The Book in Three Sentences
In this I Will Teach You to Be Rich summary, you’ll learn how to earn more, save more, and live a rich life. The book revolves around four pillars of personal finance: banking, saving, budgeting, and investing. Once you’ve grown your capital, you can then move on to guilt-free spending.
I Will Teach You to Be Rich Summary
Introduction: Would You Rather Be Sexy or Rich?
There are only two things that are important when it comes to weight loss: eating less and exercising more. Yet most people insist on discussing small and unimportant details. Something similar happens with money: don’t track spending, don’t spend more than you realize, don’t discuss interest rates and stock, and don’t listen to your friends, parents, or financial experts on TV. Most people ignore money or feel guilty about it. To learn about money, you don’t have to debate the details, you have to take small steps to manage your spending. To get rich, you don’t have to be an expert, you just have to know the basics and get started.
Managing money is hard because there’s too much information floating around which leads to decision paralysis. On top of that, the media manipulates information, there’s a victim culture, and we like to pass the blame around.
10 Rules for a Rich Life
- Spend on the things you love, and save on the things you don’t
- Focus on the Big Wins, the things that will give you the best results
- Investing becomes boring over time and that’s fine
- There’s no limit to how much you have the potential to earn
- Stick to the program, even when people you know give you advice
- Create rules and frameworks around spending (for example, if you’re thinking about buying a book, just buy it.)
- Avoid “advanced” tips. Focus on doing the basics well and consistently
- You’re in control of your finances
- Being different is part of the Rich Life
- Avoid using spreadsheets
- Set up credit cards, pay off debt if you have it, master your credit history, and free credit rewards
- Set up the right bank accounts
- Open a 401(k) and an investment account
- Figure out how much you spend and redirect your money to where you want it to go
- Automate an infrastructure of accounts that play nice with each other
- Learn the difference between investing and picking stocks
Chapter 1: Optimize Your Credit Cards
Credit cards give you numerous perks as long as you pay them on time. It’s worth having them as long as you manage them well. So pay your bill at the end of the month, never miss payments, and don’t overuse credit cards.
To get rich, you can’t ignore your credit. Credit or credit history has two main components: your credit report and your credit score. Your credit report gives lenders information about your accounts and your payment history. Your credit score is a number between 300 and 500 which represents your credit risk to lenders. The score indicates how risky you are and you’re charged differently according to the score you have. Your credit report and credit score can save you a lot of money in interest rates.
To choose a credit card:
- Don’t accept credit cards via mail or from retail stores
- Get as many rewards as you can from them
- Pick a good one and forget about it
Credit cards reward you for your spending, either with cash back or travel. The author recommends cash back because it’s simple and straightforward. Never sign up for retail store credit cards. As a rule of thumb, have no more than two or three credit cards.
The six commandments of credit cards:
- Pay your credit card on time. Missing payments means a lower credit score, a higher APR, increased rates on your credit cards, and a late fee.
- Ask your credit card company to waive your annual fee.
- Negotiate a lower annual percentage rate.
- Keep your main cards for a long time and keep them active using an automatic payment. This improves your credit score. If you miss a payment, negotiate with your credit card company to try to have your fee removed.
- Get more credit but only if you have no debt. This is only for financially responsible people. It implies calling your card company and asking for a credit increase to improve your credit utilization rate.
- Use your credit card’s perks. When you’re responsible, you can take advantage of good deals on your credit. These include waived fees, extended credit, private promotions, extended warranties on your purchases, car rental insurance, trip cancellation, insurance, and more.
A lot of people know what to do when it comes to money, but they still make mistakes anyway. Knowing something is half the game, you still have to put the theory into practice and do it consistently. This explains why a lot of people act irrationally with money, Everyone tells themselves a story around the concept of debt, bills, and so on. Dr. Brad Klontz, a professor in financial psychology calls these stories, invisible money scripts.
To use a credit card efficiently, you have to pay it in full every month.
