I Will Teach You to Be Rich

1-Page Summary

Personal finance can be confusing and overwhelming, but if you focus on taking one small step at a time, you can create a solid financial foundation. Once your finances are under control, you won’t have to worry about money, and you can focus on creating a life you love. The author of I Will Teach You to Be Rich, Ramit Sethi, is a self-taught expert in personal finance. His goal is to help you cut through the noise of conflicting and overly technical financial advice, get past your own hang-ups around money, and take small steps toward a “rich life”—whatever that looks like for you.

In this summary, you’ll learn how to make that “rich life” a reality by using credit cards wisely, choosing the right bank accounts and investment accounts, planning out how you want to spend your money, and ultimately creating a financial system that grows your money automatically.

Credit Cards

If you use credit cards responsibly (by always paying your bill on time, in full), they’re essentially free short-term loans that help improve your credit history, making it easier to get larger loans (like for a mortgage or a car) down the line. Here are the six most important rules for using credit cards the right way:

Pay your bills on time, preferably in full. Even just one late payment can lower your credit score, raise your annual percentage rate of interest paid (APR), and stick you with a late fee (usually about $35).
If you’re paying any fees, call your credit card company and get them waived.
Lower your APR. Ideally, you’re paying off your balance in full every month, but if you’re not able to do that yet, your APR determines how much more you’ll end up paying in total. Calling your credit card company to negotiate a lower APR can save you thousands.
Keep your accounts open and active. Credit history is an important part of determining your credit score—the longer you keep an account open and continue making on-time payments, the better your score.
Take advantage of your card’s perks, including automatic extended warranties, airline miles, and rental car insurance.

Paying Off Debt

Getting out of debt not only feels good emotionally, it also boosts your credit score and can save you thousands of dollars in interest. Here’s how to pay off your debt in five steps:

Step 1: Total up your debt. Many people have no idea how much debt they actually have, which makes it impossible to make a solid plan.
Step Two: Decide where to start. Focus on fully paying off one card at a time. You can either start with the card with the highest APR or the lowest balance.
Step 3: Negotiate a lower APR. This will reduce how much you pay in interest.
Step 4: Figure out how you can afford more aggressive monthly payments. Take a look at your spending habits—where can you afford to cut costs?
Step 5: Get started. It’s better to get started on a plan that’s mostly solid than to spin your wheels trying to come up with a plan that’s 100% perfect.

Choosing the Best Banks

Together, your credit cards and bank accounts form the foundation of the rest of your financial system. To make sure that foundation is solid, look for accounts with low fees. Fees are how banks make a huge portion of their profits, so low fees are a good sign that a particular bank isn’t trying to squeeze more money out of you for their own benefit.

When you’re looking for a new bank, look for three things:

Trust. Start by asking your friends which banks they personally trust. Then, browse the websites of those banks. Keep an eye out for excessive fees, minimum required balances, or misleading descriptions of different accounts.
Convenience. If the bank’s website, app, or other services aren’t convenient to use, you’ll be far less likely to actually use them.
Features. Make sure the bank offers the basic features you’ll need most: competitive interest rates, free transfers to external accounts, and free bill pay.

Choosing Your Accounts

To start, you’ll need a checking account and a savings account. Here are the ones Sethi personally uses and recommends:

Schwab Bank Investor Checking with Schwab One Brokerage Account through Charles Schwab Bank. This account boasts an impressive list of features, like zero fees, unlimited ATM fee reimbursements, overdraft protection, and free checks.
Capital One 360 Savings. Aside from having no fees and no minimums, the main benefit of this account is that you can set up sub-accounts to save up for specific goals (like a wedding or emergency fund).

Investment Accounts

Now that you know how to optimize your credit cards and bank accounts, we’ll turn our focus to opening investment accounts.

The Power of Compounding

Investing is the most powerful way to grow your money because it offers a higher rate of return than even the best savings accounts. On average, the stock market’s annual net return is about 8% (after accounting for inflation). That number is an average from decades worth of data, which means that your money will earn an average of 8% per year over the long-term, even if that rate fluctuates in the short-term.

The reason why that 8% rate is so important is the power of compound interest. With compounding, the interest you earn in a given year is added to the principal (original) amount you invested; then, the following year, you earn interest on that new principal amount.

For example, let’s say you invest $100 in the stock market (to make things easy, we’ll assume an exact 8% annual rate of return). That means that after one year, you’d have earned $8, for a new total of $108. In the second year, you then earn an 8% return on that new amount, so you’d earn $8.64 for a new total of $116.64. The longer you leave your money in the stock market, the more that principal grows, and the more you earn every year.

Start by Opening Your 401(k)

The money in your 401(k) is “pretax,” which means it isn’t taxed until you withdraw it. That means your contributions will be much bigger (because they haven’t had taxes taken out of them yet), meaning your principal investment amount is higher, which can increase the compound growth of your investments by 25 to 40%.
Your employer might match your contribution. That means that every time you funnel money into your 401(k) account, your employer will “match” that contribution up to a certain percentage of your salary. In other words, this is free money.
You’ll invest automatically, without even knowing it. Your 401(k) contributions come out of your paycheck before you get paid, so you won’t have to worry about investing it yourself—it’s already taken care of by the time you get paid each month.

There is one downside to a 401(k): If you withdraw your money before age 59.5, you’ll incur a 10% early withdrawal penalty in addition to paying income tax on the money. Basically, your 401(k) is exclusively for long-term investing, so you should avoid withdrawing the money early unless you’re absolutely desperate.

Roth IRAs

A Roth IRA is another type of retirement account, but unlike a 401(k), you don’t need an employer to sponsor it. These accounts are only available to people below a certain income level, which changes slightly each year. Roth IRAs also allow you to invest however you want rather than making you choose between a few pre-selected funds like a 401(k).

The other major difference between a Roth IRA and a 401(k) is that the money you invest in your Roth IRA has already been taxed—which means that you’ll pay taxes on the money you put in, but you’ll pay no taxes on the money you earn on top of that. That gives you a huge benefit over a regular, taxable investment account, in which you pay taxes on both your contributions and your returns.

Choosing a Brokerage Firm

To open a Roth IRA, you’ll need an account with an investment brokerage. You should focus on discount brokerages, which offer nearly all the same features as “full service” brokerages, but with much smaller minimum investing fees. (That’s how much money you’ll need before you can actually invest the money in your account. Opening the account itself is always free.) Sethi personally recommends Vanguard, Schwab, and Fidelity as discount brokerages to help you get started investing.

Spending Mindfully

Now that your savings and investment accounts are set up, you need to know how much you can afford to contribute to them every month. To do that, you’ll need a system for spending your money in a way that works for your specific goals, values, and lifestyle. That way, you’ll not only be confident that you’re contributing enough to your savings and investment goals, but you’ll also know that any money left over is yours to spend however you want—with zero guilt.

Deciding How You’ll Spend Your Money

Sethi’s system for mapping out your spending involves dividing your take-home pay into four major areas. The breakdown of these costs should look roughly like this:

Fixed costs. Fixed monthly costs are your necessities: rent or mortgage payments, groceries, and so on. Add up your total for all monthly costs, then add 15% to cover unexpected expenses like car repair, traffic tickets, or emergency medical treatment. Ideally, your fixed costs should total about 50 to 60% of your monthly take-home pay (the amount on your paycheck after taxes).
Investments. This category includes contributions to your 401(k), Roth IRA, and any other long-term investment accounts. Investments should be about 10% of your take-home pay.
Savings goals. This category is for all your savings goals, from short-term (like a vacation) to long-term (like a house). Plan to allot 5 to 10% of your monthly take-home pay for savings.
Guilt-free spending. Any money you have leftover after accounting for the other categories goes into the guilt-free spending category. This is money you get to use however you like, with zero guilt, because you know you’ve already paid your bills and funded your future through savings and investments. Ideally, this category will have 20-35% of your take-home pay.

Automating Your Financial System

Now that you have a system of spending your money that works for you, it’s time to start automating that plan so that your money divides itself up each month without you having to lift a finger.

How Automation Works

If you’ve ever tried to stick to a budget or keep track of your bills manually, you’ve probably noticed how hard it is to stay on top of your finances when you have to consciously think about where each dollar goes. It’s too easy to get distracted, bored, or overwhelmed, so we end up making costly mistakes. Automation is different: Instead of requiring constant focus, automating your financial system allows you to frontload the hard work by spending a few hours setting up your accounts; after that, you get to move on and focus on other things.

In practice, here’s how automation works: Set up a system of automatic transfers between your checking account, credit cards, bills, savings, and investment accounts. Your checking account will be the central node of this system—once your paycheck lands in that account each month, your system will kick in and initiate transfers from your checking account into all your other accounts based on the percentages you came up with when you mapped your planned expenditure.

Getting Ready to Invest

Now that your pre-planned system of transfers is funneling money into your investment accounts each month, you can start thinking about how to actually invest that money. One crucial thing to note about investing is that funding an investment account is different from actually investing that money. If you set up automatic contributions to your 401(k) and Roth IRA earlier in this summary, you haven’t actually invested that money yet—and it will just sit there, earning zero returns, until you do! This is a common mistake that can cost you thousands of dollars in lost potential returns.

Start your investing journey by learning more about different asset classes, which are the building blocks of investing.

Asset Classes

Asset classes are simply types of investments (like stocks or bonds), and each asset class has varied assets within it. For example, “stocks” is an asset class composed of all kinds of different stocks: large companies, small companies, international companies, and so on. Let’s look at each asset class in more detail, starting with stocks.

Stocks

When you think of investing, you probably think of stocks first. Stocks are shares of ownership in a particular company. Stocks are one of the most unpredictable investments because their value is determined by the shareholders. For example, if a company seems to be doing really well, more and more people will want to buy stock in that company, which drives up the price of each individual share. But if something happens to shake people’s faith in that company (like a merger or a supply shortage), shareholders will start selling off their shares and cause the stock price to drop.

Bonds

Bonds are a different type of asset class. They’re a much more stable investment than stocks because the value of a bond doesn’t fluctuate based on the whims of the market. When you buy a bond, you’re essentially giving a small loan to the bond issuer (which can be the federal government, local governments, or a corporation) with a predetermined payback period. Bonds provide a buffer against market volatility, which means that if some of your investments are in bonds rather than stocks, you won’t lose your entire investment if the market crashes.

Asset Allocation

Now that we understand the building blocks of investing, let’s learn how to combine them into a healthy investment portfolio using asset allocation, which is the division of assets (like stocks and bonds) in your portfolio. Managing your asset allocation is the best way to control the amount of risk in your portfolio because you control how much of your money is invested in higher-risk options (like stocks) versus safer investments like bonds. In other words, the way you distribute your investments is more important than the specific stocks, bonds, or funds you choose to invest in.

Your asset allocation should reflect your risk tolerance. In your twenties and thirties, you can afford to take bigger risks with your money because you have plenty of time to recover from any losses before you retire. However, as you get older, your risk tolerance will decrease (because if you take a big loss in the stock market at age 59, you won’t necessarily have the time to recoup your investment before retirement). Your asset allocation should change to reflect those changes in your risk tolerance.

Target Date Funds

If keeping track of a portfolio full of stocks, bonds, and index funds makes your head spin, don’t worry. There’s an easier way to invest: Target date funds (also called “target retirement” or “lifecycle” funds), which automatically rebalance your investments based on the year you plan to retire. That way, you don’t have to worry about adjusting your asset allocation as you age—a target date fund will automatically reallocate more of your investments into safer options like bonds as you get closer to retirement. These funds also provide automatic diversification because they’re essentially funds made up of other funds, so you can own stock in a huge variety of companies just by buying into a single target date fund.

Financial Milestones

Paying for a Wedding

Studies show that the average American wedding costs somewhere around $35,000—and that the average American thinks their wedding won’t cost nearly that much. Instead of assuming that you will somehow beat the average and have a truly simple, low-budget wedding, take those statistics to heart and start saving for your wedding now—even if you’re not engaged.

To figure out how much you should be saving each month for your future wedding, start by estimating when you want to get married. Then, use that estimate to figure out how long you have to save, and divide the total wedding cost by that number.

Negotiating a Higher Salary

The best time to negotiate your salary is the moment you get hired because you have more leverage. Here are Sethi’s top tips on how to negotiate a higher salary:

Make the negotiation about the company, not about you. In other words, emphasize the value you’ll add to the company rather than how much your salary will cost them.
Leverage other job offers. That way, the hiring manager knows you’re not afraid to walk away if she can’t come up with a fair number.
Negotiate total compensation, not just money. Don’t be afraid to ask for vacation days or stock options as part of your overall compensation.
Be friendly. Smile often and remember that your goal is to come up with an agreement that works for both of you.
Let them make the first offer and don’t reveal your salary. This makes it harder for them to make a lowball offer rather than an offer that reflects the real value of the position.
Practice, practice, practice. Ask your friends to play the role of hiring manager and drill you with the hardest questions they can think of. You’ll feel awkward at first, but try to take it seriously.

Big-Ticket Purchases

Another financial milestone on the horizon for many young people is buying a car or a house. These “big-ticket” items are important because they’re a unique opportunity to save money.

Buying a Car

The first step to buying a car is figuring out your actual budget. To do this, look back at your plan for expenditure to see how much you can afford to put toward the costs of owning a car every month. This isn’t just a car payment: You also need to include insurance, gas, parking, and maintenance. When you’re deciding what car to buy, keep in mind that the single best way to save money on a car is to drive it for as long as possible, so look for a reliable car and be prepared to invest in preventative maintenance.

When you’re ready to buy, wait until the end of the month, when salespeople are trying to meet their quotas and are more likely to give you a good deal. Then, reach out to a handful of dealerships through their websites, tell them what car you’re looking for, and ask them to quote you a price. You can use those quotes to start a bidding war between the dealerships, which means you get to field lower and lower offers from the comfort of home (you’ll only have to visit the dealership in person at the very end to sign the paperwork).

Buying a House

A house is probably the biggest single purchase you’ll make in your lifetime—and if you come prepared, you can save over $100,000. However, home ownership is often more expensive than people expect. If you own your home, you’ll be responsible for everything a landlord covers when you rent: insurance, property taxes, general upkeep, and fixing anything that goes wrong.

If you do decide to buy, start by deciding on a budget. You’ll need to save up 20% of the price of the home for a down payment. Once you have that saved, total up the total monthly cost of owning a house in your price range (including maintenance, taxes, insurance, and so on). That total monthly cost should be no more than 30% of your monthly income.

Introduction

Does thinking about your personal finances make your palms start to sweat? If so, you’re not alone. The sheer amount of information out there about managing your finances is overwhelming, especially for people in their 20s or 30s who are just starting their financial journeys. However, if you choose to focus on what you can control instead of giving in to that confusion or focusing on the flaws of our economic system, you can start building the financial habits that will put you on track to a healthy financial life.

The author of I Will Teach You to Be Rich, Ramit Sethi, is a self-taught expert in personal finance. Because he learned the ins and outs of money management through experience, he understands that traditional money advice—like “just stop buying lattes''—is completely unhelpful. His approach is different: Rather than focus on “sexy” strategies like obsessing over the hottest new investment opportunities, Sethi argues that most people just need to know a few basics in order to grow their personal wealth. His goal is to help you cut through the noise of conflicting and overly technical financial advice, get past your own hang-ups around money, and take small steps toward a “rich life”—whatever that looks like for you.

In this chapter, we’ll discuss common excuses people make for not taking control of their financial lives, how to overcome them, and how to define what a “rich life” means to you. Then, in the rest of the summary, we’ll learn how to make that “rich life” a reality by using credit cards wisely, choosing the right bank accounts and investment accounts, planning out how you’ll spend your money, and ultimately creating a financial system that grows your money automatically.

Common Excuses for Not Managing Money (and How to Avoid Them)

As a financial educator, Ramit Sethi has heard every excuse in the book for why his system can’t possibly work for someone because of their individual circumstances. And while there are structural inequalities that give some people an unfair financial advantage over others, the fact that there are some factors you can’t control isn’t a valid excuse for ignoring what you can control.

For example, if you work at a minimum wage job, it might be much harder for you to save money than it is for someone with a trust fund. And while you can’t change that unfair advantage, you can decide whether to use it as an excuse not to try or to refocus on whatever factor you can control—even if that’s just something as small as automating your credit card payments so you never face another late fee.

Over the years, Sethi has learned that many people don’t want to hear that logic—they’d rather make excuses than take control of the problem. Most of these excuses fall into two categories: decision paralysis and blaming the system.

Decision Paralysis

Information is helpful, but too much information can easily distract and overwhelm us. When people decide to take control of their financial lives, many people feel like they can’t (or shouldn’t) make financial decisions until they have all the information. However, the opposite is true: The more information you have, the less likely you are to act on it. This is called decision paralysis.

Thankfully, all you really need to know are the basics of financial health that you’ll learn in this summary; any information beyond that will just add to the confusion and overwhelm many of us feel when it comes to finances. It’s normal to be nervous about making a mistake, but at this stage in your financial journey, remember that the worst possible mistake you can make is not getting started at all. If you start investing early (ideally before age 35), you’ll be better situated in the long run than someone who waited until age 45 to invest—even if you make a few mistakes along the way.

