Summary of the book “I will teach you to be rich – No Guilt, No Excuses, No BS, Just a 6-Week Program That Works”: Authors Ramit Sethi and Michaël Ferrari explain how to improve your finances and invest so that you are in profit, in just six weeks, thanks to a simple system and an automated management system.
By Ramit Sethi and Michaël Ferrari, 2016, 336 pages
Review and summary of “I will teach you to be rich – No Guilt, No Excuses, No BS, Just a 6-Week Program That Works“
The two authors Ramit Sethi and Michaël Ferrari are American and French, respectively. In their book, they show us their simple method to have enough money to live the lifestyle you want, if you take the best aspects from both cultures: the American vision that holds no taboos about money, and its adaptation to the French culture which is more focused on savings.
When it comes to money, people generally fall into two camps:
- Those who don’t want to think about it and feel guilty;
- Those who obsess over small details, who question interest rates and geopolitical risks but actually never do anything about it.
But for the authors of “I will teach you”, both of these options achieve the same result, which is nothing.
Leave these discussions to the fools. […] Just as you don’t need to be a nutritionist to lose weight, you don’t need to be a financial specialist to become wealthy.
Why is it so difficult to manage money?
For the authors of “I will teach you“, there are some obvious reasons why:
- Information overload: too much information means nothing.
- The media: the fact that personal finance advice is provided and taught by “old men in suits” is not exactly motivational.
However, in the view of Ramit Sethi and Michaël Ferrari, generally, these are merely excuses rather than legitimate problems.
Examples of excuses: “You don’t learn that in school”, “Credit companies and banks take advantage of us”, “I’m afraid I will lose money”, “What if I don’t know how to find an extra €100 per month?”
In fact, for Ramit Sethi and Michaël Ferrari, the only important thing to do to become rich is to start early and rely on compound interest.
The most important factor to become wealthy is, simply, to take the first step, don’t try to be too clever.
The authors believe that you have no excuse. They say that there is only one person who is responsible for most of your financial problems: you.
The main messages of the book “I will teach you to be rich – 6 weeks to improve your finances”.
Ramit Sethi and Michaël Ferrari’s goal is to help you create your system to invest in the right sectors and to do it systematically, not to turn yourself into a financial expert.
They list the main messages of their book:
- 85% of the solution: to get yourself started is more important than the need to turn yourself into a specialist;
- You have to make the right kind of mistakes;
- Common shares produce common results;
- To be extraordinary, you don’t have to be a genius, but you have to act differently from the other people around you;
- The distinction between beautiful and rich;
- Investment is not concerned with how good you look, it’s concerned with the ability to make money;
- To spend excessive amounts of money on what you like and to save money on what you don’t like.
In fact, this book is about the management of your of bank accounts, how to budget, save and invest.
Ramit Sethi and Michael Ferrari’s system in “I will teach you” teaches you how to set up your accounts to create an automated financial infrastructure that will work with the minimum of fuss or effort from you.
This is done if you:
- Avoid the typical mistakes,
- Act immediately,
- Layout your aims and objectives.
While this is the kind of idea that doesn’t really hold much interest for most people, the authors insist that simple, long-term investments are ultimately the ones that work best.
The “I will teach you” program to improve your skills in just 6 weeks
- Week 1: First week: stop the flow of money out and get your payment options under control;
- Second week: Open the most suitable bank accounts, negotiate fees and put your banker to work for you;
- Week 3: Open an investment account;
- Week 4: be conscious of your expenses and channel your money where you want it to go;
- Fifth Week: automate this new infrastructure to make your accounts all work together.
- Week 6: learn why investment is different from the purchase of stocks and how to get the most out of the market with the least amount of effort.
There are no secrets to make yourself wealthy, it just takes a few steps, discipline, and a little bit of work.
Chapter 1 – Week One: Stop the flow of money out
1.1 – The philosophy of money
Rami Sethi and Michaël Ferrari believe that your first goal should not be to become rich, but to acquire the attitude and spirit of someone that knows how to appreciate what they have. Wealth will come later.
Their thought is that the need to adopt a financial philosophy is as important as to have a lifestyle philosophy. In fact, the two philosophies are very much intertwined. It is the projects that money can finance and the freedom it can provide, rather than the money itself and the possessions it can buy, that should be the things that interest you.
The philosophy of money, as defined by the authors of “I will teach you to be rich”, is based on two fundamental ideas:
- You need to have a plan for your money.
- People who have difficulties with their finances will tend to come up with excuses, while those who are successful will just become stronger through their commitment.
With discipline, it is easy to get rich. There is no miracle solution or magic bullet, but although it may not sound very glamorous, it will help you to invest, save and manage your assets.
1.2 – Dispose of the standard package that the bank offers
In this section, Ramit Sethi and Michaël Ferrari explain that you will probably gain more if you subscribe to an individual service rather than a standard package that is generally on offer.
In fact, when you examine these packages offered by banks, they don’t actually give good value for money. It shows that these packages actually cost 26% more, on average, than what the customer would have paid for the same individual products used. Therefore, it’s really only the much larger customers who tend to gain from them and use them to their advantage.
1.3 – You should no longer pay for your bank card
To have to pay for your bank card is something that you should now reject. It should be free, like in most other countries. Even if it is only a minimal amount, the authors of “I will teach you to become rich” advise that you tell your bank that you won’t pay for the card any longer. This is a first small step in your efforts to take back control of your finances and learn to appreciate that you are the only one in control of your financial situation.
