Date read: 2018-08-31
If you’re young and live in the US, it’s a 10/10. Great starter book on personal finance. Teaches a clever system to automate saving and guilt-free spending. Has detailed recommendations of bank accounts and credit cards (check his website for updates before opening any). It’s sequenced as a six-weeks-to-do-list so you take action that gets you 85% there, with options for optimizing later (becoming more of an expert). There’s a 2nd Edition that came out in 2019.
Source: Tim Ferriss
My Book Notes
“Our education system doesn’t teach this,” people whine. It’s easy for people in their twenties to wish that their colleges had offered some personal-finance training. Guess what? Most colleges do offer those classes. You just didn’t attend!
Do you need to be the Iron Chef to cook a grilled-cheese sandwich? No, and once you make your first meal, it’ll be easier to cook the next most complicated thing. The single most important factor to getting rich is getting started, not being the smartest person in the room.
Just as the diet industry has overwhelmed us with too many choices, personal finance is a confusing mess of overblown hype, myths, outright deception—and us, feeling guilty about not doing enough or not doing it right. But we can’t just blame corporations and the media: With both food and money, we’re not taking personal responsibility to step up, learn this stuff, and get started. The result is that many of us end up fat, consumption-minded, and poor. No, seriously: Two-thirds of Americans are overweight or obese, and the average American is nearly $7,000 in debt.
BECAUSE OF INFLATION, YOU’RE ACTUALLY LOSING MONEY EVERY DAY YOUR MONEY IS SITTING IN A BANK ACCOUNT.
The 85 Percent Solution: Getting started is more important than becoming an expert. Too many of us get overwhelmed thinking we need to manage our money perfectly, which leads us to do nothing at all. That’s why the easiest way to manage your money is to take it one step at a time—and not worry about being perfect. I’d rather act and get it 85 percent right than do nothing. Think about it: 85 percent of the way is far better than 0 percent. Once your money system is good enough—or 85 percent of the way there—you can get on with your life and go do the things you really want to do.
FAP: Similar to Tim Ferriss approach. This is the high-level principle for behavior change in the book.
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.
Establishing good credit is the first step in building an infrastructure for getting rich.
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.
Your credit score (often called your FICO score because it was created by the Fair Isaac Corporation) is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders.
Because a good credit score can save you hundreds of thousands of dollars in interest charges. How? Well, if you have good credit, it makes you less risky to lenders, meaning they can offer you a better interest rate on loans.
One of the key differences between rich people and everyone else is that rich people plan before they need to plan.
While other people spend many hours cutting coupons, growing food in their gardens to save on grocery bills, or being frugal with lattes, they’re failing to see the bigger picture.
It’s fine to be frugal, but you should focus on spending time on the things that matter, the big wins.
Avoid those credit card offers you receive in the mail.
Avoid cash-back cards, which don’t actually pay you much cash. People get really mad at me when I say this, but cash-back cards are worthless. “Get 1 percent back on all your spending!” Wow, if I spend $2,000 per month on my credit card, I’ll get back $20. “But Ramit,” you might say, “twenty dollars is better than nothing.” Sure, but what if you could save more by getting a free $500 flight? It wouldn’t be as obvious as receiving money each month, but in the long term, you’d save more with a travel rewards card.
The Six Commandments of Credit Cards
- Pay off your credit card regularly. Yeah, we’ve all heard it, but what you may not know is that your debt payment history represents 35 percent of your credit score—the largest chunk.
- Get all fees waived on your card. This is a great, easy way to optimize your credit cards because your credit card company will do all the work for you. Call them using the phone number on the back of the card and ask if you’re paying any fees, including annual fees or service charges. It should go a little something like this:
YOU: Hi, I’d like to confirm that I’m not paying any fees on my credit card.
CREDIT CARD REP: Well, it looks like you have an annual fee of $50. That’s actually one of our better rates.
