I’ve been on a personal-finance, FIRE movement bender these past couple of weeks. That has led me to discover FIRE figures including Mr. Money Mustache, Mad Fientist and plenty of others. As much as I like consuming podcasts and reductionist articles, majority of my learning usually comes through books. I begin digging the reading list of these folks and that’s how I stumbled onto Ramit Sethi’s I Will Teach You to be Rich. Here are my key-takeaways:
Your credit score has a more far-reaching impact on your finances than saving a few dollars on a Starbucks coffee. An excellent credit score can potentially save you tens of thousands of dollars in mortgage, car or personal loans. Here’s where the book stresses on building and utilizing a credit card system to increase/salvage your credit score. Ramit acknowledges that building an excellent score (~800) takes years and years of boring management and that there are no hacks or easy way out.
One thing I foolishly did a while back was to cancel my first ever Wells Fargo college credit card since it wasn’t serving any purpose. Credit card utilization rate and history (how long have you had the card) play a pivotal role in shaping your score. So if you’re planning to cancel any of your worthless cards, hold them on if they’re zero-fee or follow the cancellation tips (e.g. increase your net CC limit) in the book. Some other bullet points:
- Keep your old credit cards active, or they run the risk of being cancelled because of inactivity.
- You can take a loan against your house through Home Equity Line of Credit.
Investments + How Financial Advisors Are Mostly Worthless
Most employers offer 401(K) matching of some sort and the book says it’s an unforgivable sin if we don’t capitalize on this “free money”. After you’ve set up your 401(K), you should create a Roth IRA to take advantage of “tax-deferred” nature of these retirement accounts. The principal amount that you put in the Roth IRA can be withdrawn free from any penalty or tax fees. The book recommends you can be more controlling of investments that happen through this Roth IRA i.e. more aggressive investments (stock-based) until you’re 35 and conservative (blended investments) after.
You should be fearful when others are greedy and greedy when others are fearful.
Ramit spends an inordinate amount of time explaining how active management of your monies through financial advisors won’t return 8% annualized returns close to 75% of the time. On top of this, financial advisors will charge hefty (sometimes hard to justify) maintenance fees. TL;DR: Financial advisors aren’t worth it for the common folks. This John Stewart video about retirement plans sums up the book’s sentiment:
Other interesting bullet points:
- Dollar cost average out your big bets in the stock market for better ROI (i.e. invest $1K each month for a year rather than $12K at once).
- You’re most likely losing money through your high-interest savings account because of inflation.
- Take a 40-50 year outlook on investing.
Real Estate Investing
Buying a house only makes sense for good income earners if you’re planning to stay more than 7 years. Buying has a plethora of miscellaneous expenses:
- Property Taxes: $8K/annually
- Maintenance: $300/monthly
- Insurance: HOA, PMI etc
- Inflation: 2%/annually
- Major repairs, improvements, Diwali decorations etc
Ramit suggests you shouldn’t buy a house for investment purposes, pay at least 20% down and check out your state government tax-reduction housing initiatives/subsidies if you’re planning for this big purchase.
Although the title is pretty click-baity and the principles won’t apply to readers outside the US, this book provides plenty of refreshing insights on how you can optimize/automate most of your personal finance infrastructure. It has recalibrated my outlook towards real-estate, wedding spending (staying under the 28K budget is going to very hard :/), financial advisors and the power of index funds. Worth a read!