1.4 – Change to online banks
Ramit Sethi and Michaël Ferrari strongly suggest that you consider an online account as an alternative.
These banks have many advantages: as well as the best bank service on offer, you can also carry out all transactions online in just a few minutes.
1.5 – Manage your store cards (called “loyalty cards”)
These credit cards, which used to be called “revolving credit”, have exorbitant interest rates: from 19 to 21% per year!
- Their promise: you will receive better service because you will have more to choose from.
- The reality: you spend ten times more than the average customer and you become captive to their system and pay high interest on what you have purchased from them, as a result.
Therefore, the authors suggest that you take your contracts, one by one, and cancel all of them, immediately.
1.6 – Appeal to a mediator
When a problem occurs with your bank, there are a few options open to you, in relation to a possible solution:
- Talk to your financial advisor;
- Use consumer associations;
- Write a letter to your bank, your consumer association and the ombudsman.
The latter has the highest resolution rate.
1.7 – Recover your financial innocence
It is possible to become white as snow.
- The three types of payment scenarios are the:
- repayment of a loan,
- payment by check,
- payment by credit card.
- These incidents are recorded in two separate files at the Banque de France:
- The FICP (Fichier national des Incidents de remboursement des Crédits aux Particuliers): its aim is to make it as difficult as possible for you to obtain credit;
- The FCC (Fichier Central des Chèques): this is the famous “bank ban” which effectively means that you can’t issue a check for a period of five years, unless you sort out your debts.
So, if you find yourself in such a position, you have to settle the matter as quickly as possible. Ramit Sethi and Michaël Ferrari explain, in detail, how to deal with the different situations.
1.8 – Pay back your loans
The authors distinguish between good debt and bad debt:
- Good debt:
This kind of debt will have long term benefits, once it has been paid off. It has an expected return.
Examples: a rental investment or anything related to education, new skills or when you improve current skills.
- Bad debt:
This is typically a routine consumer expense that will never go up in value.
Examples: purchase of a vehicle, a television or a vacation.
One of the most important aspects of good financial management is to spend and invest your money wisely. Therefore, you must be very confident when you decide to spend. The use of credit for everyday consumer goods, for example, is, in the opinion of the authors of “I will teach you to become rich“, not justifiable.
There are two consequences from such purchases:
- You pay huge interest on the money you borrow.
- You feel indebted, or even hounded.
The 4 steps to pay off your loans, with the “I will teach you” system:
- Step 1: Take stock of the situation, i.e. a list of everything owed.
- Step 2: Decide what to pay back first
To achieve this, you must choose between two strategies:
- Either pay off the loan that has the highest interest rate first (“logical” method),
- Or start off with the smallest first (the “snowball” method).
- Step 3: Set up a repayment plan
To accomplish this, you must reduce your expenses and prioritize your loan repayments until you are back on track.
- Step 4: Get started!
1.9 – Week 1: Overview to get started
- Take a close look at your accounts and familiarize yourself with bank costs (2 hours). Do away with “service packages” where you pay for things that you don’t use, with one call to your branch manager.
- End all costs incurred when you use your bank card (1 hour).
- Get rid of your loyalty cards, those with big credit limits (2 hours) so that you no longer have to pay huge amounts of interest on your purchases, and neither do you wish to be loyal any longer.
- Pay off as much credit as you can afford (2 hours). Choose a system and try to pay high enough monthly payments.
Chapter 2 – Week 2: defeat the banks
Based on the “I will teach you” method, the second week focuses on the configuration of your bank account(s): choose the right account(s), maximize them and make sure you don’t pay any unnecessary fees.
2.1 – The advantages if you bank online
The authors of “I will teach you” tell us that the average consumer pays 147.19 euros a year in fees to a traditional bank, while the average consumer pays 39.21 euros a year to an online bank.
They believe that online banks offer straightforward management, some advantageous features for clients and very few drawbacks. On top of this, they do not charge any unnecessary fees.
2.2 – How banks work
- The current account
This is the account to which all of your money is paid. The idea is to then distribute all this money to the appropriate accounts (savings and investment accounts) on a regular basis with automatic scheduled transfer.
- The savings account
The author’s opinion is that this is an account where you invest your money for the short term (one month) to medium term (five years).
You need to:
- Differentiate between a current account and a savings account
- The current account is intended for regular withdrawals (bank cards and ATMs).
- It is an account with an objective where each euro is saved for a specific purpose.
- Have a savings account and a current account
It’s easier to manage your money if it’s split into at least two separate accounts. In fact:
- Your savings account is where you deposit your money,
- Your current account is the one from which you take it out.
- Find the perfect bank setup
To do this, the authors of “I will teach you” advise you to:
- Study the options offered by the different banks, with this in mind:
- Account types,
- Financial characteristics.
- Make the most of your bank accounts: this means that you don’t pay fees and neither do you agree to ridiculous terms and conditions.
- Avoid monthly fees: try to get all monthly fees for current and savings accounts, overdrafts or new accounts waived.
