Ramit Sethi: I Will Teach You to Be Rich

Credit

There are two main components to credit (also known as your credit history): the credit report and the credit score

• Your credit score (FICO score) is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders. It’s like Cliff’s Notes for the credit industry. The lenders take this number (higher is better) 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 the score, which signifies how risky you are
  • Manage debt to avoid damaging your credit score. “If you close an account but pay off enough debt to keep your credit utilization score the same,” says Craig Watts of FICO, “your score won’t be affected”
• Your credit report gives potential lenders-the people who are considering lending you money for a car or home-basic information about you, your accounts, and your payment history. In general, it tracks all credit-related activities, although recent activities are given higher weight
  • Once a year, by law, you’re allowed to obtain your credit report for free at www.annualcreditreport.com

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

Credit cards

• As long as you manage them well, they’re worth having
• The key to using credit cards effectively is to pay off your credit card in full every month
• your debt payment history represents 35 percent of your credit score-the largest chunk
• Get all fees waived on your card.
• if you don’t completely pay off your bill at the end of the month, you’ll owe an enormous amount of interest on the remainder, usually about 14 percent. This is what’s known as the annual percentage rate, or APR
  • Negotiate a lower APR: call your credit card company and ask them to lower your APR. If they ask why, tell them you’ve been paying the full amount of your bill on time for the last few months, and you know there are a number of credit cards offering better rates than you’re currently getting
• Keep your cards for a long time and keep them active
  • Play it safe: If you have a credit card, keep it active using an automatic payment at least once every three months.
  • 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. You want as much credit as possible when you apply. If you close it, you’ll have less credit, with the same amount of debt.
  • And if you’re getting a new credit card, don’t close the account on your old one. That can negatively affect your credit score
• improve something called your credit utilization rate, which is simply how much you owe divided by your available credit. This makes up 30 percent of your credit score
  • to improve your credit utilization rate, you have two choices: Stop carrying so much debt on your credit cards or increase your total available credit (call the company and ask for an increase
• Avoid closing your accounts (usually). Although closing an account doesn’t technically harm your credit score, it means you then have less available credit-with the same amount of debt
• Use your rewards
• Don’t make the mistake of paying for your friends with your credit card and keeping the cash-and then spending it all. NO!!! Put it in the bank!!

Investing

• Asset allocation is your plan for investing, the way you organize the investments in your portfolio between stocks, bonds, and cash.
  • by diversifying your investments across different asset classes (like stocks and bonds, or, better yet, stock funds and bond funds), you could control the risk in your portfolio-and therefore control how much money, on average, you’d lose due to volatility
  • more than 90 percent of your portfolio’s volatility is a result of your asset allocation
• dollar-cost averaging is a fancy phrase that refers to investing regular amounts over time, rather than investing all your money into a fund at once
  • By investing 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. In other words, by investing over a regular period of time, you don’t try to time the market
• 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
• People think that investing means “buying stocks,” so they throw around fancy terms like hedge funds, derivatives, and call options. Sadly, they actually think you need this level of complexity to get rich because they see people talking about this stuff on TV each day…for individual investors like you and me, these options are completely irrelevant…it’s like two elementary school tennis players arguing about the string tension of their racquets. Sure, it might matter a little, but they’d be much better tennis players if they just went outside and hit some balls for a few hours each day.
• mutual funds fail to beat the market 75% of the time
  • when it comes to fund ratings, companies rely on something called survivorship bias to obscure the picture of how well a company is doing. Survivorship bias exists because funds that fail are not included in any future studies of fund performance for the simple reason that they don’t exist anymore
  • ultimately, expertise is about results. You can have the fanciest degrees from the fanciest schools, but if you can’t perform what you were hired to do, your expertise is meaningless