If you’re older than 35 and just getting started with investing, don’t let this information scare you off. When it comes to investing, starting early is best, but starting now is far better than not starting at all.

Blaming the System

American socioeconomic policies have created a deeply unequal economic situation in which people who are born into privilege have an unfair advantage over everyone else. While those issues are real and important, they’re outside of anyone’s individual control—so when it comes to growing your own wealth, it’s much more productive to focus on what you can control than to fall back on blaming the system. Here are some of the common excuses people use for giving up on trying to improve their financial lives:

“My situation means I can’t save.” Your situation may be difficult, and you may not be able to save as much money as other people in the same amount of time, but you can still save some. The important thing is not to use your situation as a reason not to try at all.
“This financial system won’t work because the society is unfair.” Sometimes, that’s true—the American socioeconomic system is deeply unfair. However, if your goal is to increase your wealth, it doesn’t help to focus on those larger issues that you can’t control. Instead, focus on what you can control; no matter how insignificant it might feel, you’ll always be better off than if you didn’t try.
“If they’d taught this in school, I’d be better off by now.” If you went to college, they probably did teach personal finance classes, even if you didn’t take them.
“Financial institutions prey on their customers.” That’s true, and it’s what they’re designed to do. But like any other situation we can’t control, it’s best to move on and focus on the things we can control instead of getting bogged down in anger or helplessness.
“I can’t afford to get it wrong and end up worse off.” Investing can be scary, especially for people who’ve lived through global economic recessions. However, remember that investing is about long-term wealth—you don’t need to worry about the market fluctuating in the short term so long as there’s even modest long-term growth. If you’re especially nervous, remember that not all investments are equally risky, so you can always put your money in very conservative, low-risk options.
“I have no way to make extra money to invest.” That’s okay—you don’t need to. Instead of bringing in more money, this book will focus on cutting your existing costs to free up money to invest.
“I want really impressive returns, not average ones.” When it comes to investing, average is actually the best place to be: You’ll have less risk, avoid unnecessary fees, and still make a solid profit at the average 8% rate of return.

To get the most out of this book, we need to move past these excuses and focus on taking small steps toward financial success. Here are the key ideas to keep in mind as you read:

“Good enough” is better than perfect. If you can get started with managing your money and get it right most of the time, you’ll still be richer than if you don’t start at all.
Get comfortable with making mistakes so that you can learn from them.
Understand your priorities so you can spend money on the things you love—guilt free—by economizing on things that don’t matter to you. The goal of this book is to help you live your version of a rich life, including spending money on whatever means most to you.
Embrace “boring” when it comes to your financial life. You won’t become a venture capitalist just by following Sethi’s advice, but you’ll consistently grow your money with far less risk.
The goal of accumulating wealth is to free you up to focus on things other than money. The more hands-off your financial system, the more you can focus on more important things in life than spreadsheets.
Be proactive with your finances. Instead of passively accepting things like bank fees, make the effort to deal with them now and save yourself thousands in the future.

What Does a “Rich Life” Mean to You?

Being “rich” means something different to everyone. Your version of rich may look like taking lavish vacations every year, or financing your parents’ retirement, or donating huge sums to charity. In any case, having a clear vision of what a rich life means to you will help you define your goals and make financial decisions that will help you get there. We’ll cover specifics later on, but in general, here are Sethi’s 10 rules for a rich life:

Spend freely on things you love by cutting costs on things you don’t.
Focus on the five to 10 things that will have the biggest impact on your financial situation instead of getting bogged down in specifics.
Think of investing as a long-term strategy. You won’t be seeing huge returns right away, but over time, you’ll be better off than people with more “exciting” investments.
Reducing your spending is helpful, but there’s only so much you can cut. Instead, focus on maximizing your earning potential.
Ignore financial advice from friends and family. Everybody has conflicting ideas, and getting bogged down in those perspectives will just add to the confusion and decision paralysis.
Create your own spending rules, including what you will spend on, not just what you won’t. For example, one of Sethi’s personal rules is that if he wants to buy a book, he does—no second guessing, no questions asked. Books are something he allows himself to spend extravagantly on no matter what because he knows he’s cutting the costs in other areas to make that possible.
Don’t worry about “advanced” tips. Just stick to the basics. You’ll make more progress by consistently focusing on the “boring” rules than wasting time on advanced tips, just like you’ll make more progress as a runner by going for a jog than spending hours comparing different brands of running shoes.
Focus on what you can control instead of complaining about what you can’t.
Create the life you really want, not what you think a rich life should be—even if that’s wildly different from other people’s definition of success.
Do the work now so that your money takes care of itself while you focus on living your best life.

Exercise: Decide What a “Rich Life” Means to You

Being “rich” means something different to everyone. Take a moment to think about what a rich life would look like for you.

In general, what are the most important reasons you want to accumulate wealth? (For example, maybe you want to retire early, have more career flexibility, or eliminate the constant stress of making ends meet.)
Now, list three more specific financial goals by completing the phrase, “I’ll think of myself as rich when I can…” These can be big or small—think anywhere from “order appetizers before a restaurant meal” to “charter my own private yacht”—but try to be as specific as possible. (Remember, these goals should align with your values. They’re less about making money for money’s sake and more about having the freedom to spend time and money on things that are important to you.)
How is your vision of a Rich Life different from what you thought it meant to be “rich” or “successful” growing up? Why is your vision a better fit for you personally than that default definition?

Chapter 1: Credit Cards

Now that you know what a rich life looks like for you, you need to know how to get there. The first step is building healthy credit card habits. You’re probably familiar with the scare tactics other financial writers use to convince you to stay away from credit cards, but credit cards aren’t inherently bad—if you use them responsibly, they’re a great way to proactively improve your credit and get access to useful perks. In this chapter, we’ll learn the pros and cons of credit cards, how to use credit cards responsibly to build your credit, and how to pay off any existing debt you have.

The Pros and Cons of Credit Cards

Credit cards can be a powerful tool in your wealth-building arsenal, but if you already carry credit card debt, you may see them as more of a menace than a tool. The reality is this: If you use credit cards responsibly (by always paying your bill on time, in full), they’re essentially free short-term loans that help improve your credit history , making it easier to get larger loans (like for a mortgage or a car) down the line. On top of that, credit cards offer useful perks, like automatic warranty extensions on purchases you make using the card.

However, if you don’t manage to completely pay off your credit card bills in full every month, the penalties add up quickly. If you only make the minimum payment one month instead of paying off your balance in full, the balance you carry over to the next month starts to rack up interest at the annual percentage rate (APR), which is usually around 14% or higher. That interest keeps accruing as long as you carry a balance, which means that by the time you pay it off, you’ll often have paid more in interest than the original cost of the purchase!

Using Credit Cards to Build Credit

Credit cards are a helpful way to build credit, which is the foundation of the rest of your financial life. Your credit is a snapshot of your debt history, and it’s what lenders use to determine whether to loan you money (like for a mortgage or a student loan). If you use your credit card regularly and pay the balance off in full, you’re essentially taking out a mini loan and paying it back on time every month, which shows lenders that you can be trusted to borrow money and pay it back.

When lenders look at your credit, they’re looking at two main components: your credit report and your credit score. Your credit report is a comprehensive account of your credit history—all the loans and credit cards you’ve ever had, and all the payments you made on them. Your credit score sums up all that information into a single number between 300 and 850—the higher the number, the better your credit and the more attractive you are to lenders. Credit scores are also sometimes called FICO scores because the Fair Isaac Corporation (FICO) invented the credit score system.

A good credit score shows potential lenders that you have a history of paying back your loans, which means there’s less of a risk of them losing money if they give you a loan. As a result, they can offer lower interest rates, which can save you tens of thousands of dollars over the life of the loan. Even if you don’t anticipate needing to apply for a loan in the immediate future, building good credit takes time, and investing that time now will set you up for success years down the line when you do decide to apply for a loan.

To illustrate the importance of having good credit, the table below shows how your credit score changes how much you pay over the life of a 30-year mortgage (based on APRs calculated in 2018). Notice how borrowers with the best credit get the lowest interest rates, meaning they pay significantly less overall than borrowers with poor credit scores. In fact, in this scenario, someone with a score of 620 would pay over $70,000 more than someone with a score of 850 over the life of the mortgage.

Credit score	APR	Total amount you pay
760-850	4.279%	$355,420
700-759	4.501%	$364,856
680-699	4.678%	$372,468
660-679	4.892%	$381,773
640-659	5.322%	$400,804
620-639	5.868%	$425,585

Knowing your credit score is important if you want to build wealth. To check your score, you can use a free website like Credit Karma or pay a small fee for a more accurate, official score from MyFico. To get a more comprehensive picture, you can download your entire credit report for free from AnnualCreditReport.com once a year by law. Establishing good credit is one of the most important things you can do to improve your financial situation, so it’s better to focus your energy on that step than worry about cutting costs elsewhere—in the long run, improving your credit will save you much more money than clipping coupons.

Finding the Right Card for You

Using a credit card the right way—by paying off your balance in full every month, on time, using automatic payments—is a fast and easy way to boost your credit. If you’re in the market for a new card, Sethi has four guidelines for choosing the best one for you:

Opt for a rewards card so that you’ll earn either cash back or travel miles with every dollar you spend on the card.
Avoid retail store cards. The 10% you’ll save on your purchase at that store won’t make up for the high interest rates and exorbitant fees these cards usually have.
Stick to two or three credit cards. While credit cards are an important part of your credit history, they’re not the only source of credit—and the more cards you have, the easier it is to slip up, miss a payment, and accidentally damage your credit instead of strengthening it. If you already have a few cards, hold off on opening any new ones for now.
Start with Sethi’s personal recommendations. As a personal finance guru, Sethi’s done his research on the best credit cards out there. Here are the cards he uses personally:
- For everyday purchases: Alliant cash back card
- For travel and eating out: Chase Sapphire Reserve
- For business: Capital One cash back business card
- For extra benefits: Amex Platinum card

Using Credit Cards the Right Way

Once you have credit cards you’re happy with, you need to learn how to use them the right way—otherwise, it’s all too easy to forfeit the benefits and wind up saddled with debts and fees. Here are the six most important rules for using credit cards the right way:

1) Pay your bills on time, preferably in full. Even just one late payment can lower your credit score, raise your APR, and stick you with a late fee (usually about $35). You can bounce back from the occasional hit to your credit, but it’s best to avoid the issue in the first place by setting up automatic payments. If you do miss a payment, call the credit card company and tell them it was a one-time mistake and you’d like to have the late fee removed (make sure you’re telling them you’d like the fee removed, not asking if they can or will remove it). This works more than half the time.

2) If you’re paying any fees, try to get them waived. Start by calling your credit card company and asking a representative whether you’re paying any annual fees or service charges on your card. If you are, tell them you’d like a no-fee account and ask them to waive any current fees. This works more often than you might expect, but if not, ask if they have a no-fee card that you can switch to. Credit card companies don’t want to lose your business, so they’ll work with you to find a solution.

3) Lower your APR. Again, this involves calling your credit card company. If you’re nervous about the idea of negotiating, keep in mind that credit card APRs are usually between 13-16% and can be much higher. Ideally, you’re paying off your balance in full every month, but if you’re not able to do that yet, your APR determines how much more you’ll end up paying in total.

To make that more concrete: Let’s say you buy a $1000 smartphone on a card with a 14% APR. If you only make the minimum payments each month instead of paying off the balance in full, you’ll end up paying $732.76 in interest by the time you pay off the phone—so that $1000 phone ends up actually costing you $1732.76. You might occasionally need to use your credit card for a legitimate need that you can’t pay off right away, so lowering the APR as much as possible is crucial to limiting how much extra you’ll end up paying for that purchase.
When you call, tell the representative that you want a lower APR. When they ask why, use one of two reasons: If you have no debt, tell them you’ve been paying your bill in full and on time for several months now. If you do have debt, tell them you want to begin paying it down more aggressively. In either case, make sure to mention that other cards are offering lower APRs , and that you don’t want to have to switch your business to a different company that offers a low-interest card. Offering you a discount is often cheaper for the company than having to sign a brand new customer, so they may work with you if it means keeping your business.

4) Keep your accounts open and active. Credit history is an important part of determining your credit score—the longer you keep an account open and continue making on-time payments, the better your score. That means that keeping that account open will ultimately benefit you more than switching your main card every time you find a great introductory APR somewhere else. This is especially important if you’re planning to apply for a loan in the next six months because closing an account will slightly reduce your credit score.

5) Call your credit card company and get a credit increase—but only if you have no current debt. This improves your credit utilization rate , which is responsible for determining 30% of your credit score. Your credit utilization rate is how much of your available credit you’ve actually used, which we can calculate by dividing the balance you currently owe by your total available credit.

For example, if you owe $1,000 and have $1,000 in available credit, you’ve used 100% of your available credit. But if you owe $1,000 and have $5,000 in available credit, you’ve only used 20% of the total available credit. The lower your credit utilization rate, the better your credit score, because you’re less at risk of defaulting on the card.
You should only use this tip if you have no existing credit card debt because increasing your credit limit could tempt you to spend more and ultimately accumulate more debt rather than help you pay it down.

6) Take advantage of your card’s perks. If you have a rewards card, you probably know that you can earn cash back and airline miles on your purchases. However, credit cards offer a host of other benefits, such as:

Automatically extending the warranty on anything you purchase on the card (meaning that even when the manufacturer warranty expires, you can still get repairs and replacements covered)
Trip insurance to reimburse airline change fees
Rental car insurance for damages up to $50,000
Concierge services that can help you get tickets to sold-out events
Disputing charges on your behalf (for example, if your cell phone company charges you a fee even after you’ve negotiated out of it, your credit card company can often get the fee reimbursed for you)

Credit Card Debt

Most people have at least some debt, whether from credit cards, student loans, or a mortgage. In this chapter, we’ll discuss credit card debt exclusively (we’ll cover student loan debt in Chapter 7). Although we think of it as “normal,” debt can be a crushing weight, both financially and emotionally. Those emotions are so overwhelming that we freeze up and avoid thinking about debt at all costs instead of actively working to pay it down.

To justify ignoring the problem, we fall back on a host of invisible money scripts . This is a term coined by financial psychologist Dr. Brad Klontz to describe the unconscious beliefs we absorb in childhood about money and debt that end up influencing our financial behavior as adults. Here are the types of invisible scripts people have around credit card debt and what they sound like in practice:

Comparing ourselves to others. “Everyone has credit card debt. At least I don’t have as much as my friends do.”
Using the size of the problem as an excuse not to try at all. “It doesn’t matter how much I spend now—I have so much debt that I’ll never be able to pay it off, anyway.”
Normalizing the problem. “I already pay other fees, so I don’t mind paying interest.”
Not taking personal responsibility. “Credit card companies are predatory. It’s their fault that I’m in debt.”
Ignoring the problem. “I don’t even know how much debt I have.”
Giving in to hopelessness. “I’m doing my best.”

When we rely on these invisible scripts, we give up the power to do something about debt. Becoming aware of these scripts is the first step to taking that power back; the next step is taking responsibility for the problem and the solution. Once you accept that you can do something about the problem, you can make a plan to attack your debt as aggressively as possible. Having a plan turns a scary, overwhelming, emotional topic like debt into a simple, manageable math problem.

Paying Off Debt

Getting out of debt not only feels good emotionally, but it also boosts your credit score and can save you thousands of dollars in interest. Instead of thinking of debt as a looming monster you’ll have to deal with “someday,” think about how much money you’re losing every day by carrying a balance that’s racking up interest. To illustrate this, imagine you have $5,000 in credit card debt at 14% APR. You could approach this in a few different ways.

You could pay only the monthly minimum (usually 2% of your balance). In this case, your first payment would be $100 (2% of $5,000). However, because the payment is a percentage of the balance, it will decrease as your balance decreases (so when your balance gets down to $4,000, your payment will go down to $80 per month). With this strategy, you’re making smaller and smaller payments each month, which stretches out the repayment period for years.
Alternatively, you could pay a fixed amount each month—let’s say $100. This starts out the same as the situation above, but because it’s a fixed amount and not a variable percentage, you’re paying the balance down more aggressively as time goes on, not less. At the start, you’ll pay $100, which is 2% of your $5,000 balance; when your balance gets down to $4,000, you’ll still pay $100, which is now 2.5% of the balance. By the time your balance is $1,000, your fixed payments will be a full 10% of the balance.

To see how much time and interest money you’d save by paying more than the monthly minimum on that $5,000 debt at 14% APR, look at the chart below. Notice how doubling your fixed monthly payment from $100 to $200 would save you roughly four years of payments and $1,600 in interest.

Monthly payment	Years to fully pay off	Total interest paid
$100 (variable monthly minimum)	25 years	$6,322.22
$100 (fixed payment)	6.3 years	$2,547.85
$200 (fixed payment)	2.5 years	$946.20

Five Steps to Paying Off Debt

It’s time to get proactive about paying off debt. This process can take time, but with every payment, you’ll have the satisfaction of knowing you’re actually doing something about your debt. Remember, little steps can add up to big financial wins.