- Study the options offered by the different banks, with this in mind:
2.3 – Week 2: Checklist of things to do
- Open a current account that suits your requirements or check the one that you already have, and verify that it does not have any fees or minimum requirements (1 hour). If you discover that there are fees to be paid, you must negotiate to have them cancelled, even if it means you have to threaten to withdraw your account from the bank, should they refuse.
- Open an online savings account (3 hours) to earn more interest and pay less in fees.
- Optional: open an online current account (2 hours), so that you benefit from reduced fees and all the financial transactions that you can easily do for yourself.
- Top up your online savings account (1 hour) with a month and a half’s worth of current expenses deposited into your current account.
- Transfer the rest to your savings account (even if you only have €20 left).
Chapter 3 – Week 3: Get ready to Invest
3.1-The three categories of people in personal finance
For the authors of “I will teach you,” there are three broad categories of people when it comes to personal finance:
- The “active”: they already manage their money and merely seek to optimize what they do.
- The “open”: this includes the vast majority of people; they hardly do anything with their money and are just in search of advice.
- The “no hopers”: in theory, they could do something, but when it comes to the crunch, they always have a good excuse to postpone their decision.
3.2 – Become wealthy bit by bit
For Ramit Sethi and Michaël Ferrari, to become wealthy is not hard, but it isn’t a fun process. For them:
You don’t need to be intelligent to become wealthy, it’s more to do with discipline.
History demonstrates that most millionaires became wealthy because they spent less than they earned and invested in their business. Many are entrepreneurs, and always invest their money.
Investments are the surest way to make yourself wealthy.
3.3 – The stock market: an attractive market opportunity
Access to the stock market is not limited to just those who are wealthy: anyone can open an account, especially with online banks, which offer very good terms compared to traditional banks.
In the stock market and in investment in general, there are two main categories of people:
- Those who target capital gains: these people will look for an undervalued stock, buy it, wait for it to rise to a certain point and sell it to cash in their profit.
- Dividend investors: these people look for investments that provide a regular income, which may not be linked to the value of the stock.
3.4 – The personal finance progression scale
Ramit Sethi and Michaël Ferrari suggest that you systematically follow these five investment steps:
- First step: actively pay off your debts;
- Second step: adjust your standard of living to your income, which means that you either reduce your expenses or try to earn more money;
- Third step: build up some back-up savings (Instant savings account and the LDD are two perfect vehicles for this);
- Fourth step: take advantage of “assisted” investments (ISA, life insurance, Company Savings Plan, Perco)
- Step 5: Invest
3.5 – Assisted placements
- An ISA (Individual Savings Account)
It works like a securities account so that you can invest in the stock market. This type of investment is particularly beneficial if you have funds to invest in the financial markets.
- Life insurance
There are two main types of contracts, namely:
- single unit-linked
- multi unit-linked
Here again, online banks offer the best deals.
- The PEE (or PEG)
The company savings plan is a scheme intended to encourage employee investment. The benefit is that all costs are covered by the company and, when you withdraw your money, the tax rate is advantageous.
- The PERCO
The purpose of the group retirement savings plan is to help employees build up a supplement for their retirement, via this locked-in savings account.
3.6 – Week 3: Summary to start off
- Make sure you have enough savings in the event of an emergency (1 hour). Ideally, you should have the equivalent of six months’ income set aside (invested in a long term or Instant savings account, for example). If this isn’t already in place, you need to work out how much you can put aside each month into this savings account. This will be your first priority for your first investment decision.
- Open an investment account (3 hours): ISA, PEA, life insurance, Perco.
Chapter 4 – Week 4: Spend smarter
In this chapter, the authors of “I will teach you” suggest that you come up with a smart plan to how you spend. It’s all based on a high enough level of monthly savings and investments, and to use what you have left over to treat yourselves.
4.1 – Spend on things that make you feel good
Ramit Sethi and Michaël Ferrar believe that, in order to become wealthy, you need to possess a thrifty mentality. But this does not mean that you have to cut out all other expenses from your life. Anyhow, you wouldn’t be able to keep to that lifestyle, even if you wanted to.
To be thrifty means that you choose the things that you care about and that interest you enough to spend a lot of money on, and not to do it on things that don’t interest you.
So, work out what is important to you and what isn’t, in order to choose exactly what you will spend your money on.
4.2-Your smart spending plan
A smart spending plan has four parts.
- Fixed costs
Here, the authors of “I will teach you” suggest that the reader download a spreadsheet to keep track of their expenses. The idea is to list all of your fixed monthly expenses and then add 15% for the expenses that you have forgotten about.
- Long-term investments
This part contains the sums that you invest every month in your Company Pension Scheme/Perco, your life insurance and your ISA. The main aim is to invest 15% of your salary (after tax) for the long term.
These should include your short-term, medium-term and, most importantly, long-term savings goals. However, it is important to differentiate between these savings goals and investment goals.
- Spend without guilt
This is money intended to keep you happy and therefore to be used no need to feel guilty about it.
4.3 – Make the most of your smart spending plan
In most cases, 80% of excess expenditure is related to only 20% of purchases.
So, to maximize your smart spending plan, the authors of “I will teach you” offer three tips:
- Set realistic goals
- Don’t just save money, save it for a specific purpose and aim for a specific account
To save money is hard, unless you have a reason. […] Don’t think of the €5 you saved as €5, but rather as something that will be a small step closer to your goal to save €20,000 to put towards your house. This will change your whole motivation.
