Ramit Sethi will teach you to be rich – 4 links to wealth: negotiate, automate, cut costs & earn more

Ramit Sethi is my favorite financial blogger and advice-giver for the ‘basics’ (which can still be complicated) of personal finance: spending, saving and earning income.  He recently railed against those who worry about things that they can’t control, yet fail to do the simple steps that will really matter.

His quoted question below to these people (and everyone else who needs to take control of their money) have 4 excellent starting points (links) for personal financial freedom.  Check out each of these and apply them to your financial life.

“Have you negotiated? Automated? Earned more? Taken the 30-day challenge to save $1,000?”

Negotiation

Ramit stresses the importance of negotiating all things financial, from credit card interest rates, getting out of bank fees, to your next salary raise.

Automation

The best way to save is to automate the process so that no active effort is required on your part.  This can be anything from setting up direct deposits on your paycheck (most employers allow you to split the check into multiple accounts, the better to target your savings goals), having 401k deductions come out of your check, or using Vanguard (or whoever your mutual fund provider is) to invest money from your bank account on a regular schedule.  (If you already have a Vanguard account, go here.  If you need to set up a Roth IRA or other financial account, go here.)

Earn More

Expenses are only half of the financial coin of savings.  Earning a healthy salary is also a big help along the road to wealth.  Here’s a few ideas on how to make more money:

Get an education (academic or vocational, formal or informal) that increases the worth of what you know, and your ability to apply that knowledge and make money (or other benefits) from it.

Ask for a raise at work.

Start your own business on the side, or find a part-time or freelance job that you can do in your spare time.  (Make it something you enjoy and that energizes you, otherwise it’ll be hard to force yourself to do it given your other work/life commitments.)

Save Money – Enter Ramit’s ’30 day challenge’

Ramit put together a fantastically useful list of 30 tips (described in each of the links below) to save money.  These aren’t the typical ‘stop buying lattes’ ideas generated on so many financial blogs.  Instead, they’re likely to save you big bucks without taking away the things that you really enjoy in life.

While I’ve copied Ramit’s entire list below (with his links for the details of each tip), his original post can be found here.

Full list of Ramit Sethi’s tips from iwillteachyoutoberich.com
Tip #1: Pack lunches for the rest of the week
Tip #2: Turn your thermostat down 3 degrees
Tip #3: Sell something on eBay today
Tip #4: Involve your friends in your savings challenge
Tip #5: Optimize your cellphone bill
Tip #6: Use gas prices to become your own hedge fund
Tip #7: Create a “No Spending” day once a week
Tip #8: Implement the A La Carte Method
Tip #9: Only buy new things when replacing something old
Tip #10: Use the free rewards from your credit card, car insurance, and workplace
Tip #11: Never pay full retail price for clothes or eyeglasses again
Tip #12: How I’m saving $2,000+ on eating out in 2009
Tip #13: How to negotiate your car insurance
Tip #14: Use self-persuasion to share how much you’ve saved so far
Tip #15: Forget going to a bar — ask people over for dinner
Tip #16: Cancel any large purchase this month
Tip #17: Buy generic for the stuff you don’t care about
Tip #18: No Christmas gifts this year
Tip #19: Save Money, Eat Well and Look Hot in Less Than an Hour
Tip #20: Change the date of Christmas
Tip #21: Save thousands by pre-paying your debt
Tip #22: Analyze your progress in the 30 Day Challenge (plus, see how I’m doing)
Tip #23: Go cash only for 15 to 30 days
Tip #24: Cut your commute expenses by 40%
Tip #25: Earn more money using your God-given skills
Tip #26: Gardender? Cleaning lady? DIY instead
Tip #27: Use barriers to prevent yourself from spending money
Tip #28: Use price-protection guarantees to always get the lowest price (travel, retail)
Tip #29: Stop being a loser and spend money to save money
Tip #30: How I’m saving $25,000+ in 2009

 

Automating your finances (Ramit Sethi-style)

I’m a big fan of automation, especially for personal finance & investing (think automatic 401k withdrawals.)  A ‘classic’ video from Ramit Sethi is at the bottom of this post, outlining his approach to automating your money.  I recommend watching it (12 minutes) and trying to automate your own money to the extent possible.  It takes a little up-front effort (which you never have to leave your computer chair for), but it pays off big time in making life simpler & helping you effortlessly hit your financial goals.

Using INGDirect for online banking is a big step in the right direction on the automation front.  I use them to automatically mail out my monthly rent checks, and to automatically put pieces of my direct deposited-paycheck into various high-interest savings sub-accounts.  Here’s how I do it.

