investment account. It can just sit there, empty, as you use the magnificent features in the checking account. You can deposit money by transfer, direct deposit, or mobile check deposit.

You cannot deposit physical cash through this account, so if depositing cash is important, you’ll need to pair this checking account with another checking account.

Your local bank checking account with no fees and no minimums.

Online savings accounts let you earn more interest with lower hassle. And because you’ll be primarily sending money there, not withdrawing it, what does it matter if it takes three days to get your money?

Capital One 360 Savings

This is the savings account I use. It lets you create virtual sub-savings accounts, in which you can specify savings goals like an emergency fund, wedding, or down payment for a house. You can also set up automatic transfers to other accounts (“Transfer $100 on the 1st of every month from my checking account to my savings account, and send $20 to my investment account on the 5th of every month”). There are no fees, no minimums, and no tricky up-sells or annoying promotions. It’s not always the highest interest rate, but it’s close. Capital One 360 Savings is just a simple savings account that works.

Ally Online Savings Account (ally.com/bank): Also recommended. This no-fee savings account also lets you create multiple savings accounts, which will help your automation system. It has solid interest rates and works great.

Other savings accounts to consider: Marcus by Goldman Sachs and American Express Personal Savings

Banks to consider

Banks to avoid

Ally Bank: ally.com

Bank of America

CapitalOne360: capitalone.com

Wells Fargo

Schwab: schwab.com

Marcus by Goldman Sachs: marcus.com

American Express Personal Savings: americanexpress.com/personalsavings/home

keep your old account open with a small amount of money in it in case you have any automatic transfers that are still trying to draw from your old account. Set a 60-day calendar reminder to close the old account. And we’re off to our next step!

you need to optimize your checking and savings accounts. This means you shouldn’t be paying fees or minimums. The key to optimizing an account is talking to an actual customer service rep, either in person or on the phone.

Almost All Bank Fees Are Negotiable

Open a checking account or assess the one you already have (one hour).

Open an online high-interest savings account (three hours).

Optional: Open an online checking account (two hours).

Fund your online savings account (one hour). Leave one and a half months of living expenses in your checking account, or as close to it as you can manage. (The little extra prevents overdrafts as you’re getting used to transferring money between accounts. Remember, most transfers take a day or two.) Transfer the rest to your savings account—even if it’s only $30.

ix systematic steps you should take to invest.

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. A “401(k) match” means that for every dollar you contribute to your 401(k), your company will “match” your contribution up to a certain amoun

Rung 2: Pay off your credit card and any other debt.

Rung 3: Open up a Roth IRA (see The Beauty of Roth IRAs) and contribute as much money as possible to it. (As long as your income is $120,000 or less, you’re allowed to contribute up to $5,500 in 2018. For current contribution limits, search for “Roth IRA contribution limits.”

Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it

Rung 5: HSA: If you have access to a Health Savings Account (HSA), it can also double as an investment account with incredible tax features that few people know about

Rung 6: If you still have money left to invest, open a regular non-retirement (“taxable”) investment account and put as much as possible there. For more about this, see Chapter 7. Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it’s starting a company or getting an additional degree, there’s often no better investment than your own career.

401(k)

It’s a “retirement” account because it gives you large tax advantages if you agree not to withdraw your money from the account until you reach the retirement age of 59½.

401(k) Benefit #1: Using Pretax Money Means an Instant 25 Percent Accelerator

isn’t taxed until you withdraw it many years later

a regular investment account

you don’t get many tax advantages

that extra 25 percent turns out to make a huge difference as it gets compounded more and more.

401(k) Benefit #2: Your Employer Match Means Free Money

say your company offers a 1:1 (“one-to-one”) match up to 5 percent. This means your company will match every dollar you invest up to 5 percent of your salary

401(k) Benefit #3: Automatic Investing.

What if I switch jobs?

1. Move it to an IRA.

This option is preferred. It lets you “roll over” your 401(k) money into an IRA, which is great, because an IRA gives you more control over where you invest your money, including lifecycle funds and index funds, which we’ll cover in Chapter 7. Call your discount brokerage, such as Vanguard, Fidelity, or Schwab (you’ll be signed up with one of these by the end of the chapter), and ask for their help with a 401(k) rollover, including converting to a Roth IRA.

2. Roll your money from the old company’s 401(k) to the new company’s 401(k).

investing choices are limited. Plus, the main reason to contribute to a 401(k) is to take advantage of your employer’s match, which won’t apply to funds you roll into the new account.

3. Leave it at your current company. This is almost always a bad move, because you’ll forget about it and certainly won’t stay up to date on the investment options and changes offered through the plan.

4. Cash out the money and pay taxes and a 10 percent early-withdrawal penalty.

worst thing you could possibly do

What about a Roth 401(k)?

allows you to contribute after-tax money to a 401(k) instead of pre-tax money like a traditional 401(k).

If you expect your tax rates to be higher later in life, a Roth 401(k) is a great option for you. T

no income restrictions

you can take any Roth 401(k) money and roll it over to a Roth IRA, tax-free, which will give you even more investment options.

calculate how much you need to contribute to your 401(k) to get the full match,

and then have it automatically deducted from your paycheck.

Crush Your Debt

The second step on the Ladder

The Beauty of Roth IRAs

Every person in their twenties should have a Roth IRA

lets you invest in whatever you want.

index funds, individual stocks, anything

you invest already-taxed income and you don’t pay any tax when you withdraw it.

with a 401(k), you’re expected to treat a Roth IRA as a long-term investment vehicle, and you’re penalized if you withdraw your earnings before you’re 591/2 years old.

you can withdraw your principal

the amount you actually invested from your pocket) penalty-free

You qualify for these exceptions only if your Roth IRA has been open for five years or more.

At present, the maximum you’re allowed to invest in your Roth IRA is $5,500 a year, but you can find the most current amount by searching “Roth IRA contribution limits.”

if you make more than $135,000 per year, there are restrictions on how much you can contribute to a Roth IRA

To start a Roth IRA

first going to open an investment brokerage account with a trusted investment company

Think of the “investment brokerage account” as your house and the Roth IRA as one of the rooms

We’ll focus on discount brokerages like Vanguard because they charge dramatically smaller fees than full-service brokerages like Morgan Stanley. 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 salespeople. Discount brokerages, on the other hand, let you make the choices, charge only small fees, and offer online access.