Step 1: Total up your debt. Many people have no idea how much debt they actually have, which makes it impossible to make a solid plan (because the process of paying off $1,000 of debt might look a lot different than paying off $12,000). To get a sense of your current situation, call your credit card companies using the phone number on the back of your cards and find out your total debt, the APR, and current minimum monthly payment. Keep track of all the information using a chart like this one:

Card name	Total debt	APR	Minimum payment
Card 1	$1000	14%	$20
Card 2	$2000	18%	$40

Step Two: Decide where to start. You’ll want to focus on fully paying off one card at a time instead of increasing your payments on all of them. You can do this in two ways:

Start with the highest APR (in the chart above, that’s Card 2). This is the most financially efficient way to pay off debt because the card with the highest APR is costing you the most in interest for each month you stay in debt.
Start with the lowest balance (in the chart above, that’s Card 1). This is financial guru Dave Ramsey’s “snowball method.” It’s slightly less efficient in terms of pure financial math, but it has the psychological advantage: If you start with the lowest balance, you should be able to pay it off pretty quickly, and paying off an entire card’s debt is a huge win that will motivate you to keep going.

These are both solid options for paying off debt, so don’t get hung up on choosing where to start—pick one, commit to it, and move on. Remember, getting started on paying off debt is more important than doing it perfectly.

Step 3: Negotiate a lower APR. This is something everyone should be doing, whether or not they have credit card debt. Remember, the key is to let the credit card representative know that other cards are offering lower APRs, and you’d hate to have to transfer your balance to another company with a better interest rate. Credit card companies want to keep your business—use this to your advantage.

Step 4: Figure out how you can afford more aggressive monthly payments. You don’t necessarily need to bring in more money every month, you just need to reprioritize and divert money that you’re already spending elsewhere into your debt. Take a look at your spending habits—where can you afford to cut costs? If you’re not sure, keep that question in mind as you read the rest of this summary—you’ll find tips for saving money that you can use toward paying down your debts. Remember, the financial and emotional benefits of paying off debt will be worth any temporary sacrifices you make.

There are other, less effective ways to fund your debt payoff—namely, balance transfers (essentially, using a credit card with a lower APR to pay off the current debt on a card with a higher APR) and taking money from your 401(k) or home equity line of credit (HELOC). Sethi cautions against these methods because they don’t address the root problem of your spending behavior. Instead, focus on building good financial habits by reducing spending and prioritizing building credit by getting out of debt.

Step 5: Get started. Remember that it’s better to get started on a plan that’s good enough than to spin your wheels trying to come up with a plan that’s 100% perfect.

Credit Card Action Items

Now that you’re a credit card expert, it’s time to apply that knowledge. Here are your concrete action steps to make your credit cards work for you:

Log onto your credit card’s website and set up automatic payments. That way, you’ll pay on time every month without having to worry about it at all. Each month, you’ll get a statement before the automatic payment goes through, so if you don’t have enough in your checking account to make your usual payment that month, you can log in and change the amount of the scheduled payment.
Call your credit card company (you’ll find their phone number on the back of your card). Ask them to:
- Waive the fees on your card
- Lower your APR
- Send you a list of all their available perks
Use your main credit cards to set up automatic payments on your other bills. For example, if you set up autopay on a streaming service using one of your credit cards, that card automatically stays active and continues building a solid payment history—and because you’ve already set it up so your checking account automatically pays your credit card balance every month, you can reap the benefits of using a credit card without any worry about missing payments.
Make a plan to pay off your debt. When it comes to debt, half the battle is accepting the situation and actually taking action instead of ignoring it and hoping it’ll go away. Figure out how much you owe and make a plan for how to pay it down more aggressively (you can use financial calculators online to see how your repayment date and the total amount paid will change depending on how much you increase your monthly payments). Then, set up automatic payments so you can attack your debt without having to think about it each month.

Chapter 2: Bank Accounts

Now that you have your credit cards set up, it’s time to choose the right bank accounts to back them up. Together, your credit cards and bank accounts form the foundation of the rest of your financial system. Taking a little bit of time to set up the right accounts now will save you time, money, and frustration down the line. In this chapter, we’ll learn how banks make money off their customers and how to tell the difference between trustworthy banks and predatory ones. Then, we’ll discuss the best checking and savings accounts, including the ones Sethi uses personally. Finally, we’ll learn how to optimize your accounts to avoid fees and earn more interest.

Choosing the Best Banks

What makes a “good” bank? Low fees are an important component. Fees are how banks make a huge portion of their profits—in 2017, banks made a cool $34 billion from overdraft fees alone—so low fees are a good sign that a particular bank isn’t trying to squeeze more money out of you for their own benefit. For example, Bank of America has a reputation for exorbitant fees on every kind of account (and has even taken customers to court over fees that the bank mistakenly levied).

In addition to fees, a bank’s history and reputation are important. Whether you’re evaluating your existing bank accounts or searching for a new one, keep in mind that banks are businesses, and some have a better customer service track record than others. Before you choose where to keep your money, look at each bank’s history: Do they charge ludicrous fees or push unnecessary products? Even worse, have they ever been accused of fraud? If so, you can assume that pattern will continue, and you’re much better off choosing a bank with a better reputation.

For example, federal regulators fined Wells Fargo $1 billion after they admitted to opening unauthorized accounts for 3.5 million people as well as forcing 570,000 customers to buy auto insurance that they didn’t need. Even worse, 20,000 of those customers ultimately had their cars repossessed because of Wells Fargo’s predatory tactics.

On the other hand, some banks have a solid reputation for honesty and integrity. These companies put their clients first and focus on customer service rather than relying on exorbitant fees to make their money. Schwab and Vanguard both meet these high standards—they offer low fees, solid benefits, and don’t push unnecessary products—which is why Sethi personally uses and recommends them. When you’re looking for a new bank, look for three things:

Trust. While major scandals like Wells Fargo’s are rare, you should still do your research before deciding which banks to trust. Start by asking your friends which banks they personally trust. Then, browse the websites of those banks. Keep an eye out for excessive fees, minimum required balances, or misleading descriptions of different accounts. Make sure their customer service department is available 24/7 in case you run into trouble.
Convenience. If the bank’s website, app, or other services aren’t convenient to use, you’ll be far less likely to actually use them. The goal here is to set up a financial system that will eventually run itself, so you want to start with bank accounts that are as convenient as possible.
Features. Make sure the bank offers the basic features you’ll need most: competitive interest rates, free transfers to external accounts, and free bill pay. Keep in mind your own deposit needs, too: If you deposit cash often, you’ll need a bank with a local physical location. If you deposit checks often, you’ll probably want a bank that allows mobile check deposits through their app.
- One important caveat: Competitive interest rates are important, but if you spot a higher rate at a different bank after you’ve set up accounts you’re generally happy with, don’t switch accounts to chase those high interest rates. Those offers are often introductory and expire within a few months, so you’ll waste a lot of time chasing a boost of just a few dollars in interest. In terms of financial gains, you’ll be much better off using that time to set up investment accounts instead (as we’ll discuss in Chapter 3).

Switching Banks

If you already have an account with Bank of America or Wells Fargo, or you do some digging and discover that your current bank is charging you excessive fees or has a pattern of bad behavior, it’s time to switch.

For many people, the idea of opening a new bank account, transferring money, and closing the old one is so daunting that they give up and stay with their existing bank, even if it’s a terrible one. However, banks are such a fundamental part of your financial system that even if there are just a few minor issues with your current bank (like a fee they refuse to waive), those minor annoyances can become major problems once your net worth increases. You’re far better off investing one afternoon now to set up a solid foundation that will save you headaches for decades to come.

Choosing Your Accounts

Now that you know which banks to avoid entirely, let’s focus on the specific types of accounts you’ll need to open: a checking account and a savings account.

Checking accounts are set up to make withdrawing money easy, whether from an ATM or through transfers to other accounts. It’s also the account where your paycheck will land first before being split up into savings, investments, and spending money.

Savings accounts, on the other hand, aren’t designed for frequent withdrawals. You’ll use your savings account to save up for short- to mid-term goals (like a trip or an emergency fund)—once you deposit money into that account, you likely won’t withdraw it until you’ve met your full savings goal.

Another benefit to using a dedicated account for your savings goals (instead of just keeping that money in your checking account) is that it’s much less tempting to dip into that money for other things. For example, if you’re saving up for a car and you keep that money in a savings account at a different bank than your checking account, it will be so inconvenient to have to transfer the money between banks that you’ll think twice before borrowing from that account for a shopping spree (and derailing your savings goal in the process).

Precisely how you set up your checking and savings accounts depends on your personality and how hands-on you want to be with managing your money. There are three possible setups:

A checking account and a savings account at the same local bank. This is the most basic option. If this is the setup you have now and you decide to stick with it, make sure to double check that you’re not paying any fees on either account. (Technically, you could use a credit union, too, but Sethi doesn’t recommend them—their customer-owned structure is a fantastic alternative to predatory big banks, but their services often just can’t measure up to the features that larger banks offer).
A local bank checking account and an online savings account. For most people, this is the best option. It’s the best of both worlds—you have the convenience of a local bank for your checking account (which is especially important if you need to make cash deposits), plus the higher interest rates that online savings accounts offer.
Multiple checkings and savings accounts at multiple banks. This option offers the most customization, but it’s also the most confusing. However, if you’re someone who loves personal finance and wants to find the best possible interest rates, the added confusion of having multiple accounts might be worth it.

Once you decide on which setup works for you, it’s time to find the exact accounts you’ll use. In the following two sections, you’ll see the checking and savings accounts that Sethi recommends, as well as the accounts he uses personally.

Checking Accounts

Your checking account is one of the most important components of your financial system because it’s the first place your money lands before it gets sent off to your credit card, bills, savings, and investments each month. Later on in this summary, you’ll learn how to set up automatic transfers for all of those, so you won’t have to worry about your checking account very often—it just needs to be a solid, fee-free first step in your financial system.

The Best Checking Accounts

Schwab Bank Investor Checking with Schwab One Brokerage Account through Charles Schwab Bank. Sethi uses this account personally and considers it the best on the market. This account boasts an impressive list of features, like zero fees, unlimited ATM fee reimbursements, overdraft protection, and free checks.
- The Investor Checking account is unique in that it’s linked to a brokerage (investment) account. That means you’ll have to open a Schwab brokerage account in order to access all the benefits of their checking account—but you don’t actually have to use the brokerage account in order to get those benefits (and don’t worry, you won’t be charged any fees for leaving the brokerage account empty and inactive).
A no fee, no minimum account at your local bank. This is especially helpful if you need to deposit cash frequently (you can’t make cash deposits into the Schwab Investor Checking account). Keep in mind that you may have to set up direct deposit in order to have fees waived at local banks. (If you’re a college student, ask about student accounts. These are typically barebones accounts that offer zero fees and few fancy add-on services.)

Savings Accounts

Your savings account is where you’ll save up for short- and mid-term savings goals, up to five years away (for longer-term savings goals, you’ll use your investment accounts, which we’ll cover later in this summary). The main benefit to keeping this money in a savings account rather than simply in your checking account is that savings accounts have higher interest rates, so your money will be able to grow while you save. However, those interest rates are still rarely high enough to make a huge difference.

For example, if you have $5,000 in a savings account that offers a 0.5% interest rate, you'll earn $25 per year in interest. If you have that same $5,000 in an account with a 3% interest rate, you’ll earn $150 per year in interest. Earning that extra $125 per year is helpful, certainly—but because the bulk of your money will be in investment accounts that earn an average of 8% each year, that extra $125 doesn’t actually make that big a difference in your overall wealth (especially when you take inflation into account, which can often make the interest you accrue worth even less as the value of a dollar changes).

As you research savings accounts, stick to online banks rather than “Big Banks” with physical locations. You’ll earn more interest and face fewer hurdles to getting your account up and running.

The Best Savings Accounts

Capital One 360 Savings. This is the savings account Sethi uses personally. Aside from having no fees and no minimums, the main benefit of this account is that you can set up sub-accounts to save up for specific goals (like a wedding or emergency fund).
Other savings accounts that have no fees, no minimums, and the ability to set up sub-accounts include:
- Ally Online Savings Account
- Marcus by Goldman Sachs
- American Express Personal Savings

Negotiating Bank Fees

If you prefer to stay at your current bank, make sure you’re not paying any fees. Even a small monthly maintenance fee is often enough to totally negate any interest you earn on your account. Even worse, things like overdraft fees can add up quickly, turning a $5 overdraft into a $100 mistake. Negotiating those fees might seem intimidating, but the savings add up in the long run.

Negotiating General Account Fees

If your account does have fees, call your bank and try to get them waived. In some cases, banks might be willing to waive fees if you set up direct deposit. If not (or if your job doesn’t offer direct deposit), you’ll have to negotiate. Here’s how:

Call the bank’s customer service number. Tell them you’ve noticed your account has fees and that you’d like to change to an account with no fees and no minimum balance.
If they say they don’t offer that kind of account, don’t give up! Tell them you’ve seen their competitors offer that exact deal and ask them to check again for any no-fee accounts they can offer (make sure to cite a specific competitor and a real offer). Often, this is all it takes for them to suddenly be willing to waive all fees.
If the first two steps don’t work, ask to speak to a supervisor, then repeat your first arguments. If they still won’t budge, tell them you’ve been a loyal customer for a long time (specify how many years), that you know they’ve already invested hundreds of dollars to land you as a customer, and that you’d hate to have to take your business elsewhere.

Negotiating a Specific Fee

If you’re facing an existing overdraft fee, late fee, or processing fee, try calling up your bank and asking them to waive it. If it’s your first time being charged that fee (or if you have a good excuse, like overdrawing because your automatic transfer posted a day late), most banks will happily waive the fee. Here’s now to handle this negotiation:

Call the bank, reference the specific fee on your account, and ask them to waive it.
If they refuse, don’t give up! They’re counting on you to take their first answer and walk away. Instead, repeat the issue and ask them what they can do to help (this works about 85% of the time).
If that doesn’t work, remind them that you’ve been a loyal customer for several years and that you’d prefer to stay with them rather than go through the headache of switching to one of their competitors. Most of the time, the customer service representative will talk to their supervisor and ultimately waive your fee.

Bank Account Action Items

Now that you have a solid understanding of how to find the best bank accounts, here are your action steps:

Find a checking account that works for you and open a new account. If you decide to stick with your current checking account, call your bank to make sure your account has zero fees or minimums. If you do have fees, negotiate your way into a no-fee account (and don’t be afraid to take your business elsewhere if your bank doesn’t play along).
Open a high-interest savings account at an online bank. This should be an entirely separate bank from your checking account—that way, it’ll be much less convenient to dip into your savings on a whim (because transferring money between banks takes longer than transferring money between two accounts at the same bank).
Transfer your money into your new savings account. Be sure to leave enough in your old account to cover one and a half months of living expenses. This gives you time to switch your bill payments over to the new account and avoid accidental overdrafts if one of them tries to charge your old, empty account.

Chapter 3: Opening Your Investment Accounts

By now, you’ve optimized your credit cards and bank accounts and created a solid foundation for the rest of your financial system. Next, we’ll turn our focus to opening investment accounts. Investing is the best way to grow your money into more money, and starting early is crucial to maximizing that growth.

In this chapter, we’ll see why investing is such a powerful tool to grow your wealth and why starting to invest at a young age makes such a difference. We’ll also examine why so many young people miss out on those returns by not investing. Then, we’ll go through the initial steps of investing, which will help demystify investments and give you concrete action items to help you get started. Finally, we’ll cover the main types of investment accounts you should consider—401(k)s, Roth IRAs, and Health Savings Accounts (HSAs)—as well as how to choose a brokerage firm to help you open and fund those accounts.

The Power of Compounding

For example, let’s say you invest $100 in the stock market (to make things easy, we’ll assume an exact 8% annual rate of return). That means that after one year, you’d have earned $8, for a new total of $108. In the second year, you then earn an 8% return on that new amount, so you’d earn $8.64 for a new total of $116.64. The longer you leave your money in the stock market, the more that principal grows, and the more you earn every year.

Compounding maximizes returns on a one-time investment—but if you keep investing more money at regular intervals, those returns grow exponentially. The more you add, the more your principal grows, which creates a higher total for you to earn an 8% return on. In the table below, you can see the difference after 10 years of investing $10 per week compared to investing $50 per week.

Amount invested per week	Total after 1 year	Total after 5 years	Total after 10 years
$10	$541	$3,173	$7,836
$20	$1,082	$6,347	$15,672
$50	$2,705	$15,867	$39,181

The Importance of Starting Young

The power of compounding also means that the longer you leave your money in the market, the more it grows—which means that the earlier you start investing, the more money you’ll have by the time you retire. To see this in action, consider two fictional people who both decide to invest $200 every month.

Sally starts investing at age 35 and keeps actively contributing to her accounts for 10 years (after that, she lets her money grow without actively adding more to it). By the time she’s 65, her accounts will be worth $181,469 (assuming an 8% rate of return).
Dan, on the other hand, doesn’t start investing until he’s 45, but he keeps it up for 20 years. By the time he’s 65, Dan’s accounts will be worth $118,589— that’s $60,000 less than Sally, even though Dan invested for twice as long!

(However, this doesn’t mean you shouldn’t start investing if you’re already in your 40s. Your money will still grow—maybe not as much as it would have if you’d started 10 years ago, but far more than it will if you never get started at all!)