Comments from Jim Wang
- Use the envelope system to stick to your monthly targets
This means that you set yourself a monthly target within each particular category of expenditure (e.g.: €200 food, €150 restaurants, €60 entertainment…), and then put that of money into the envelopes. When the envelopes are empty, that’s your budget gone for the month.
4.4 – What if I don’t make enough money?
Based on your own personal financial situation, to put a viable smart spending plan into action may seem unrealistic.
Although it may seem that way (some people just don’t want to change the way they spend), it’s true that many people can’t afford to cut back on their spending and actually manage their money on a day-to-day basis.
In that case, this plan can be a practical theoretical guide, but what you then need to worry about is how to set a plan in motion to earn more money.
That’s why the authors of “I will teach you” give you three strategies to implement so that you can earn more money:
1. Negotiate a raise
When we talk about a raise, we don’t mean you as a person, but about your ability to show your value to your employer.
So, at this point the authors put forward a strategy to show your employer how your work has clearly been an influential factor to the success of the company and ask them to reward your positive input in a way that reflects your efforts.
2. Take a job that pays better
This is an option should it seem that your current boss will not provide you with the scope to progress and develop your career.
3. Supplement your income
If you work as a freelancer, you can earn more money. If you are self-employed it can work particularly well for those who wish to supplement their main income with additional work.
4.5 – Stick with your expenditure plan and be prepared for the unexpected
Once you have the smart spending plan in place that seems right, you need to take the time to put it into action.
- Your priority needs to be for you to track your expenses every week (e.g. put aside 30 minutes every Sunday morning).
- It is important to know how to deal with the unexpected:
- Irregular events that you know about: these can be anticipated (because you roughly know what they will cost) if you put money in your savings account.
- Unexpected scenarios: you only need to add 15% to your estimated fixed expenses to deal with these surprises.
- One-off unexpected income: the authors recommend that you enjoy yourself with this unexpected income (maybe spend 50% of what you get) and then put the rest in your investment account. If it happens on a regular basis, it is recommended to keep the same standard of living.
The best approach, with a reliable plan, is to expect the unexpected and then give yourself a bit more leeway.
4.6 – Week 4: Summary to put things in motion
- Determine what you spend each month and think about what your smart spending plan should look like (30 minutes). To do this, divide your income into 4 parts: “Fixed expenses” (50-60%), “Long-term investments” (10%), “Savings goals” (5-10%) and “Enjoyment money” (20-35%).
- Reduce your expenditure as much as possible (2 hours) and look at your expenses, your monthly fixed costs, maybe give the à la carte method a try.
- Target one or two specific problem areas (5 hours) and use the envelope system.
- Keep to your sensible spending plan (1 hour/week). Make sure your system is practical enough so that you can stick to it in the long run.
Chapter 5 – Week 5: Save money when you’re asleep
The way in which you look after your money is really no different from how you manage your career: if you invest a little now, you won’t have to invest a lot later on. […] It all ties into a principle I call the “Do more before you do less” curve.
What the authors of “I will teach you” mean by this is that if you spend a bit of time, in advance, to research the proposed money management system, you will save yourself a lot of time in the long run. This is because your cash flow will become automatic. Every dime that comes in will be directed to the right account within your plan without the need to think about it.
5.1 – Create your own automated cash flow
The management of your money must be automated.
So, to set this up properly, you need to:
- Link all your accounts together
- Set up scheduled transfers from one account to another and choose the appropriate dates
In fact, the most efficient way to deal with the time delay between the bills you have to pay and the cash that comes into your account is to schedule the payment of all your bills at the same time.
- Forget about the current system
Forget about the current system
If you set things up so that all of your accounts run smoothly and efficiently by themselves, all you have to do is check them every month to make sure that everything works the way it’s supposed to.
In fact, nearly all of the banks offer all the necessary services and tools (email notifications in case your finances go below a certain limit, for example) to facilitate this process.
- Modify the system
Certain situations will necessitate some changes to what you spend and save (if you get paid twice a month, for example).
5.2 – Week 5: Summary for action
- Organize it so that all your accounts held in the same place (1 hour) and make sure that they are interlinked.
- Set up your automated cash flow system (5 hours). Define the core elements of what this needs to achieve: Scheduled transfers. Make sure that you change the debit dates so that they are synchronized with your invoices.
Chapter 6 – The Myth of Financial Expertise
Becoming rich is under our control, not in the hands of a few experts.
Indeed, Ramit Sethi and Michaël Ferrari remind us that our finances depend on how much we are able to save as well as on our smart spending plan.
The only person responsible for your wealth is you, not advisors, complex investment strategies or “market conditions”. It also means that only you control what happens to you and your money.
6.1 – The myth of the financial expert
Experts can’t predict what the market will do.
Unfortunately, no one can predict exactly what the financial markets will do. But that doesn’t mean that the TV pundits won’t come up with their over-inflated forecasts on a daily basis, for which they are never held accountable, whether they are right or wrong. […] The predictions of these expert pundits should be ignored.
The authors of “I will teach you”, believe that when you do your research of a specific fund, the only way to properly assess it is to look at its history over the last ten years or even longer. However, this still does not mean that you can predict the future just from what has happened in the past.