Recommended Discount Brokerages

Brokerage name

Minimum to open a Roth IRA

Things to know

Vanguard

vanguard.com

$1,000

My personal recommendation is Vanguard. They’re great because of their relentless focus on low-cost funds. They don’t waive their minimums, even with automatic investing, but the savings are well worth it. If you want a Vanguard account but don’t have $1,000 to start, set it as a savings goal.

Schwab

schwab.com

$1,000

Minimum is waived with $100 automatic monthly contribution. If you set up a high-interest Schwab checking account, Schwab will automatically link a brokerage account to it. Handy for automatic investing.

Fidelity

fidelity.com

$0

Fidelity launched a price war with a no-minimum account and $0 fee for certain mutual funds. This is great for consumers and a promising sign for where Fidelity is heading. However, their target date funds still have higher expenses than Vanguard.

Factors to Consider When Choosing Your Investment Brokerage

Minimums

compare minimum required investments.

use a discount brokerage. Most do require a minimum contribution of $1,000–$3,000 to open a Roth IRA, but they’ll often waive it if you set up an automatic transfer.

Even if it doesn’t waive any minimums, I recommend setting up a monthly automatic transfer so your money will grow without you having to think about it.

Features.

What About Robo-Advisors?

their fees don’t justify what they offer.

Pick one and move on.

ascend to Rung 4 and look again at your 401(k).

employer match isn’t counted toward your contribution limit

HSA can be an incredibly powerful investment account because you can contribute tax-free money, take a tax deduction, and then grow it tax-free

Does Investing in an HSA Make Sense for Me?

Have you already completed at least the first three rungs of the Ladder of Personal Finance: investing in a 401(k) match, paying off any credit card debt, and maxing out your Roth IRA? If so, read on. If not, skip this section—you’re not ready to invest in an HSA yet.

Do you have a high-deductible health plan?

I use an account called Navia Benefits, but you can search around and compare options.

Do they have good funds with low fees?

you can invest it. You’re taking tax-free money and investing it, and it grows. Tax-free.

You don’t pay taxes on the money when you earn it—and you don’t pay taxes on the investment earnings! After twenty years, you’ll have $137,286. Incredible!

By the way, you can use the money for any qualified medical expense anytime, tax-free. And after the age of 65, you can spend that money on anything

If you withdraw funds for non-qualified medical expenses before you’re 65, you’ll be charged a penalty. If you use your HSA funds for non-qualified medical expenses after age 65, it’s taxable.

Just be sure the HSA you open offers solid funds. A good rule of thumb is they should offer low-cost funds, ideally a target date fund or a “total stock market” fund

Open your 401(k) (three hours)

Come up with a plan to pay off your debt (three hours).

Open a Roth IRA and set up automatic payments (one hour).

Find out if you’re eligible for an HSA and, if you are, open your account (three hours).

conscious spending is not about simply cutting your spending on various things. It’s about making your own decisions about what’s important enough to spend a lot on and what’s not, rather than blindly spending on everything.

A Conscious Spending Plan involves four major buckets where your money will go: fixed costs, investments, savings, and guilt-free spending money.

Categories of Spending

Fixed costs

Rent, utilities, debt, etc.

50–60% of take-home pay

Investments

401(k), Roth IRA, etc.

10%

Savings goals

Vacations, gifts, house down payment, emergency fund, etc.

5–10%

Guilt-free spending money

Dining out, drinking, movies, clothes, shoes, etc.

20–35%

You’ve heard me talk about the 85 Percent Solution, which focuses on getting most of the way there—until it’s “good enough”—rather than obsessing about achieving 100 percent, getting overwhelmed, and ending up doing nothing at all. Well, Richard Jenkins, the former editor-in-chief of MSN Money, wrote an article called “The 60 Percent Solution,” which suggested that you split your money into simple buckets, with the largest, basic expenses (food, bills, taxes), making up 60 percent of your gross income. The remaining 40 percent would be split four ways:

1. Retirement savings (10 percent)

2. Long-term savings (10 percent)

3. Short-term savings for irregular expenses (10 percent)

4. Fun money (10 percent)

The article has been widely distributed, although curiously, none of my friends had heard of it. My Conscious Spending Plan relates to Jenkins’s 60 Percent Solution, but it’s more focused toward young people. We spend a huge amount on eating out and going out, whereas our housing costs are lower because we can share apartments and rent more comfortably than older people with families.

20 percent to 35 percent of your take-home income for guilt-free spending money.

focus on one or two

big problem areas and solve those instead of trying to cut 5 percent out of a bunch of smaller areas.

To get more prescriptive about your spending, I recommend using a piece of software called You Need a Budget (youneedabudget.com) or YNAB (I know, the name is ironic in this chapter where I talk about how I hate budgets). YNAB lets you assign every dollar a “job,” like “cell phone bill” or “guilt-free spending.” Use it for two weeks—just two—and you’ll get incredible insight into your spending.

do less but make it sustainable.

envelope system, in which you allocate money for certain categories like eating out, shopping, rent, and so on. Once you spend the money for that month, that’s it: You can’t spend more. If it’s really an emergency, you can dip into other envelopes—like your “eating out” envelope—but you’ll have to cut back until you replenish that envelope. These “envelopes” can be figurative (like in YNAB or even Excel) or literally envelopes that you put cash in. This is the best system I’ve found for keeping spending simple and sustainable.

Negotiate a Raise

Asking for a raise takes careful planning.

Three to six months before your review: Become a top performer by collaboratively setting expectations with your boss, then exceeding those expectations in every way possible.

One to two months before your review: Prepare a “briefcase” of evidence to support the exact reasons why you should be given a raise.

One to two weeks before your review: Extensively practice the conversation you’ll have with your boss, experimenting with the right tactics and scripts.

Three to six months before you ask for a raise, sit down with your boss and ask what it would take to be a top performer at your company. Get crystal clear about what you’d need to deliver. And ask how being a top performer would affect your compensation.

my role in the position can be broken down into three main areas: A, B, and C.

In your eyes, what would be the most meaningful things I can do in these three areas to really be considered a top performer?

I’d like to achieve goals A, B, and C, and I’d like to do all this in six months. That’s pretty aggressive, but I think it’s doable. Would you agree that’s something that you’d like to see from me, and that it would also help peg me as a top performer?

If I do an extraordinary job, then at the end of the six months all I ask is that we sit down to discuss a possible compensation adjustment. But let’s cross that bridge when we get to it, OK?

they love brief status updates roughly every week or two.

two months before you ask for a raise, meet with your boss again and demonstrate 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 it’s important that you regularly communicate your progress.