YOU: I’d rather pay no fees. Which card can you switch me to that doesn’t charge fees? I’d like to make sure my credit score isn’t affected by closing this account, too. Can you confirm?
What to Do If You Miss a Payment If you pay within a few days of your missed bill, it usually won’t be reported to the credit agencies. Call them to be sure.
YOU: I understand I was late, but I’d like to have it waived.
CREDIT CARD REP: Why?
YOU: It was a mistake and it won’t happen again, so I’d like to have the fee removed. (Note: Always end your sentence with strength. Don’t say, “Can you remove this?” Say, “I’d like to have this removed.”) At this point, you have a better-than-50-percent chance of getting the fee credited to your account. But just in case you get an especially tough rep, here’s what to say.
YOU: I’m sorry, but I’ve been a customer for four years and I’d hate for this one fee to drive me away from your service. What can you do to remove the late fee?
- Negotiate a lower APR. Your APR, or annual percentage rate, is the interest rate your credit card company charges you. The average APR is 14 percent, which makes it extremely expensive if you carry a balance on your card. Put another way, since you can make an average of about 8 percent in the stock market.
So, 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. In my experience, this works about half the time. It’s important to note that your APR doesn’t technically matter if you’re paying your bills in full every month
- Keep your cards for a long time and keep them active. Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score.
If you’re getting a new credit card, don’t close the account on your old one. That can negatively affect your credit score. As long as there are no fees, keep it open and use it occasionally, because some credit card companies will cancel your account after a certain period of inactivity. To avoid having your account shut down, set up an automatic payment on any card that is not your primary card. Don’t close old accounts. use them for small subscriptions on autopay
- Get more credit. (Warning! Do this only if you have no debt.). Getting more credit to 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.
Lower is preferred because lenders don’t want you regularly spending all the money you have available through credit—it’s too likely that you’ll default and not pay them anything.
YOU: Hi, I’d like to request a credit increase. I currently have five thousand dollars available and I’d like ten thousand.
CREDIT CARD REP: Why are you requesting a credit increase?
YOU: I’ve been paying my bill in full for the last eighteen months and I have some upcoming purchases. I’d like a credit limit of ten thousand dollars. Can you approve my request?
REP: Sure. I’ve put in a request for this increase. It should be activated in about seven days.
I request a credit-limit increase every six to twelve months.
Always Track Your Calls to Financial Companies: when I call to dispute anything, I open a spreadsheet that details the last time I called them, whom I spoke with, and what was resolved.
- Use your rewards!
If you have very good credit, you should call your credit cards and lenders once per year to ask them what advantages you’re eligible for. Often, they can waive fees, extend credit, and give you private promotions that others don’t have access to. Call them up and use this line:
“Hi there. I just checked my credit and noticed that I have a 750 credit score, which is pretty good. I’ve been a customer of yours for the last four years, so I’m wondering what special promotions and offers you have for me . . . I’m thinking of fee waivers and special offers that you use for customer retention.”
Credit card rewards you might not know about:
- Automatic warranty doubling: Most cards extend the warranty on your purchases.
- Car rental insurance:
- Trip-cancellation insurance: If you book tickets for a vacation and then get sick and can’t travel, your airline will charge you hefty fees to re-book your ticket. Just call your credit card and ask for the trip-cancellation insurance to kick in, and they’ll cover those change fees—usually up to $1,000 per year.
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.
I’m going to admit my bias up front: I’m a big fan of online banks like ING Direct and Emigrant Direct because they offer simple banking with great rewards and almost no downsides.
These online banks have realized that by eliminating overhead, they can offer dramatically higher interest rates and better customer service than the traditional Big Banks. Online banks have no branches and no tellers and spend very little on marketing, which allows them to accept lower profit margins than conventional banks. That savings is passed on to you as lower fees and higher interest rates.
Emigrant Direct Online Savings Account: (800) 836-1997 HSBC Direct: (888) 404-4050 ING Direct Orange Savings: (800) 464-3473
FAP: Check his blog for updated accounts before opening.