In this section, with the use of some examples, Ramit Sethi and Michaël Ferrari show us that the “specialists” are often wrong, that they do not manage to outperform the market, and, furthermore, they neglect to show how they have actually performed.
In the eyes of the authors, only three legendary investors have real investment skills and justify their titles as the best investors in the world. They are Warren Buffett, Peter Lynch (of Fidelity) and David Swensen (of Yale).
6.2 – In the majority of cases, financial advisors are a waste of time
Most people don’t need a financial advisor. In fact, Ramit Sethi and Michaël Ferra believe that you can do everything yourself and be very successful.
The authors’ opinion is that only people who are faced with a very complex financial situation, maybe they have inherited a lot of money or are really too busy to learn about investments, should consider the services of a financial advisor. After all, it’s better to spend a small amount and start to invest, rather than to do nothing at all.
In such situations, before you put your trust in a specific financial advisor, Ramit Sethi and Michaël Ferrari recommend that you check that the advisor is a member of one of the professional associations approved by the appropriate Financial Markets Authority (FMA), in which ever country you live in. They even provide you with the appropriate contact email.
6.3 – Active versus passive management
The main difference between active management (pooled funds) and passive management (index funds) relates to cost: index funds are less expensive than pooled funds because there are no people involved.
Chapter 7 – Investments are not just for those who are wealthy
7.1 – Identify your type of investment profile
To choose the right investment fund, it is essential to determine the sort of thing that you wish to invest in.
To achieve this, Ramit Sethi and Michaël Ferrari suggest you ask yourselves questions:
- Do you need money for next year or can you afford to build up your capital for a while?
- Do you want to save for a new home?
- Can you deal with the daily fluctuations in the stock market or does it worry you?
The authors of “I will teach you” recommend that you choose the most straightforward investment to start with and, from there, build up a portfolio that is easy to maintain.
7.2 – Invest wisely, invest automatically
To spend as little time as possible on your investments, but still get the maximum return available, Ramit Sethi and Michaël Ferrari strongly recommend that you combine a classic low-cost investment with an automated system.
Although it may not appear to be the most attractive choice, they believe that automated investments are still very efficient for two reasons. They are:
- Less expensive
7.3 – Investments are not related to which stocks you opt for
Consider this: how you organize your investments is more important than your actual investments.
The asset allocation is:
- Your investment strategy: how you intend to structure your investments across your portfolio, divided into stocks, bonds and cash.
- The element over which you have the most control.
7.4 – Basis of investment
The authors of “I will teach you” explain the different investment options available to you, illustrated by the pyramid below:
- The actions
- When you buy stocks, you buy shares in a company.
- The so-called “market” is a group of forty large-cap stocks, the CAC 40.
- In general, stocks as an investment category provide an excellent return.
- Stocks are a good way to achieve significant returns in the long-term. However, the authors advise that you don’t select individual stocks, as it is extremely difficult to make the right choice. Rather select funds, i.e., groups of stocks, to reduce risk and achieve a balanced portfolio.
- Bonds are mainly debt issued by companies or governments.
- If you buy a one-year bond, it’s as if you bank says, “If you lend us €100, we’ll give you €103 back in a year.
- Wealthy or older people generally prefer to invest in bonds because they offer an investment that is, typically, very steady, with a guaranteed return (but, therefore, relatively low).
- Cash flow
- In investment terms, cash is money that is kept in reserve, not invested, and which earns interest in conventional accounts, i.e. regulated savings accounts.
- Cash is usually the third component of a portfolio, after stocks and bonds.
- Cash is safe, but you get the lowest return of the three. If you add inflation, you can actually lose money on most accounts.
7.5 – The allocation of assets provides more than 90% of your returns
It is important to diversify across different types of assets, such as stocks and bonds. In fact, the authors of “I will teach you” believe that if you invest in only one kind of asset, it is a risky for the investor in the long-term.
In the table below, it is clear that the return is proportional to the risk.
So, when you first take a look at it, the temptation is to invest everything in stocks because they offer the highest return. However, this is a mistake. Bonds offset the movement of stocks, they rise when stocks fall, which reduces the risks to your global investments. This means that when you invest part of your money in bonds, you reduce your overall risk.
7.6 – Diversify your portfolio: the different varieties of stocks and bonds
A strong recommendation of the authors of “I will teach you” is to diversify your portfolio. They recommend that you invest something in each type of stock and bond, and, as a consequence of this, in all the sub-categories described in the table below:
7.7-Mutual funds: okay, practical, but sometimes expensive and unreliable
Mutual funds are pools of several different types of investments (often stocks). Therefore, rather than pick individual stocks, the investor simply decides which fund is right for them.
Mutual funds are very popular because they:
- Allow you to select different stocks without:
- Concerns that you have placed too many eggs in one basket (mutual funds contain a variety of stocks, so if one stock goes down, the fund survives);
- The need to monitor prospectuses or keep up to date with developments in each sector;
- Means that you have immediate and constant diversification through the various different stocks that you own
The annual fees are high and the way they are calculated is often rather questionable.
To summarize, mutual funds are advantageous because they are practical, but also because they are carefully managed, they are expensive for the investor and can’t be considered the best form of investment vehicle.
7.8 – Trackers: the handsome cousin of a loathsome family
Trackers are an indexed collection of stocks managed by computers to replicate the market. Today, these indexed funds are an easy and efficient way to invest your money.