Invisible Investment Scripts

As we’ve seen, if you start investing when you’re young, you’ll earn tens or even hundreds of thousands more over the course of your lifetime than someone who starts investing later. So why aren’t more young people investing? The answer has to do with the invisible scripts we all have about investing. Here are some examples of invisible scripts and Sethi’s responses to them:

“There’s too much information. I’m overwhelmed.” Remember that you don’t have to be perfect, you just have to get started. Pick one source of information to start with and go from there.
“I don’t know how to time the market.” You don’t have to. Just invest a little bit every week, regardless of what the market’s doing, and you’ll come out on top in the long run.
“Investing in stocks means giving up control of my money.” It might seem counterintuitive, but this is a good thing. Studies show that consistent, automated investing leads to greater returns than if you try to buy, sell, and trade on your own.
“I don’t know enough to do it right, so I’m better off doing nothing.” Not only are you losing out on the opportunity to grow your money, but doing nothing will actually lose you money in the long run because of inflation.
“The fees are too high.” The fees are only high if you’re actively trading stocks, which you won’t be if you follow Sethi’s advice to automate your investments.
“I don’t make enough money.” It’s hard to think about investing when you’re living paycheck to paycheck, but if you sit down and look at your spending habits, you’ll more than likely find a place where you can cut $10 per week to invest instead.

All of these invisible scripts about investing usually have the same outcome: People put off thinking seriously about their finances until their 40s, when they suddenly realize they might not have enough money for retirement. Starting earlier—even if you’re not an expert—will save you years of worry down the line.

The Steps of Starting to Invest

Now that we’ve seen what a powerful tool investing is for growing your personal wealth and confronted some of the common reasons people don’t invest, it’s time to make a plan for how to get started. To do that, we’ll use a six-step process for getting started with investing:

Step 1: Take advantage of your employer’s 401(k) match.
Step 2: Get rid of credit card debt
Step 3: Open a Roth IRA.
Step 4: Max out your 401(k).
Step 5: Find out if you’re eligible for an HSA.
Step 6: Open a regular taxable investment account and fund it.

In the next sections, we’ll cover the 401(k), Roth IRA, and HSA accounts in more depth. As you read, keep in mind that investing through these accounts requires two steps: funding the account and actually investing the money in it . Many people end up not investing at all because they mistakenly assume their money is automatically invested once they set up automatic transfers into their 401(k) or Roth IRA. That can be a costly mistake: If you pour money into your account but never actually invest it, it will just sit there without earning any returns. In this chapter, we’re only going to focus on opening the accounts and funding them—we’ll get to the actual investing in Chapter 7.

Start With Your 401(k)

A 401(k) is an investment account sponsored by many employers to help their employees save for retirement. When you open a 401(k) account, you authorize your employer to send a certain amount out of each paycheck into that account automatically. The money in your 401(k) isn’t automatically invested—you’ll have to actively decide where to invest it (we’ll cover that in detail in Chapter 7). A 401(k) is one of the best retirement investment accounts out there for three major reasons.

1. The money in your 401(k) is “pretax,” which means it isn’t taxed until you withdraw it. That means your contributions will be much bigger (because they haven’t had taxes taken out of them yet), meaning your principal investment amount is higher, which can increase the compound growth of your investments by 25 to 40%. You’ll have to pay taxes on the money when you withdraw it, but because of compound interest, you’ll still come out ahead compared to a regular investment account (where you invest money that has already been taxed).

2. Your employer might match your contribution. That means that every time you funnel money into your 401(k) account, your employer will “match” that contribution up to a certain percentage of your salary. For example, if your employer has a one-to-one matching policy up to 5% of your salary, that means that if you contribute 5% of your salary, your employer will double that contribution. In other words, this is free money . To see how big a difference this makes, look at the table below to see how a 401(k) account grows over time, with and without matching (assuming 8% returns).

Age	Account balance without matching	Account balance with matching
35	$3,240	$6,480
40	$19,007	$38,016
45	$46,936	$93,873
50	$87,973	$175,946
55	$148,269	$296,538
60	$236,863	$473,726
65	$367,038	$734,075

3. You’ll invest automatically, without even knowing it. Your 401(k) contributions come out of your paycheck before you get paid, so you won’t have to worry about investing it yourself—it’s already taken care of by the time you get paid each month.

(If your employer doesn’t offer a 401(k), don’t worry! In the next section we’ll learn how to set up a Roth IRA, which is a different type of tax-advantaged retirement account open to everyone below a certain income level. And if you’re self-employed, look into Solo 401(k) and SEP-IRA accounts, which function similarly to a traditional 401(k) for people who don’t work for a traditional employer.)

If You Change Jobs

If you get a new job, you won’t lose your 401(k) money—but because the account itself is sponsored by your old employer, you’ll have to move that money somewhere else. There are a few different ways to do this:

The best option is to “roll over” the money from your 401(k) into an IRA . Once the money is in an IRA, you’ll have more control over where to invest it (because 401(k) investment options are usually very limited). A brokerage firm can help you transfer the money into an IRA for free.
You could also roll the money in your existing 401(k) over to your new company’s 401(k) . The problem with this is that if you use that money to fund your new 401(k), those contributions won’t be eligible for employer match, so you lose out on the main benefits of a 401(k).
You could leave your 401(k) where it is . This is dangerous—it’s easy to forget about an old 401(k) and end up letting your money stagnate.
Finally, you could cash the money out and pay the hefty early-withdrawal penalties—but you’ll lose a lot of money this way!

Roth IRAs

Once you’ve set up your 401(k) (or if your employer doesn’t offer one), it’s time to set up a Roth IRA. This is another type of retirement account, but unlike a 401(k), you don’t need an employer to sponsor it (and there’s no employer match option). Roth IRAs also allow you to invest however you want rather than making you choose between a few pre-selected funds like a 401(k).

The other major difference between a Roth IRA and a 401(k) is that the money you invest in your Roth IRA has already been taxed —which means that you’ll pay taxes on the money you put in, but you’ll pay no taxes on the money you earn on top of that. That gives you a huge benefit over a regular, taxable investment account, in which you pay taxes on both your contributions and your returns.

The more you contribute to your Roth IRA, the more you capitalize on that tax benefit. For example, if you contribute $5,000 per year for 30 years (assuming an 8% annual return and 25% tax rate), you’ll earn almost $200,000 more in a Roth IRA than in a taxable investment account.

Another benefit to Roth IRAs is that it’s easier to access your money than with a 401(k): You can withdraw the money you’ve personally contributed to your Roth IRA account at any time, penalty-free. However, you’ll face penalties if you withdraw the money you’ve earned on top of that principal before the age of 59.5. There are exceptions to this rule—you won’t face penalties if you withdraw your earnings to pay for education, emergencies, buying a home, or other similar expenses. However, these exceptions are only available if your account has been open for at least five years, which is one reason why it’s so important to open your account sooner rather than later!

Contribution and Income Restrictions

There are two major restrictions on Roth IRA accounts. The first is a maximum yearly contribution, or how much you can add to the account out of your own pocket every year. The exact amount changes each year, so search “Roth IRA contribution limits” to find the current maximum.

The second restriction is a maximum income limit. To open a Roth IRA, your income can’t exceed a certain maximum limit (this number also changes every year, so search “Roth IRA income limits” to find the current numbers). If your income is below the maximum but still higher than average, you can open a Roth IRA, but the maximum yearly contribution you’re allowed to make decreases.

If your income is too high for a Roth IRA, you can still get after-tax benefits by opening a Roth 401(k), if your employer offers one. These accounts offer the best of both worlds: the after-tax benefits of a Roth IRA (without the income restrictions), and the employer-match benefits of a traditional 401(k). Roth 401(k) accounts are a good option if you expect to be in a higher tax bracket when you retire than you are now, because the money won’t be taxed when you withdraw it like it would be with a traditional 401(k).

Choosing a Brokerage Firm

To open a Roth IRA, you’ll need an account with an investment brokerage. For now, you want to focus on discount brokerages, which offer nearly all the same features as “full service” companies (like Morgan Stanley) but with much smaller minimum investing fees, usually between $0 and $3,000. (Remember, that’s how much money you’ll need before you can actually invest the money in your account. Opening the account itself is always free.) Most brokerages will even waive those minimums if you set up automatic monthly transfers. Here are the top three discount brokerages Sethi recommends.

Vanguard. This is the company Sethi personally uses for his investments because they offer low-cost funds to invest in. Vanguard charges a $1,000 minimum to start investing with their Roth IRAs. You won’t be able to get this one waived (even with automatic monthly contributions), so if you don’t have $1,000 to invest yet, set it as a savings goal.
Schwab. If you opted to open a Schwab Investor Checking account back in Chapter 2, you already have a Schwab brokerage account linked to your checking account automatically. The minimum to invest in your Roth IRA through this account is $1,000, but Schwab will waive that minimum if you set up a $100 automatic monthly contribution.
Fidelity. Fidelity is unique because they have zero minimums, so you can invest however much you like, but the fund options they offer to invest in typically have higher fees than Vanguard’s.

Robo-Advisors

In addition to the discount brokerages above, you now have the option to invest with “robo-advisors” like Wealthfront and Betterment, which are brokerages that use computer algorithms rather than human financial advisors to help you invest your money. These companies typically have a sleek user interface that appeals to younger people, and they even allow you to add your financial goals (like saving for a down payment on a house) and automatically allocate some of your returns to them.

For most people, robo-advisors are a good, low-fee option to get started with investing. However, there are downsides to investing with robo-advisors compared to traditional discount brokerages like Vanguard. Robo-advisors are a relatively new technology, which means they have far fewer customers and manage far less wealth than companies like Vanguard, who have been around much longer. In practice, that means that robo-advisors may not be able to sustain the low fees they currently offer unless they significantly increase their customer base—so there’s a risk of their fees rising in the future. For example, Wealthfront already faced a small scandal when it introduced a higher-cost fund and automatically enrolled some customers in that fund without their knowledge.

Sethi personally recommends traditional discount brokerages like Vanguard over robo-advisors, but if the ease and accessibility of robo-advisors appeals to you, they’re still a solid option. Do your research, but don’t agonize too much over this decision—remember, the fact that you’re investing at all is far more important than the specific company you use to do it.

Health Savings Accounts (HSAs)

Once you’ve started investing in your 401(k) and Roth IRA, you can also look into investing through a Health Savings Account (HSA). These are tax-advantaged accounts that are only available to people who have high-deductible health insurance plans. HSAs are designed to help you save for qualified health expenses, like insurance deductibles, copayments, and prescriptions. There are two major benefits to using an HSA: tax-free health spending and tax-free retirement investing.

Tax-Free Health Spending

Although HSAs are technically a form of savings account, they function more like a checking account: Once you open the account and fund it, you’ll get a debit card you can use to pay for medical expenses using the money in your HSA. The benefit of paying for those expenses with an HSA instead of with your checking account or credit card is that the money in an HSA is tax-free. That means you can spend that money without ever paying income taxes on it, which will save you at least 20%, if not more.

Tax-Free Retirement Investing

The other major benefit of using an HSA rather than a typical savings account is that you can invest the money you set aside in an HSA into the stock market , which means that any money you don’t use for health expenses can earn much higher returns than the interest it would earn in a typical savings account.

Like 401(k)s and Roth IRAs, you’ll only get the tax benefits of investing in an HSA if you wait to withdraw that money until you reach retirement age (in this case, age 65, rather than age 59.5 for other retirement accounts)—and if you withdraw the money for anything other than health expenses before that point, you’ll face a penalty. However, as a reward for your long-term investing, you won’t pay income taxes on the money you contribute to your HSA or on the returns you earn from investing that money. On top of all that, contributing to an HSA qualifies you for a tax deduction, making it a triple threat of tax benefits (some people even pay for health expenses out of pocket and invest all the money in their HSA to maximize those benefits).

After you turn 65, you can keep using the money in your HSA to pay for health expenses, tax-free. At that point, you can also withdraw it for any non-health-related expenses without paying a penalty (although you will have to pay taxes on the money you withdraw).

Investment Account Action Items

Open your 401(k). To get started, talk to the human resources administrator at your company. As you’re filling out the forms, hold off on choosing which specific funds to invest in for now (we’ll cover different kinds of funds in depth in Chapter 7). If your company offers employer matching, proceed to the next action item; if not, open the 401(k) account but hold off on funding it until you’ve maxed out your Roth IRA.
Calculate your 401(k) contribution to take full advantage of employer match (remember, if your employer offers a 5% match, you want to contribute a full 5% of your yearly salary to get the full benefits of that match). When you open your 401(k) account, you’ll be able to specify how much of each paycheck you want automatically sent to your 401(k). To figure out how much to contribute, multiply your yearly salary by the employer match percentage your company offers, then divide that amount by 12 months (if you get paid biweekly rather than monthly, divide by 24 instead).
- For example, If you make $50,000 per year, 5% of income is $2,500 per year. Divided monthly, that’s a contribution of $208 per month. If you can’t afford to lose $208 per month out of your paycheck, you can scale this back, but try to get as close as you can to the full match.
Open a Roth IRA and set up automatic monthly contributions. Here’s how to do this:
- First, spend some time researching the discount brokerages and robo-advisors.
- Once you find one that fits your needs and lifestyle, open an “investment brokerage account” with that company. This will be the general account that houses your more specific investment accounts (like a Roth IRA).
- Next, open a Roth IRA through your investment brokerage account using the instructions on your brokerage account’s website (opening the account is free).
- Last, set up automatic monthly contributions from your checking account into your Roth IRA. If you’re investing through Schwab, these need to be at least $100 per month—otherwise, pick a number you’re comfortable with for now (you can adjust it up or down later depending on the expenditure plan you’ll develop in Chapter 4).
If you have money left over to invest, max out your 401(k) contribution. Right now, you’re probably investing just enough into your 401(k) to get your full employer match, but you can invest even more—up to the maximum yearly contribution—to take advantage of the tax benefits of a 401(k). That maximum only includes your own contributions, not your employer match.
- For example, in 2019, the maximum yearly 401(k) contribution was $19,000. If you currently contribute $5,000 per year and your employer matches that with another $5,000, you’d have a total of $10,000 in your 401(k). But if you max out your personal contribution with another $14,000 (bringing your total contribution to the maximum of $19,000), you’d have a total of $24,000 in your 401(k).
Open an HSA (if you’re eligible). Call your health insurance company to find out if you have a “high deductible health plan.” If they say yes, ask them if you can pair that plan with an HSA (and if they say no, ask if you’re eligible for a high deductible plan). If so, research the different HSAs available, find one you like, and open the account.

Exercise: Revisit Your Thoughts About Investing

If you’re new to investing, this chapter may have been a lot of information to take in all at once. Let’s take a moment to apply that information to your own situation.

Before reading this chapter, how familiar were you with the basics of investing? (For example, maybe you’d heard of 401(k) accounts but didn’t know about Roth IRAs—or maybe you already have a few investment accounts, but weren’t clear on the difference between investing pre-tax versus post-tax money.)
Did you recognize yourself in any of the invisible investing scripts listed in this chapter? If so, how did those scripts change after reading more?
Based on your familiarity with investing and your invisible scripts, what is your main takeaway from this chapter? (For example, if you were afraid to invest because you didn’t know where to start, your main takeaway might be that investing isn’t as intimidating as you thought; or, if you’ve been trying to invest by buying individual stocks, your main takeaway might be to refocus on funding your 401(k).)

Chapter 4: Think About Your Spending Habits

Now that your savings and investment accounts are set up, you need to know how much you can afford to contribute to them every month. To do that, you’ll need a blueprint for spending your money in a way that works for your specific goals, values, and lifestyle. Having a plan like this lets you do the hard work of deciding how to allocate your take-home pay up front. Then, you can sit back, relax, and not have to worry about tracking every single dollar (like you would with a traditional budget) because you’ll know you already have your financial priorities in order.

In this chapter, we’ll learn more about spending money mindfully, including how you can spend even more than you currently do on the things you love while cutting costs on the things that aren’t as important. Then, you’ll learn how to create your own plan for expenditure that splits your money into four categories—fixed costs, saving, investing, and guilt-free spending—and how to use the envelope system to divide your money into those categories automatically. Finally, you’ll learn how to gradually adjust your current spending until it matches your plan.

What Is “Spending Money Mindfully”?

Most people are guilty of having no idea where their money goes or how much they’re spending on different things. As a result, they’re constantly feeling guilty about spending money because they don’t actually know how much money they have to spend, so each purchase could mean a nasty surprise on that month’s credit card bill.

Spending mindfully, on the other hand, means planning your spending in advance. That way, you’ll not only be confident that you’re contributing enough to your savings and investment goals, but you’ll know that any money left over is yours to spend however you want—with zero guilt. Spending mindfully lets you spend extravagantly on the things you love without worrying if you can really afford it (or judging yourself for not saving or investing that money instead).

This approach is all about using your money to create your version of a rich life. For some people, that means going out four times a week; for others, it might mean having a fancy car, traveling often, or founding a nonprofit. Spending mindfully means making your money work for you and your specific goals.

This means that spending mindfully looks different for everyone. For example, the author has a friend who spends $21,000 per year partying—but who also maxes out his 401(k) contribution, hits his investment goals, and saves money by living in a small, bare apartment and never taking vacations. His solid financial foundation means he can afford to spend extravagantly on what he truly loves, guilt-free, because he knows he’s still being responsible with his money.

