I recently read I Will Teach You To Be Rich by Ramit Sethi to brush up on personal finance basics since I haven’t been super organized with my personal finance system.
I also recently sold a small business and have been working on getting things more organized moving forward so that I have a better system that allows for less stress and greater financial clarity in decision-making.
I thought it was a good read and it helped to go over the type of system you should have in place to automate your cash flow on a personal level.
The only caveat for me on this type of system is it focuses primarily on people who hold a standard 9-5 job for most of their life with a steady paycheck.
Personally, I have been working on small businesses as a self-employed professional for a while and the cash flow is less stable while also having to incorporate business accounts alongside personal accounts which is a bit more complicated.
The other thing I’m still hashing out personally is the idea of investing for retirement where you are putting your money into a tax-advantaged account (Roth IRA, 401k) where it compounds over time but you can’t remove it until you’re 60.
I’ve never really liked this idea because it takes the view that you should sock your money away and settle for 8% returns over time while diminishing your interest in looking for unique opportunities that you can work on to get way higher returns.
It’s definitely a safer bet to take the steady investing approach over the long term but what if you don’t want to hold a steady 9-5 job for the rest of your life?
I find that most people who become rich find something they are really good at, take advantage of a good opportunity, or find work they love in their younger working years and invest most of their time/money into that to get rich.
Then when they have made a good chunk of money or increased their income a lot from investing in themselves they funnel larger sums of money into steady index funds to maintain and grow that money over time.
Anyway, just my thoughts for now.
Overall I thought it was a great read and I’m working on setting up my personal system in a more automated way like he suggests while incorporating it with my business accounts.
Table of Contents
Key Messages:
- Getting started and developing habits is more important than becoming an expert
- It’s okay to make mistakes if we just get going
- Spend extravagantly on the things you love and cut costs mercilessly on the things you don’t
- There’s a difference between being sexy and being rich- being rich requires being boring at times
- Don’t live in the spreadsheet- pick a system and get active in life
- Play offense not defense- craft your goals and go for them
- Use money to design your rich life, don’t live your life based on money
Why Do You Want To Be Rich?
- Want to be able to have friends over to my apartment (host get together 1x month)
- $2000-2500 to rent or $60-120k to buy
- Want to be able to not have to stress about paying monthly bills
- Around $4300 expenses so 6 month fund is $25k
- Want to do extended travel and learning/retreat for 2-3 months out of the year
- 3 months’ worth of expenses is $12k
- Want to be able to shop at healthy food stores and buy healthy food
- Want to have the freedom to spend lavishly on gym and wellness stuff
- Want to be able to choose the work I do in the world not be tied down to a job (business or service)
What is My Rich Life?
- 1-3 month hiatus each year for travel, learning, reading, growth, health
- Short-term savings cover 3-6 months’ worth of living expenses
- 6-10k+ in net earnings each month after taxes (12k revenue in business or jobs)
- Business/job allows for some schedule freedom to maintain health
- Business/work is something that I can offer value and help people that I’m good at
- Growing investments with the goal of reaching $750k-1M portfolio by 50 to live off 8%
- Social circle, investment assets to cover expenses, work that I’m good at with life freedom
Overview Action Steps to Take:
- Set up credit cards with no fees, good rewards, pay on time, build good credit
- Set up the right bank accounts (checking, short-term savings with sub-accounts)
- Open Roth IRA and investment account (even with small input)
- Analyze spending habits and make a conscious plan
- Automate infrastructure to make accounts work together nicely
- Smart investing into low-cost funds consistently over time with a smaller portion into higher-risk ventures
Credit Cards
- Have to completely pay off your bill each month to maintain credit score
- If you dont pay them off you will have large APR interest fees
- 2 main components to credit
- 1. Credit report– gives potential lenders basic information about you and your accounts
- 2. Credit Score– score that represents your risk to lenders
- Check credit report at annualcreditreport.com
- Check credit score at creditkarma.com or myfico.com
- A good credit score can save you hundreds of thousands of dollars in interest charges over time so it’s important to get this in line
Credit Card Commandments
- Pay off your card regularly
- Try to get fees on your cards waived
- Negotiate a lower APR
- Keep your main cards for a long time and keep them active and simple
- Get your credit increased to have score benefits
- Use your cards secret perks
- Warranty doubliing on purchases
- Car rental insurance
- Trip cancellation insurance
- Concierge services
Credit Card Action Steps
- Get your credit score and credit report
- Set up your credit card- check out bankrate.com for new cards
- Make sure your handling your credit cards effectively
- Set up auto payments monthly to pay off in full
- Get fees waived
- Apply for more credit
- If you have debt start paying it off
Banking
Nuts & Bolts of Accounts
Checking Account: backbone of your financial system where all your personal income comes in before it is automatically distributed to other accounts. This is the #1 place where you get hit with fees and you need to fix that.
