‘I Will Teach You to Be Rich’ takes a firm stance on prudent banking, saving, spending, and investing. The book emphasizes that you do not have to be a pro to get wealthy. All you need is a strategy and a few techniques. The author, in this book, teaches you the importance of saving as early as feasible and setting up automated investments so you can sit back and let your money work for you.
According to the author Ramit Sethi, people are reluctant to learn about investing and saving, because it is straightforward and requires very little effort. The author tried to teach you how to spend 20% of your income guilt-free without hurting your savings and how to set up a totally hands-free investment and savings system.
The author has attempted to show how to spend 20% of your salary guilt-free while not jeopardising your savings, as well as how to build up a completely hands-off investing and savings strategy.
Ramit Sethi is a personal finance counsellor, writer, public speaker and entrepreneur, recognised for his humorous style of sound financial advice.
Disclaimer: This book has been written for audience in USA and hence I have tried to tweak this to be relevant to audiences in India.
Do not blame your surrounding for your financial problems:
Stop blaming yourself for not saving money and believing that it’s too late to invest or save now. The first thing you need to realise is that you shouldn’t let all the financial information that the media feeds you to divert your attention. A lot of this material is dull and useless.
The greatest approach for someone to modify their savings results is by accepting ownership of their actions, as opposed to accusing this false flow of information from the media. Common arguments, such as our school system not teaching money management, are completely false.
Another common reason for refraining from doing anything with money is fear of squandering it. However, losing money when you’re young is better because you don’t have as much to lose! When you have more, you’ll learn how to maintain it effectively. Remember that money gets emptied from your account when it sits in a bank, as inflation consumes that money over time.
Investors had no diversified portfolios during any kind of economic downturn (such as the one in 2008), therefore they pulled their money from the market, which was a massive error. People, on the other hand, began to condemn the government and banks for the catastrophe. It is always simple to point the finger, but the remedy here should have been to educate oneself. We must accept accountability for our challenges and begin to address them.
Smart use of Credit cards:
Your first step to saving money and becoming wealthy will be to understand how to effectively use credit cards.
We must remember the two main components of credit: a credit score, which lenders use to determine your credit risk, and a credit report, which tracks your credit utilisation and provides information about it.
If you have a strong credit score, you will be more appealing to lenders, who will offer you lower loan interest rates. A strong credit score can help you avoid paying thousands of rupees in interest, which is even better.
The author suggests a few helpful hints for efficient credit card management:
- Pay on time: On-time debt payments contribute for 35% of your credit score, so setting up automated credit card payments ensures you never miss a payment.
- It’s worthwhile to get in touch with your credit card provider and ask them to waive your annual fees, service charges, and annual percentage rate. To the author’s amazement many credit card providers are open to do so (this is the reality in the United States; but we do not know about other nations). The author also suggests that you to search for the greatest credit card advantages available.
Choose bank accounts with the highest interest (and obviously the best banks):
Small finance banks frequently provide the most favourable savings interest rates. Their overhead is low, and they don’t have to spend money on many branches or marketing. As a result, they provide enhanced client service and may operate with smaller profit margins than traditional banks.
Assume you saved Rs. 25,000. This would yield Rs. 1750 in a year at a 6% interest rate at a small bank. In contrast, you would receive only 750 rupees from a traditional bank at a rate of 3 percent.
Then, look for the top bank accounts. One salary account and one savings account should be enough. Salary accounts are required for regular withdrawals of funds, whereas savings accounts are required for goals such as for trips or special occasions.
You may maintain one and a half months’ worth of living costs in your salary account and everything else in your savings account, which will yield you more interest than traditional banks.
Open a retirement account, even if you have very small amount to invest:
Being careful with your money and setting away some money in your savings account are important, but they won’t go you very far. You should invest if you want your money to work for you.
Opening a PF account, which many employers provide to their employees, is the perfect place to begin.
Just enable a portion of your pay to be transferred automatically from your employer to your PF account. You may then relax and watch your money grow.
Saving money in a PF account has several advantages, including tax benefits since you’re committing to invest long term, money contributed by your employer if they agree to match your PF contribution, and the fact that it’s a low-effort investment.