- You don’t have to spend that much time on it.
- Low cost.
- You need to choose multiple funds to invest in and replicate your initial patterns.
- If you pick multiple index funds, you need to adjust your choices regularly (typically, every year).
To sum up, index funds are a great way to invest when compared to the sole purchase of direct stocks or mutual funds. Thanks to their low fees, they are a good way to control the exact makeup of your portfolio.
7.9 – Life insurance: easy to invest in
Life insurance is a good and easy way to invest. Despite its name, life insurance is not only death insurance. Nowadays, it is used as a tool to invest and share wealth.
- Easy to open and keep control of the contract,
- The variety of funds available,
- The low cost,
- Attractive tax system
This investment requires you to monitor it and spend a bit of time on it, if you choose something other than the euro fund.
7.10 – Swensen’s asset allocation system
- To create a balanced portfolio based on the Swensen model
Ramit Sethi and Michaël Ferrari’s belief is that what is important when you build a portfolio is not to choose the stocks that perform the best: what matters is to establish a balanced asset allocation that will gradually grow, even when the times are tough.
The authors of “I will teach you” put forward David Swensen’s system to demonstrate the best way to allocate and diversify your portfolio.
Swensen’s approach involves a lot of calculations, but the key is that no single share within the portfolio is predominant compared to the others.
- Tips from the authors of “I will teach you” to help choose your index funds
In fact, to create this kind of well-balanced portfolio, you have to select your own index funds. This means that you will have to research and identify the funds that suit you best. The authors of “I will teach you” then provide you with some tips on how to do this:
- Always start your research with the most popular companies: Lyxor, EasyETF and Amundi ETF.
- Use one of these search engines: etrade.com, boursorama.com or boursier.com, all of which make it easy to see the fund’s costs, fees and the type of stocks it contains.
- Make sure that the management fees are minimal: around 0.2%.
Once you have decided upon a list of funds (between three and seven), you should gradually begin to invest in them.
The minimum for each fund is between €1,000 and €3,000. Therefore, if you can’t afford to buy them all simultaneously, the authors suggest that you do it one by one. You then need to build up enough capital to pay the minimum amount for the first fund. Once you have paid for the first fund, you need to set a new target amount that you have to save in order to buy the next one.
Once you have invested in all the funds that you want, you can divide the money between the funds in accordance with your asset allocation. However, to evenly distribute them is not a good idea. In fact, the authors of “I will teach you” recommend that you adjust what you have in each fund based on these calculations:
(Total amount to invest) x (percentage of asset allocation for a specific investment) = amount you will invest.
7.11 – Week 6: review of the steps required to move forward
- Work out your investment style (30 minutes). Either pick a straightforward investment, such as life insurance, or one that offers greater control (and complexity), such as an index fund. The author’s recommendation here, is to choose a life insurance policy with a euro fund as part of the 85% solution.
- Research your funds (3 hours every week). If you have chosen an index funds, make use of Lyxor, EasyETF and Amundi ETF. If you set up your own portfolio, you can follow the Swensen system.
- Invest in your funds (1 hour per week). It is easy to invest in a life insurance policy: you just have to transfer your money from your investment account. If, initially, you have no money available to invest, you can start an investment account and set aside money until you have enough to get started. If you buy individual index funds, the best approach you should adopts is to purchase one at a time and set up savings accounts for the others.
Chapter 8 – Remain faithful to your system
8.1 – Keep your system fuelled
The authors of “I will teach you” encourage you to evaluate the value of your investment in terms of the amount of monthly contributions you make (you can find tools on the Internet to help you do this).
8.2 – Ignore the background noise
Ramit Sethi and Michaël Ferrari strongly advise you to resist the urge to log into your investment account more than once a month. If you have implemented a system of funds that you pay into regularly, you have to stick to it, and ignore the opinions of those around you.
8.3 – Adjust your investments
If you have decided to manage your own investments, you will have to change it around every 12 to 18 months.
The idea is to keep your portfolio choices stable so that no single sector is much larger or smaller than when you started. If you adjust your portfolio, it will ensure that your assets are properly distributed. It will mean that you won’t be adversely affected by fluctuations in any one sector.
So, the best way to readjust your assets is to invest more into the sectors that you need to top up so that they equal your initial amount of investment.
8.4 – Don’t worry about taxes
Don’t let tax phobia dictate your investments.
The authors of “I will teach you”, believe that, in general, people tend to worry too much about taxes and, so as to pay as little as possible, the end result is that they make bad investment decisions.
What they believe is that you should just invest as much as possible in funds that offer tax advantages: life insurance, ISA’s, Company pensions and Perco.
However, you should always carefully consider the situation before you sell your securities, as, generally, you will be eligible to have to pay taxes on the capital gains you make (except in the case of an ISA).
8.5 – Know when to sell your investments
The author’s opinion is that, when you’re in your 20s or 30s, there are only three reasons to sell your assets:
- You need money, immediately
In this case, the authors of “I will teach you” remind you of the order that you should choose to sell in:
- Use your back-up savings;
- Sell goods you don’t need;
- Ask your family if they can lend you some money;
- Use the money placed in your Company Savings plan/Perco thanks to the early release clauses.
- Use a credit agency.