Savings Account: a place for short term savings (1m-5yrs) where you can save for things like vacation, emergency fund, down payment on a house, etc. This is a goals account where you can set up specific sub accounts for goals. Two different accounts at different banks is usually best for checking and savings.
- The perfect time to start is when the stakes are low and you don’t have a lot of money so you can develop the right habits
Finding Your Account Setup
- Most basic option: a checking account and a savings account at any local bank. This is bare minimum. Even if you already have these accounts, it’s worth talking to your bank to make sure you’re not paying fees.
- Basic Option + small optimization: opening accounts at two separate banks, a no fee checking account at your local bank and a high yield online savings account. With the checking account, you’ll have immediate access to money and free cash transfers to the savings account. You can also deposit cash through your local bank.
Good Accounts to Consider
Checking Accounts
Schwab Bank Investor Checking: no fees, no minimums, no-fee overdraft protection, free bill pay, free checks, ATM card, auto transfers, unlimited reimbursement of ATM fees. Cannot deposit physical cash into this account.
Local bank checking account with no fees and minimums: just make sure it has no fees and minimums. This is really only for people who need to deposit physical cash regularly.
Savings Accounts
Capital One 360 Savings: Allows you to create virtual sub savings accounts where you can specify different savings goals. No fees, minimums, or promotions. A simple account that works.
Ally Online Savings: A no fee account that also lets you create sub savings accounts.
Bank Accounts Action Steps:
- Open a checking account or assess the one you already have. Make sure it is a no fee no minimum account. If it has fees call and negotiate a new policy.
- Open a high interest online savings account. You’ll earn higher interest and it’s psychologically powerful to have your savings separate from checking with sub accounts for specific goals so you don’t reach into them.
- Fund your online savings account. Leave one and a half months of living expenses in your checking account to pay off your monthly bills and transfer the rest to your savings account.
Investing Basic Accounts
Ladder of Personal Finance
- If your employer offers a 401k match, invest to take full advantage of it and contribute just enough to get 100% match
- Pay off your credit card and any other debt.
- Open up a Roth IRA and contribute as much money as possible to it. $6,500 in 2023.
- If you have a 401k go back and contribute as much as possible to it
- HSA: if you have access to a health savings accounts, it can also double as an investment account with incredible tax features. Use this account if you’ve done #4
- If you still have money to invest open a regular non retirement taxable account and put as much as possible there.