Customer-acquisition cost is more than two hundred dollars for big banks.
ING Direct and the American Bankers Association put the cost of acquiring a new customer between $100 and $3,500—including all of their advertising, personnel, and technology costs.
They don’t want to lose you over something as small as a $5 monthly fee. Use this knowledge as leverage whenever you contact any financial company.
Open an online high-interest savings account (three hours). You’ll earn more in interest and pay less in fees.
Leave one and a half months of living expenses in your checking account, or as close to it as you can manage. (This prevents overdrafts as you’re getting used to transferring money between accounts. Remember, most transfers take three to five business days.)
“Compounding,” Albert Einstein said, “is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.”
The Ladder of Personal Finance. These are the five systematic steps you should take to invest:
- Rung 1: if 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. A “401(k) match” means that for every dollar you contribute to your 401(k), your company will “match” your contribution up to a certain amount.
- Rung 2: Pay off your credit card and any other debt.
- Rung 3: Open up a Roth IRA (see page 83) and contribute as much money as possible to it.
- Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match).
- Rung 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there. Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it’s starting a company or getting an additional degree, there’s often no better investment than your own career.
The Beauty of Roth IRAs
One of the benefits is that it lets you invest in whatever you want. Whereas a 401(k) has an array of funds that you must choose among, a Roth IRA lets you invest in anything you want: index funds, individual stocks, anything. A second difference has to do with taxes: Remember how your 401(k) uses pretax dollars and you pay taxes only when you withdraw money at retirement? A Roth IRA uses after-tax dollars to give you an even better deal. With a Roth, you invest already-taxed income and you don’t pay any tax when you withdraw it.
Exception: Most people don’t know this, but you can withdraw your principal, the amount you actually invested from your pocket, at any time, penalty-free. There are also exceptions for down payments on a home, funding education for you or your partner/children/grandchildren, and some other emergency reasons. Important note: You qualify for the above exceptions only if your Roth IRA has been open for five years or more.
To start a Roth IRA, you’re first going to open an investment brokerage account with a trusted investment company (see the table on next page). Think of the “investment brokerage account” as your house, and the Roth IRA as one of the rooms.
We’ll focus on discount brokerages like Vanguard and T. Rowe Price because they charge dramatically smaller fees than full-service brokerages like Morgan Stanley.
FAP: check for updates on his blog
Frugality isn’t just about our own choices, though. There’s also the social influence to spend. Call it the Sex and the City effect, where your friends’ spending directly affects yours. Next time you go to the mall, check out any random group of friends. Chances are, they’re dressed similarly—even though chances are good that they have wildly different incomes.
Spend on What You Love: frugality isn’t about cutting your spending on everything. That approach wouldn’t last two days. Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on—and then cutting costs mercilessly on the things you don’t love.
Book reference: The Millionaire Next Door
Conscious Spending Plan (“I automatically send money to my investment and savings accounts, then just spend the rest”),
FAP: automatic, low maintenance system. will power wanes off after initial excitement
THE À LA CARTE METHOD: Instead of paying for a ton of channels you never watch on cable, buy only the episodes you watch for $1.99 each off iTunes. Buy a day pass for the gym each time you go (around $5–$10). Buy songs you want for $0.99 each from Amazon or iTunes.
Each of them pays themselves first, whether it’s $500/month or $2,000/month. They’ve built an infrastructure to do this automatically so that by the time money ends up in their checking account, they know they can spend it guilt-free.
Conscious Spending Plan involves four major buckets where your money will go: Fixed Costs, Investments, Savings, and Guilt-free Spending Money.
FAP: I use Mint to track my Guilt-free Spending money
CATEGORIES OF SPENDING
FAP: on Dumb Taxes.