- You hold assets that always underperform the markets
In this case, it is important to research the sector, as a whole, to understand why your stock is down. However, if you have a portfolio of index funds, the author’s think that you shouldn’t even consider the option to sell them.
- The main objective has been achieved
8.6 – Give: get rid of your goals from your daily routine
The authors recommend that you ask people who are five or ten years older than you what they would have done if they had taken control of their investments earlier (e.g. set aside some back-up savings, taken out insurance, set aside money for their children’s education) and then put some of the advice to work.
Chapter 9 – A Rich Life
Money is great, but for me, wealth is even better. For me, it’s about freedom, to not constantly have to think about my money and to be able to travel and work on things that interest me.
9.1-Student loans: should you pay them off or invest?
There are three choices:
- Pay back the monthly minimum and invest the rest;
- Pay off as much of your loan as possible and then start to invest;
- Opt for a 50/50 approach, where you pay back half the loan and put the other half in your investment accounts.
The decision is basically driven by interest rates: if your student loan has a very low interest rate of 3%, then it makes more sense to pay it off slowly, as you can get an 8% return if you invest in low-cost funds.
However, if the thought of your debts is something that keeps you awake at night, then you can choose the second option and pay back your loan as quickly as possible.
The third option, where you combine the two, is, in the opinion of the authors, also an attractive proposition.
9.2 – Love and money
In this part, Ramit Sethi and Michaël Ferrari try to answer different problems that are related to money and love.
This is a summary of the main issues that they put forward:
- To give your parents the responsibility to manage your money is stupid
They are your investments, as well as your profits and losses. To trust your parent’s advice is fine, but the final decision must be yours.
- Work out a financial plan with your partner
The trick to start with is to ask your partner for advice, as a gentle way of introduction to the subject. Next, the authors suggest that you make time with your partner to: talk about your financial situation, share your personal finances, discuss your financial goals. This allows you to:
- Develop a management plan that outlines how you will pay for things, your bank accounts, your budget and your investment accounts;
- Set yourself some short and long term savings goals.
- When one of you earns more than the other
Ramit Sethi and Michaël Ferrari suggest that you choose one of these two options:
- Split each bill jointly
- Split expenses proportionally to income
- If your partner spends money freely: agree upon a joint savings goals
Discuss what you will need to save in order to achieve these shared goals and then formulate a savings plan together. If you focus on this approach, rather than on the individual, you will avoid any conflicts and be able to work towards the mutual achievement of your objectives and expenses.
- Work out how much your wedding will cost, rather than have no plans in place and end up in debt
On average, a wedding in France will cost about 12 000 €. It is one of the most expensive things you will do in your life. However, most people don’t bother to work out how much things will cost. So the authors offer some advice on how to considerably reduce the cost of your wedding and how to plan ahead for the costs involved and start to save over the next few years.
9.3 – Work and money
In this section the authors of “I will teach you” elaborate on how to negotiate your salary in the “Rich Mind” style:
- Nine basic rules of negotiation:
1. Remember that no one cares about you
It is crucial to put forward your demands backed up in tandem with the value you bring to the table. Basically, you have to show that the company will earn more with you there; on top of how much they pay you, and highlight how you will help them to achieve their goals.
2. Get an offer for a new job and make the most of it
When you are offered another job, your bosses will see you in a new light and will appreciate your abilities. So, when you have an interview, it’s a good idea to inform other companies that you already have other job offers on the table, but don’t tell them how much you have been offered.
3. Prepare (99% of people don’t)
The author’s suggestion is that you get in touch with your business connections and work out, beforehand, how much you would like to earn and how much you can reasonably expect to ask for.
4. Have some negotiation techniques prepared and ready to use
Write a list of your skills and achievements to ensure that you are able to answer any questions in an intelligent manner.
5. You need to discuss more than money
You need to discuss the various elements involved with the job; not purely the salary but also everything else that comes with it. This will mean that you can be strategic with your negotiations; so you compromise on the less important aspects and can reach a mutually happy agreement with the other party.
6. Be cooperative, not confrontational
At this point, the appropriate phrase to use is, “We’re almost there…now let’s work on the final agreement.”
- Practice on your negotiation techniques
So that you carry out a professional and precise negotiation; you can either ask a friend (preferably one who is an expert in negotiation) to conduct a mock interview; or you can film yourself.
- If that fails, you can salvage the situation
You can use this kind of response: “I understand that you can’t offer me what I ask for now. However, suppose I do a great job over the next six months. If my performance is great, I’d like to resume negotiations. Does that sound fair to you? (get the other person to agree.) “Fine. Let’s get that in writing and we’ll be done.”
- Five things you should never do when you negotiate
- Do not reveal your current salary;
- Do not make the first move;
- If an offer you have received is from a company that is not held in high regard within that sector, don’t disclose the company’s name;
- Do not ask a loaded question;
- Never lie.
Lastly, if you are offered a raise, Ramit Sethi and Michaël Ferrari’s advice is to celebrate the fact but then make some smart decisions to improve your financial situation.
9.4 – How to save thousands of euros on major purchases
At this point, Ramit Sethi and Michaël Ferrari revisit the best approach to take when you make decisions about your major purchases, such as your car and your home.
- The car
- The four steps to follow when you buy a car:
- Decide upon your budget,
- Choose the car,
- Negotiate aggressively,
- Service and look after your car.
