Author: Ramit Sethi writes the personal finance blog: iwillteachyoutoberich.

com

Jason's comments in BLUE

Note: This book was published March 2009, and I read it/wrote up these notes in March
2010, so information may be outdated. I've added some updates in my comments (most
recently 01/2012), but it's not comprehensive.

The Overall Gist: This book is about how to manage your money, particularly for young
people (20's). It's about the 85% solution: most young people don't manage their
money because they believe they have to be experts, but what actually matters is
getting started NOW, even it's only 85% right.

6-Week Program
Week 1: Optimize your credit cards and use them responsibly to build good
credit.
 Having good credit is one of the most vital factors in getting rich: Our
largest purchases are made on credit and good credit saves tens of
thousands of dollars.
o Your credit score is based on: 35% payment history (late
payments are bad), 30% amounts owed (how much you
owe compared to how much credit you have available),
15% length of history, 10% new credit (older accounts
are better), 10% types of credit (varied is better, e.g.
credit cards, student loans).
o You can get a free annual credit report at
www.annualcreditreport.com, and you can get your credit
score for $15 at www.myfico.com
 The fastest and most concrete way to optimize credit is with credit
cards.
o Pay off your credit card regularly! If you miss a payment:
your credit score drops, your rates go up (even possibly
on other credit cards), and you'll be charged a late fee
(usually ~$35)
o Choosing credit cards: Compare cards online (e.g.
www.bankrate.com) and choose one with rewards you'll
actually want, not cash-back. Choose one without annual
fees (unless you've done the calculations and the extra
rewards are worth it). If you have one with fees, ask for
them to be waived. How many cards? 2 or 3. Jason: I like
the Charles Schwab Invest First Visa that offers 2% cash-
back. Update (01/2012): this card no longer exists. Most
cash back cards with no annual fee offer at most
1.5%. Ramit (the author) currently recommends the
Starwood American Express card, which has an annual
fee. It depends on your spending patterns; if you ask me,
I might have suggestions, but I haven't chosen a new
primary credit card yet.
o To optimize your credit, keep your cards open and (if you
have no debt) call to ask for credit increases.
o Misc. benefits: Credit cards often offer extended
warranties on your purchases, car rental insurance, trip-
cancellation insurance, and will dispute charges for you.
o Debt: Pay off your credit card debt aggressively, because
the interest is REALLY high and it hurts your credit. Pay
off those with the highest APR first (though still make
sure to pay the minimum on all cards).
Week 2: Set up no-fee, high-interest bank accounts.
  Checking and savings account: Your checking account let's you deposit
and withdraw money easily; It's for everyday use but pays low
interest. A savings account is for short-term (one month) to midterm
savings (five years): It pays more interest but you rarely withdraw
from it. Jason: I'm not really planning on using a savings account.
Savings will just go into a brokerage account.
 Choosing accounts: Based on trust (bank shouldn't nickel-and-dime
you with fees and minimums), convenience (easy to get money in and
out, working website), and features (good interest rate, free bill
paying).
o Get an account with no minimums and no fees (monthly
fees, overdraft fees, or setup fees). If not, call to ask
them to waive it (perhaps by setting up direct deposit).
o Suggestions. Online banks are usually good. Checking:
your local bank or credit union (for convenience), Schwab
Bank High Yield Investor Checking Account (Jason: I
chose Schwab), ING Direct Electric Orange. Savings: ING
Direct Orange Savings, Emigrant Direct, HSBC Direct.
Week 3: Open a 401(k) and Roth IRA.
 Investing is the single most effective way to get rich: the average
annual stock-market return for the 20th century was 11% (8%
adjusting for inflation). Especially given compounding, this is way
more effective than even the highest interest rate on a savings
account. E.g. Investing $1000 for 40 years in a 3% savings account
would become $3000, but in an 8% investment account it would
become $21000. Start investing early!
 Invest in your 401(k) plan. It's a type of retirement account that
many companies offer their employees. You agree not to withdraw
money until age 59.5, but there are huge benefits:
o Tax advantages: The money you contribute isn't taxed
until you withdraw it many years later. This allows you to
invest more money now, taking advantage of compound
growth. Jason: His explanation seemed a little odd to me,
but essentially it allows your investments to grow tax-
free (normally you pay income tax or capital gains tax on
investment gains).
o Employer match: Many employers will match part of your
contribution. This is basically free money, if nothing else
invest enough to take full advantage of this match.
o Concerns: What if I really need the money? You can
withdraw early at a penalty of 10%. With if I switch jobs?
You can roll it over into an IRA. How much can I invest
per year? $16,500 Update(01/2012): $17000 in
2012 (though how much your employer matches depends
on the employer).
o Jason(01/2012): He's talking about a pre-tax 401(k),
which is most common. Many employers offer a choice
between a pre-tax 401(k) and a Roth 401(k). In a Roth