I actually have a “Stupid Mistakes” category in my money system. When I first started this, I saved $20/month for unexpected expenses. Then, within two months, I had to go to the doctor for $600 and I got a traffic ticket for more than $100. That changed things quickly, and I currently save $150/month for unexpected expenses.
Do you know people who get so into their idea du jour that they go completely overboard and burn out? I would rather do less but make it sustainable. The problem is that that’s rarely sexy.
I’ve come to realize that when a person goes from one extreme to another, the behavioral change rarely lasts.
I’d rather have people cut their spending by 10 percent and sustain it for thirty years than cut 50 percent for just a month.
Whether you’re implementing a change in your personal finances, eating habits, exercise plan, or whatever . . . try making the smallest change today. Something you won’t even notice.
Saving with a goal—whether it’s tangible like a house or intangible like your kid’s education—puts all your decisions into focus.
SET UP A SPECIFIC ACCOUNT. Another key difference was how I was saving. I opened up an ING Direct savings account and named it “Down Payment,” regularly transferring in the amount I had determined I wanted to save. As the months passed, the amount in that account grew larger and larger, and I felt as though I was making progress toward my goal. My friend never set aside an account, so his regular checking account was one big pot of money mentally “earmarked” for various things. His account balance grew but he had no pride of achievement or sense of closing in on his goal (because he didn’t have a goal). It’s possible that he could have saved as much as I had and just not have known it!
I recommend the envelope system, in which you allocate money for certain categories like eating out, shopping, rent, and so on. Once you spend the money for that month, that’s it: You can’t spend more. If it’s really an emergency, you can dip into other envelopes at the cost of spending in that category.
What If You Don’t Make Enough Money?
NEGOTIATE A RAISE
A recent study by NACE, the National Association of Colleges and Employers, showed that companies pay more than $5,000 to hire the average college graduate. If you’ve been out of school for a few years, it’s even more expensive. If they’ve already spent $5,000 recruiting you, and thousands more training you, would they really want to lose you?
REMEMBER THAT GETTING A RAISE IS NOT ABOUT YOU. IT’S ABOUT YOU DEMONSTRATING YOUR VALUE TO YOUR EMPLOYER.
Cool Trick: Quickly Discover How Much You Make To find your annual salary, just take your hourly rate, double it, and add three zeros to the end. If you make $20/hour, you make approximately $40,000/year. If you make $30/hour, you make approximately $60,000/year. This also works in reverse. To find your hourly rate, divide your salary by two and drop the three zeros. So $50,000/year becomes approximately $25/hour.
GET A HIGHER-PAYING JOB. During the job-hiring process, you have more leverage than you’ll ever have.
DO SOME FREELANCE WORK Freelancing can be a relatively easy way to earn some extra money. Think about what skills or interests you have that others could use. You don’t necessarily have to have a technical skill. Babysitting is freelancing (and it pays very well). If you have free time at home (or don’t have a car), you can sign up to be a virtual assistant on sites like http://www.elance.com and http://www.odesk.com. Tutoring is also a simple, profitable way to make some extra side cash: You might be able to moonlight at a company like Kaplan and help kids with test prep, or you can post a notice at your neighborhood library and offer to teach English, math, or anything. What about dog walking?
Remember, busy people want others to help them with their lives.
Planning for irregular expenses. Known irregular events (vehicle registration fees, Christmas gifts, vacations).
There’s an easy way to account for this type of irregular event. In fact, this is already built into your spending plan: Under Savings Goals, you allocate money toward goals where you have a general idea of how much it will cost.
There’s one important thing to remember when you get a raise: Maintain your current standard of living.
Buy yourself something nice that you’ve been wanting for a long time, and make it something you’ll remember. After that, however, I strongly encourage you to save and invest as much of it as possible, because once you start getting accustomed to a certain lifestyle, you can never go back.
I never miss the money I invest because I never see it.
The key to taking action is, quite simply, making your decisions automatic.
by setting up an automatic payment plan you actually make it difficult to stop the contributions to your retirement account! Not because you can’t—you can adjust your system any time—but because you’re lazy and you won’t.