How I automate my money

I generally have a ‘cycle’ of automatic things that happen per each paycheck.  A certain percent goes to my 401k at Vanguard (and invested according to the index funds I picked.)  The remainder (minus taxes and insurance premiums) is direct-deposited into my ING checking account online.  Of that, a fixed dollar amount goes into a vacation sub-savings account, an account for money that I spend on myself to make more money, and to my no-ATM-fee Charles Schwab checking account that I use for miscellaneous cash needs.

Once a month, my rent check is automatically mailed out to my landlord from my ING checking.  All my other bills (including utilities, cell phone, internet, etc) have been set up to be automatically paid by my credit card.  Thus, I just have one automatic credit card payment out of my ING checking that occurs monthly.  (Some bills can be set up to automatically come out of your bank account if paying by credit card is not an option; but I prefer the latter for the simplicity.)

Anything left over is available for me to either spend (without feeling guilty since I’ve hit all my savings goals), or add to my savings.  If you know me, you can guess that I generally choose the latter, but every once and a while I loosen the purse strings and splurge on myself in the form of good beer or relatively-inexpensive travel.  (I know, I know, I’m a wild man when it comes to my spending sprees.)

Below is a picture from Ramit’s post (linked below) that illustrates how this works:

Having my money automatically going to various savings places BEFORE I get to spend it on discretionary items is part of the idea.  I’m ‘paying myself first’ as the mantra goes.  Of course, you’ll want to have a rough idea of your more ‘mandatory’ spending like rent/mortgage, utilities, gas, groceries, plus a little spending money so that you can estimate how much you can sock away.  If you want to have more money to save, scroll down to the 30 excellent tips in this post.

Ramit’s more detailed explanation

Ramit outlined the approach he discusses in the below video in a blog post here as well.

On happiness and choice: mindful ways to feel better about life

I watched a ‘TED Talk’ by author & psychologist Barry Schwartz on the ‘paradox of choice‘.  He explained why too much choice can make us less happy than we would be if we had fewer choices.  This is because with many choices we 1) have more regrets about our choices, 2) feel the loss of the ‘opportunity cost’ of the options we don’t choose, 3) expect more from the choice we make, and thus are more frequently disappointed, and 4) blame ourselves when we’re disappointed, since, with so much choice, we have no one to blame but ourselves if we make a bad decision.

Check out the video for more on this reasoning.  Schwartz’s arguments are a stark departure from the usual line of reasoning in Western thought which argues that more personal liberty and freedom equals more choices (and vice versa), and hence greater societal welfare.

As Schwartz argues, and as empiricalhappinessstudies have shown, this appears to be false for prosperous societies like ours.  While choice is wonderful up to a point, too much of it can be bad for us.  (Unlike poorer or dictatorial societies, whose problem is not enough choice.)  Studies suggest that, despite the proliferation in material & social gains, human happiness has not increased in the United States since 1950.

I wanted to share my own thoughts (warning: this is an ‘opinion’ piece!) on this, and provide some personal recommendations on how to minimize the harmful effects of too much choice.

Simplify, simplify

Take a page out of Thoreau’s book (it’s called ‘Walden’) and voluntarily cut down on choice by simplifying your life.  By reducing the things that absorb your time and energy without producing commensurate benefit, you can focus on what really matters to you.  Consider limiting your exposure to television advertising and shopping malls.  They increase your material options for things that probably won’t make you much happier after owning them for a couple months.

Experiences, on the other hand, increase in value over time.  Spend money & time acquiring good memories instead.  Or, provide more choices for those who WILL benefit from them by contributing charitably to poor nations.

The secret to happiness

Simplification notwithstanding, there are obviously many benefits to choice.  Being able to decide whom to marry, how many children to have, what job to work at, where to live, etc allow people to pick and choose the things that they believe will make them the happiest (within the range of their ability to attain these things.)  One of the problems with all of the great choices we have (think food, electronics, cars), is that people’s expectations have increased along with their improved options.  There’s much truth to Schwartz’s statement that ‘the secret to happiness is low expectations.’

To me, I think of this as a difference between absolute and relative value.  The standard economic model of human behavior is that humans care about absolute value, or how much stuff/money/time/pleasure we have on a zero to infinity scale.  Thus, if you can choose between 25 different digital music players, and can select the one with the most valuable features, you’re better off than only being able to pick from 2 players with less gadgets.

However, what humans also care about is how things match up to their expectations.  If you already expect your digital music players to do 10 things, and the new player does 11 things, you may only feel ‘1 thing’ better, but not 11 things better.  This may be easier to see in how people feel about their jobs.