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.

it wouldn’t hurt to ask your fellow coworkers to put in a good word with the boss.

Two weeks before you ask for a raise, ask a couple of friends to role-play your job negotiation

we both agreed that if I hit these goals, I’d be considered a top performer—and that we’d discuss a compensation adjustment in the future.

I’d like to get clear that I’m on track for a raise on our next cycle—in writing.”

On the day you negotiate, come in with your salary, a couple of competitive salaries from salary.com and payscale.com, and your list of accomplishments, and be ready to discuss fair compensation.

Get a Higher-Paying Job

Do Freelance Work

How to Handle Unexpected and Irregular Expenses

Known irregular events

, allocate money toward goals where you have a general idea of how much it will cost

Unknown irregular events

add about 15 percent to your estimate of your fixed costs to accommodate these surprises

surprise income. It’s tempting to take a windfall and blow it all on something fun, but I urge you not to follow that instinct. Instead, work within your Conscious Spending Plan.

Unexpected one-time income.

use 50 percent of it for fun—usually buying something I’ve been eyeing for a long time. Always!

other half goes to my investing account.

Raises

It’s okay to increase your standard of living a little—but bank the rest.

once you start getting accustomed to a certain lifestyle, you can never go back

Get your paycheck, determine what you’ve been spending, and figure out what your Conscious Spending Plan should look like (thirty minutes).

Optimize your spending (two hours).

Pick your Big Wins (five hours)

Open an account at You Need a Budget or Personal Capital. Assuming you want to cut your spending by $200/month, what one or two Big Wins will you target? Start using the envelope system.

Maintain your Conscious Spending Plan (one hour per week)

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:

Connect your checking account to your savings account.

checking account to your investment account/Roth IRA.

(Do this from your investment account, rather than from your bank account.)

credit card to any bills you’ve been paying via your checking account.

Some bills, like rent and loans, can’t be paid using a credit card. Link these regular bills to your checking account.

(Do this by logging in to the company’s website and initiating the transfer from your checking account to the company.)

Set it up so that all your credit card accounts are paid from your checking account

Mildred.

Anyway, you can still automate payment using your checking account’s bill-pay feature, which is free with nearly every account.

How to connect your accounts

This account . . .

. . . should fund this account

Paycheck

■ 401(k)

■ Checking account (direct deposit)

Checking account

■ Roth IRA

■ Savings account (which is subdivided into savings goals)

■ Credit card

■ Fixed costs that don’t allow credit card payment (like rent)

■ Occasional-spending cash

Credit card

■ Fixed costs

■ Guilt-free spending

Set Up Your Automatic Transfers

get all your bills on the same schedule.

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).

5th of the month: Automatic transfer to your savings account.

5th of the month: Automatic transfer to your Roth IRA

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 seventh 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 using tools like You Need a Budget. 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 need be.

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 seventh of every month—in full. (Because your bill arrived on the first of the month, you’ll never incur late fees using this system.) If you have credit card debt and you can’t pay the bill in full, don’t worry. You can still set up an automatic payment; just make it for the monthly minimum or any other amount of your choice.

while you’re logged in to your credit card account, also set up an email 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.

you’ll pay your bills with your first paycheck of the month, and you’ll fund your savings and investing accounts with your second paycheck of the month.

two other options

do half the payments with one paycheck (retirement, fixed costs) and half the payments with the second paycheck (savings, guilt-free spending), but that can get clunky.

Save a “buffer” of money

great way to simplify your system and simulate getting paid once a month

If you have irregular income:

In months where you make a lot, you’re going to save and build a buffer for the slow months

First

you’ll have to figure out how much you need to survive on each month. This is the bare minimum: rent, utilities, food, loan payments—just the basics

Now, back to the Conscious Spending Plan. Add a savings goal of three months of bare-bones income before you do any investing.

buffer should exist as a sub-account in your savings account.

Because you’re self-employed, you probably don’t have access to a traditional 401(k), but you should look into a Solo 401(k) and SEP-IRA, which are great alternatives.

1 List all your accounts in one place (one hour).

2 Link your accounts together (three to five days).

3 Set up your Automatic Money Flow (five hours).

When you’re evaluating a fund, the only way to really gauge it is by looking at its track record for the last ten years or more.

If you’re currently working with a financial adviser, I encourage you to ask them if they are a fiduciary (i.e., if they’re required to put your financial interests first). Joe’s adviser was not a fiduciary; he was a salesman. That was instantly obvious by his recommendation that Joe (a single man in his twenties) “invest” in life insurance. The only reason for someone like Joe to have life insurance is if he has a dependent—not to fatten his adviser’s wallet.

If you’re determined to get professional help, begin your search at the National Association of Personal Financial Advisors (napfa.org). These advisers are fee-based (they usually have an hourly rate), not commission-based, which means that they want to help you, not profit off their recommendations.

DID YOU KNOW THAT OVER TIME A 1 PERCENT FEE CAN REDUCE YOUR RETURNS BY AROUND 30 PERCENT?

Morgan Housel writes one of the most interesting blogs on psychology and money out there. Read his posts to understand why you do what you do (and why the herd does what it does). collaborativefund.com/blog

Dan Solin, author of a number of great investing books, writes a terrific newsletter where he names names and calls out the BS of the investing industry. Here are a few topics he’s tackled: “Cracks in the Robo-Advisor Facade,” “Active Fund Managers Are Losers,” and “Find the Courage to Be ‘Different.’ ” danielsolin.com

Ron Lieber writes the Your Money column for the New York Times. I love the variety of topics he tackles, and he’s always pro-consumer. ronlieber.com

Finally, I love the Bogleheads forum, where you can find good investing advice. They’ll steer you clear of scams and fads and refocus you on low-cost, long-term investing. bogleheads.org/forum

“passive management.” This is how index funds (a cousin of mutual funds) are run. These funds work by replacing portfolio managers with computers. The computers don’t attempt to find the hottest stock. They simply and methodically pick the same stocks that an index holds—for example, the five hundred stocks in the S&P 500—in an attempt to match the market. (An index is a way to measure part of the stock market. For example, the NASDAQ index represents certain technology stocks, while the S&P 500 represents five hundred large US stocks.

Index funds have lower fees than mutual funds

Automatic investing works for two reasons:

Lower expenses.