- For self employed use:
- Traditional or Roth IRA
- Solo 401k
401k’s
- 401k uses pretax money out of your paycheck before you pay taxes on the money and you aren’t able to take it out until your 60 years old. You have to pay taxes when you withdraw money but not on the input
- If an employer matches it means free money
- You can automatically invest your money into an investment account without seeing it
Roth IRAs
- Not an employer account
- It lets you invest in whatever you want
- Roth IRA is post-tax dollars but it doesn’t get taxed when you withdraw it
- Its a long term investment vehicle and you’re penalized if you withdraw money early
- Contribute as much as possible
Recommended Discount Brokerages
- Vanguard.com
- Schwab.com
- Fidelity.com
Investing Action Steps
- Open your 401k if you are an employee
- Come up with a plan to pay off your debt
- Open a Roth IRA and set up automatic payments, even $50 a month to start
- Find out if you’re eligible for an HSA and open an account
Conscious Spending
- Automatically send money to investment and savings accounts, pay off expenses, and then the left over you get to decide what you want to spend it on
- As long as you have your system in place and you have decided what you want to spend your money on after paying bills and adding to savings/investments you can spend your money on what you love
Categories of Spending
- Fixed Costs (rent, utilities, bills): 50-60% of take home income
- Rent, cable, insurance, groceries, cell phone, ect
- Investments (401k, Roth IRA, accounts): 10%
- Savings Goals (downpayment, travel, retreat): 5-10%
- Guilt Free Spending: 20-30%
Monthly Fixed Costs Estimate
| Monthly Expense | Monthly Cost |
| Rent/Mortgage | $1700 |
| Utilities | NA |
| Medical Insurance and Bills | Insurance: $356 + $100= $500 |
| Car Payments | Gas: $150 Insurance: $75 = $225 |
| Public Transportation | Uber: $50 |
| Debt Payments | NA |
| Groceries + Normal Dining | $1000 |
| Internet/Cable | $70 |
| Total Monthly Fixed Costs | $3,500 + 15% extra= $4,000 |
Long Term Investments & Savings
- Work on investing 10% of your take home pay
- Use Bankrate.com investment calculator to input different contributions with an 8% return over 20-30 years
- Work on saving 10% of take home income for short and long term goals
- Retreats, travel, downpayment for apartment or home, car, business startup cash, alternative investment money
The 60 Percent Solution
Splitting your income into the following buckets to get you 85% of the way there:
- Food, bills, taxes (rent & fixed costs): 60%
- Retirement savings/investment: 10%
- Long term Savings: 10%
- Short term Savings Irregular Expenses: 10%
- Fun Money: 10%
This is compared to IWT numbers which are:
- Fixed monthly costs: 50-60%
- Investments: 10%
- Savings: 10%
- Spending Money: 20%
Tools For Managing Money
- Youneedabudget.com (tracking spending)
- Mint.com (sync with cards to show trends)
- Personalcapital.com for overview of all investments or brokerage account
- Myfico.com for credit report and score each year
Conscious Spending Action Steps:
- Go through your paycheck or income and look at where your spending has been going
- Break your take home income into chunks of fixed costs, investment, savings, and guilt free spending
- Optimize your spending
- Pick your big wins
- Open an account at ynab or personal capital and figure out where you can make a big win with a cost that’s large which you can reduce a quarter or so
- Maintain your conscious spending plan
Automation of Your System
Link Your Accounts
- When you login to your accounts you’ll usually find an option like “link accounts”, “transfer”, or “set up payments”
- Connect your checking account to your savings account
- Connect your checking account to your investment account/ ROTH IRA (do from investment account)
- Connect your credit card to any bills you’ve been paying via your checking account
- Some bills like rent and loans can’t be paid by credit card so link them to your checking account
- Set it up so that all your credit card accounts are paid from your checking account (this is set up from your credit card’s transfer or link accounts page)
How to Connect Your Accounts
| This Account… | ….Should fund this account |
| Income or Paycheck | 401k Checking Account |
| Checking Account | Roth IRA Savings (with savings goals) Credit Card Fixed costs that don’t allow credit card payment (rent) Occasional spending cash |
| Credit Card | Fixed costs Guilt Free Spending |
Setting Up Automatic Transfers
- Go back into your accounts and automate transfers and payments
- You need to set up auto transfers at the right time depending on when you get paid
- Get all your bills on the same schedule (call the companies and switch them) usually the beginning of the month is best
Example Schedule:
2nd of month: Income or take home pay is deposited into your checking account. If you’re paid on the first the money may not show up until the 2nd.