Create Your Automatic Money Flow
LINK YOUR ACCOUNTS
SET UP YOUR AUTOMATIC TRANSFERS
If you don’t synchronize all your bills, you’ll have to pay things at different times and that will require you to reconcile accounts. Which you won’t do. The easiest way to avoid this is to get all your bills on the same schedule.
To accomplish this, gather all your bills together, call the companies, and ask them to switch your billing dates.
Another strategy to avoid impulse buying is filling up online shopping carts or wishlists and then making yourself wait a week or two before you pull the trigger and hit the “Check out” button.
5th of the month: Automatic transfer to your savings account. FAP: do the same for the 20th if you’re paid twice a month.
5th of the month: Automatic transfer to your Roth IRA.
7th of the month: Auto-pay for any monthly bills you have. Log in to any regular payments you have, like cable, utilities, car payments, or student loans, and set up automatic payments
7th of the month: Automatic transfer to pay off your credit card.
If you’re paid twice a month: I suggest replicating the above system on the 1st and the 15th—with half the money each time.
Money exists for a reason—to let you do what you want to do. Yes, it’s true, every dollar you spend now would be worth more later. But living only for tomorrow is no way to live.
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.
Mutual funds—which are simply collections of stocks
Fund managers fail to beat the market 75 percent of the time,
NOT ONLY DO MOST FUND MANAGERS FAIL TO BEAT THE MARKET, THEY CHARGE A FEE TO DO THIS.
An index is a way to measure part of the stock market. For example, the NASDAQ index represents certain technology stocks, while the S&P 500 represents 500 large U.S. stocks. There are international indexes and even retail indexes.
Index funds have lower fees than mutual funds because there’s no expensive staff to pay.
Over the long term, the overall stock market has consistently returned about 8 percent.
When combined with their high expense ratios, actively managed funds have to outperform cheaper, passively managed funds by at least 2 or 3 percent just to break even with them—and that simply doesn’t happen.
Book reference: The Smartest Investment Book You’ll Ever Read, Daniel Solin
The test of a real Automatic Investor is not when things are going up, but when they are going down. It takes strength to know that you’re basically getting shares on sale—and, if you’re investing for the long term, the best time to make money is when everyone else is getting out of the market.
As Warren Buffett has said, investors should “be fearful when others are greedy and greedy when others are fearful.”
They demonstrated that more than 90 percent of your portfolio’s volatility is a result of your asset allocation.
Asset allocation is your plan for investing, the way you organize the investments in your portfolio between stocks, bonds, and cash.
Diversification is D for going deep into a category (for example, buying different types of stocks: large-cap, small-cap, international, and so on), and asset allocation is A for going across all categories (for example, stocks and bonds).
index funds set a lower bar: A computer matches the indexes by automatically matching the makeup of the market. For example, if a stock represents 2 percent of the S&P 500, it will represent 2 percent of the index fund. Index funds are the financial equivalent of “If you can’t beat ’em, join ’em.”
Disadvantages: When you’re investing in index funds, you typically have to invest in multiple funds to create a comprehensive asset allocation (although owning just one is better than doing nothing). If you do purchase multiple index funds, you’ll have to rebalance (or adjust your investments to maintain your target asset allocation) regularly, usually every twelve to eighteen months.
Lifecycle funds are actually “funds-of-funds,” or collections made up of other funds, which offer automatic diversification.
Your lifecycle fund will own many funds, which all own stocks and bonds. It sounds complicated, but believe it or not, this actually makes things simple for you, because you’ll have to own only one fund, and all the rest will be taken care of for you.
Choosing 401K funds. As a young person, I encourage you to pick the most aggressive fund they offer that you’re comfortable with.