Spending Mindfully vs. Budgeting

Spending mindfully is not the same as budgeting. Budgeting involves tracking every dollar you spend, all the time. That’s why most people don’t stick to a budget—it’s time consuming, work-intensive, and complicated. Instead, spending mindfully automates this process—you decide in advance what you want to spend in a given area, then set up your system to funnel that money to the right areas automatically. Once your system is up and running, you no longer have to worry about tracking where each dollar goes, and you’ll only have to revisit the system about once a year to make sure it still aligns with your goals.

Spending mindfully is also not the same thing as just being “cheap.” Cheap people are so fixated on cost that they ignore value. They obsess over saving money for its own sake, whereas mindful spenders recognize that money is just a tool that’s meant to help you build a rich life. Plus, mindful spenders make money decisions that only affect themselves, whereas cheap people often save money at the expense of other people (like by shorting a waiter on a tip).

Deciding How You’re Going to Spend Your Money

Now that we know the benefits of spending mindfully, let’s create a plan that works for your specific situation. This will take some hard work, but the time and effort you spend now will be worth it for the peace of mind it buys down the road.

Sethi’s method for planning expenditure involves dividing your take-home pay into four major areas: fixed costs (like rent and utilities), investments, savings, and spending money. The breakdown of these costs should look roughly like this:

Category	Percentage of take-home pay
Fixed costs	50-60%
Investments	10%
Savings	5-10%
Guilt-free spending	20-35%

To start, we’ll take one category at a time, calculate how much you should be spending on that category, and compare that number to your current spending.

Fixed Costs

Fixed monthly costs are your necessities: rent or mortgage payments, groceries, utilities, car payment, and so on. Ideally, your fixed costs should total about 50 to 60% of your monthly take-home pay (the amount on your paycheck after taxes). You may know some of these costs offhand—to find the others, you’ll have to look back at your bank and credit card statements to get a sense of how much you spend each month. Keep track of these costs in a table like this:

Expense	Cost per month
Rent/mortgage
Utilities
Medical costs (insurance, regular prescription or appointment costs)
Transportation (car payment, public transportation, gas)
Debt payments
Groceries
Internet

Add any other monthly fixed costs you have (like childcare or a phone bill) to this table, but don’t add things like eating out—that belongs in the “guilt-free spending” category.

Once you have your total for all monthly costs, add 15% to cover unexpected expenses like car repair, traffic tickets, or emergency medical treatment. (That may seem like a lot, but those unexpected costs can add up quickly. Over time, you’ll get a better idea of how much money should go in the “unexpected expenses” category and you can adjust accordingly, but for now, it’s better to be overprepared than underprepared.)

Now, you should have a good estimate of your monthly total for fixed expenses. Subtract that from your monthly take-home pay—the resulting number is what you’ll divide up among the other categories. So, for example, if you make $4,000 per month and your fixed expenses total $2,200 per month, you have $1,800 left over to divide into investments, savings goals, and spending money.

Investments

This category includes contributions to your 401(k), Roth IRA, and any other long-term investment accounts. Investments should be about 10% of your take-home pay. That 10% number includes your 401(k) contributions, so if those are already deducted from your paycheck, factor that in when you calculate how much additional money to invest (for example, if you currently contribute 5% to your 401(k), allocate another 5% of your take-home pay for investing). If you’re curious how those monthly contributions will grow over time, use an online investment calculator (assuming an 8% rate of return). You can also use this tool to see the difference after 40 years if you invest more or less than 10% each month.

Savings Goals

This category is for all your savings goals, from short-term (like a vacation) to long-term (like a house). Based on the size of these goals, you’ll want to allot 5-10% of your monthly take-home pay for savings. Keep in mind that this category should also cover predictable-but-irregular expenses like holiday gifts. If you celebrate Christmas, you know you’ll be buying gifts every December; instead of letting it sneak up on you, start planning in January and save a certain amount each month. That way, you’ll avoid taking a huge hit to your bank account when the holidays roll around because you’ll already have the money set aside.

Guilt-Free Spending

After you account for fixed costs, investments, and savings, any money you have leftover goes into the guilt-free spending category. This is money you get to use however you like, with zero guilt, because you know you’ve already paid your bills and funded your future through savings and investments. Ideally, this category will have 20 to 35% of your take-home pay (if you have high fixed costs, it may be on the lower end). If you have more than 35% of your income left over each month, add the extra into the “investment” or “savings” buckets.

Analyze and Optimize the Plan

Now that you’ve mapped out how you want to spend your money, look back over each of the categories. Are any of them bigger or smaller than you’d like them to be? For most people, overspending follows the 80/20 rule: 80% of their overspending happens for just 20% of their expenditures. In other words, you can probably make the biggest difference in your spending by focusing on just one or two areas that will generate big results instead of trying to cut every single cost.

To find the areas that will give you the best results, start by looking at your fixed costs category. Identify which fixed costs you can reduce—for example, if you have high debt payments every month, you can call your credit card company and negotiate a lower APR to reduce those costs. Then, look at your spending money category and compare how much you’ve allotted for spending to your actual spending habits over the last few months. For example, maybe you’re spending hundreds on eating out every month. That’s an easy cost to reduce if you make a plan to gradually cut back.

The “À La Carte” Spending Method

If you need to cut back on spending, try starting with your subscriptions (like media streaming services or gym memberships). Subscription services often cost more than we realize because we overestimate how much we’ll use them. To cut costs, try cancelling those subscriptions and paying for things à la carte. For example, instead of paying for a monthly gym membership, try buying day passes each time you go to the gym; instead of paying for Netflix, buy individual episodes of the shows you actually watch from iTunes. Here’s how to get the most from the à la carte method:

Figure out how much you spend on subscription services per month. Include things like music and movie streaming sites, gym memberships, magazines, and so on.
Cancel all of those subscriptions and buy what you use à la carte.
After one month, tally up how much you spent total and compare it to how much you were spending on subscriptions.
Now, see if you can reduce that number even further. If you bought six magazines this month, set a goal to only buy five next month. The à la carte method allows you to prioritize what you really want and use, which makes it much easier to cut costs gradually like this.

If you discover that the à la carte method is too much hassle or that you were actually saving money by using subscriptions, feel free to restart the subscriptions that you use and value most.

Tools to Optimize Your Plan

Sethi recommends several apps and websites to help you optimize your finances. The table below summarizes each tool and how he uses it.

Tool	What it is	Sethi’s advice
Mint	An app that syncs with your bank accounts and credit cards and automatically categorizes your spending to give you an overall picture of your current spending habits.	Try out Mint for a few weeks to get a feel for your current spending habits, but then move on to a more sophisticated tool.
You Need a Budget (YNAB)	Money management software that helps you set goals for optimizing your spending.	Once you have a sense of your typical spending patterns, use YNAB to assign a “job” to each dollar you earn.
Personal Capital (or your existing brokerage account)	A unified home for all your investment data across all your accounts, creating a bird’s-eye view of your investments.	Log into your brokerage account and add your outside accounts so you can see all your investments at once.
Vanguard Personal CFO	A Vanguard service to manage asset allocation.	You probably only need this tool if you have a high net worth or a complicated personal finance system.
MyFico	The official website to see your credit reports and credit scores (for a fee).	Other credit reporting sites have no fees, but might be less accurate and less convenient.
Bankrate	A website with financial calculators and information on all different kinds of bank accounts and credit cards.	Play around with the investment calculators on this site to see how your ultimate earnings will change depending on how much you invest now.
OptOutPrescreen.com	The official website for opting out of paper mail credit card offers.	The credit cards that send offers in the mail are never the best cards, so opt out to reduce the temptation to open new cards (and cut down on junk mail in the process).

Spending Mindfully Action Items

Decide how you want to spend your money. Start by dividing your take-home pay into each of the four categories to get a rough sense of how much you should be allotting to each (remember, fixed costs should be 50-60%, investments should be 10%, savings should be 5-10%, and spending should be 20-35%). Then, compare those goal numbers to how much you’re currently spending in each area to see what needs to change.
Dig deeper into your spending. If you’re spending too much in any one area, brainstorm ways to cut costs. For example, if you’re spending too much “fun money” per month right now, look back through your receipts or credit card statements to see exactly where that money is going. Or, if your fixed expenses are too high, look at your breakdown of each expense to see where you might be able to save.
Choose one or two areas to focus on. Based on what you discover when you dig into your spending, pick one or two things that will have the most impact and do them now (for example, calling your cable company to negotiate your monthly bill or creating a plan to cook more and eat out less).
Try out the plan (and adjust it as necessary). This is your plan, so the most important thing is that it actually works for your life. If something isn’t working, don’t be afraid to change it. For example, if you find that investing 10% each month just isn’t realistic, you can experiment with investing 5% instead and reallocating the other 5%.

Exercise: Create Your Savings Goals

Determining your savings goals is an important step in deciding how to spend your money. Brainstorm some short-, mid-, and long-term goals here.

What are your short-term savings goals? These are your goals for roughly the next year, like vacations or holiday gifts.
What are your mid-term savings goals? These are savings goals for the next one to five years, like a wedding or a car.
What are your long-term savings goals? These goals are the big things you want to do five or more years from now, like a down payment on a house.

Exercise: Identify Your High-Impact Financial Changes

Want to optimize your finances and create your rich life? Start by identifying the few areas where you can make the biggest impact on your financial life.

Let’s start with the “fixed costs” category (remember, these are basic necessities like rent and transportation). What one fixed expense can you reduce, and how will you do it?
Now, look at your “guilt-free spending” category. Off the top of your head, what non-essential things (like eating out or renting movies) do you think you spend too much on each month? How can you reduce that spending?
Remember, you’re most likely to meet your goals if they’re realistic. How can you gradually reduce your spending on one of these areas over the course of the next few weeks? (For example, if eating out is one of your areas to focus on and you currently eat out four times a week, you could map out a plan to eat out three times next week, and only twice the week after that.)

Chapter 5: Automating Your Financial System

Now that you have a plan for how you want to spend your money, it’s time to start automating that plan so that your money divides itself up each month without you having to lift a finger. Automation isn’t just convenient—it’s crucial. When you automate your financial system, you bypass all the normal human flaws that get in the way of managing your money (like forgetting to pay a bill on time or not feeling motivated to think about investing), allowing your wealth to keep growing in the background while you focus on other things.

In this chapter, we’ll learn how to link all your accounts, create a system of automatic transfers between them to fund your investment and savings accounts, and schedule everything so that all your bills are paid on time—automatically.

How Automation Works

If you’ve ever tried to stick to a budget or keep track of your bills manually, you’ve probably noticed how hard it is to stay on top of your finances when you have to consciously think about where each dollar goes. It’s too easy to get distracted, bored, or overwhelmed, so we end up making costly mistakes or missing out on lucrative opportunities. Automation is different: Instead of requiring constant focus, automating your financial system allows you to frontload the hard work by spending a few hours setting up your accounts; after that, you get to move on and focus on other things, knowing that your finances are taken care of and your money is growing itself.

In practice, here’s how automation works: You’re going to set up a system of automatic transfers between your checking account, credit cards, bills, savings, and investment accounts. Your checking account will be the central node of this system—once your paycheck lands in that account each month, your system will kick in and initiate transfers from your checking account into all your other accounts based on the percentages you came up with when planning your spending.

To make this more concrete, let’s give an example: If you made $100 today, how much of it would go into each area of your plan for expenditure? If your plan follows the general recommended percentages, your split might go like this: $60 would go to your fixed bills, $10 would go into your investments, another $10 would go into savings, and $20 would be guilt-free spending money. That outline gives you a scaled-down view of the transfer system you’re about to set up (and puts you well ahead of the people who have no idea where their money would go).

Sample Transfer System

For a more specific look at how this works, let’s use the author’s friend Michelle’s transfer system as an example. Michelle contributes 5% of her pay to her 401(k) each month, so that money is automatically taken out of her paycheck before she gets paid. Then, her employer sends the remaining 95% of her paycheck to Michelle’s checking account via direct deposit. From there, her system kicks in, initiating a series of automatic transfers from her checking account over the next few days. Here’s how it works:

First, Michelle’s fixed bills that can’t be paid by credit card are automatically paid out of her checking account. Meanwhile, all her other regular bills (like subscription services and her internet bill) are automatically paid from her credit card. At the end of the month, she’ll look over her credit card bill to catch any errors before that bill is paid in full with an automatic transfer from her checking account. By paying her bills this way, Michelle can rack up credit card rewards and build up her credit without worrying about incurring debt because her card is automatically paid off each month.
Next, 5% of her paycheck is automatically transferred to her Roth IRA account (combined with her 401(k) contribution, she’s investing a total of 10% of her pay each month).
Then, Michelle’s savings account pulls another 5% of her take-home pay. She’s set up this account so that it automatically divides her money between sub-accounts for her savings goals (like a wedding and an emergency fund).
Finally, whatever’s left in Michelle’s checking account after all those automatic transfers go through is her spending money for the month. Michelle can spend this money completely guilt free because she knows that all her bills are already paid and she’s already saved and invested for the future.

Because Michelle often uses her credit card for her guilt-free spending, she sets up alerts in a financial software (like You Need a Budget) to alert her if she spends too much in a particular category. She also checks on her account balances once in the middle of the month to make sure she’s not overspending—if she is, she has the rest of the month to get back on track.

Setting Up Your Transfer System

Now that you’ve seen how much easier it is when your finances run themselves, it’s time to set up your own system of transfers. You’ll need to get a few things in order before you dive in. First, you’ll need a list of all your accounts and your login credentials for each of them (to make this easier, Sethi recommends using an online service called LastPass, which securely stores all your account information). Second, if you haven’t set up your 401(k) yet, you’ll need to do that too before you worry about automating. And finally, make sure you’re getting paid through direct deposit if your job allows for it (talk to your human resources representative to set this up). That way, your paycheck will reliably land in your checking account at the same time each month, without you having to manually deposit it.

Linking Your Accounts

Before you can set up automatic transfers, you’ll need to link all your accounts to one another. Generally, you’ll do that by logging into the destination account (so, for example, to link your checking account to your student loan bill, start from your student loan company’s website) and finding the “Link Accounts,” “Transfer,” or “Set Up Payments” option. Remember, you’re just establishing the links at this point—you’ll come back to set up the actual transfers later. Here’s what you need to do.

Link your paycheck to:
- Your 401(k)
- Your checking account via direct deposit
Link your checking account to:
- Your savings account
- Your credit card
- Any bills that can’t be paid by credit card
- Your investment account/Roth IRA
Link your credit card to:
- All other bills

If you have any bills that you can’t pay online (for example, if you rent from an individual landlord and pay by check every month), don’t worry—you can still automate it! Your checking account most likely has a free bill-pay feature, which you can set up so that your bank automatically writes your rent check and mails it to your landlord every month.

Scheduling Automatic Transfers

Now that your accounts are linked, you can set up automatic transfers using your previous plan for expenditure as a guide for how much to divert into your savings and investment accounts each month. Setting up those transfers is simple, but we’re going to take it one step further by scheduling all of them so that they happen within the first week of you getting paid. This makes the whole process much simpler—if you get paid on the first of the month, you’ll know by the seventh of the month that all your bills are paid, your savings and investments are funded, and you can spend the rest of the month spending the leftover money however you want. This also helps you avoid accidentally spending money early in the month that was supposed to pay off a bill that’s due at the end of the month.

The first step to scheduling this system is to get your bills on the same schedule. Luckily, most companies now let you choose which day of the month your bill arrives (to choose a new day, you can call the company or check their website). To keep things simple, schedule all your bills to arrive on the same day you get paid each month. Here’s how the whole system should look if you get paid on the first of the month.

Day of the month	Action
1	Your paycheck is issued (but might not show up in your account yet). All bills arrive.
2	Your employer automatically sends your 401(k) contribution to your 401(k) account. Your take-home pay shows up in your checking account via direct deposit.
5	Automatic transfer sent from your checking account to your savings account. Automatic transfer sent from your checking account to your Roth IRA.
7	Auto-payments sent for all bills (from your credit card or your checking account). Auto-pay your credit card bill (preferably in full) from your checking account.

You may notice that nothing auto-transfers out of your checking account until the 5th of the month. That gives you a full four days of leeway to make sure your paycheck deposits correctly, which protects you against overdrafts and late fees. Similarly, when you set up auto-pay on your credit card bill, set up an automatic email notification to arrive with your bill each month (you’ll find this option under “Notifications” or “Bills”). That way, you can look over the charges and even adjust the amount of your automatic payment if needed (for example, if you’ve accidentally charged more money on your credit card than you have in your checking account).

(Keep in mind: This is how your system should look when you’re able to fully carry out your plan for spending your money. That may not be the case for you right away (for example, if you can’t afford to save a whole 5% of each paycheck, or if you have credit card debt and can’t pay it in full), but it’s still important to set up this system, even if you’re only transferring $5 into each account. You can always add to that amount later on—in the meantime, you’re building good financial habits and a solid system that will grow with you as your wealth increases.)

As you schedule all the transfers in your system, make sure to leave some money in your checking account to act as a buffer against accidental overdrafts until you know everything is running smoothly. Once you’re confident in your system, you can reallocate that buffer money according to your initial plan for expenditure.