5th of month: Auto transfer to your savings account. Login to your savings and set up an auto transfer from your checking account to your savings on the 5th of every month.
5th of month: Auto transfer to Roth IRA or investment account. Login to your investment account and create an auto transfer from your checking account to your investment account.
7th of month: Auto pay for monthly bills you have.
7th of month: Auto transfer to pay off credit card. Login to your credit card account and instruct it to draw money from your checking account and pay the credit card bill in full on the 7th of each month.
| On this date…. | ….these actions happen |
| 1st of month | Salary or income is deposited into your checking account |
| 2nd of month | Part of your salary goes to 401k if have one |
| 5th of month | Auto transfer from checking account to savings account Auto transfer from checking account to Roth IRA/investment account |
| 7th of month | Auto payment of bills from checking account and credit card Auto transfer from checking account to pay off credit card bill |
Automation Action Steps
- List all your accounts in one place
- As you start linking accounts together you will need access to all of them in one place. Make your life easier by getting all the info in one place that you can access from home and work.
- Link your accounts together
- Connecting them is free and quick but it usually takes 3 days to have them sync
- Set up your automatic money flow
- Set up auto payments by automatically sending money to your savings, investment, fixed cost/ credit card bills
Investing & Picking a Simple Portfolio
Basics of Investing Options
Index Funds: a fund that takes the index of the stock market and tries to just match it with very low fees.
Target Date Funds: a mutual fund that automatically allocates your investment cash into different stocks and bonds for your retirement date
- For long term investing the best option is either an index fund or target date fund using a tax advantaged account and if you don’t use a tax advantaged account a regular investment account which will be taxed
Swensens Allocation
- 30%- Domestic Equities: us stocks large, mid, small cap
- 15%-Developed world international equities: funds from UK, Germany, France
- 5%- Emerging market equities: China, India, Brazil
- 20%- Real Estate Investment trusts: known as REITs which invest in mortgages and real estate
- 15%- Government bonds
- 15%- Treasury inflation protected securities
**Pick 3-7 index funds if you are choosing your own asset allocation and not a single target date fund. Such as domestic equities, international equities, real estate.
- Pick a small portion of your portfolio to invest into higher risk investments like crypto, art, startups, individual stocks of companies you like, and starting your own businesses
Use bankrates calculator to input investment contributions over time with an 8% return to see how much you will have in 10-30 years and think about how you want to earn money and invest money.
Investing Action Steps
- Figure out your investing style
- Either a target date fund to take care of everything for you or buy individual index funds
- Research your investments
- Look into the funds from Vanguard, Schwab, and T Rowe Price
- Buy your funds
- Transfer money to your investment account and pick your funds
Maintaining Your System & Other
Annual Financial Checklist
Take some time to maintain your automated financial system. Go through each of the steps below once a year.
Conscious Spending Evaluation:
- Fixed costs (50-60% income)
- Investments (10%)
- Savings (5-10%)
- Guilt Free Spending (20%)
- Reassess current subscriptions
- Renegotiate cable and internet bills
- Revisit spending goals: are they accurate and are you saving for them
- If fixed costs are too high look into cheaper or sharing rent, earning more, or renting out a room
- If you aren’t investing 10% it’s worth finding the money from somewhere else or increasing earnings
Negotiate Any Fees:
Use scripts from iwt.com/negotiate
- Cell phone bill
- Car insurance
- Cable and internet
- Bank fees
Investments:
- Confirm your contributing the max to your Roth IRA and 401k
- Take advantage of all the tax advantaged accounts you can
Debt:
- Revisit your debt payoff plan to make sure you are on track
Credit Cards:
- Make a plan to use credit card points
- Call to ask what other perks credit cards offer that you haven’t taken advantage of yet
- Confirm you’re not paying any unnecessary fees and if so negotiate them down
Earn More:
- Negotiate a raise
- Make money on the side or start a business
- Look into higher risk investments and passions