Folks in the western world have more purchasing power, work less hours in more comfortable surroundings, and have more free time than any generation before us.  Despite this, many of us still hate our jobs, even though, on an absolute scale, we’re way better off than even our parents’ generation.  (Read ‘The Progress Paradox‘ if you don’t believe the last part of that sentence.)  A big reason for this is because we’ve come to expect certain characteristics in our jobs.  We measure our happiness by how much our job meets, exceeds or fails to exceed the things we take for granted.  (Like leisure time, health benefits, wages that allow us to live in large houses, own multiple cars, and never go hungry.)  If this is true, how do we learn to appreciate the ‘absolute’ value in the objectively luxurious (by historical standards) lifestyle we live?

Be appreciative at every opportunity

One way is to be actively conscious of how fortunate we are, and to remind ourselves of the good things in our lives (rather than constantly grouse about the negatives, something humans are particularly skilled at.)  For example, the next time you’re at the grocery store complaining about the unripe bananas in January, remind yourself of how amazing it is that we have access to cheap, out-of-season produce every day of the year.

Being appreciative is also important when confronted with even better versions of the stuff we already have.  Some of the happiness literature (cited above) suggests that envy is responsible for part of our failure to enjoy the immense material wealth that’s been created over the last 60 years.  When your neighbor gets a new BMW, your own Toyota Corolla doesn’t look so great in comparison.   (Never mind that your car has excellent comfort, performance and safety features, especially when compared to cars of just a few decades ago, or the fact that you were perfectly happy before your neighbor’s purchase.)

Be appreciative of people as well.  Complimenting those around you for what they do increases your happiness as well as theirs.  (Psychologists have shown this empirically; people who are more appreciative are happier than those who aren’t.)  It’s easy to take the nice things a spouse or friend does for you for granted.  Be mindful of when someone is doing something beneficial for you, and praise/reciprocate accordingly.

Be appreciative of random chance (or Providence, depending on your viewpoint) and remember all the good luck you receive, and try not to dwell on the bad.  Everyone can bring to mind the last time they were stuck in grinding traffic, but what about the last time your commute was a breeze for some inexplicable reason?  Did you remind yourself how fortunate you were at that moment?

Don’t be too hard on yourself

While I believe that people should hold themselves to high ethical and behavioral standards, I also think people beat themselves up over things that, when put in perspective, are actually quite trivial.  Even if you make a big mistake, it doesn’t make anything better to simply feel guilty about it.  Focus on the future instead: repair the damage if you can, cope with it if you can’t, and consider if you need to take preventative action going forward.

I know someone who has been agonizing about leaving a job they don’t like, mostly because they’ve invested a lot of time and effort into this career path.  They spent a lot on school to receive a specialized degree to go into this field.  They spent several years gaining experience on the job.  This person dislikes the job, but feels guilty about quitting because they’ve put so much into it.

The bottom line is, they can’t get back the time and money they spent for their current profession, so there’s no point in feeling bad about it.  Instead, they should focus on answering questions that matter like: will it make me happier to leave this career for a new one?  (Yes!)  How can I find a new career and avoid making similar mistakes in my next job?  Note that these questions deal with the controllable future, not the uncontrollable past.

Worry about what you can control, steel yourself against for the rest

This last suggestion is particularly apt to investing and my point about letting bad luck go.  In investing, the best you can do is make smart choices in the present with respect to your goals and needs.  For most people, low-fee stock index funds are the way to invest for distant goals, like retirement.  If you have $100,000 in such a fund for a retirement that’s 20 years away, and the fund drops by 25% the next day, should you feel remorse for your decision?  No!  When uncertainty is involved, rationally expected results should determine how you evaluate your decision-making, not actual results.  To see why this is true, imagine the following gambling scenario:

Multi-billionaire Bill Gates offers you the following proposition: You’ll flip a quarter, and if it comes up heads, you get $2 from Gates.  If it’s tails, you pay him $1.  Do you accept this flip?  (Make the decision in your head for the purposes of this thought experiment.)

Now ask yourself: if the coin comes down tails (you lose $1), does that mean you made a bad decision (before the flip occurred)?

Assuming your goal in this scenario is to make money, the answer to the first question is ‘yes, take the flip’ and the answer to the second question is ‘no, you made a good decision even though you lost.’  Let’s see why: 50% of the time, you win $2, the other 50% loses you $1, for a net average gain of $1 (= 2 – 1) for every two flips.  This is a positive ‘expectation’ (average result) of 50 cents per single flip.  With each flip you ‘expect’ to win 50 cents on average, so ‘yes’ you want to flip.