With automatic investing, you invest in low-cost funds

It’s automatic

frees you from having to pay attention to the latest “hot stock” or micro-change in the market

That’s the Crossover Point, first described by Vicki Robin and Joe Dominguez in their book, Your Money or Your Life.

Option 1:

cut your monthly expenses down to $3,000.

Option 2:

raise your income

Option 3:

do a combination of both

Earn more. Spend less.

Investing Is Not About Picking Stocks

more than 90 percent of your portfolio’s volatility is a result of your asset allocation.

Asset allocation is your plan for

investing, the way you distribute the investments in your portfolio between stocks, bonds, and cash. In other words, by diversifying your investments across different asset classes (like stocks and bonds or, better yet, stock funds and bond funds), you can control the risk in your portfolio—and therefore control how much money, on average, you’ll lose due to volatility. It turns out that the way you allocate your portfolio—whether it’s 100 percent stocks or 90 percent stocks and 10 percent bonds—makes a profound difference on your returns.

Your investment plan is more important than your actual investments.

The Building Blocks of Investing

each category of investment (also known as “asset classes”) to see what lies beneath.

Stocks

buy shares of a company

stocks as a whole provide generally excellent returns over time, individual stocks are less clear

individual investors like you and me should not invest in individual stocks. Instead, we’ll choose funds, which are collections of stocks (and sometimes, for diversification, bonds)

Bonds

longer-term investments of ten-plus years

Also, bonds, especially government bonds, are generally stable and let you decrease the risk in your portfolio.

renders your money illiquid, meaning it’s locked away and inaccessible for a set period of time.

Cash

third part of a portfolio, alongside stocks and bonds. You want to have totally liquid cash on hand for emergencies, and as a hedge if the market tanks

you actually lose money by holding cash once you factor inflation in.

As long as you’re contributing toward your savings goals as I described in Chapter 5 and have enough to cover emergencies and ideally more, you’re fine. Don’t worry about having cash in your investment account.

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).

If you’re twenty-five years old and have dozens of years to grow your money, a portfolio made up of mostly stock-based funds probably makes sense. But if you’re older, retirement is coming up within a few decades and you’ll want to tamp down your risk. Even if the market tanks, you have control over your asset allocation. If you’re older—especially if you’re in your sixties or older, for god’s sake—a sizable portion of your portfolio should be in stable bonds.

Bonds act as a counterweight to stocks, generally rising when stocks fall and reducing the overall risk of your portfolio. By investing part of your money in bonds, you reduce some of your overall risk.

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.

Stocks and Bonds Have Many Flavors

Stocks

Bonds

Large-Cap

Big companies with a market capitalization (“market cap,” which is defined as outstanding shares times the stock price) over $10 billion

Government

An ultra-safe investment that’s backed by the government. In exchange for their low risk, government bonds tend to return less than stocks.

Mid-Cap

Midsized companies with a market cap between $1 billion and $5 billion

Corporate

A bond issued by a corporation. These tend to be riskier than government bonds but safer than stocks.

Small-Cap

Smaller companies with a market cap less than $1 billion

Short-Term

Bonds with terms of usually less than three years

International investments

Stocks from companies in other countries, including emerging markets (like China and India) and developed markets (like the United Kingdom and Germany). Americans may sometimes buy these directly, but may have to buy them through funds.

Long-Term

These bonds tend to mature in ten or more years and, accordingly, offer higher yields than shorter-term bonds.

Growth

Stocks whose value may grow higher than other stocks, or even the market as a whole

Municipal

Also known as “munis,” these are bonds issued by local governments

Value

Stocks that seem bargain priced (i.e., cheaper than they should be)

Inflation-Protected

Treasury inflation-protected securities, or TIPS, are ultra-safe investments that protect against inflation.

Note that because of their complicated structure, REITs, “real estate investment trusts”—which are types of investments that let you invest in real estate through a single ticker symbol, just like a stock—don’t neatly fall into any of these categories.

Basically, there are many types of stocks, and we need to own a little of all of them. Same with bonds. This is called “diversifying,” and it essentially means digging in to each asset class—stocks and bonds—and investing in all their subcategories.

book Skating Where the Puck Was, William Bernstein

Here’s what typical investors’ asset allocations—remember, that’s the mix of different investments—might look like as they get older

Index Funds:

No experts. No attempts to beat the market.

low cost and tax efficient

Advantages: Extremely low cost, easy to maintain, and tax efficient.

Disadvantages:

typically have to invest in multiple funds to create a comprehensive asset allocation (although owning just one is better than doing nothing). If you do purchase multiple index funds, you’ll have to rebalance (or adjust your investments to maintain your target asset allocation) regularly, usually every twelve to eighteen months. Each fund typically requires a minimum investment, although this is often waived with automatic monthly investments.

Target Date Funds

Target date funds are simple funds that automatically diversify your investments for you based on when you plan to retire.

automatically changed to a more conservative asset allocation as they approached their golden years.

automatically pick a blend of investments for you based on your approximate age.

start you off with aggressive investments in your twenties and then shift investments to become more conservative as you get older.

you’ll need between $100 and $1,000 as a minimum to buy into a fund.

usually the options are called something like aggressive investments (which will be a fund of mostly stocks), balanced investments (this fund will contain stocks and bonds), and conservative investments (a more conservative mix of mostly bonds).

Stay away from “money market funds,” which is just another way of saying your money is sitting, uninvested, in cash.

As a young person, I encourage you to pick the most aggressive fund they offer that you’re comfortable with.

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 target date fund. You can just buy it, set up automatic monthly contributions, and forget about it.

Choosing a Target Date Fund for Your Roth Ira

Some companies call them “target date” funds, while others call them “target retirement” or “lifecycle” funds.

Some companies require you to invest a minimum amount—usually $1,000 to $3,000—but that fee can often be waived if you agree to automatic investing,

you can choose any target date fund, depending on your age and risk tolerance. So if you’re twenty-five and pretty risk averse, you can pick a fund designed for someone older, which will give you a more conservative asset allocation.

he Rule of 72

The Rule of 72 is a fast trick you can do to figure out how long it will take to double your money. Here’s how it works: Divide the number 72 by the return rate you’re getting, and you’ll have the number of years you must invest in order to double your money. (For the math geeks among us, here’s the equation: 72 ÷ return rate = number of years.) For example, if you’re getting a 10 percent return rate from an index fund, it would take you a little more than seven years (72 divided by 10) to double your money. In other words, if you invested $5,000 today, let it sit there, and earned a 10 percent return, you’d have $10,000 in about seven years. And it doubles from there, too. Of course, you could accumulate even more using the power of compounding by adding more every month.