Savings

• Get your paycheck, determine what you’ve been spending, and figure out what your Conscious Spending Plan should look like (thirty minutes).
  • break your take-home income into chunks of fixed costs (50–60 percent), long-term investments (10 percent), savings goals (5–10 percent), and guilt-free spending money (20–35 percent)
• Fundamentally, banks earn money by lending the money you deposit to other people. For example, if you deposit $1,000, a Big Bank will pay you 0.5 percent to hold on to that money, and then they’ll turn around and lend it out at 7 percent for a home loan
• Set up several accounts
  • Open a checking account or assess the one you already have
  • call the bank (or go in), and open the account. If you’ve already got one, make absolutely sure it is a no-fee, no-minimum account. How? Review your last bank statement or, if you don’t have that, call your bank and say, “I’d like to confirm that my bank account has no fees and no minimums whatsoever. Can you confirm?”
  • use an online high-interest savings account
  • I would not encourage anyone to use a standard Big Bank savings account. Online savings accounts let you earn dramatically more interest with lower hassle
    • Having your money in two separate accounts makes money management easy. One basic way of looking at it is that your savings account is where you deposit money, whereas your checking account is where you withdraw money
  • List all your accounts in one place
  • Link your accounts together
  • Set up your Automatic Money Flow (automatic payments, savings/investment deposits, etc.)
• keep track of all calls in a spreadsheet with date, person I spoke to, and what was resolved

401(k)

• A 401(k) plan is a type of retirement account that many companies offer to their employees
• 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
• It’s a “retirement” account because it gives you large tax advantages if you agree not to withdraw your money from the account until your reach the retirement age of 5

Roth IRA

• another type of retirement account with significant tax advantages. It’s not employer sponsored - you contribute money on your own
• lets you invest in anything you want: index funds, individual stocks, anything
• you pay taxes on the amounts you contribute, but not the earnings
  • you invest already-taxed income and you don’t pay any tax when you withdraw

Cars

• steps before buying:
  • investigate recent graduate incentive plans for first-time car buyers
    • Many car companies offer programs that give rebates or special financing if you’re a new grad and have reasonably good credit
  • calculate total cost of ownership (TCO)
    • figure out how much you’ll be spending over the life of the car
    • these expenses can have a big effect on your finances
    • Besides the cost of the car and the interest on your loan, the TCO should include maintenance, gas, insurance, and resale value
  • decide whether new or used
    • Over the long term, a new car may end up saving you money, if you pick the right new car, pay the right price, and drive it for a long time
    • The insurance rates for a new and used car can be pretty different
  • Leasing nearly always benefits the dealer, not you
  • 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
  • “When I decided to buy - at the end of December, when salespeople are desperate to meet their quotas - I faxed 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…faxes 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.”
• record every service along with any notes. when selling, show it to the buyer to prove meticulous maintenance, and charge the buyer accordingly.
• real savings come once you’ve paid off your car loan and driven it for as long as possible. Most people sell their cars far too early. It’s much cheaper to maintain your car well and drive it into the ground
• You’ll be surprised how quickly most cars depreciate and how others (Toyotas and Hondas especially) retain their value

Job interviews

• DON’T ASK “YES” OR “NO” QUESTIONS
  • Instead of “You offered me fifty thousand dollars. Can you do fifty-five thousand?” say, “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”
• 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
• DON’T TELL THEM YOUR CURRENT SALARY.
  • Why do they need to know? I’ll tell you: So they can offer you just a little bit more than what you’re currently making. 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?”
  • Typically first-line recruiters will ask for these. If they won’t budge, ask to speak to the hiring manager. No recruiter wants to be responsible for losing a great candidate, so this will usually get you through the gatekeeper
• DON’T MAKE THE FIRST OFFER.
  • That’s their job.
  • If they ask you to suggest a number, smile and say, “Now come on, that’s your job. What’s a fair number that we can both work from”
• Sometimes, the hiring manager simply won’t budge. In that case, you need to 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.

Buying a 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 pay. If you can’t do that, wait until you’ve saved more