401(k) (like in the Roth IRA described in the next bullet),
you pay taxes on your contribution but don't pay taxes
when you withdraw. This doc has some thoughts on
which to choose.
 Invest in a Roth IRA. A Roth IRA is like a 401(k): you agree not to
withdraw until age 59.5 but you get tax advantages. It differs in that
instead of not paying taxes on your contribution and paying taxes
when you withdraw, you instead pay taxes on your contribution but
don't pay taxes when you withdraw. Jason: He seems to prefer the
 scheme of paying taxes earlier, though I'm not clear why. Both
essentially allow your investments to grow tax-free. Whether you'd
rather pay taxes now or later should depend on whether you think
your taxes will be higher now or after age 59.5. Update(01/2012): For
more clarification, this depends on whether you think your income/tax
bracket will be higher/lower and whether you think taxes in general
will be higher/lower.
o Like the 401(k) you are penalized if you withdraw your
earnings before age 59.5, but you can actually withdraw
your principal (the original amount you invested) at any
time, penalty free.
o How much can you contribute? Depends on your income,
but check the numbers as they can change. Jason: E.g.
currently if you're single and make under $105,000 you
can contribute $5000. If you make over $120,000 you
can't contribute at all. In between you can make a
proportional partial contribution. Update(01/2012): Even
if you exceed the income limit, I believe you can
currently get around it by contributing up to $5000 in a
traditional IRA and rolling it over into a Roth IRA. Using
this backdoor method, you may be able to contribute
even more than $5000 to a Roth IRA per year, notably if
your employer lets you contribute to an after-tax 401(k)
(which is confusingly not the same thing as a Roth
401(k)). It's kind of complicated, so ask me if you want
more information.
 Choosing an investment brokerage account: You need one to open
your Roth IRA. Choose one based on the minimums (~$1000-$3000,
but some will waive with a monthly automatic transfer) and features
(Good online interface? Easy automatic investing?). Recommended
discount brokerages: Vanguard, T. Row Price, Schwab. Jason: I'm
using Schwab, which works well with my other Schwab accounts.
Generally Vanguard is known for their low-cost funds, but Schwab now
has some index funds that are as low (or lower) cost.
Week 4: Figure out how much you're spending and where, then create a
Conscious Spending Plan and optimize your spending to make your money go
where you want it to go. Jason: Okay, I'll be honest, I didn't think this would be
helpful in my case so I didn't do it and spent less time on it, but I've tried to
extract the main points.
 Create a Conscious Spending Plan: Allocate your spending into 4
buckets:
o ~50-60% Monthly fixed costs (rent, utilities, debt,
groceries, clothes, etc.). See how much you've spent in
the past month and add 15%.
o ~10% Long-term investments: 401(k) and Roth IRA
o ~5-10% Savings goals: short-term (Christmas gifts and
vacation), midterm (a wedding), and longer-term (down
payment on a house).
o ~20-35% Guilt-free spending money.
 Track your expenses and optimize your spending: Track your
expenses using mint.com or a spreadsheet. See where you're
spending money and optimize your spending, focusing on big wins (a
couple areas where you spend a lot but could cut down with some
effort: e.g. eating out and drinking, or subscriptions you don't think
about).
  If you just don't make enough money you can try to: negotiate a
raise, get a higher-paying job, or do some freelance work (he provides
some tips for these).
Week 5: Automate your new financial infrastructure so bills are automatically
paid and money is automatically saved and invested.
 Most of your money management can be automated: your paycheck
can be direct deposited into your account, money can be scheduled to
automatically transfer between accounts, and your bills (credit card
and otherwise) can be payed off automatically.
 Take the time to set up an Automatic Money Flow. E.g. With each
paycheck, a portion automatically funds your 401(k) and the rest is
deposited to your checking account. From your checking account,
portions are automatically transferred to your Roth IRA and savings
account. Your checking account also automatically pays off your credit
card and any fixed costs that may not allow credit card payment (like
rent). All of these "portions" should correspond with the percentages
in your Conscious Spending Plan.
Week 6: Learn how to get the most out of the market with very little work. It's
not about picking stocks, it's about investing in index funds: either a lifecycle
fund or a set of index funds that fits your ideal asset allocation.
 The Myth of Financial Expertise:
o You don't need (or want) financial experts investing your
money, because you have to pay them and their
performance is usually no better (and sometimes worse)
than investing on your own. Fund managers fail to beat
the market 75% of the time. Why? Almost no one can
consistently beat the market, and trying to do so often
incurs costs (fees and taxes from buying and selling
frequently).
o Financial experts hide poor performance because funds
that fail are closed down. So if a company starts 100
funds, and 50 succeed while 50 fail and are closed down,
then all you see is that they have 50 funds that have
been succeeding. This is survivorship bias. This is also
why if you see a fund and it has been beating the market