Alternate Schedule: Biweekly Pay

The schedule above assumes you get paid once a month. Here’s what it looks like if you get paid biweekly:

Day of the month	Action
1	Your first paycheck of the month is issued (but might not show up in your account yet). All bills arrive.
2	Your first paycheck shows up in your checking account via direct deposit.
7	Auto-payments sent for all bills (from your credit card or your checking account). Auto-pay your credit card bill (preferably in full) from your checking account.
15	Your second paycheck of the month is issued.
16	Your employer automatically sends your 401(k) contribution to your 401(k) account. Your take-home pay for this paycheck shows up in your checking account via direct deposit.
19	Automatic transfer sent from your checking account to your savings account. Automatic transfer sent from your checking account to your Roth IRA.

Another way to schedule this system if you get paid twice a month is to save up a buffer of money in your checking account. That way, you can pay your bills and fund your investments and savings all during the first week of the month using a combination of your first paycheck and your savings buffer (you’d then use your second paycheck to rebuild that savings buffer). This technique lets you take advantage of the benefits of the default schedule (like having all your bills and payments taken care of within the first week of the month). If you decide to go this route, make sure to build up your savings buffer a little more than you think you’ll need to protect yourself in case anything goes wrong with your transfer system.

Alternate Schedule: Irregular Income

What if your income is irregular? For example, if you do freelance work, you might have some months where you make a lot of money and other months where you make none at all. In that case, you can still set up a transfer system; you’ll just need to create a savings buffer first. That way, you’ll be able to simulate a stable income by saving up enough money to pay yourself regularly, even during slow months. Here’s how to create that savings buffer:

First, figure out the bare minimum amount of money you need every month to survive. Only include the basic necessities, like rent and food—ignore savings, investments, spending money, and any fixed costs you could potentially go without for a few months (like a gym membership). Once you total up that number, multiply it by three to find out how much you’ll need to save up in order to cover yourself for three months of low income (for example, if you need $3,000 to survive each month, you’ll need to save a total of $9,000 for your buffer). If you’re worried that three months may not be enough to cover you, you can double that total to calculate your six-month savings buffer.
Next, set that buffer as a savings goal. This should be your first financial priority, which means you should temporarily divert all the money you’d normally save and invest each month toward this savings goal.
Finally, once you’ve hit your savings goal, you can go back to saving and investing according to your plan for expenditure. However, if your income is irregular, you may want to tweak your plan to increase your monthly savings—that way, if you have to dip into your buffer, you’ll automatically be working toward building that buffer back up.

Another thing to keep in mind: If you’re self-employed, your taxes aren’t automatically withheld from your pay, so you’ll have to set aside a portion of your income for taxes each year. Sethi recommends saving 40% of your income for taxes—that may be more than you end up needing, but it’s always better to have money left over than to come up short at tax time. However, self-employment taxes can be tricky, so you’ll definitely want to talk to a tax professional.

Transfer System Action Items

Create a master list of your accounts. To keep track of everything, it helps to have a list of all your accounts as well as the login information for each of them. That way, if you need to go in and tweak one part of your transfer system, you can do it easily without having to hunt down an old password.
Link your accounts. This part is easy, and you can do it from the account websites. However, some financial sites take a while to verify external accounts the first time you link them, so make sure you allow three to five days of buffer room before you need to make transfers between any two accounts.
Set up automatic payments. You’ll use your previously mapped expenditure plan to determine how much each automatic payment should be for your savings and investment accounts. For billing accounts, make sure to change the date your payment is due each month so that it works with the rest of your transfer system.

Chapter 6: Managing Your Own Investments—Without a Financial Advisor

Now that your pre-planned system of transfers is funneling money into your investment accounts each month, you can start thinking about how to actually invest that money. If you’re not a personal finance expert, managing your own investments might seem intimidating, and you may even be tempted to hire a professional financial advisor. However, unless your financial situation is especially complicated, you don’t need a financial advisor—you can get the same (or even better) results by managing your own investments, even without any special expertise.

In this chapter, we’ll see how financial “experts” are typically no better than amateurs when it comes to predicting the market or choosing where to invest—and how falling for their false expertise can cost you thousands of dollars in fees. Then, we’ll cover the basics of investing, including the difference between actively-managed mutual funds and passively-managed index funds.

Financial Experts Rarely Beat the Market

When you think of a financial expert (or, more specifically, an investing expert), who do you think of? Most people picture one of two things: media pundits who make their living loudly predicting stock market trends on television, or mutual fund managers (people who choose how to invest the money in a mutual fund, which is a group of different stocks that make up a single fund people can invest in). In either case, their job is to “beat the market,” which means getting better-than-average returns by correctly predicting which specific stocks will rise or fall in value

We tend to put these people on a pedestal because we assume that their investing experience will equate to better financial returns. However, that’s rarely the case: Mutual fund managers only “beat the market” about 25% of the time. Even if they do manage to beat the market one year, that result typically involves more chance than skill—and they’re rarely able to replicate their success the next year, let alone for several years in a row. That’s because the stock market is an extremely complicated system by nature, so it’s nearly impossible to predict how it will change in the short-term.

To see how chaotic the market can be, consider this example: Back in 2008, if you had the option to buy stock in Google or in Domino’s Pizza, which would you choose? Most people would choose Google, and they’d see some great returns—between 2008 and 2018, Google’s stock tripled in value. However, in that same period, Domino’s Pizza’s stock grew to 18 times its 2008 value. That’s why fund managers can so rarely beat the market—it’s almost completely unpredictable.

Hiding Poor Performance

You might wonder why so many people put so much faith in pundits and fund managers when they have such a poor track record for predicting the market. There are a few reasons for this.

First, many people make their investment decisions based on information from companies (like Morningstar) that rate various mutual funds based on their performance. If a fund is well-rated, the company advises investors to buy more shares (or hold onto their current shares). The problem with that is that these ratings don’t actually reflect a fund’s performance. One study even found that 47 out of 50 financial ratings companies told investors to buy or hold shares in mutual funds right up until the day the company in charge of the mutual fund filed for bankruptcy.
Second, fund ratings are subject to survivorship bias because financial ratings companies can only rate funds that still exist, which means they’re automatically ignoring all the funds that performed poorly and ultimately closed down. In other words, if a mutual fund management company starts 20 new funds and only five produce better-than-average returns, the company will drop the 15 failed funds. Then, when companies like Morningstar rate that fund-management company based on how their funds perform, they only see the five successful funds, so the resulting rating gives a skewed picture of how well that company’s funds actually perform.

Understanding Financial Advisors

By now, we know not to rely on financial pundits or mutual fund managers, but deciding whether to rely on a financial advisor is a bit more nuanced. Financial advisors are professionals who make their money by advising people on how to invest given their individual needs and financial situation. If you’re overwhelmed by the idea of managing your own finances, you may be tempted to pay a financial advisor to take over for you, but remember—when you give up control of your money, you also give up the opportunity to create your own Rich Life.

In general, most young people can manage their own finances just fine without the help of a professional advisor. However, if you have a complicated financial situation (for example, if you’ve inherited a substantial amount of money or if you have dependents), a financial advisor can be helpful. If you decide to hire one, there’s a few things you’ll need to look out for:

Look for “fee-only” advisors who charge a flat fee for their services and don’t make any money through commissions. That way, you can be confident that when they tell you to invest in a particular fund, it’s because that’s what’s best for you, not because it will make the most money for them.
Ask any potential financial advisor if they’re a fiduciary (which means they are legally obligated to give you advice based on your own best interest instead of their own bottom line). If they’re not, you’re at risk of being scammed and should choose a different advisor.

Financial Independence

Managing your investments might ultimately be the most important part of your financial life because it can lead to financial independence. In personal finance, the term “financial independence” means that your investments completely cover your living expenses—meaning you no longer have to work if you don’t want to. The moment your investments start generating more money than your salary is called the Crossover Point. (Shortform note: The term “Crossover Point'' was first coined by Vicki Robin and Joe Dominguez in their book, Your Money or Your Life. To learn more about financial independence and the Crossover Point, read our summary of Your Money or Your Life.)

When you reach the Crossover Point and no longer have to work for a living, you’re Financially Independent and Retiring Early (FIRE). FIRE can look different depending on your goals and lifestyle. For example, some people pursue “LeanFire,” which means they plan to live a modest lifestyle for the rest of their lives, so their investments only need to generate $30,000 to $50,000 per year to cover their expenses. On the other hand, there’s “FatFire,” in which people try to generate the highest possible net worth before retiring so that they can invest more and rake in higher returns.

For both FIRE styles, there’s a tradeoff between money and time: With LeanFire, you can retire earlier (often in your thirties or forties), but won’t be able to spend extravagantly; with FatFire, you’ll have to work longer, but you’ll be able to afford a lavish lifestyle once you do retire.

Remember: You get to choose what your Rich Life looks like and whether it involves reaching your crossover point. If so, you have a few options for how to achieve that goal: You can increase your income, reduce your spending, or try a combination of both. In the table below, see how each option changes how long it would take you to reach your Crossover Point (and how much you’d be able to live on in retirement) based on an income of $80,000 and $6,000 in monthly expenses.

Strategy	Yearly Income	Monthly Expenses	Years to Crossover Point	Yearly Spending Allowance After Crossover Point
Save and invest 10% of income	$80,000	$6,000	38	$72,000
Increase income by 30%	$104,000	$6,000	22	$72,000
Reduce expenses by 50%	$80,000	$3,000	12	$36,000
Increase income by 30% and reduce expenses by 30%	$104,000	$4,200	9	$50,400

Overall, setting FIRE as your goal can be a powerful way to increase your savings, but it’s not for everyone. Remember, a Rich Life is about more than money: If relentlessly cutting your spending or fretting over your investments is going to make you stressed and miserable, you may want to reconsider whether retiring early is worth that misery.

Taking Control of Your Own Investments

If your financial situation is relatively straightforward and you opt to manage your own investments without an advisor (as most young people can and should), you’ll need to know the basics of investing, beginning with mutual funds and index funds. (Remember, in the context of investing, a “fund” is a diverse group of investments. When you buy into a fund, you’re actually buying a variety of stocks and bonds, without the hassle of choosing each of them individually.)

Active Management: Mutual Funds

A mutual fund is a collection of different investments. Mutual fund managers buy each of those specific investments (using a pool of money contributed by a group of individual investors) depending on what they think will generate the best returns. We call this “active management” because an actual human is in charge of picking and choosing where to invest the fund’s money.

The benefit of a mutual fund is that each person who buys into it is automatically investing a little bit of money in each of the stocks and bonds that make up the fund. In other words, as an investor, you get all the benefits of a diverse investment portfolio without having to worry about picking specific stocks yourself (we’ll learn more about why a diverse portfolio is important in the next chapter). Mutual funds also sometimes produce amazing returns, but that performance only lasts a year or two.

However, actively managed mutual funds have a major downside: fees. We already know that mutual fund managers typically can’t beat the average market returns—so if you invest in a mutual fund, not only will you likely see subpar returns, but you’ll pay significant fees that sap the value of your investment even further. These fees (or “expense ratios”) are usually 1-2% of assets managed per year. That may not sound like a lot, but those fees compound—which means a 1% fee can end up reducing your overall returns by a whopping 30% in the long run.

Passive Management: Index Funds

Thankfully, you can bypass those fees by investing in index funds. Index funds are “passively managed” because they don’t have a fund manager who chooses which stocks and bonds to invest in. Instead, they use a computer algorithm to automatically invest in all the stocks in a given index, which is a section of the stock market (for example, NASDAQ is an index of technology stocks). This means that the value of an index fund will rise and fall in the same pattern as the section of the market that the index represents.

In the short term, index funds might not always match the returns of mutual funds because they track so closely with the wider market. However, in the long run, passively managed funds are a far better deal because there is no fund manager’s salary to pay, so the fees are much lower. For example, an index fund might have an expense ratio of 0.14% compared to a mutual fund’s 2% expense ratio.

To understand how important those low fees are, let’s look at an example. If you invest $100 per month in a mutual fund with a 1% expense ratio and keep that making that monthly investment for 25 years, you’ll pay almost $12,000 more in fees than if you’d invested that same money in an index fund with a 0.14% expense ratio (assuming the standard 8% return). The more money you invest, the more money you lose to mutual fund fees. For example, if you initially invested $5,000 in that same mutual fund and contributed another $1,000 each month after that, after 25 years, you’d pay $126,418 more in fees than you would for an index fund.

Exercise: Reflect on Managing Your Own Investments

If you’re new to the world of personal finance, managing your own investments might seem intimidating. This exercise will give you a chance to reflect on those feelings.

Before reading this chapter, what were your thoughts on financial advisors? Have you ever met with (or considered meeting with) a financial advisor? Why or why not?
What concerns do you have about managing your investments on your own?
If you needed help with an investment decision, what would you do? (For example, you might ask a parent for advice, or do some research online, or consult with a financial advisor). Why would you choose that particular resource?

Chapter 7: Getting Started With Investing

Now that you know that investing is the surest and simplest way to grow your wealth (and that you’re totally capable of managing your own investments), it’s time to actually get started investing. There are two main investment strategies to choose from, and how you invest will ultimately depend on your financial needs as well as your risk tolerance.

In this chapter, you’ll learn more about different asset classes, which are the building blocks of investing. Then, you’ll learn how to allocate and diversify your investments based on your age and risk tolerance. Finally, we’ll discuss the two main investment strategies: choosing your own portfolio (which gives you full control over your investments) and target date funds (which automatically adjust your portfolio based on when you want to retire). However you choose to invest, remember that you don’t have to do it perfectly, you just have to get started.

Asset Classes

Before you can start investing, you’ll need to understand the different asset classes that will make up your investment portfolio. Asset classes are simply types of investments (like stocks or bonds), and each asset class has varied assets within it. For example, “stocks” is an asset class composed of all kinds of different stocks: large companies, small companies, international companies, and so on. Let’s look at each asset class in more detail, starting with stocks.

Stocks

There are many different types of stocks. You’ll want to invest in several of these different types in order to create a healthy, diverse portfolio. Here are the most common types of stocks:

Large-Cap. These are the big company stocks that have a market capitalization (the amount invested in that company by its current shareholders) over $10 billion.
Mid-Cap. These companies have a market capitalization of $1 billion to $5 billion.
Small-Cap. These companies have a market capitalization under $1 billion.
International. These are stocks from companies in other countries.
Growth. These are stocks that experts expect to grow in value, potentially outpacing the growth of the market as a whole.
Value. These are stocks that are relatively low priced compared to their actual value.

Bonds

Bonds are a different type of asset class. They’re a much more stable investment than stocks because the value of a bond doesn’t fluctuate based on the whims of the market. When you buy a bond, you’re essentially giving a small loan to the bond issuer (which can be the federal government, local governments, or a corporation) with a predetermined payback period. For example, say you buy a $100 bond with a 20 year term. If you hold onto that bond for the full 20 years (instead of selling it prematurely), you’ll get your $100 back, plus 20 years worth of interest.

Bonds provide a buffer against market volatility, which means that if some of your investments are in bonds rather than stocks, you won’t lose your entire investment if the market crashes. If you’re younger (in your twenties), you can afford to have a portfolio made up entirely of stocks, because even if you lose money, you’ll have enough time to earn it back before you really need it. If you’re in your thirties, you’ll want to start adding bonds into the mix since you have less time before retirement to bounce back if the market dips. If you’re in your forties or fifties, you’ll want the majority of your money to be in stable bonds—that way, you don’t risk losing your entire retirement income.

There are several types of bonds available, such as:

Government. These are bonds issued by the federal government and are generally considered one of the safest possible investments. The tradeoff for that safety is a comparatively lower rate of return than stocks.
Corporate. These bonds are issued by corporations. They’re a relatively safe investment (as long as the corporation stays in business).
Short-term. These bonds mature in three years or less and provide relatively small returns.
Long-term. These bonds take at least 10 years to mature, but provide higher yields than short-term bonds.
Municipal. These are bonds issued by local governments.
Treasury inflation-protected securities (TIPS). These are one of the safest investments because your investment won’t lose any value due to inflation.

Cash

In the past, financial experts recommended keeping part of your portfolio in cash, but as long as you’re funding your savings accounts, you don’t need to worry about this. In the context of investing, “cash” doesn’t refer to paper money—it’s any money that isn’t actively invested and is just sitting in a money market account, slowly earning interest. This type of cash is specifically part of your investment portfolio (so it doesn’t refer to the money in your savings account).

The benefit of having part of your portfolio in cash is that it remains completely liquid, which means you can withdraw it at any time, for any reason, without penalty. Traditionally, people kept part of their portfolio in cash in case of emergencies. However, that money will lose value over time due to inflation as long as it continues to sit there uninvested—which is why you shouldn’t set aside part of your portfolio for liquid cash.

Asset Allocation and Diversification

For example, at age 35, you can afford to invest 90% of your money in stocks (a higher-risk option) and 10% in bonds (a low-risk option). By age 65, that allocation should change so that nearly half of your total portfolio is invested in bonds. At that point, you’ll be less concerned about growing your money and more concerned about protecting the money you’ve made from investing.