Depending on what company your employer uses to administer your 401(k), your fund options may be a little pricey in terms of expense ratios (I consider anything over 0.75 percent expensive), but on balance, you’re getting huge tax advantages and employer-match benefits. So, it’s worth it to invest in these funds, even if they aren’t perfect.
Choosing lifecycle funds for your roth ira. Check for updates in his blog: Two companies with popular lifecycle funds are Vanguard and T. Rowe Price, both of which are great.
Other popular companies with lifecycle funds include Schwab, Fidelity, and TIAA-CREF.
THE SWENSEN MODEL OF ASSET ALLOCATION
30 percent—Domestic equities: U.S. stock funds, including small-, mid-, and large-cap stocks
15 percent—Developed-world international equities: funds from developed foreign countries, including the United Kingdom, Germany, and France
5 percent—Emerging-market equities: funds from developing foreign countries such as China, India, and Brazil. These are riskier than developed-world equities, so don’t go off buying these to fill 95 percent of your portfolio.
20 percent—Real estate funds: also known as REITs, short for real estate investment trust. REITs are funds that invest in mortgages and residential and commercial real estate, both domestically and internationally.
15 percent—Government bonds: fixed-interest U.S. securities, which provide predictable income and balance risk in your portfolio. As an asset class, bonds generally return less than stocks.
15 percent—Treasury inflation-protected securities: also known as TIPS, these treasury notes protect against inflation. Eventually you’ll want to own these, but they’d be the last ones I’d get after investing in all the better-returning options first.
the most important takeaway is that no single choice represents an overwhelming part of the portfolio.
Choosing Index Funds
Choosing your own index funds means you’ll need to dig around and identify the best index funds for you. I always start researching at the most popular companies: Vanguard, Schwab, and T. Rowe Price. (You’ll find their phone numbers and websites on page 87.) I especially like etrade.com’s research tools, which let you easily see how much the funds cost, what their fees are, and what types of stocks they contain.
Ideally you should have just one (a lifecycle fund). But if you’re picking your own index funds, as a general guideline, you can create a great asset allocation using anywhere from three to seven funds.
The first thing you want to do when picking index funds is to minimize fees. Look for the management fees (“expense ratios”) to be low, around 0.2 percent, and you’ll be fine. Really, anything lower than 0.75 percent is okay. Most of the index funds at Vanguard, T. Rowe Price, and Fidelity offer excellent value. Remember: Expense ratios are one of the few things you can control, and higher fees cost you dearly—
Dollar-Cost Averaging: Investing Slowly Over Time
Anyway, 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.
But if you have the cash, why would you invest at regular intervals instead of all 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.
Dollar-cost averaging decreases risk even further because your money is diversified across time.
Blog post: he invested in 2008 instead of pulling the money out. How did he have $46k in cash in his 401k?
I just made the largest investment of my life, moving $46,000 in my 401(k) from cash into a Fidelity index fund.
Anyone who tells you otherwise is lying. FAP: Why do writers keep saying this? Is it a rhetoric technique? Looks like a way to convince you without providing proof (maybe it’s too complicated?)
“Save $1000 in 30 Days Challenge”
Note:You can get out of almost any fee in any company. Here it explains how to get out of early termination fees for cell phone contracts.”companies spend a fortune on national advertising to get new customers, then treat them horribly and lose them. But even they’re smart enough to know it’s cheaper to keep you around than to get a new customer.” ”How about plans not listed in your website?” ”Your goal here is to be switched to their ’customer retention’ department, which can give you better deals. ” ”You always have the most leverage when there are other offers on the table. That’s why I recommend checking with other reputable insurance companies to see what prices they can offer you.”
Rebalancing a Portfolio
If you have a diversified portfolio, some of your investments, such as international stocks, may outperform others. To keep your asset allocation on track, you’ll want to rebalance once a year so your international stocks don’t become a larger part of your portfolio than you intended.
If you’ve chosen to manage your own asset allocation, you’ll need to rebalance every twelve to eighteen months.