Furthermore, you’ll be better off if you buy a car at the end of the year or at the end of the quarter; when sellers want to reach their quotas and are more inclined to negotiate.
- Things you should do:
- Calculate the overall cost to own the car, i.e. the total cost of the car whilst you own it (these expenses have a significant impact on your finances).
- Buy a car that you can afford to keep for at least ten years.
- Refer to magazines or specialty websites to help you select the right car.
- Choose a long-term rental;
- Sell your car within seven years;
- Go over budget for this purchase;
- Set a realistic budget and then go beyond it.
- The most important points to consider when you buy a car:
- A car you love;
- Resale value;
- Fuel consumption;
- The interest rate.
- Your home
- A complex, important and unnecessary purchase
In fact, as a general rule, it’s not a great idea to buy a house. For the authors of “I will teach you“, this particular investment only makes sense if you have the funds and if you are certain that you’ll live in the same area for a long time. If so, it is a great way to save and build a nice place to start a family.
- Real estate: the wrong investment for individuals
- The question of risk: if your house is your biggest investment, then your portfolio is not properly diversified;
- A very low rate of return for individuals: actually, over time; it is more profitable to invest in the stock market than in real estate.
- Buy or rent: identify which one is more attractive
When you rent your home, you are not obliged to cover all the costs involved when you buy a house. This means that you can save a lot of money. So, the easiest way to determine if it is better to rent or to buy is to use one of the online calculators: it factors in maintenance, renovations, appreciation, the cost to buy and sell, inflation and much more.
- Become a homeowner: advice for when you buy a house
The authors strongly advise you to follow these guidelines:
- A 20% deposit,
- A twenty-year fixed-rate mortgage
- Monthly re-payments that do not exceed 30% of your gross salary.
If that’s not possible, the authors of “I will teach you” suggest that you wait until you have saved enough money to do this.
Additionally, it could be advantageous to search for other helpful features (purchase subsidies, zero interest rate loans…).
Finally, you need to be aware of myths that are held in relation to property, such as: “real estate prices can only go up” or “the value of a house doubles every ten years”, etc.
- How, overall, to approach your next major purchase
- Come up with a realistic cost of your purchase over a 10-year period.
- Set up an automated savings plan.
Create a well-off and comfortable life for you and those around you
As a conclusion, Ramit Sethi and Michaël Ferrari reinforce the notion that wealth is not only about the money:
A wealthy lifestyle is about more than money. To begin with, it’s about how you manage your own money, but after that it’s about how you help others.
Conclusion of “I will teach you to be rich” by Ramit Sethi and Michaël Ferrari
The book “I will teach you” is very reader-friendly and everyone can read it. It deals with the subject of personal finance from all angles, step by step.
Part 1: The (perhaps too) obvious basics of financial management
The first part of the book, which is mainly focused on the prerequisites required for you to invest and the “smart spending plan”; contains several obvious statements that I thought were pretty basic. In fact, when the reader thinks of “wealth”; the authors appear to focus more on “budget management”; and reiterate some of the more elementary points in this regard: payment of monthly costs on the required dates; use of a current/savings account, etc.
However, maybe it is useful to reiterate these basic management strategies in order to provide the reader, who starts of with no, or very limited knowledge, with a sound base, in order to improve and help to achieve their financial goals.
Part 2: Some more technical issues combined with a very practical approach
In the second part of the book, which, in the most part, deals with investments and more strategic financial issues, the authors delve into the technical elements. You learn how to build your own automated investment system and how to manage it, with the use of the “85% method”.
In fact, the approach suggested in “I will teach you” is easy to understand and apply. It enables you to put things into action straight away, week after week; without the need to become a financial expert. However, it’s a very easy read, with lots of charts and diagrams to make it easier to understand.
A guide to “improve your finances” rather than to simply “become rich”
The title of the book “I will teach you” misleads you a bit compared to what is actually in it. You may expect to discover a way to become truly “wealthy”, that is, to accumulate a massive fortune very quickly; maybe become a “millionaire”. In reality, it deals more with the process required, as described in the second part of the book’s title, to “improve your finances”.
In fact, on a number of occasions, Ramit Sethi and Michaël Ferrari explain exactly what they mean by “become rich”. For them, wealth is not necessarily linked to a huge amount of money, or a massive fortune. It is more to do with the freedom that money offers you in the options you then have in your life.
A practical and user-friendly book
Basically, “I will teach you” has no magic formulas or revolutionary ideas to help you become rich. What Ramit Sethi and Michaël Ferrari suggest is a system that combines common sense, discipline, patience and for you to do something about it, because they believe that this is really the best way to make money. From this point onwards, the book adopts a very realistic approach without the promise of any miracle solutions.
“I will teach you” is a book that I strongly recommend to anyone who is interested in some guidance and advice on how to become rich, with a practical and effective plan of action to help you.
- Fun to read and very easy to understand, even when it comes to the more technical subjects related to investment strategies.
- Without the need to become an expert, you can follow the step-by-step process put forward in the book and then apply the measures immediately and use them every week.
- No promises of miracles: clear and practical information.
- Parts of the process of how to deal with your budget seem a little too obvious to be referred to in this book;
- The title can lead to a bit of confusion: it’s more of a personal finance management book, rather than a way to “get rich”.
My rating :
Have you read “I will teach you to be rich”? How do you rate it?