These numbers are just guidelines, not hard and fast rules, so you can adjust them based on your personal risk tolerance (so, if you’re young and want to be extra aggressive, you could invest 100% of your portfolio in stocks). Your financial situation also influences your asset allocation. If your net worth is in the millions, your investment portfolio should be almost entirely composed of bonds. You don’t need to aggressively grow your returns, so you have no reason to take unnecessary risks with your money.

Diversification

Your asset allocation refers to how your portfolio is divided across asset classes, but you also need to consider diversification, which refers to the diversity of your investments within each asset class. This also protects your investments in case one type of stock or bond doesn’t perform well in a given time period. So, for example, if you’re in your twenties and have 90% of your money invested in stocks and the other 10% invested in bonds, you have a solid asset allocation—but if all that money is invested in just large-cap stocks and government bonds, your portfolio isn’t diversified.

Investment Option 1: Choose Your Own Portfolio

So far in this summary, we’ve covered all the basic building blocks of investing. Now, it’s time to actually take the plunge. When you’re ready to invest, you have two options: choosing your own portfolio or buying a single target date fund. If you value control over convenience and you’re up to the challenge of learning all about the logistics of investing, choosing your own portfolio is the path for you. In this option, you’ll learn how to create a diverse, well-allocated portfolio to maximize your investments while protecting yourself from unnecessary risk.

Before you commit to choosing your own portfolio, make sure you understand the downsides to this approach. Most people who manage their own portfolios can’t match the market, let alone beat it, because they overreact to small changes in the market and end up buying and selling frequently, which ultimately diminishes their returns. If you’re determined to choose your own portfolio, you’ll need to resist the temptation to sell when the market dips, which is easier said than done. Plus, you’ll need to understand the market well enough to determine your own specific asset allocation, then manually rebalance it every year.

If choosing your own portfolio still sounds like the right choice for you, start by deciding how to allocate your portfolio. Sethi recommends using this template from David Swensen, who manages Yale’s endowment and is famous for maintaining a 13.5% return over thirty years of investing (remember, most fund managers can’t even match the average 8% market return). Swensen recommends dividing your investments like this:

30% in domestic equities. These are funds composed of small-, mid-, and large-cap stocks in American companies.
15% in developed-world international equities. These are funds composed of stocks from companies in developed countries like Germany and France.
5% in emerging market equities. These stocks are from companies in developing countries like Brazil and India. They’re generally considered riskier than developed-world entities, which is why they make up such a small percentage of your overall portfolio.
20% in real estate investment trusts (REITs). REITs are essentially funds that invest in real estate rather than stocks.
15% in government bonds. As we saw earlier in this chapter, bonds are a stable investment that help balance the risk in your portfolio.
15% in treasury inflation-protected securities (TIPS). These are one of the safest investments because they’re protected against inflation, but they typically have much smaller returns than the other investing options listed above.

You can use Swensen’s model as-is or adjust it based on your own needs and goals.

Once you have your ideal asset allocation planned out, it’s time to start researching specific index funds within each of those categories. (Remember, there are thousands of index funds available, so choosing your own portfolio requires a lot of research!) Start your search using the websites of investment companies like Vanguard and Schwab (information about specific funds is usually under the “Products and Services” tab). Here’s how to choose the exact funds to include in your portfolio.

Look for funds with low fees (expense ratios of no more than 0.2%).
Dig into each fund you’re considering to see how it aligns with your asset allocation (for example, if a stock fund is made up entirely of domestic equities, you’ll have to find specific international index funds to balance your portfolio).
Research the fund’s performance over the last 10 to 15 years.

What If You Can’t Afford Multiple Funds?

Ideally, your search turned up three to seven funds that meet your criteria. Since each index fund typically has a $1,000 minimum investment, that’s $3,000 to $7,000 total for initial investments alone. If you can’t afford to buy into all your ideal funds right now, don’t worry—you can set up a step-by-step plan to buy into each fund over time.

To start, choose the first index fund you want to buy into (this should be a stock fund so that you can start early and take full advantage of compounding over time). Then, take a look at the plan for expenditure you made in Chapter 4. Whatever you set aside for investing each month (after your 401(k) contribution), save that amount every month instead until you have enough to buy into your first fund. Once you buy into that first fund, you’ll set up a small automatic investment into that fund, then use the rest of your monthly investment allowance to save up for the next fund.

Let’s clarify this with an example. Say you have $500 per month to invest on your own (after your 401(k) contribution) according to your plan. If each fund you want to buy into has a $1,000 minimum, start by saving your monthly $500 investment allowance for two months. That gives you enough money to buy into the first fund. Then, set up an automatic $100 monthly contribution to that fund. You now have $400 per month in unallocated investment funds. If you save that $400 for another three months, you’ll have $1,200—enough to buy into your second index fund. You can keep repeating this process until you own all the index funds you need for a solid portfolio.

Once you’ve saved up enough to buy into all your index funds, you’ll split your monthly investment allowance across all those funds. Use your asset allocation to decide how to split up that money instead of just dividing it evenly. For example, if you’re using David Swensen’s asset allocation, 30% of your portfolio is invested in domestic equities—which means you should contribute 30% of your monthly investment allowance to your domestic equities funds.

Investment Option 2: Target Date Funds

If keeping track of a portfolio full of stocks, bonds, and index funds makes your head spin, don’t worry. There’s an easier way to invest: Target date funds (also called “target retirement” or “lifecycle” funds), which automatically rebalance your investments based on the year you plan to retire. That way, you don’t have to worry about adjusting your asset allocation as you age—a target date fund will automatically reallocate more of your investments into safer options like bonds as you get closer to retirement. This is one of the biggest benefits of target date funds because it saves you the headache of reevaluating your investments every single year.

Target date funds also provide automatic diversification because they’re essentially funds made up of other funds (and those funds, in turn, are made up of different stocks). That means you can own stock in a huge variety of companies just by buying into a single target date fund, giving you all the benefits of diversification without the headache of juggling a complex portfolio.

Target date funds are a great example of the “good enough” mentality: They don’t always have the very best returns, but they make it incredibly easy to invest, so they’re good enough. If you’re chasing the biggest possible returns and would rather sit back and let your money grow without having to worry about it, target date funds are the perfect choice. To find the right target date fund for you, you can start your research on investment company websites (just as you would if you were researching index funds). These funds are typically named after the target retirement year (for example, if you plan to retire in 2045, you can look for funds called “Target Retirement 2045”).

How to Actually Invest

By now, you know your investment strategy (either building a portfolio from scratch or using a target date fund), how to research different funds, and how to save up the required minimum investments. Now, it’s finally time to actually invest!

One crucial thing to note is that funding an investment account is different from actually investing that money. If you set up automatic contributions to your 401(k) and Roth IRA earlier in this summary, you haven’t actually invested that money yet—and it will just sit there, earning zero returns, until you do! This is a common mistake that can cost you thousands of dollars in lost potential returns.

When you’re ready to take the final step and invest the money in your investment accounts, start with your 401(k). Companies that offer 401(k)s typically only offer a small handful of funds for you to choose from (to see the funds your company offers, talk to your HR representative). These will usually be divided based on your risk tolerance, so you can choose between an aggressive fund, a balanced fund, or a conservative fund (as we saw with asset allocation, if you’re young, you can and should invest as aggressively as possible).

Next, you can invest the money in your Roth IRA. The great thing about Roth IRAs is that you can invest in any fund you like. This is where you have the freedom to invest in the target date funds or index funds that you found in your research (and still get the tax benefits of investing through your Roth IRA). When you’re ready to buy in, log into your Roth IRA, search the name of the fund, and click “buy.”

Automatic Investing

Once you own a target date fund or a handful of index funds, you should keep contributing money to them each month on top of your initial investment. You’ll do this using the automatic payment infrastructure you set up in Chapter 5. Automation is especially important for investing because you continue automatic contributions every month, regardless of whether the market is going up or down. In practice, that means that even if the stock market drops severely, you continue funding your investments because you know that those dramatic highs and lows will even out over time to a modest-but-predictable gain of about 8%.

It can be scary to keep buying into the market during a recession, but consider the long-term view: When the market is down, you’re essentially buying shares on sale that will almost certainly appreciate in value over the course of your 40 or 50 years of investing. When you invest automatically, you don’t have to worry about buying and selling stocks, which means you won’t incur any trading fees. You also won’t have to consciously think about investing because it will all be taken care of for you automatically.

Extra Credit: Other Types of Investments

You may be wondering about other types of investments, like real estate, art, or cryptocurrency. As a general rule, Sethi cautions against these types of investments because they tend to have unpredictable returns. For example, when most people talk about investing in real estate, they mean their own homes, and they forget how quickly the cost of upkeep and property taxes eat away at any annual returns from owning property.

The art world is equally unpredictable: One study of a famous art collection worth $99 million found that just two of the 135 pieces in the collection accounted for half the collection’s value. The odds of choosing the art piece that will appreciate most in value are about the same as the odds of choosing which individual stock will skyrocket (which, as we know, even professional fund managers typically can’t do). The same boom-and-bust pattern tends to apply to cryptocurrency (such as Bitcoin). In 2017, Bitcoin generated a 240% return on investment—and then immediately bottomed out.

The bottom line for these alternative investments is this: They’re too high-risk for a reliable, long-term investment strategy, so if you want to invest in them, you should use your guilt-free spending money to do so. However, once you have a mature, well-balanced portfolio and at least six months of emergency funds saved up, you can use 5-10% of your monthly investment money to invest in something fun.

Action Items

Decide whether to invest in a single target date fund or select your own portfolio of index funds. Remember, don’t take too much time on this decision—just choose whatever will help you get started quickest (for most people, this will be a target date fund).
Research the different funds available.
Buy your funds.

Chapter 8: Keep Your Financial Momentum Going

So far in this summary, we’ve covered all the basics of personal finance, from credit cards to investing—and if you’ve been following along with the action steps in each chapter, you now have a solid financial foundation and an automated system that grows your money for you while you sleep. Now, we’ll learn how to optimize that system if you want to enhance your finances even further. Sethi calls this “extra credit” because these steps are optional—you don’t need them to have a healthy financial infrastructure.

In this chapter, you’ll dig down into the concrete reasons why you want to grow your wealth and learn how to feed your financial growth even further. Then, we’ll debunk some common myths about taxes. Finally, we’ll discuss selling your investments (and why selling should be your last resort).

Think About Your “Why”

If you’ve followed the advice in the earlier chapters of this summary, you’ve created a financial infrastructure that pays your bills, funds your future, and leaves you with guilt-free spending money left over. At this point, you could easily sit back and enjoy the Rich Life you’ve worked hard to create. If you do want to keep working on your finances, there are ways to do that—but before you start, you need a concrete reason to keep growing your wealth. Otherwise, you’ll risk what Sethi calls “living in the spreadsheet”: becoming so fixated on making money that you forget the purpose of having money in the first place.

Before you read on, ask yourself: If I’m already making enough money to live comfortably, why do I want to make more? Your first answer might be high-level ideals like “freedom” or “security,” but it’s hard to motivate yourself with abstract ideas. Instead, make the abstract more concrete: Rather than “security,” maybe you want to make more money so you can create college funds for your children or buy the house you’re currently renting. When you focus on a concrete vision, you give yourself a specific goal to shoot for and avoid the trap of making money for its own sake.

Feed Your System

Once you have a clear vision for why you want to grow your wealth further, you’ll want to focus on pumping more money into your investments. Remember, the more you invest early on, the more that money will grow due to compounding—so every extra cent you can funnel into your investments will create huge returns later on. To free up more money for investments, you can go back to your plan for expenditure to see where you might be able to optimize even further (for example, by putting off major purchases like a car or a house). If you’ve squeezed every possible dollar out of your spending plan, you may need to increase your income by negotiating a raise or looking for a higher-paying job.

Rebalance Your Investments

If you handpicked your own investment portfolio, another way to optimize your finances is by rebalancing your investments once a year (if you chose to invest through a target date fund, you don’t need to worry about this because your fund will rebalance itself for you). That way, if one part of your portfolio performs better or worse than the others, it won’t throw your entire asset allocation off balance.

For example, let’s say you followed the Swensen model and allocated 30% of your investments to domestic equities. If your domestic equities fund booms in a particular year and nets 50% more returns, that means you’ll have more money (both principal and returns) invested in the domestic equities part of your portfolio than you planned. This also means that if that domestic fund were to crash, a bigger portion of your portfolio would suffer.

To protect yourself from wild swings in the market, you need to make sure that no one part of your portfolio grows too large relative to all the others. So if one area (like domestic equities) starts to grow, you’ll need to rebalance the portfolio by pumping more money into all the other areas (like international equities and bonds). You don’t need to conjure up more money in order to do this—just temporarily pause your contributions to the high-performing fund and reallocate that money so it’s divided among your other investments. Once your asset allocation is back where you want it to be, you can start contributing to the high-performing fund again (you may want to set up a calendar reminder so you don’t forget to restart automatic contributions).

If one area of your portfolio is underperforming, you can rebalance in much the same way. This time, instead of pausing payments to the fund that’s out of alignment, you’ll pause payments to all your other funds and reallocate that money toward the underperforming fund. Keep building up that area of your portfolio until your asset allocation is balanced again, then resume payments into all the other funds.

Avoid Selling Your Investments

As you consider rebalancing your investments, keep in mind that you should avoid selling any investments unless it’s absolutely necessary. This is especially true if you’ve held an investment for under a year: If you sell within a year of buying, you’ll have to pay income taxes on your earnings, which can significantly reduce your overall returns. However, if you wait at least a year to sell, you’ll avoid paying income tax on those earnings (you’ll still have to pay capital gains tax, but that’s typically much lower).

While it’s best to avoid selling your investments at all, there are three situations where you might need to: emergencies, underperforming investments, and achieving goals. We’ll cover each of these in more detail.

Emergencies

No matter how well you plan for your financial future, surprises happen. If you suddenly need money to cover unexpected expenses like medical bills or property damage, don’t sell off your investments as a first resort. Instead, start with the emergency fund you’ve saved up in your savings account. If that’s not enough to cover you, you can try to earn additional money with a side hustle or by selling off some of your possessions. Finally, you can ask your family for help.

If you’ve pursued all those options and are still short on cash, then you can consider withdrawing money from your retirement accounts. You can always withdraw the principal from your Roth IRA without a penalty, and your 401(k) should have options for “hardship withdrawals.” However, in either case, keep in mind that if you borrow even a small amount from your retirement accounts, you’re actually costing yourself more money down the line due to lost earnings from compound interest.

One caveat to this rule is that if your only other option is to use your credit card, then you absolutely should withdraw from your retirement account first. The earned interest you lose out on is nothing compared to the exorbitant interest rates your credit card will charge if you start to carry a balance. You should only use your card for emergency money if you’ve exhausted all other options.

Underperforming Investments

If you’ve followed the advice in this summary so far, all your investments should be in either index funds or target date funds, not stocks in individual companies. When the price of those funds fluctuates, it’s because the whole market (or at least that particular index) is trending up or down. In practice, that means there is very little use selling your investments, because the market as a whole almost always trends upward with a roughly 8% annual return averaged over decades. In the short term, if one of your index fund investments dips, you’re better off holding onto it because the market will almost certainly recover, even if it takes a few years.

However, let’s say that you invested some money in an individual company just for fun, and the price of that particular stock starts to decline. Before you panic and sell, step back and look at the industry context. If the entire industry is declining, there may be a temporary cause (like a supply shortage), in which case you can expect the industry to recover. (On the other hand, if you suspect that the entire industry is becoming redundant, you may want to sell.)

If the industry is doing fine, but the specific company you own stock in is suffering, that may be a sign of a more serious issue. In that case, you can sell your shares through your brokerage company’s website, but keep in mind that you may face tax penalties.

Achieving Goals

The best reason to sell your investments is that you’ve achieved your financial goals. For example, if you were investing to make enough money to afford a nice car, you should absolutely sell when you meet that goal and use the money for that purpose. This isn’t extremely common because you should be using your savings account for most of your short- and medium-term savings goals—but if you decide to invest with a shorter-term goal in mind, don’t hesitate to sell once you meet that goal.

Understand the Truth About Taxes

Another way to optimize your finances is to make sure you understand how taxes work. Common misconceptions about taxes can cost you money in the long run, especially if you avoid increasing your income due to fears about paying higher taxes. Here are some common myths about taxes and the real story behind them.

Tax Myth 1: Tax refunds are bad. Some people hate tax refunds because they see them as an interest-free loan to the government. Instead, they think we should get consistent, small tax refunds throughout the year instead of a lump sum at tax time. However, research shows that when people do get small tax refunds more frequently, they just spend the money without even realizing they’ve received a refund. On the other hand, when you get a lump sum once a year, you’re more aware of the amount, so you’re more likely to save it or put it towards debt rather than blowing through it.

Tax Myth 2: Increasing your income isn’t worth it because moving up a tax bracket will negate the extra money you make. This is a common misconception that can cost you tens of thousands in missed wage increases. In reality, American income taxes are calculated using “marginal tax brackets,” which means that if your income increases and you move up a tax bracket, you’ll only pay higher taxes on the portion of your income in the higher tax bracket. As an overly-simplified example, let’s say the upper limit of one tax bracket is $80,000 per year and you make $100,000 per year. In that case, you would only pay a higher tax rate on $20,000 of your income—not the whole $100,000!

