My Rating: 8 of 10
Summary
Follow a 6-week plan to tap into your behavioral psychology to save more, earn more, and live your rich life.
Disclosure: I worked for Ramit (I talk about that here). We are friends. I stand by everything written in these notes. I also added personal notes based on my experience.
You can read about how I think about my rich life today (including exact net worth and income goals) here.
Table of Contents
4 Life-Changing Ideas About Money
Ramit covers four major lessons about money:
- Behavior trumps information. Knowing the perfect right answer is less important than taking action. That’s why the book focuses on small, innocuous behaviors. You’ll quietly move towards your goal without realizing it. For example, you’ll open an investment account, but won’t put money in right away.) Better yet, you’ll automate your finances and remove the decision altogether.
- Focus on getting things 85% right. You don’t need to get it perfect. Get it 85% there. Then move on.
- Spend on what you love. Cut back on what you don’t. If you love something, spend money (or time) on it. If it’s not important, don’t spend either.
- There are two ways to get more money. First, you can earn more. Second, you can spend less. Cutting costs is great, but Ramit finds increasing earnings to be more fun.
Author’s note: Getting a new job is the fastest, most reliable way I’ve earned more. Read about how to get your first job in tech (which tend to pay well), and how to land a remote job (even with no experience).
Your Six Week Plan To Become Rich
Ramit breaks down your plan to become rich into six steps. I’ll dive into each of those steps below:
- Optimize Your Credit Cards
- Open high-interest, low-maintenance bank accounts
- Open Investing Accounts
- Start Your Conscious Spending Plan
- Automate Everything
- Start Investing
Step 1. Optimize Your Credit Cards
- Set up autopay to pay your credit cards bills
- Call to waive any past credit card fees
- Negotiate a lower APR
- Build credit history by keeping credit lines open
- Increased your credit allowance
- Take advantage of your rewards
Build credit. This enables better rates for larger items (for example, a house).
Pay off your credit cards in full. Spend less than you earn, and set up autopay to automatically pay your bills.
Improve your credit utilization rate (CUR). You can do this by (1) spending less or (2) calling your bank to increase your available credit.
Use the credit card perks. Most credit cards come with perks like warranty doubling, car rental insurance, and trip cancellation insurance. Read about your credit card perks and take advantage of them
Step 2. Open high-interest, low-maintenance bank accounts
Ramit’s advice here is:
- Open a no-fee online bank account (e.g. Ally, Capital One)
- Avoid brick n’ mortars banks
The problem with brick n’ mortar banks (e.g. Bank of America) is they need minimum balances to avoid fees. For example, Bank of America’s “free” checking account requires a minimum $1,500 balance. This locks up your capital.
Author’s note: I move around a lot, including abroad. I’ve found different banks, including brick n’ mortars, serve different use cases. Some examples, plus the accounts I use:
- No-fee online bank account. The hub of your financial system, e.g. Ally Bank
- Brick ‘n mortar. Useful if you need a bank check, e.g. a downpayment because you’re buying a house. I’ve also found these better for opening business checking accounts, e.g. Bank of America, Chase
- No-fee ATM withdrawals. Handy if you travel abroad and need cash. Withdraw from any ATM in the world and you’ll get all fees paid back to you, e.g. Charles Schwab
Step 3. Open Investing Accounts
Open two investment accounts: a 401(K) account and a regular investment account. You can do this with Vanguard, TD Ameritrade, Wealthfront, etc.
Next, follow each step to start investing:
- If your employer offers a 401(k) match, invest to take full advantage of it. Contribute enough to get 100 percent of the match. Assume you make $100,000. A “100 percent match up to 5 percent of your contribution” means that you’ll contribute $5,000 and your company will match it with $5,000. This is free money. There’s no better deal.
- Pay off your credit card and any other debt. The average credit card APR is 14 percent and many APRs are higher. Paying off your debt will give you a significant instant return.
- Open a Roth IRA. Contribute as much money as possible. Check the IRS website for current maximum income levels. As of this writing, $140,000 adjusted gross income, or $208,000 if married filing jointly.
- Money left over? Go back to your 401(k). Max this out. This time above and beyond your employer match. The current limit is $19,500.
- Money left over? Open a regular non-retirement account. Invest as much as possible. Also, pay extra on any mortgage debt you have, and consider investing in yourself (e.g. start a business).
Step 4. Start Your Conscious Spending Plan
Use a tracking tool to see where your money is going, e.g. Mint, Personal Captial, Tiller, etc. Don’t just go and “create a budget”
Choose the things you love enough to spend on— and then cut costs on the things you don’t love. This leads to a happy, rich life, not living a life of frugality for no reason.
Think about your goals. Ask yourself if you’d rather spend $10 on lunch or save $10 toward a house or a car. If you would rather spend the money on lunch, enjoy lunch! You save money so that you can spend it later on the things that make you happy.
Author’s note: What’s the best software to track your money? Each software serves a different use case. Whatever you choose, it should automatically track:
- Your spending, e.g. Mint is the OG here, and what I still use
- Your net worth, e.g. Personal Captial is good for beginners. Tiller is more advanced, but you can get granular with budget allocation and cash flow projections.
Step 5. Automate Everything
This video is a great explanation of how to automate your money.
Or use this schedule to help you set up your own automation:
- If you’re paid on the 1st of the month. Switch all bills to arrive on or around that time, too. Do this online. Or call your credit card company and say: “Hi, I’m currently being billed on the 17th of each month, and I’d like to change that to the 1st of the month. Do I need to do anything besides ask right here on the phone?”
- 5th of the month. Set up an automatic transfer to your savings account and to your Roth IRA.
- 7th of the month. Set up automatic payments for your bills, like cable, utilities, car payments, or student loans. Then set up an automatic transfer to pay off your credit card.
- Set up e-mail notifications. Get notified before your credit card is paid. That way you can review it before the money is transferred out of your checking account.
Before you start investing, add a savings goal of three months of bare-bones income. For example, if you need at least $1,500 per month to live on, you’ll need to have $4,500 in savings. Fund this with money allocated for your investments.
Money exists for a reason—to let you do what you want to do. Yes, every dollar you spend now would be worth more later. But living only for tomorrow is no way to live.
Step 6. Start Investing
Invest in index funds vs individual stocks. Again, put your own behavioral psychology to work here. Invest automatically and over long periods of time.
Generally, Ramit advises against personal finance advisors. He talks about when it’s appropriate to use an advisor in his program, Advanced Personal Finance.
What about crypto? Real estate? This is also covered in Advanced Personal Finance. Ramit’s general advice: once you’ve covered the basics listed here, allocate 5-7% of your income to “mental outlets.” This is money for you to invest or spend however you like.
After you’ve maxed out savings and investments, consider your most important investment: yourself. Take a course, learn new skills, and improve your career trajectory.
Author’s note: I’ve used an advisor in the past. I found them helpful in the “mid-game” of personal finance (when I was thinking about starting a family and buying a house). Read about who a personal advisor is right for (and not right for) here.