Take small steps towards solid personal finance and free yourself from money worries. Ramit Sethi, author of “Will Teach You to Be Rich,” provides clear and actionable advice to help you navigate the confusing world of personal finance.
Learn how to use credit cards effectively, choose the right bank and investment accounts, plan your spending, and create a system that automates your financial growth. With Sethi’s guidance, you can achieve your vision of a “rich life” without being overwhelmed by technical jargon or conflicting advice.
Using credit cards responsibly can benefit your credit history and future loan eligibility.
Follow these six essential rules: pay your bills on time and in full, avoid fees, negotiate a lower APR, keep accounts open and active for longer credit history, and use card perks like extended warranties and travel insurance.
One late payment can hurt your credit score, raise your APR, and incur fees. By making smart choices and utilizing card benefits, you can improve your financial standing and save money in the long run.
Paying Off Debt
Eliminating debt is a smart financial move that can boost your credit score and save you thousands of dollars.
Here are five steps to help you pay off your debt:
- First, calculate the total amount of debt you owe.
- Second, decide which card to focus on paying off first, either by starting with the highest APR or the lowest balance.
- Third, negotiate a lower APR to reduce interest payments.
- Fourth, review your expenses to find ways to increase your monthly payments.
- Finally, get started with your plan, even if it’s not perfect. Don’t delay your progress by striving for perfection.
Choosing the Best Banks
Your credit cards and bank accounts are crucial to your financial system. To ensure a strong foundation, choose accounts with low fees. Banks profit from fees, so selecting a bank that charges minimal fees is a good indication that they aren’t trying to take advantage of you.
When searching for a new bank, consider three essential factors.
- First, trust is critical. Ask your friends which banks they trust, then check the bank’s website for any red flags like high fees or misleading account descriptions.
- Second, convenience is essential. If the bank’s services aren’t user-friendly, you’re unlikely to use them.
- Lastly, make sure the bank offers important features like competitive interest rates, free transfers to external accounts, and free bill pay.
Choosing Your Accounts
To get started, you’ll need a checking and savings account. Here are Sethi’s recommended accounts:
- Charles Schwab Bank offers Schwab Bank Investor Checking for usage.
- Using Capital One 360 Savings, you may set up sub-accounts for particular objectives.
- Once your bank accounts are set up, you can shift your attention to opening investment accounts.
The Power of Compounding
Investing beats saving because it offers a higher rate of return; the stock market averages about 8% annually, after accounting for inflation. This rate is crucial because of compound interest, where you earn interest on the interest earned in previous years. For example, a $100 investment earning 8% annually would become $108 after the first year and $116.64 after the second year.
The longer you leave your money in the market, the more you earn. Therefore, the earlier you start investing, the more money you’ll have at retirement.
Start by Opening Your 401(k)
A 401(k) is a retirement investment account that allows employers to automatically deduct a percentage of an employee’s paycheck. It offers several advantages:
- Your contributions are made pre-tax, giving you a higher principal investment amount and potential compound growth of 25 to 40%.
- Employers may match your contributions, providing you with free money.
- Investing is automatic, without any additional effort.
- The downside is that early withdrawal before age 59.5 will result in a 10% penalty and income tax. Therefore, 401(k) investments should be made for long-term financial planning.
A Roth IRA is a retirement account that doesn’t require an employer sponsor and is available to people with lower incomes. Unlike a 401(k), you can choose how to invest in a Roth IRA.
Also, the money you invest in a Roth IRA has already been taxed, which means you won’t pay taxes on the returns you earn. This gives you an advantage over a regular taxable investment account where you pay taxes on both your contributions and your returns.
Choosing a Brokerage Firm
Open a Roth IRA by signing up with an investment brokerage like Vanguard, Schwab, or Fidelity. Choose a discount brokerage that requires lower minimum investing fees than “full service” ones.
To determine how much you can contribute to your savings and investment accounts each month, create a personalized budget that aligns with your goals, values, and lifestyle. This approach will enable you to be confident that you’re saving enough while also allowing you to spend any remaining money without feeling guilty.
Deciding How You’ll Spend Your Money
Sethi recommends dividing your take-home pay into four categories:
- Fixed costs (50-60%): Your necessary monthly expenses, plus 15% for unexpected expenses.
- Investments (10%): Contributions to your long-term investment accounts.
- Savings goals (5-10%): For both short-term and long-term goals.
- Guilt-free spending (20-35%): Any money left over after accounting for the other categories.
Automating Your Financial System
Automating finances means establishing automatic transfers between accounts to distribute funds each month without manual intervention. It avoids budgeting errors and saves mental energy. Spend a few hours setting up the transfers between checking, credit cards, bills, savings, and investment accounts. The checking account will be the central node and automatically transfer funds to other accounts according to the allocated percentages.
Getting Ready to Invest
After setting up automated transfers to your investment accounts, it’s important to actually invest that money instead of letting it sit idle.
Asset classes, such as stocks and bonds, are the building blocks of investing. Stocks are unpredictable as their value is determined by shareholders, while bonds are a more stable investment with a predetermined payback period.
Asset allocation is the division of assets in your portfolio and helps control the amount of risk you take on. As you age, your risk tolerance decreases, so your asset allocation should change accordingly.
Target Date Funds
Investing can be made easy with target date funds. These funds automatically adjust your asset allocation based on your retirement timeline, providing automatic diversification and eliminating the need for managing individual stocks and bonds.
As retirement approaches, the fund will reallocate your investments into safer options like bonds. Additionally, it’s important to plan for major financial milestones such as paying for a wedding. To save for a wedding, estimate the desired date and total cost, divide the cost by the number of months, and save accordingly.
Negotiating a Higher Salary
To negotiate a higher salary, take advantage of your leverage when you get hired. Follow these tips from Sethi:
- Emphasize the value you’ll add to the company, not how much your salary will cost them.
- Use other job offers to show you’re not afraid to walk away if the offer isn’t fair.
- Negotiate total compensation, including vacation days and stock options.
- Be friendly and aim for a win-win agreement.
- Let them make the first offer and don’t reveal your salary.
- Practice with friends playing the role of the hiring manager.
Young people often have two major financial milestones: buying a car or a house. To buy a car, the first step is to figure out your budget and include all the costs associated with owning a car. Look for a reliable car and be ready to invest in preventative maintenance to save money. To get a good deal, wait until the end of the month and ask for quotes from multiple dealerships to start a bidding war.
When it comes to buying a house, start by deciding on a budget and save up 20% of the price for a down payment. The total monthly cost of owning a house should be no more than 30% of your monthly income. Don’t forget to account for closing costs, insurance, property taxes, and any needed renovations. Owning a home is more expensive than renting, so be prepared for the extra costs.
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