So You Want to Do It on Your Own

if you want more control over your investments and you just know you’re disciplined enough to withstand market dips and to take the time to rebalance your asset allocation at least once a year, then choosing your own portfolio of index funds is the right choice for you.

David Swensen’s recommendation as a model

Swensen suggests allocating your money in the following way:

30 percent—Domestic equities: US stock funds, including small-, mid-, and large-cap stocks

15 percent—Developed-world international equities: funds from developed foreign countries, including the United Kingdom, Germany, and France

5 percent—Emerging-market equities: funds from developing foreign countries, such as China, India, and Brazil. These are riskier than developed-world equities, so don’t go off buying these to fill 95 percent of your portfolio.

20 percent—Real estate investment trusts: also known as REITs. REITs invest in mortgages and residential and commercial real estate, both domestically and internationally.

15 percent—Government bonds: fixed-interest US securities, which provide predictable income and balance risk in your portfolio. As an asset class, bonds generally return less than stocks.

15 percent—Treasury inflation-protected securities: also known as TIPS, these treasury notes protect against inflation. Eventually you’ll want to own these, but they’d be the last ones I’d get after investing in all the better-returning options first.

no single choice represents an overwhelming part of the portfolio.

you can actually reduce your risk while maintaining an equivalent return

how do we make them real and pick funds that match his suggestions? By picking a portfolio of low-cost funds, that’s how.

I always start researching at the most popular companies: Vanguard, Schwab, and T. Rowe Price; check out their websites.

Keep It Manageable

Q: How many funds should I invest in?

A: If you’re wondering how many funds you should own, I’d encourage you to keep it simple. Ideally you should have just one (a target date fund). But if you’re picking your own index funds, as a general guideline, you can create a great asset allocation using anywhere from three to seven funds. That would cover domestic equities, international equities, real estate investment trusts, and perhaps a small allocation to treasury bonds. Remember, the goal isn’t to be exhaustive and to own every single aspect of the market. It’s to create an effective asset allocation and move on with your life.

When you visit these websites, you’ll be able to research funds (you may have to click “Products and Services” on many of the sites) to make sure they’re low-cost and meet your asset allocation goals.

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. Most of the index funds at Vanguard, T. Rowe Price, and Fidelity offer excellent value.

Second, you want to make sure the fund fits into your asset allocation.

Third, note that you should absolutely look at how well the fund has returned over the last ten or fifteen years, but remember that, as they say, past performance is no guarantee of future results.

when you click “Products and Services” on most sites, you’ll be able to find a fund screener that will let you add search filters like “international index funds with an expense ratio of less than 0.75%” to find funds that fit your criteria.

Stocks (“Equities”)

30 percent—Total Market Index/equities (VTSMX)

20 percent—Total International Stock Index/equities (VGTSX)

20 percent—REIT index/equities (VGSIX)

Bonds

5 percent—Short-Term Treasury Index Fund (VSBSX)

5 percent—Intermediate-Term Treasury Index Fund (VSIGX)

5 percent—Vanguard Short-Term Treasury Index Fund (VSBSX)

15 percent— Short-Term Inflation-Protected Securities Index Fund (VTAPX)

You don’t need to get all seven funds I just listed—even one is better than nothing. But you should have a list of funds that you’ll eventually buy to round out your allocation.

Dollar-Cost Averaging: Investing Slowly Over Time

dollar-cost averaging” is a phrase that refers to investing regular amounts over time, rather than investing all your money in a fund at once.

By investing at regular intervals 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

But if you have a lump sum of money, most of the time you’ll get better returns by investing it all at once.

Once you’ve got a list of index funds

usually three to seven funds—start buying them one by one.

If you can afford to buy into all of the funds at once, go for it—but most people can’t do this, since the minimum for each fund is between $1,000 and $3,000.

set a savings goal to accumulate enough to pay for the minimum of the first fund.

Then you’ll buy that fund, continue investing a small amount in it, and set a new savings goal to get the next fund.

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

Depending on your asset allocation, you’ll send more or less money to various funds, using this calculation: (Your monthly total amount of investing money) (Percentage of asset allocation for a particular investment) = Amount you’ll invest there.

A fifteen-year-old is too young to open a Roth IRA, so my dad and I opened a “custodial” account together at E-Trade

1 Figure out your investing style (thirty minutes)

2 Research your investments (three hours to one week).

3 Buy your fund(s) (one hour to one week).

How Rich Will I Be In . . .

If You Invest . . .

$100/month

$500/month

$1,000/month

After 5 years . . .

$7,347

$36,738

$73,476

After 10 years . . .

$18,294

$91,473

$182,946

After 25 years . . .

$95,102

$475,513

$951,026

Or you might need to cut your expenses as ruthlessly as possible, which I cover on my website (search for “ramit savings”).

Rebalancing Your Investments

If you’ve chosen to manage your own asset allocation, you’re going to have to rebalance from time to time

best way to rebalance is to plow more money into the other areas until your asset allocation is back on track.

stop sending money there temporarily and redistribute that 30 percent of your investment contribution evenly over the rest of your investment categories.

can do this by “pausing” your automatic investment to particular funds from within your investment account.

stop investing in the outperforming area and grow the other areas of your portfolio until your allocation is back in line with your goals.

Don’t forget to set a calendar reminder to resume your automatic payments for the asset class you paused once your portfolio is rebalanced.

If, on the other hand, one of your funds has lost money, that will also knock your asset allocation out of whack. In this case, you can pause the other funds and add money to the loser until it returns to where it should be in your portfolio.

To keep the math simple, I recommend the free financial dashboard at personalcapital.com to help guide your rebalancing.

if you’ve invested in a target date fund, this will be automatically taken care of for you

Stop Worrying About Taxes

Tax Truth #1: People think getting a tax refund is bad. In reality, it’s great.

You would have spent that money.

“marginal tax brackets.” If you start earning more and move up tax brackets, the “marginal” amount—or the money in the higher tax bracket—is taxed at a higher rate, not the entire amount you earn.

The One Thing You Need to Know About Taxes and Investments

By moving toward investing in tax-advantaged retirement accounts, you’ll sidestep the vast majority of tax concerns.

Investing in tax-advantaged retirement accounts is the 85 Percent Solution for taxes. Set it up, then move on.