Tax Myth 3: If you make enough money, you can use loopholes to avoid paying taxes. While there are some legal tax loopholes, they’re generally only available to the super-rich (people who earn millions of dollars each year off of their investments alone). Unless you plan to inherit millions or launch the next Google or Facebook, you probably shouldn’t worry about finding tax loopholes.

Ultimately, the “good enough” mentality should guide your approach to taxes: Use tax-advantaged accounts like 401(k)s and Roth IRAs as much as possible, then move on, taking comfort in the fact that the taxes you do pay contribute to important national infrastructure.

Exercise: Find Your “Why”

Before you make a plan to grow your wealth even further, take a moment to think about the specific way you plan to use that money to live a Rich Life.

What high-level ideals (like freedom or security) do you associate with wealth? How could you turn those abstract ideas into concrete goals? (For example, if you associate money with freedom, a concrete goal might be earning enough money to be able to travel wherever you like, whenever you like.)
Imagine you’re earning an extra $1,000 per year by following the advice in this chapter. If all your basic financial needs were already met, how would you use that money to create your Rich Life? Be as specific as possible. (For example, maybe you’d feel free to order appetizers whenever you eat out, or take your spouse on a lavish weekend getaway).
Now, dream even bigger: Imagine you’re earning an extra $10,000 per year. How would you use that money to create your Rich Life? (For example, maybe you’d move into your dream neighborhood or start a new business.)

Chapter 9: Financial Milestones

You may be wondering how your new financial system will fit into the rest of your life. In particular, there are a few financial milestones that most people in their twenties and thirties need to consider—like paying for a wedding, negotiating a salary at a new job, and buying a house. In this chapter, we’ll learn the best way to approach those milestones, starting with managing investing while paying down your student loans. Then, we’ll see the best way to talk about money with your loved ones, including how to handle tricky financial issues with your partner. After that, we’ll talk about how to grow your wealth by negotiating a higher salary and saving money on big purchases like a car or a house.

Student Loans

Most people who graduate from college do so with a hefty amount of student loan debt. That debt can feel demoralizing, but don’t worry: Studies show that investing in your education is a solid financial decision because it significantly increases your earning potential over a lifetime. Beyond that, student loan debt tends to have a much lower interest rate than credit card debt, which means you can (and should) start investing even before fully paying off your student loans.

Investing and Student Loans

Earlier in this summary, we learned how important it is to start investing early. If you have student loan debt, there are three ways you can approach investing: invest aggressively, pay off your debt aggressively, or combine the two.

If you want to start investing aggressively right away, you certainly can, as long as you’re still making the minimum payment on your student loans each month. This is a smart decision if your student loans have particularly low interest rates, because the money you make from the average 8% annual return on your investments will more than make up for the money you lose due to accrued interest on your loans.
There can be an emotional cost to focusing on investing, because it will take longer to pay off your loans and you might feel like they’re hanging over your head. If that’s the case, you can divert the money you would have invested toward your loans to pay them off earlier. However, if your loans are large and it will take years to pay them off, keep in mind that not investing during those years could cost you in the long run because you’ll miss out on the earnings from compound interest.
Overall, Sethi recommends taking the best of both of these approaches by paying slightly more than the minimum on your student loans each month while still investing aggressively with the rest of your money. That way, you can speed up the process of paying off your loans while still taking advantage of investing early and letting your money compound for longer before retirement. With this approach, you don’t need to worry about interest rates because student loans tend to have interest rates that are roughly the same as the average market return of 8% (which means you’ll pay about the same amount whether you keep accruing interest on your loans or miss out on interest earnings in the stock market).

Money and Family

As you work through the advice in this book, you might be tempted to share your financial wins with your loved ones. If you do, keep in mind that money is a fraught subject, and you might notice some uncomfortable or negative reactions from your friends and family. Try not to take any negative comments personally—remember, people tend to react based on their own invisible scripts around money, which aren’t always logical.

At some point, you may also need to have tough conversations with your family about their finances—especially if your parents are in debt. This can be a particularly difficult conversation to have because it reverses the typical parent-child roles; parents are used to helping their children with money, so the idea of their kids helping them can be tough to swallow.

If you suspect your parents are in debt and you want to help, it’s important to approach the subject carefully and compassionately. Start by asking questions about money in general (not about their debt specifically), like how they learned about personal finance or what their ideal financial situation would be. Starting with general topics like these often helps parents warm up to talking about their finances with their children at all. If that goes well, you can move onto more specific questions about their investments, credit cards, and savings.

As you approach these conversations with your parents, keep in mind that they may not be willing to talk about money at all—and even if they are, they may not be ready to accept your help with their finances. If that’s the case, don’t force it. As difficult as it might be, whether they take control of their finances is ultimately their decision.

Money and Marriage

How much you choose to talk about money with your family is up to you—but if you have a serious romantic partner, conversations about money will be impossible to avoid. In this section, you’ll find advice for three common sticking points when it comes to love and money: talking about money with your partner, paying for a wedding, and prenuptial agreements.

Talking About Money With Your Partner

Before you can dig into the nitty gritty of your personal financial situations, you and your partner need to get comfortable with talking about money at all. That might be especially difficult if you’re not used to being open about your finances, or if you know that you and your partner have very different financial situations (for example, if one of you makes more money or has more debt than the other). However, if you approach the conversation with an open, humble, and nonjudgmental attitude, discussing money doesn’t have to be a scary thing.

To make these conversations easier, start with general questions—like how your partner thinks about money in general, how their parents talked about money, or what their ideal financial situation would be. Put them at ease by being vulnerable and sharing something about your own finances (for example, if you know you tend to overspend in a certain area, or if you’re stressed about your credit card debt). That vulnerability will encourage them to share openly in return. This conversation doesn’t have to happen all at once—it might take place over the span of several weeks. Either way, remember that the goal is for both of you to get comfortable talking about money and helping each other prioritize your financial health.

Once you and your partner are comfortable talking about money in general, it’s time to dig down into specifics. Sit down with your partner and openly discuss your salaries, savings, spending habits, debt, and financial goals. Here’s an example of how you could approach this conversation.

First, start by talking about your short- and long-term financial goals. This could be anything from taking a vacation next year to going back to school or supporting your aging parents. You should also get clear on the kind of lifestyle you’re hoping to live—will you spend thousands every year at bars and restaurants, buckle down to save as much as possible and reach FIRE at 35, or something in between?

Once you’ve both had a chance to share your goals, discuss your spending habits. Again, you can put your partner at ease by going first. Show them your plan for spending, including any areas where you feel you could improve, and ask for their feedback. Talking about your plan will naturally open the door to discussing your debt, savings, and investments (since you’re making automatic payments to all those accounts each month). At this point, you can also talk about how you’ll handle joint expenses if one person makes more money than the other (for example, if you make more than your partner, you might split the rent payment 60/40 instead of 50/50 so that you’re both putting the same percentage of your monthly income toward rent).

Finally, when you’ve worked through all the details together, end the conversation on a positive note by setting up a few savings goals together, like a tropical honeymoon or a bigger apartment. As you continue having conversations about money, you can get more specific about these goals.

This has the added benefit of making it easier for you to bring up concerns about your partner’s spending habits down the line. If you’re worried that your spouse is spending too much, you can remind them of your joint goals (and how important those goals are to both of you) rather than directly accusing them of spending too much and making them feel judged or attacked.

Paying For a Wedding

Studies show that the average American wedding costs somewhere around $35,000—and that the average American thinks their wedding won’t cost nearly that much. But when it comes time for the big day, most people end up paying far more than they planned on all the details that go into a wedding. Those costs can add up quickly, and they can even put you into debt if you don’t plan ahead.

Instead of assuming that you will somehow beat the average and have a truly simple, low-budget wedding, take those statistics to heart and start saving for your wedding now—even if you’re not engaged. You may feel silly doing it, but you’ll be far better off than if you just assume you’ll somehow have an extra $35,000 on hand when the time comes. Plus, if you don’t end up spending that money on a wedding, you can always put it towards a different savings goal.

To figure out how much you should be saving for your future wedding, start by estimating when you want to get married (for reference, the average age at marriage is 27 for women and 29 for men). Then, use that estimate to figure out how long you have to save, and divide the total wedding cost by that number.

For example, if you’re 24 and you plan to get married at 29, you have five years (or 60 months) to save up enough money. Assuming you’re paying for the entire wedding yourself, that means you need to save $583.33 every month for the next 60 months.

Prenuptial Agreements

Prenuptial agreements (or “prenups”) are legal contracts that two people sign before getting married that dictate how their assets will be divided in the event they get divorced. Typically, people only sign prenups if one partner has a much higher net worth than the other, or if one partner owns a business. That way, if the relationship ends and things get contentious, the richer partner won’t lose the wealth they accumulated prior to the marriage as part of the divorce settlement.

There is a cultural stigma against prenups: They’re considered unromantic because people see them as a sign of doubt that the marriage will last. It’s true that no one wants to think about the possibility of divorce before they’re even married, but it’s also important to keep in mind that marriage isn’t just about love—it’s a binding legal contract. And like any other legal contract, it’s important to make sure you’re protected from potential losses before signing.

If you own a business or have significantly more wealth than your partner and you do decide to sign a prenup, you’ll need a plan for how to bring up the subject with your partner while still reassuring them that you don’t intend to ever have to use it. Before springing that conversation on them, make sure that you and your partner are comfortably talking about money on a regular basis and that you’re both completely transparent about your own finances. Then, when you’re ready to talk about prenups, here’s how to do it:

First, reassure your partner that you’re marrying them because you want to be with them forever and that you don’t see divorce in your future. You may need to come back to this point several times as the process unfolds—especially once lawyers get involved.
Second, take responsibility for your decision. It might be tempting to blame it on your lawyers, but being dishonest will only make the process harder.
Third, explain your reasons for wanting a prenup (typically because you want to protect the business you built before your marriage).
Fourth, don’t be afraid to get help. Talking about prenups can bring up a lot of difficult emotions for both of you, and a professional marriage counselor can help give you the tools to communicate those emotions in a productive way.

Negotiating a Higher Salary

Now that we’ve talked about money and relationships, let’s talk about how to handle money issues at work—specifically, how to negotiate a higher salary at a new job. Technically, you can use the tactics in this section to negotiate a raise at your current job, but the best time to negotiate your salary is the moment you get hired because you have more leverage. The company most likely spent thousands to recruit you, and they’ve communicated that they think you’re a valuable asset. Negotiation is your way of showing your new employer that you know your value and you expect to be compensated accordingly. Here are Sethi’s top tips on how to negotiate a higher salary:

Make the negotiation about the company, not about you. In other words, emphasize the value you’ll add to the company rather than how much your salary will cost them. Be specific about what you bring to the table and keep the conversation focused on why they’re getting a great deal by hiring you, even at a higher salary point. You can drive this point home by sending the hiring manager a comprehensive list of how you plan to excel in your new role.
Leverage other job offers. If you’re actively job searching, you’ll most likely have at least one other offer. Mention this during your salary negotiation so that the hiring manager knows you’re not afraid to walk away if she can’t come up with a fair number. (However, if your other offer is from an inferior company, don’t name names—just give a description of the industry.)
Negotiate total compensation, not just money. Don’t be afraid to ask for vacation days or stock options as part of your overall compensation.
Be friendly. Smile often and remember that your goal is to come up with an agreement that works for both of you. This is a cooperative process, not a battle with winners and losers.
Let them make the first offer and don’t reveal your salary. If they ask your current salary, politely but firmly redirect the conversation. Making the first offer and revealing your salary both give the hiring manager a baseline number, which makes it easier for them to make a lowball offer rather than an offer that reflects the real value of the position.
Practice, practice, practice. Ask your friends to play the role of hiring manager and drill you with the hardest questions they can think of. You’ll feel awkward at first, but try to take it seriously. Run through the negotiation process several times until you feel more comfortable asking for what you want.

Big-Ticket Purchases

Another financial milestone on the horizon for many young people is buying a car or a house. These “big-ticket” items are important because they’re a unique opportunity to save money—so much so that if you do it right, you can save so much on these purchases that you won’t need to worry about saving on smaller things like groceries or clothes. In this section, you’ll learn how to approach these big purchases in a way that will save you money in the long run.

Buying a Car

The first step to buying a car is figuring out your actual budget. To do this, look back at your plan for expenditure to see how much you can afford to put toward the costs of owning a car every month. This isn’t just a car payment: You also need to include insurance, gas, parking, and maintenance (these expenses will vary based on where you live and how you use your car). In other words, if you plan to spend around $500 total per month on your car, you can probably afford an actual car payment of roughly $200 per month—or $12,000 over five years.

Choosing a Car

The next step in buying a car is choosing the right car for your lifestyle, budget, and tastes. To do this, start by thinking through your priorities when it comes to transportation. If you love cars and enjoy driving, you may want to push your budget to buy the fanciest model you can afford. On the other hand, if you see your car as just a tool to get from one place to another, you may be able to find a reliable car for less than your monthly budget and use the savings for something you really care about.

When you’re deciding what car to buy, keep in mind that the single best way to save money on a car is to drive it for as long as possible—ideally, over 10 years—because the real savings don’t start until after you’ve paid off the car in full. That means that when you’re looking to buy a car, you should choose one that is reliable enough to last over a decade (and since you’re going to be driving it that long, make sure the car you choose is one you really like).

Other factors to keep in mind when choosing a car are insurance costs (which will vary based on whether the car is new or used), gas mileage, and resale value (you can look up the resale value of any car using Kelley Blue Book). You’ll also need to consider the down payment, which is the money you pay for the car up front rather than on a monthly basis. In general, the down payment for used cars is lower than for new cars.

Negotiate From Home

Once you know the exact car you want, start by doing your research. Look online to find out how much car dealerships pay for the exact car you’re looking for (Sethi recommends a service called Fighting Chance for this purpose). Once you know how much they pay, you can use that knowledge to avoid being scammed by dealers.

When you’re ready to buy, wait until the end of the month, when salespeople are trying to meet their quotas and are more likely to give you a good deal. Then, reach out to a handful of dealerships through their websites, tell them what car you’re looking for, and ask them to quote you a price. Then, when you have those quotes in hand, call up each dealership and tell them the lowest offer you received from another dealership. Every salesperson you speak to wants to be the one to close this sale, so they’ll bid against one another for your business, which means you get to field lower and lower offers from the comfort of home (you’ll only have to visit the dealership in person at the very end to sign the paperwork).

After you drive your shiny new (or new-to-you) car off the lot, remember that you need to make it last at least a decade. That means that regular car maintenance is key to saving money on your car in the long run. Get in the habit of taking your car in for regular maintenance and keeping a record of each service. That way, when you eventually sell the car, you’ll be able to charge more because you can prove that the car has been well-maintained.

Buying a House

A house is probably the biggest single purchase you’ll make in your lifetime—and if you come prepared, you can save over $100,000. However, before you commit to buying, think about whether home ownership makes sense for your financial situation.

If you own your home, you’ll be responsible for everything a landlord covers when you rent: insurance, property taxes, general upkeep, and fixing anything that goes wrong. That means that even if your mortgage payment were the exact same as your current rent, the true cost would actually be much higher. On top of that, before you can buy, you’ll have to save up at least 20% of the total cost of the house for a down payment, which is a significant chunk of money (on a $125,000 house, that’s $25,000). Finally, if you decide to buy your home, you’ll need a much larger emergency fund than if you’re renting, which is another cost to account for.

In addition to your finances, home ownership can put a strain on your lifestyle. You’ll pay a fortune in taxes and fees when it comes time to sell your home, which means you may not be able to afford to move to a new city or even a new house for many years, so you could miss out on exciting new opportunities in other places. Plus, unless you’re already very rich, you likely won’t be able to afford your dream home right away. Instead, you’ll be buying a starter home, which may not have the same amenities or even as much space as rentals in the same price range. Before you buy, you’ll have to decide whether the stability of owning your home is worth the financial and social costs.

If you do decide to buy a house, don’t think of it as an investment. After you factor in taxes, fees, and maintenance, real estate only nets an average 0.6% annual return, which can’t hold a candle to the 8% average annual return of the stock market. That doesn’t mean you should never buy a house—it just means you shouldn’t expect to make money off of it.

How to Buy a House

If you decide that home ownership makes sense for you, here’s how to avoid some common mistakes that first-time home buyers make.

First, decide on a budget. You shouldn’t start the process of buying a house until you’ve saved up 20% of the price of the home for a down payment. Once you have that saved up, total up the total monthly cost of owning a house in your price range (including maintenance, taxes, insurance, and so on). That total monthly cost should be no more than 30% of your monthly income.

Next, improve your credit score as much as you can. The higher your score, the lower the interest rate on your mortgage, and the less you’ll pay over the life of the mortgage (typically 30 years).

Then, do your research to find out the true cost of buying a house. You’ll need to account for closing costs for the sale (typically 2-5% of the price of the house), insurance, property taxes, and any renovations the house needs. To make sure you’re not forgetting anything, ask any homeowners you know what surprise costs they encountered when buying their house. At this point, you should check whether any associations you belong to (like credit unions or teachers’ associations) offer access to special mortgage deals. If you’re a first-time home buyer, check your state and local government websites, which often have perks to encourage people to buy real estate.