for a few years, that doesn't mean it's especially good
and will continue to do so.
 Active vs. Passive Management: Active management refers to a
mutual fund where a portfolio manager actively tries to pick the best
stocks. Passive management refers to index funds where computers
simply and methodically pick stocks to emulate a market index (like
the S&P 500). Passive is better because returns are the same, but
active management has higher fees.
o Fees for a mutual fund mostly consist of the expense
ratio: a percentage of the assets managed, charged each
year. For actively managed funds this is typically ~1.5-
3%. For index funds this could be ~0.18%.
o A mutual fund could also have additional sales charges
(or "loads") for purchasing or selling. These are more
likely for actively managed funds.
 Asset Allocation: It's important how you distribute your investments
across the 3 asset classes: stock, bonds, and cash (i.e. money market
accounts, not cash under your mattress). It's a trade-off between
returns and risk: stock has the highest returns (~10.5%) and the
highest risk, followed by bonds (~5.2%) and then cash (~3.8%).
Young people, who want returns but have time so are better able to
handle risk, could invest entirely in stocks. But as you get older, you
 want to shift to a less risky allocation, e.g. suggestion of 63% stock
and 37% bonds at the age of 55.
 What funds do you actually invest in? There are 2 routes, depending
on the type of investor you are:
o The Easy Route: Lifecycle Funds. Lifecycle funds have a
target retirement date (e.g. Vanguard's Target
Retirement 2045 fund). You just put all of your money
into one lifecycle fund and it will invest in a blend of
mutual funds to create an asset allocation suitable given
your target retirement date. Costs vary but they're
generally low cost and tax efficient.
o Pick your own index funds: This is more work because
you have to research index funds, choose an asset
allocation, and rebalance your portfolio about once a
year. But you may want to do it if a one-size-fits-all
lifecycle fund (which can only be tailored to you based on
age) doesn't fit you well enough. Jason: I do this instead
of using a lifecycle fund. Here are some tips:
 Each asset class can be further divided into
subcategories. Categories of "stock" are:
large-cap (large companies), mid-cap,
small-cap, international, growth (stocks
whose value may grow higher than others),
and value (stocks that seem bargain
priced). The performance of each varies a
lot from year to year, so to reduce risk you
should diversify among these categories.
Start by deciding on an allocation. You can
work off of the following Swenson model
and tailor to your situation:
 30% Domestic equities: U.S.
stock, including small-, mid-,
and large-cap stocks
 15% Developed-world
international equities: Funds
from developed foreign
countries like the U.K.,
Germany, and France.
 5% Emerging market equities:
Funds from developing foreign
countries like China, India, and
Brazil. These are riskier.
 20% Real estate funds (a.k.a.
REITs): Funds that invest in
mortgages and real estate,
both domestically and
internationally.
 15% Government bonds: fixed-
interest U.S. securities which
are low-risk but return less.
 15% Treasury inflation-
protected securities (a.k.a.
TIPS): These protect against
inflation. You'll want them
eventually but not as important
for young people
  What are you looking for in a fund? Minimize
fees, i.e. the expense ratio and loads. The
expense ratio should be lower than 0.75%,
hopefully around 0.2%. Also, do look at how
the fund has returned over the last 10 or 15
years, while remembering that it's no
guarantee of future results.
 Jason: The allocation I'm following at the
moment is: 40% Schwab Total Stock Market
Index, 5% Schwab Small Cap Index Fund,
30% Schwab International Index Fund, 25%
Schwab Fundamental Emerging Market
Index. Update(01/2012): For clarification, I
may have no idea what I'm doing in
choosing this allocation, and it's admittedly
somewhat arbitrary to me. =P
Maintenance: With our setup, the work from here on out is almost nothing.
 Ignore the noise: Stick to your automatic investing plan regardless of
stock market activity (withdrawing investments when the stock
market falls is a bad idea, if anything that's a good time to buy)
 Rebalancing your investments: If you've chosen a lifecycle fund, this
doesn't apply. If you've chosen to manage your own asset allocation,
you'll have to rebalance every 12 to 18 months. Some categories will
outperform others, so your actual asset allocation will no longer match
your target. The best way to rebalance is to temporarily stop sending
money to the outperforming categories that make up too much of
your portfolio, and instead invest more in the categories making up
too little. An alternative is to sell from outperforming categories to
invest in the others, but selling involves trading fees and more
paperwork.
 Stop worrying about taxes. This is what you need to know:
o Prefer tax advantaged retirement accounts like the
401(k) and Roth IRA. For these you don't have to worry
about taxes.
o Be careful about selling investments because when you
sell you pay taxes on the gains. To encourage long-term
investing, the government charges you ordinary income
tax (~25-35%) for investments held under a year, and
capital gains tax (~15%) for investments held over a
year. Ideally, pick a good investment (index funds are
generally fine) and hold it for the long-term.