The Annual Financial Checklist

It’s important to maintain your automated financial system. Every year, I spend a few hours re-reviewing my system and making any changes necessary. For example, have I added subscriptions that I don’t need anymore? Should I adjust my Conscious Spending Plan to account for new short-term goals? Set aside some time every year—I recommend December so you can start the next year off right—to go through each of the steps below.

Evaluate your conscious spending plan (three hours) Use these as general guidelines, but take them seriously: If your money is following these suggested percentages, that’s a Big Win toward a Rich Life.

☐  Fixed costs (50–60%)

☐  Investments (10%)

☐  Savings (5–10%)

☐  Guilt-Free Spending (20–35%)

☐  Reassess current subscriptions (cut if necessary).

☐  Renegotiate cable and internet bills.

☐  Revisit spending goals: Are they accurate? Are you actively saving for them?

☐  If your fixed costs are too high, it may be time to look at a cheaper rent (or AirBnB’ing a room out, or earning more).

☐  If you aren’t investing at least 10 percent, it’s worth finding the money from somewhere else—usually guilt-free spending—and reallocating it to investments.

Negotiate any fees (two hours)

Many companies will offer you introductory rates or lower your monthly fees if you ask. Use my word-for-word scripts at iwillteachyoutoberich.com/negotiate.

☐  Cell phone bill

☐  Car insurance

☐  Cable and internet

☐  Bank fees

Investments (two hours)

☐  Confirm you’re contributing the max to your 401(k), that your money is being invested (not just sent over and sitting there—for a cautionary tale), and that it’s being invested in the right fund(s).

☐  Confirm you’re contributing the max to your Roth IRA, that your money is being invested (not just sent over and sitting there), and that it’s being invested in the right fund(s).

☐  Be sure you’re taking advantage of all the tax-advantaged accounts you can (Chapter 4)

Debt (two hours)

☐  Revisit your debt payoff plan: Are you on track? Can you pay any of your debt off sooner?

☐  Check your credit report and credit score.

☐  Renegotiate your credit cards’ APRs.

Credit Cards (one hour)

☐  Make a plan to use your credit card points! (Some might expire, some might not—but you earned them. Now have fun with them!)

☐  Call to ask what other perks your credit card offers that you haven’t taken advantage of.

☐  Confirm you’re not paying any unnecessary fees. If you are, try to negotiate them down.

Earn more (ongoing)

☐  Negotiate a raise.

☐  Make money on the side (visit iwillteachyoutoberich.com for ideas, examples, and courses).

(We cover these at iwillteachyoutoberich.com.)

other

☐  Review your insurance needs, including renters insurance and life insurance.

☐  If you have dependents, create a will.

Why You Should Think Twice About Selling

If you sell an investment that you’ve held for less than a year, you’ll be subject to ordinary income tax, which is usually 25 to 35 percent.

If, however, you hold your investment for more than a year, you’ll pay only a capital-gains tax, which is much lower than your usual tax rate.

If you’ve invested within a tax-advantaged retirement account, you don’t have to pay taxes in the year that you sell your investment. In a 401(k), which is tax deferred, you’ll pay taxes much later, when you withdraw your money. In a Roth IRA, by

contrast, you’ve already paid taxes on the money you contribute, so when you withdraw, you won’t pay taxes at all.

Knowing When to Sell Your Investments

When you’re young, there are only three reasons to sell an investment: You need the money for an emergency, you made a terrible investment and it’s consistently underperforming the market, or you’ve achieved your specific goal for investing.

You Need the Money for an Emergency

hierarchy of where to get it.

1. Use your savings account,

2. Earn additional money

3. Ask your family if you can borrow the money from them.

4.

Use the money in your retirement accounts. You can always withdraw the principal you contributed to your Roth IRA penalty-free, although you’ll be severely retarding your money’s ability to compound over time. With a 401(k), you can take money out for “hardship withdrawals,” which typically include medical expenses, buying a home, tuition, preventing foreclosure, and funeral expenses, but you’ll probably still pay early withdrawal fees.

5. Use your credit card only as a last resort.

The chances are very good that your credit card will gouge you as you’re repaying it

“What’s next?”

1. Create an emergency fund.

should contain six to twelve months of spending money (which includes everything: your mortgage, payments on other loans, food, transportation, taxes, gifts, and anything else you would conceivably spend on).

2. Insurance

homeowner insurance (fire, flood, and earthquake) and life insurance

3. Children’s education.

First, get out of debt and save for your own retirement. Then you can worry about your kids. That said, just as Roth IRAs are great retirement accounts, 529s—educational savings plans with significant tax advantages—are great for children’s education.

Remember, if your goal is less than five years away, you should set up a savings goal in your savings account. But if

you’ve invested money for a longer-term goal that you’ve achieved, sell and don’t think twice.

Investing vs. Paying Off Student Loans

I would consider a hybrid split, paying off your debt with part of your money and investing with the rest. The exact split depends on your risk tolerance. You could choose a fifty-fifty split to keep things simple, but if you’re more aggressive, you’ll probably want to invest more.

How to Help Parents Who Are in Debt

■  Where did they learn about money? What did their parents teach them?

■  If they could wave a magic wand and be in any financial situation, what would it be? (Let them dream here. If they say “win the lottery,” encourage them. What would that mean? What would they do? Then get more realistic: “Okay, let’s assume you can’t win

the lottery. What would your ideal situation look like five years from now?” Most parents have pragmatic dreams.)

■  How much do they make per month? How much do they spend?

■  What percentage of their income are they saving? (Almost nobody knows this. Be reassuring, not judgmental.)

■  Do they pay fees for their bank accounts and credit cards?

■  What’s their average monthly credit card balance? Out of curiosity (use that phrase), why isn’t it zero? How could they get it there?

■  Do they have any investments? If so, how did they choose them?

■  Do they own a mutual fund or funds? How much are they paying in fees?

■  Are they maximizing their 401(k)s, at least contributing as much as their company matches?

■  What about other retirement vehicles, like a Roth IRA? Do they have one?

■  Do they read iwillteachyoutoberich.com? NO? WHY NOT, DAD?!?! (Note: I highly recommend that you scream this really loudly at them.)

Talking Money with Your Significant Other

■  “I’ve been thinking about my personal finances a lot and I’d love to get on the same page with you. Can we talk about it?”

