financial planning

Book Summary of The Millionaire Fastlane by MJ DeMarco

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By questioning accepted financial knowledge, The Millionaire Fastlane by MJ DeMarco provides a shortcut to wealth and early retirement. DeMarco offers three methods for building wealth: active production, hopeful accumulation, and insatiable consumption.

Each formula reflects your control over finances and time, and influences your income, spending habits, and strategy. This guide delves into each formula, explaining why the first two are unsuccessful and revealing how to leverage time for unlimited passive income with the third formula. It concludes with actionable advice to fast-track your path to wealth.

Formula #1: Insatiable Consumption

People who use the Insatiable Consumption formula to preserve an appearance of riches by spending more than they make, according to DeMarco, are on a route to poverty. These consumers prioritize luxury items and experiences to fulfill their desire for recognition and admiration, without the willingness to work for it. In essence, they are more motivated by the appearance of wealth than actual wealth.

Seeking Short-Term Gratification Risks Long-Term Security

DeMarco emphasizes that the Insatiable Consumption formula for wealth relies on credit and quick fixes, disregarding the effort needed to create actual wealth. Credit destroys your chances of financial freedom, limits your ability to save, and creates financial stress. Additionally, when you rely on credit, you lack control over your finances and are vulnerable to external factors that can bankrupt you.

Financial Outcome: Poverty

DeMarco asserts overspending without regard to financial security or lifestyle will hinder wealth accumulation, even with a high salary. Spending more than you earn inevitably leads to poverty.

Spending Mindfully Prevents Lifestyle Creep

High earners can fall into lifestyle creep by increasing spending on non-essential items as income rises. This can lead to overspending and financial instability. Experts suggest creating a budget and being mindful of spending habits. Alternatively, Ramit Sethi recommends allocating a portion of income to different areas to enjoy non-essential expenses without overspending.

Formula #2: Hopeful Accumulation

The employment plus market investments equals limited income and a dismal retirement, according to DeMarco’s formula for wealth accumulation. Hopeful accumulators adhere to conventional methods recommended by financial advisors for a comfortable retirement, such as obtaining an expensive education, working for decades, budgeting every penny, buying a home, and investing in pensions and safe accounts.

Sacrificing Time and Money Creates the Illusion of Control

DeMarco believes that the Hopeful Accumulation formula for wealth is flawed because it relies on factors beyond your control, such as the value of your education, the economy, and your health.

Uncontrollable Factor #1: The Value of Your Education

DeMarco argues that an expensive education can limit your freedom in two ways: Firstly, it forces you to work to pay off your debts, which can take more than 20 years to clear, despite your increased salary. Secondly, it restricts your career choices, as your education’s value depends on the opportunities in your field.

Uncontrollable Factor #2: The Time You Spend Working

DeMarco points out that relying solely on a fixed hourly wage or annual salary limits your earning potential because time is a finite resource – you can’t work more than 24 hours a day or beyond your life expectancy.

Uncontrollable Factor #3: The Economy

DeMarco warns that the economy’s unpredictability means that sudden downturns can greatly affect your ability to maintain a stable income. Losing your job or business can make it challenging to contribute regularly to your pension, investments, debts, or mortgage.

Uncontrollable Factor #4: The Markets

DeMarco explains that accumulating wealth through investments relies on time, regular contributions, and high returns. However, the reality is that the small sums of money allowed for investment, low rates of return, poor investment decisions, and inflation may not have a significant impact on your net worth.

Additionally, DeMarco argues that relying on home equity to increase your net worth is not reliable as real estate values may not always rise.

Uncontrollable Factor #5: Your Health and Well-Being

DeMarco cautions that sacrificing your health, relationships, and freedom by working long hours for a prosperous future may not guarantee a payoff. There is no assurance that you will be healthy enough to work until retirement or enjoy your money by the time you retire.

Financial Outcome: You Might Get Rich but You Won’t Be Able to Enjoy It

According to DeMarco, the usual approach of taking a job for life, deferring gratification, and waiting for interest rates to increase is not advised since it does not guarantee a pleasant retirement and depends on factors outside your control.

Sacrificing time, freedom, and pleasures for this plan is not worth it, as you may not be able to enjoy your wealth when you’re older and inflation could decrease its value.

Formula #3: Active Production

DeMarco’s Active Production formula for wealth is unrestricted profits + investments/assets = massive wealth and early retirement. Active producers aim to create and enjoy wealth through discipline and forfeiting short-term comfort.

This approach leads to extraordinary wealth in a short time and eliminates debt fears, unlike insatiable consumers who confuse “get rich quick” with “get rich easy.”

Using Time Generates Liberty and Passive Revenue

DeMarco suggests active producers can accumulate wealth quickly by creating passive income, which generates recurrent income without direct involvement. By investing in assets that appreciate over time, such as physical or intellectual property, it’s possible to expand income potential and grow net worth rapidly.

Financial Outcome: A Lifetime of Luxury and Freedom

DeMarco contends that directing funds towards passive income businesses and investments has a massive impact on earnings, health, relationships, and freedom. Although it requires an initial investment of time and effort, the rewards far surpass those of the other formulas.

The Active Producers’ Checklist

DeMarco believes that becoming an active producer and starting a business that generates passive income is the quickest way to build wealth, provided you’re not a highly-paid celebrity or athlete. To achieve this, you need to find businesses that offer value, have growth potential, and only require periodic support.

Passive income can come from selling low-priced products to millions of customers or high-priced products to a few customers, or even high-priced products to millions of customers, which has the potential to make you a billionaire. There are several business strategies that provide passive revenue, such as renting out real estate, developing internet systems, selling knowledge, and distributing goods.

DeMarco offers seven ways to generate business ideas and increase your income:

  1. Take action based on your knowledge to create opportunities.
  2. Switch your focus from consuming to producing to discover opportunities.
  3. Consider what value you can offer to others and solve their problems.
  4. Avoid the easy route and focus on unique and challenging opportunities.
  5. Control everything in your business to avoid vulnerability to external factors.
  6. Look for tax-saving opportunities by registering your business as a corporation.
  7. Think big and aim for creating a business that can generate millions in passive income.

 

Book Summary of I Will Teach You to Be Rich by Ramit Sethi

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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.

Credit Cards

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.

Roth IRAs

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.

Spending Mindfully

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.

Big-Ticket Purchases

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.