The Ladder of Personal Finance: A summary of prioritized steps on how to invest

1. If your employer offers a 401(k) match, invest to take full advantage of it (but
not more). It's free money.
2. Pay off your credit card and any other debt. Pay off the debt with the highest
APR first. Note that for low-interest debt, instead of paying it off beyond the
minimum, you may want to invest instead (i.e. the following ladder rungs)
3. Open up a Roth IRA and contribute as much as possible (if your income is
$101,000 or less in 2009, this is $5000). Jason(01/2012): It may be possible
to invest more than this, regardless of income, by putting the money in
accounts like a traditional IRA or after-tax 401(k) and rolling it over into a Roth
IRA. Ask me if you want more information.
4. Continue contributing to your 401(k). Jason: The current limit is
$16,500 Update(01/2012): $17000.
 5. Open a regular nonretirement account and put as much as possible there. Also
consider investing in yourself.

Additional Tips on Finance and Life

 Finance and your various relationships: Don't let your parents manage your
money because you should learn how to (and you just have). Discuss with your
significant other your attitudes towards money, states of your finances, and
setting up financial goals. If your parents or significant other are bad at
finances, basically teach them everything in this book.
 Tips on the big-ticket items:
o General Tips:
 People don't spend enough time and effort on the
big-ticket items, where a relatively small amount of
work results in huge financial wins on the order of
thousands of dollars.
 For major costs (like weddings, cars, houses), force
yourself to be realistic about the total costs, reduce
them by prioritizing what matters to you, and budget
and plan appropriately.
o Specific Items:
 Wedding: The average American wedding costs
$28,000. When reducing costs, it's generally
suggested to focus on the fixed costs: reducing the
number of guests probably doesn't reduce total costs
as much as you'd expect.
 Car: From a financial perspective, the most
important factor is how long you keep the car before
selling it. Pick a reliable car with good resale value,
maintain it well, and drive it for at least 10 years.
When calculating the total cost, don't forget things
like insurance, fuel efficiency, and the interest rate.
Be informed (use www.fightingchance.com, even
though it costs $39.95). His negotiation method:
have 17 car dealers bid against each other by
phone/fax.
 House:
 First off: Think of a house as a
purchase, not an investment. Houses
are actually poor investments. Robert
Shiller: "From 1890 through 1990, the
return on residential real estate was just
about zero after inflation." When
considering how a house's value
appreciates, remember the additional
costs of property taxes, maintenance,
and the opportunity cost of not
investing that money in stocks.
 Conventional wisdom says renting is
throwing your money away, but as we
see, buying is not necessarily better.
Renting allows you to instead invest the
money. See the NY Times' online
calculator "Is It Better to Rent or Buy?"
 Only buy a house if you plan to stay
there for at least ten years. Selling
through a traditional realtor generally
 requires paying a fee of 6% of the
selling price.
 Does it make financial sense? Here are
some guidelines from the olden days:
the house should cost no more than 2.5
times your annual income, you should
be able to put at least 20% of the
purchase price down, and total monthly
payments (including mortgage,
maintenance, insurance, and taxes)
should be about 30% of gross income.
 Tips for purchasing a home: Check your
credit score; Save as much as possible
for the down payment to pay as little
Private Mortgage Insurance (PMI) as
possible; Calculate the total cost of
buying the house; Get a conservative,
boring 30-year fixed-rate loan; Check
for perks for first-time homebuyers from
state/local governments
(www.hud.gov/buying/localbuying.cfm),
your employer, or associations (like a
credit union or even Costco); Use online
services like Zillow and Redfin to
comparison shop.
 Salary: Being prepared when you negotiate a salary
(particularly for a new job) is a huge win and easily
worth the effort.
 Be prepared: know the typical salary for
your position by visiting
www.salary.com and www.payscale.com
and by asking people who work/worked
at the company. Practice negotiating
with multiple friends. Have another offer
and use it.
 When negotiating, focus on how the
company (and the boss) will benefit.
Negotiate for more than money. Be
cooperative instead of adversarial. And
smile.

Suggested Personal Finance Blogs

 www.iwillteachyoutoberich.com
 www.getrichslowly.org/blog
 www.thesimpledollar.com
 allfinancialmatters.com