■  “How do you think about money? Like some people like to spend more on rent and other people like to save a certain percentage. I think I overspend on eating out. Speaking broadly, what are your general thoughts about money?” (Notice that I started off broad, then offered examples, then offered a confession about an area I’m not great in. Start by being vulnerable with your own finances.)

■  “If you could wave a magic wand, what would you be doing with your money? For me, I know I should be investing in my 401(k), but to tell you the truth, I haven’t filled out the paperwork yet.” (Another admission—only if true, of course.)

■  “How should we use our money together? Have you thought about whether you’d want to change anything?” (This is where you can discuss how you share expenses, if you’re saving toward joint goals, or what fun things you want to use your money for.)

you both lay bare all your finances and work through them together.

■  A list of your accounts and the amount in each

■  A list of debts and what the interest rates are

■  Monthly expenses (see table for details on how to determine this)

■  Your total income

■  Any money that is owed to you

■  Your short-term and long-term financial goals

What to Do if Your Partner Spends Money Irresponsibly

By focusing on the plan, not the person, you’re more likely to be able to sidestep the perception of being judgmental and work on bringing spending in line with your goals

Negotiating Your Salary

Negotiating is 90 percent about mindset and 10 percent about tactics

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

1. Remember that nobody cares about you.

When it comes to you, your manager cares about two things—how you’re going to make him or her look better, and how you’re going to help the company do well.

Negotiating tactic: Always frame your negotiation requests in a way that shows how the company will benefit. Don’t focus on the amount you’ll cost the company. Instead, illustrate how much value you can provide the company.

“Let’s find a way to arrive at a fair number that works for both of us.”

2. Have another job offer—and use it.

When you have another job offer, your potential employers will have a newfound respect for your skills. People like others who are in demand.

Negotiating tactic: Interview with multiple companies at once. Be sure to let each company know when you get another job offer, but don’t reveal the amount of the exact offer

3. Come prepared (99 percent of people don’t). Don’t just pick a salary out of thin air. First, visit salary.com and payscale.com to get a median amount for the position.

talk to people currently at the company (if you know someone who has recently left, even better—they’ll be more willing to give you the real information) and ask what the salary range really is for the job

bring a plan of how you’ll hit your goals to the negotiating session.

4. Have a toolbox of negotiating tricks up your sleeve.

Have a repertoire of your accomplishments and aptitudes at your fingertips

Stories about successes you’ve had at previous jobs that illustrate your key strengths

■  Questions to ask the negotiator if the conversation gets off track (“What do you like most about this job? . . . Oh, really? That’s interesting, because when I was at my last job, I found . . .”)

5. Negotiate for more than money. Don’t forget to discuss whether or not the company offers a bonus, stock options, flexible commuting, or further education. You can also negotiate vacation and even job title. Note: Startups don’t look very fondly on people negotiating vacations, because it sets a bad tone. But they love negotiating stock options, because top performers always want more, as it aligns them with the company’s goals.

Negotiating tactic:

“Let’s talk about total comp,”

reat them each as levers: If you pull one up, you can afford to let another fall.

6. Be cooperative, not adversarial.

be confident, not cocky, and eager to find a deal that benefits you both.

Negotiating tactic: The phrase to use here is “We’re pretty close . . . Now let’s see how we can make this work.”

7. Smile.

8. Practice negotiating with multiple friends.

9. If it doesn’t work, save face.

be prepared to either walk away or take the job with a salary that’s lower than you wanted. If you do take the job, always give yourself an option to renegotiate down the line—and get it in writing.

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 the hiring manager to agree.) “Great. Let’s put that in writing and we’ll be good to go.”

1. Don’t tell them your current salary

If you’re asked, say, “I’m sure we can find a number that’s fair for both of us.” If they press you, push back: “I’m not comfortable revealing my salary, so let’s move on. What else can I answer for you?”

2. Don’t make the first offer.

“Now come on, that’s your job. What’s a fair number that we can both work from?”

3. If you’ve got another offer from a company that’s generally regarded to be mediocre, don’t reveal the company’s name.

It’s another tech company that focuses on online consumer applications.”

4. Don’t ask “yes” or “no” questions.

“Fifty thousand dollars is a great number to work from. We’re in the same ballpark, but how can we get to fifty-five thousand?”

5. Never lie

How My Friend Got a 28 Percent Raise by Doing Her Homework

1. I broke down their job posting

2. I researched their website extensively

so that I could speak knowledgeably about the company and why I was a good fit

3. I prepared a spiel about my somewhat eclectic résumé

4. I called an expert on startups

“Tell them you want to get your hands dirty” and “Suggest three things

you would do to improve/enhance their marketing efforts.”

5. I actually took Ramit’s advice

I dreamed up three proposals for generating greater interest at trade shows, better responses to direct marketing efforts, and increased name recognition in the general population.

I emailed the proposals to my potential boss instead. I then individually emailed every person I spoke to that day to thank them for their time.

How to Save Thousands on Big-Ticket Items

A Fresh Look at Buying a Car

pick a reliable car, maintain it well, and drive it for as long as humanly possible.

drive it for more than ten years

There are four steps to buying a car: Budgeting, Picking a Car, Negotiating Like an Indian, and Maintaining Your Car.

First, ask yourself how buying a car fits into your spending and saving priorities

Once you’ve thought about where your car fits into your priorities, you need to look at your Conscious Spending Plan and decide what you’re willing to allocate toward your car each month.

(Note: Ignore the random offers for “$199/month.” Those are scammy introductory rates that are simply not real.)

knowing that there will be other expenses involved in the total expense of having a car, you want to decide how much you want to spend on the car itself.

I factored in insurance, gas, maintenance, and $200/month in parking.)

Don’t Buy a Horrible Car

Here’s what makes a good car:

Reliability.

A car you love.

Resale value.

visit the Kelley Blue Book site at kbb.com and calculate resale prices in five, seven, and ten years.

Insurance.

Fuel efficiency.

The down payment.

used car is more attractive because the down payment (i.e., the money you have to pay up front when you buy the car) is typically lower.

if you put $0 down, the interest charges on a new car will be much more.

Interest rate.

. Don’t be afraid to walk out if the dealer tries to change the finance terms on you at the last minute.

Dos and Don’ts for Buying a Car

Do

Calculate total cost of ownership (TCO

Besides the cost of the car and the interest on your loan, the TCO should include maintenance, gas, insurance, and resale value.

Buy a car that will last you at least ten years,

Don’t

Lease.

Sell your car in fewer than seven years.

Assume you have to buy a used car.