Alongside your PF account, you should also create an NPS account, which is a type of retirement account. Unlike a PF account, which is supported by your company, an NPS is created with your own money.
Everyone should have both a PF and an NPS because, unlike a PF, an NPS allows you to invest in any allocation you wish, such as majority equity, equity plus debt, or majority debt instruments.
Arrive at how much you’re spending:
Conscious spending is the practise of spending less money on items that aren’t as essential to you and more money on things that are. You just need to implement a Conscious Spending Plan. Automatically save and invest a certain amount each month and spend the remainder without any regrets. Conscious spending involves assessing what is essential to you.
The author recommends the proportion you spend on certain things be divided as follows:
- 60% on fixed expenditures (rent, utilities, debt)
- 10% on investments (retirement accounts such as PF and NPS)
- 10% on savings (vacations, presents, unexpected needs)
- 20% on guilt-free purchases
After devising the above plan, learn to regulate your spending.
Try “the envelope system,” in which you pick how much you want to spend on each of the four categories mentioned above and place that cash in envelopes, such that when the envelopes are empty, there is no more spending in that category for that month.
If you think “Envelopes” are too literal, you may create a bank account with a debit card that functions like an envelope. You can put money onto the debit card for socialising each month, and after the money is gone, you should not spend money for that month on socialising.
It takes time to transition from one extreme behavior to another, so focus your expenditure on a few specific areas rather than attempting to cut 5% from several areas.
Automate your bill payments:
Bill paying is unpleasant and frustrating. If you dislike handling money, set up an automatic system to do it for you. Adopt the above-mentioned Conscious Spending Plan and automate it using your bank.
You may now set up automatic transfers and payments using your online banking service.
Set up automated payments for fixed charges like phone bills, house rent, internet bills, utility bills, and so on, and you can also automate transfers from your salary account to retirement plans like NPS, and so on.
After that, utilise the remaining funds for spending and create mid-month calendar reminders to notify you if you surpass your spending targets. It’s a good idea to keep Rs. 10,000 in your bank account as a reserve, but make sure you don’t go over that limit.
Check to see if your spending is on track in your mid-month account review. If things aren’t going as planned, use the next fifteen days of the month to get back on schedule.
Ignore the noise and follow the simple way when it comes to investing:
We can observe that the financial world is filled of gurus who are often talking about stock selection. However, there is a far simpler method to invest. Don’t listen to those gurus. None of them can anticipate how mutual funds or equities will fare in the market over time. Experts are usually incorrect, regardless of what they say.
According to a study, 47 out of 50 consulting firms continued to provide investors with stock recommendations up until the point at which those companies filed for bankruptcy. Hence, ignore the surrounding expert noise and take the easiest route to investing.
Consider an investing pyramid with an asset type for each category. Stocks, bonds, and cash are at the bottom, index and mutual funds are in the centre, and debt instruments are on top.
As you proceed down the pyramid, these investments get more difficult, thus the easiest option is to invest in automated debt instruments or retirement funds (the author recommends Life-cycle funds for this).
Let us see this example to understand what Lifecycle funds are. For example, if you are 25 years old, Life-cycle funds invest 90% in stocks and 10% in bonds, but if you are 55, it invests just 63% in stocks and 37% in bonds.
As you can see, you have higher investments in stocks in your twenties. This is due to the fact that at this age, you have the ability to take the risk. The balance shifts as you age, and lifecycle funds make things smoother by automatically adjusting for you.
The author suggests investing in lifecycle funds, however this type of investment is not widely used in India.
There are very few mutual fund product offerings in India that are life-cycle funds due to the unfavorable tax treatment of these funds compared to equity funds (life-cycle funds are taxed as non-equity funds or debt funds, despite the fact that they may have a significant exposure to equity in the early stages of the investment life-cycle).
Conclusion:
Saving and investing money strategically does not have to be limited to professionals, nor does it have to be rocket science. Set up no-fee accounts, automate savings and bill payments, and invest a little to streamline your personal finances. Set up a mindful spending strategy, which can greatly assist you in effectively handling your money. This will help you to stop worrying about money and instead sit back and watch your reserves grow. Don’t allow others tell you how to spend or save your money. You take the step and keep it as elementary as possible.
