# 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.