Stretch your budget for a car.

. 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!

highly recommend using Fighting Chance (fightingchance.com), an information service for car buyers, to arm yourself before you negotiate.

You can order a customized report of the exact car you’re looking for, which will tell you exactly how much car dealers are paying for your car—including details about little-known “dealer withholding.”

lso provided specific tips for how to negotiate from the comfort of your sofa

When I decided to buy—at the end of December, when salespeople are desperate to meet their quotas—I reached out to seventeen car dealers and told them exactly which car I wanted. I said I was prepared to buy the car within two weeks and, because I knew exactly how much profit they would make off the car, I would go with the lowest price offered to me. The same day, as I sat back with a cup of Earl Grey tea and three tacos with habanero salsa, responses started rolling in from the dealers. After I had all the offers, I called the dealers, told them the lowest price I’d received, and gave each of them a chance to beat it. This resulted in a bidding war that led to a downward spiral of near-orgasmic deals.

enter the major maintenance checkpoints into your calendar so you remember them. Here’s a hint: The average car is driven about fifteen thousand miles per year. You can use that number as a starting point to calculate a maintenance schedule based on the car manufacturer’s instructions.

have regular oil changes, watch your tire pressure, and keep your car clean.

keep a record of each service I have, along with any notes. When I sell my car, I’ll show the documentation to the buyer to prove how meticulous I’ve been (and charge the buyer accordingly).

The Biggest Big-Ticket Item of All: Buying a House

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

be an expert on common mistakes most home buyers make

know all the common real estate terms, as well as how to push and pull to get the best deal.

Who Should Buy a House?

Can you afford at least a 20 percent down payment for the house? If not, set a savings goal and don’t even think about buying until you reach it.

Second, when you buy a house, you’ll owe property taxes, insurance, and maintenance fees that will add hundreds per month

So even if your mortgage payment is the same $1,000/month as your rental, your real cost will be about 40 to 50 percent higher—in this case, more like $1,500/month when you factor everything in

you need to readjust your expectations and begin with a starter house

simple houses that require you to make trade-offs but allow you to get started.

Your first house probably won’t have as many bedrooms as you want. It won’t be in the most

amazing location. But it will let you get started making consistent monthly payments and building equity.

will you be able to stay in the house for at least ten years? Buying a house means you’re staying put for a long time.

the longer you stay in your house, the more you save.

When you go through a traditional real estate agent, there are large transaction fees—usually 6 percent of the selling price. Divide that by just a few years, and it hits you a lot harder than if you had held the house for ten or twenty years. There are also the costs associated with moving. And depending on how you structure your sale, you may pay a significant amount in taxes. The bottom line here: Buy only if you’re planning to live in the same place for ten years or more.

Buying a house changes your lifestyle forever. No matter what, you have to make your monthly payment every month—or you’ll lose your house and watch your credit tank. This affects the kinds of jobs you can take and your level of risk tolerance. It means you’ll need to save for a six-month emergency plan in case you lose your job and can’t pay your mortgage.

, buying a house can be a great way to make a significant purchase, build equity, and create a stable place to raise a family.

The Cost of Buying a Home Over 30 Years

Purchase price (typical single-family home)

$220,000

Down payment (10%)

$22,000

Closing costs

$11,000

Private mortgage insurance ( 76 payments of 0.5% PMI at $82.50)

$6,270

Interest @ 4.5%

$ 163,165.29

Taxes & insurance ($3,400/year)

$102,000

Maintenance ($2,200/year)

$66,000

Major repairs & improvements

$200,000

Total costs

$778,408.73

The easiest way to see if you should rent or buy is to use the New York Times’s excellent online calculator “Is It Better to Rent or Buy?”

Becoming a Homeowner: Tips for Buying Your New House

stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross income.

1. Check your credit score. The higher your score, the better the interest rate on your mortgage will be. If your credit score is low, it might be a better decision to delay buying until you can improve your score.

not only a lower total cost, but lower monthly payments.

The Effect of Credit Scores on a Mortgage Payment

FICO score

APR*

Monthly payment

Total interest paid

760–850

4.18%

$1,073

$166,378

700–759

4.402%

$1,102

$176,696

680–699

4.579%

$1,125

$185,021

660–679

4.793%

$1,153

$195,200

640–659

5.223%

$1,211

$216,022

620–639

5.769%

$1,287

$243,146

2. Save as much money as possible for a down payment.

Traditionally, you have to put 20 percent down. If you can’t save enough to put 20 percent down, you’ll have to get something called Private Mortgage Insurance (PMI), which serves as insurance against your defaulting on your monthly payments. PMI typically costs between 0.5 percent to 1 percent of the mortgage, plus an annual charge

If you haven’t been able to save at least 10 percent to put down, stop thinking about buying a house.

3. Calculate the total amount of buying a new house.

the total price shouldn’t be much more than three times your gross annual income

(It’s okay to stretch here a little if you don’t have any debt.)

don’t forget to factor in insurance, taxes, maintenance, and renovations

search “surprise costs of owning a house.”

4. Get the most conservative, boring loan possible.

I like a thirty-year fixed-rate loan. Yes, you’ll pay more in interest compared with a fifteen-year loan. But a thirty-year loan is more flexible, because you can take the full thirty years to repay it or pay extra toward your loan and pay it off faster if you want.

But you probably shouldn’t: Consumer Reports simulated what to do with an extra $100 per month, comparing the benefits of prepaying your mortgage versus investing in an index fund that returned 8 percent. Over a twenty-year period, the fund won 100 percent of the time.

5. Don’t forget to check for perks.

Check out hud.gov/topics/buying_a_home to see the programs in your state

don’t forget to check with any associations you belong to, including local credit unions, alumni associations, and teachers’ associations.

6. Use online services to comparison shop.

zillow.com

redfin.com and trulia.com

For your homeowner’s insurance, check

insure.com to comparison shop. And don’t forget to call your auto insurance company and ask them for a discounted rate if you give them your homeowner’s insurance.

How to Tackle Future Large Purchases

1. Acknowledge that you’re probably not being realistic about how much things will cost—then force yourself to be.

2. Set up an automatic savings plan.

3. You can’t have the best of everything, so use the P word. Priorities are essential.

Giving Back: Elevating Your Goals Beyond the Day to Day

Sites like Pencils of Promise or kiva.org let you give directly to poor developing communities.

if you’re short on cash, donate your time, which is often more valuable than money.