Although it’s great that one of your investment areas is performing well, you want to keep your allocation in check so one sector isn’t disproportionately larger or smaller than the others. Rebalancing your portfolio will make sure your assets remain allocated properly and protect you from being vulnerable to one specific sector’s ups and downs.
Stop investing in the outperforming area and grow the other areas of your portfolio until your allocation is back in line with your goals.
There’s another way to rebalance, but I don’t like doing it. You can rebalance by selling the outperforming equities and plowing the money into other areas to bring the allocation back under control. I hate selling because it involves trading fees, paperwork, and “thinking,” so I don’t recommend this.
If, on the other hand, one of your funds has lost money, that will also knock your asset allocation out of whack. In this case, you can pause the other funds and add money to the loser until it returns to where it should be in your portfolio.
People worry about taxes too much, and they make all kinds of bad decisions to avoid them.
“Don’t let Uncle Sam make your investment decisions.”
MANAGING ASSET ALLOCATION WITH MULTIPLE ACCOUNTS AND MINIMAL EFFORT by nickel of http://www.fivecentnickel.com
THE ONE POT SOLUTION. The solution is simple: Treat all of your accounts as one big pot of money.
In order to make this work with the least effort possible, keep one account as your “variable” account and make the others static. The variable account will contain a mix of different funds, which you can rebalance based on your target asset allocation.
The static accounts will each contain a single type of investment, whether it’s domestic equities, international equities, or bonds.
Tax- inefficient (i.e., income-generating) assets such as bonds should go into a tax-advantaged account like an IRA or 401(k).
Taxable accounts should only hold tax- efficient investments like equity index funds, and you should try to make these accounts static to minimize the tax consequences associated with selling your investments when rebalancing.
Since withdrawals from Roth accounts such as a Roth IRA or Roth 401(k) will be completely tax free, you should seek to maximize growth in those accounts by picking aggressive investments.
If you believe the market will recover, that means investments are on sale for cheaper prices than before, meaning not only should you not sell, but you should keep investing and pick up shares at a cheaper price.
Giving Back: Elevating Your Goals Beyond the Day-to-Day
in 2006, I created The Sethi Scholarship (scholarships.ramitsethi.com), which awards money and mentoring to one entrepreneurial young person per year.
Look, my scholarship is for $1,000. You don’t need to be rich to give back. Even $100 helps.
Plan That Few Others Do
Just ask people five to ten years older than you what they wish they had started earlier, then do that.
- CREATE AN EMERGENCY FUND. Your emergency fund should contain six months of spending money (which includes everything: your mortgage, other loans, food, transportation, taxes, gifts, and anything else you would conceivably spend on).
- INSURANCE. As you get older and more crotchety, you’ll want more and more types of insurance to protect yourself from loss.
- CHILDREN’S EDUCATION. Whether or not you have children yet, your first goal should be to excel financially for yourself. 529s—educational savings plans with significant tax advantages—are great for children’s education. If you’ve got kids (or know that one day you will) and some spare cash, pour it into a 529.
LIVING TOGETHER: WHAT TO DO IF ONE OF YOU MAKES MORE MONEY THAN THE OTHER The first question to ask is “Do you realize you’re living in sin?” Just kidding, I don’t give a damn.
When it comes to splitting bills, there are a couple of options. The first, and most intuitive, choice is to split all the bills 50/50.
She encourages dividing expenses based proportionately on income.
FAP: the problem with doing this with rent is that the person that makes less may feel like a guest instead of an equal roommate.
Budget and plan for the wedding.
We don’t think about this at all: one of the most major expenditures of our lifetimes, which will almost certainly arrive in the next few years, and we don’t even sit down for ten minutes to think about it.
Changing the number of guests doesn’t change the cost as much as you’d imagine. In the example on the next page, reducing the headcount by 50 percent reduces the cost only 25 percent.