To get rid of credit card debt:
- Determine how much debt you have
- Decide what to pay in full first
- Negotiate the APR
- Decide where the money to pay your debt will come from. The most sustainable way is to spend less and prioritize debt
- Get started
Chapter 2: Beat the Banks
Banks make money by lending the money you deposit to others and they get their money back with fees.
Back account basics:
- Checking accounts: the place where your money goes before it moves to a savings account, investing account, or spending. You can deposit or withdraw money using debit cards, checks, and online transfers.
- Savings account: this is for short-term to mid-term savings. This is to save for holiday gifts, vacations, and weddings. You get an interest rate for saving your money in this kind of account.
The author suggests setting up an investment account instead of a savings account. The difference between the two accounts is that you withdraw money from the checking account often, but rarely from the savings account. The author recommends having the two accounts on two different backs. When looking for a bank, pay attention to three things: trust, convenience, and features.
Chapter 3: Get Ready to Invest
Saving money isn’t enough, you also need the help of compounding. Investing isn’t about picking stocks.
- A 401(k) is a type of investment account. The 401(k) is a retirement plan that a lot of companies offer to their employees. As long as you don’t withdraw funds from that account until you turn sixty years old, you get big tax advantages. To set it up, you authorize how much you allow to be sent to the account.
- A Roth IRA is another kind of retirement account with big tax advantages. The difference is that you contribute your own money. Unlike a 401(k) where you have to choose funds, a Roth IRA lets you invest in whatever you want, including index funds, individual stocks, and so on. Another difference is taxes. 401(k) uses pre-tax dollars which means you pay taxes when you withdraw your money at retirement. A Roth IRA uses after-tax dollars which means you invest taxed income and don’t have to pay tax when you withdraw it. That said, you have to see a Roth IRA as a long-term investment tool since you’re penalized for withdrawing your funds.
- A healthy savings account or HSA can let you grow money as well. The idea is that you save for medical-related expenses and you can invest the money you put in that account. Some people are eligible and some aren’t, so figure that out first.
Chapter 4: Conscious Spending
Create a Conscious Spending Plan. This requires planning ahead of time. There’s a difference between consciously deciding what you value and being cheap. Cut costs on things you don’t love, so that you can spend on the things you do.
- Spend on what you love: what’s important enough to spend a lot on and what’s not. The price isn’t that important, its value is. Your frugality should only affect yourself, not those around you.
- The a la carte method: cancel all subscriptions (magazines, cable, gym), then buy everything you need “a la carte”. This works because you’re probably overpaying for most subscriptions anyway, this method forces you to be conscious about your spending, and finally, you value what you pay for. Try to invest 10% of your pay. Alternatively, you can use the 60% solution where you use 60% of your income for essential experiences (food, bills, taxes, and rent) and distribute the remaining 40% in the following things: 10% on retirement savings, 10% on long-term savings, 10% on short-term savings, and 10% on fun things.
- The envelope system encourages you to allocate money for a specific category (buying video games, paying the rent, eating out) and once you spend that money over the course of a month, you can’t spend anymore. You can move money from one category to the next, but once the money from your envelopes is gone, you have to wait until next month. The key to spending less is building the habit little by little. By going from one extreme to the other, you risk jeopardizing the process. If you truly live paycheck to paycheck, consider asking for a raise getting a higher-paying job, or doing freelance work. Always have money saved for unexpected expenses or emergencies. When you get an unexpected, one-time income spend half of it on something fun and invest the rest.
Chapter 5: Save While Sleeping
Creating a system to automate your money is one of the best things you can do. Because it works in the background, this system generates money, and once you set it up, it doesn’t require time to maintain. Also, systems require you to put in the time and work now and you can benefit from it for years.
To make your Conscious Spending Plan automatic, the author recommends the Next $100 which involves deciding where your next $100 will go. Essentially, the idea is to divide those $100 and allocate them into the percentage you determined in the 60 percent solution (60% for essential expenses, 10% for an investment account, 10% for saving short-term, 10% for saving long-term, and 10% for fun.)