Beyond the obvious—negotiating for better prices on the venue and food—the best suggestion I’ve heard about cutting wedding costs is to tackle the fixed costs.
Your honeymoon is going to cost $5,000? See if you can get someone to give you frequent flier miles as a wedding gift, check for travel deals online,
Bridesmaids’ dresses cost $4,000? Cut it in half by going with a local dress store.
Chances are, it’s better to optimize the three biggest cost areas by 30 percent than to get a 10 percent reduction in everything (and it’ll keep you sane).
Negotiating your salary at a new job is the fastest legal way to make money. Your starting salary is even more important than you think because it sets the bar for future raises and, in all likelihood, your starting salary at future jobs.
If you negotiate, you explicitly communicate that you value yourself more highly than the average employee.
- Remember that nobody cares about you.
Your manager cares about two things—how you’re going to make him look better, and how you’re going to help the company do well.
Illustrate how much value you can provide to the company.
Highlight how you’ll make your boss’s life easier by being the go-to person he can hand anything to.
Highlight the ways you’ll help your company hit its goals.
“Let’s find a way to arrive at a fair number that works for both of us.”
- Have another job offer—and use it. This is the single most effective thing you can do to increase your salary. When you have another job offer, your potential employers will have a newfound respect for your skills. It’s like seeing the hot girl in the bar who’s surrounded by guys. You want her more because everyone else does, too.
3. Come prepared (99 percent of people don’t). Most of the negotiation happens outside the room. Call your contacts. Figure out the salary amount you’d love, what you can realistically get, and what you’ll settle for.
Literally bring a strategic plan of what you want to do in the position and hand it to your hiring manager.
5. 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 negotiate the job title.
They love negotiating stock options, because top performers always want more, as it aligns them with the company’s goals.
6. Be cooperative, not adversarial.
“We’re pretty close . . . Now let’s see how we can make this work.”
- Smile. Smile. Really, do it.
- Practice negotiating with multiple friends. This sounds hokey, but it works better than you can imagine. If you practice out loud, you’ll be amazed at how fast you improve. Yet nobody ever does it because it feels “weird.” I guess it also feels “weird” to have an extra $10,000 in your pocket, jackass.
Call over your toughest, most grizzled friend and have him grill you.
Check his blog for more on negotiation.
Five Things You Should Never Do in a Negotiation
- 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?”
- 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?”
- 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?”
- NEVER LIE. Don’t say you have another offer when you don’t. Don’t inflate your current salary. Don’t promise things you can’t deliver. You should always be truthful in negotiations.
Buying a Car
the most important factor is how long you keep the car before selling it. You could get the best deal in the world, but if you sell the car after four years, you’ve lost money. Instead, understand how much you can afford, pick a reliable car, maintain it well, and drive it for as long as humanly possible.
Don’t be afraid to walk out if the dealer tries to change the finance terms on you at the last minute. This is a common trick.
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.
Buying a House
Adding taxes and maintenance of house: when you buy a house, you’ll owe property taxes, insurance, and maintenance fees that will add hundreds per month. If the garage door breaks or the toilet needs repairing, that’s coming out of your pocket, not a landlord’s—and home repairs are ridiculously expensive. So even if your mortgage payment is the same $1,000/month as your rental, your real cost will be about 40 to 50 percent higher—in this case, more like $1,500/month when you factor everything in.
If you sell through a traditional realtor, you pay that person a huge fee—usually 6 percent of the selling price. Divide that by just a few years, and it hits you a lot harder than if you had held the house for ten or twenty years. There are also the costs associated with moving. And depending on how you structure your sale, you may pay a significant amount in taxes.
Buy only if you’re planning to live in the same place for ten years or more.
Basic math guidlines for buying a house: I’m conservative when it comes to real estate. That means I urge you to 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.
As Patrick Killelea from the real-estate site http://www.patrick.net says, “You don’t get rich spending a dollar to save 30 cents!”
Don’t buy a house just to save on taxes