To implement an Automatic Money Flow, you have to link your accounts and set up automatic transfers. To do so, you need a list of your accounts, their URLs, logins, and passwords, so that you can connect everything together. Bear in mind that you can adjust the system to match your payment schedule, so make changes as you see fit.
Although every dollar you spend today will be worth more in the future, feel free to spend what’s left over. Don’t live only for tomorrow. Instead, consider investing in yourself and live with the consequences because it’ll be worth it and the potential return is infinite.
Chapter 6: The Myth of Financial Expertise
Expertise is about results, otherwise, it’s meaningless. No expert can truly predict the financial market and most of them are worse than automatic investments in low-cost funds. Most people don’t need a financial advisor and you can do everything on your own. There are two main types of funds:
- Mutual Funds: they’re a collection of investments such as stocks or bonds. They’re the best way to invest for most people. They are “active management” which means that a portfolio manager picks your stocks and gives you the best return. The problem is they get poor results over time and they charge a lot in fees.
- Index Funds: they involve “passive management” which means that computers (not people) choose the same stocks an index holds to try to match the market. Index funds have lower fees than mutual funds. Index funds are the ones the author recommends.
Chapter 7: Investing Isn’t for Rich People
The author recommends automatic investing because it has lower expenses and it’s automatic.
Never take your money out of the market, especially when it goes down. Keep investing every month regardless of what happens. The best point you can reach in personal finance is when your money makes more money and at some point, it makes so much that all of your expenses are covered. This is called being financially independent or FI. There’s a movement called FIRE which stands for financial independence + retiring early. Having financial goals is great, but don’t forget to live outside spreadsheets.
Asset allocation is how you distribute the investments in your portfolio. It includes stocks, bonds, stock funds, or bond funds. How you allocate your portfolio makes a difference in your returns.
- Stocks: these are shares of a company. When the economy does well, so does your stock. Instead of individual stocks though, you should choose funds, which are a collection of stocks.
- Bonds: these are IOUs from companies or the government. You can choose the term or the length of time. Bonds are safe, low-risk investments, so the return is lower than stocks. Investing in stocks turns your money illiquid though, which means that you can’t access it for a specific time without penalties.
- Cash: cash is a safe part of your portfolio, but you don’t get rewards over time for having it. In fact, due to inflation, you lose cash over time. Cash is useful for emergencies and little else.
Investing in one category is dangerous over time, so you have to diversify. Diversifying means owning a little of all stocks and bonds. You can then move on to index funds. Index funds buy stocks and match the market, unlike mutual funds which use experts who try to predict the individual stocks that are supposed to perform well. Index funds are run by computers, so there are no “experts” involved. To start, the author recommends target date funds, these are collections of funds that feature automatic diversification depending on your age. To buy into a fund, you need between $100 and $1000 as a minimum investment. The best places to invest after index funds and target date funds are your 401(k) and Roth IRA, in that order.
Instead of investing all of your money in a fund at once, you should invest regular amounts over time. People who only invest in cryptocurrency are speculators, not investors.
Chapter 8: How to Maintain and Grow Your System
Why do you want more money? Most people do it for freedom or security, but try to have clear and concrete objectives in mind. Your system is only as strong as the amount of money you put into it. You may have to rebalance from time to time, so review the system at least once a year. Think twice before reselling an investment.
Once you’ve optimized your finances:
- Create an emergency fund
- Buy insurance
- Invest in your children’s education
Chapter 9: A Rich Life
To live a rich life, you have to make decisions outside the spreadsheet and you have to design the kind of life you want. Using a spreadsheet to manage your personal finance is easy, what’s difficult is using money with the people around you. Here are some general guidelines:
- Ignore other people’s money advice
- Investing isn’t fun, living your rich life is
- Check your investment account no more than once a month
- To help your parents with money give them advice if they’re open to it
- Don’t tell people how much you make
- To get more money, earn more or spend less. The most effective way to earn more is by renegotiating your salary
- Buy a car you can afford and buy a reliable car that’s easy to maintain and you can use as long as you can