If the coin comes down tails, losing you a buck, did that change your expectation before the flip?  Of course not, you still had a 50 cent expectation.  Thus, even though you lost, you made the right decision in terms of maximizing your expected profit.  Similarly, your expectation for future flips is still a positive 50 cents, so you should offer to keep playing with Bill no matter how many times you lose (or win.)  (If you can flip fast enough and/or get Bill to raise the stakes, you’ll eventually bust one of the richest men in the world.)

This example can be applied to life, albeit with less clarity.  If you made a decision that seemed like a good one based on your rational evaluation of the information you could get, that’s the best you can do.  In the investing example, since market movements are impossible to predict with any accuracy (run from, or punch, anyone who tells you otherwise), there’s no point in kicking yourself if the market dives unexpectedly.  (The same goes for congratulating yourself on your wise intelligence if the market soars.)

Instead, be emotionally prepared to cope with the misfortune that is sure to come to everyone in greater or smaller amounts in life.  Counting the positive things in your life will help.  (I remind myself of my wonderful wife, friends, family, ridiculously good looks, and the existence of microbrewed beer whenever I’m feeling down.)

If your decisions repeatedly turn out badly, you should reexamine your thought process to make sure you’re really making rational decisions based on good information.  (This is because similar repeated outcomes suggest that luck is not the reason for them.)   Ask your friends or family to check your logic.  They should be quick to tell you if, say, you’ve dated obvious jerks in your last three relationships and need to stop kidding yourself about your ‘bad luck’ with love.

I’d love to hear comments from folks on how they’ve dealt with choice, and their thoughts on what I’ve written above.  Good luck implementing the above in your own life!

Automate your finances – Perspectives from the Fool and Ramit Sethi

Below is a good summary of the automations you can make to simplify and improve your finances, courtesy of the Motley Fool:

Use the tips in this article and automate:

1) Your savings via direct deposit of your paycheck to your checking or savings accounts.  Depending on what your employer allows (ask HR), you can break up your direct deposit by placing some of your money in a checking account and some in a savings or brokerage account.

2) Your retirement via 401k contributions straight from your paycheck.

3) Your credit card bill by automatic payment of at least the monthly minimum plus whatever else you can afford (if you have a revolving balance) or the whole amount each month (the preferable choice.)

4) Your other bills by signing up for automatic payment on utilities, student loan, car payment, and even your rent or mortage (using your bank’s online bill payer if the company you’re paying doesn’t have an online payment option.)

5) Take a page out of Ramit Sethi’s book by opening high-interest savings accounts to auto-save for large purchases like weddings, cars and houses, or smaller things like a plasma TV or that $500 pair of Jimmy Choo heels.  (A really fantastic article on finance automation by Sethi is link here.  The article gets into the nuts and bolts of how to picture and implement the above.  I highly recommend reading it.)

Automate your finances to save time, money and peace of mind!

How to get off paper mail, email and telemarketing lists

As part of my campaign to help people simplify their lives, I’ve provided some links below for an important and easy-to-complete step:  Removing yourself from junk (e)mail and telemarketing lists that the post office sends us.

This helps cut way down the amount of time-consuming junk we have to sift through and phone calls we have to answer and patiently explain that “no,” in fact, we’re quite happy with our long-distance telephone service.  As a side benefit, this also keeps us from getting sidetracked by things that we might be tempted to buy, despite the fact that until received a “free” catalog in the mail, we had no desire to purchase them.  (Reducing your junk mail is also better for the environment.)

Step 1) To get off ~80% of direct mail marketing lists, go to https://www.dmachoice.org/ and register for an account.  Then, go through the 4 categories of direct mail and request that all mail be STOPPED.  (For credit offers, you’ll have to follow a link on DMA Choice to a separate site (OptOutPreScreen.com), and either electronically remove yourself for 5 years, or (my recommendation) print out and mail in the paper form to be removed PERMANENTLY.)

Step 2) From the same folks that brought you the above link, go to http://www.ims-dm.com/cgi/optoutemps.php to remove up to 3 emails at a time from commercial emailing lists.  (You’ll still get spam email from other sources outside of the DMA’s control, but this should help reduce the total burden.)

Step 3) Go to https://www.donotcall.gov/register/reg.aspx to register up to 3 phone numbers at a time (including cell phones) with the federal governments National Do Not Call list.

Step 4 (optional) For getting off specific catalog mailings (such as ones from companies that you had bought from in the past), go to http://www.catalogchoice.org and they will submit an email on your behalf to remove you from whichever companies’ catalogs you select.

Step 5 (optional) To get off Red Plum specifically (I still got it even AFTER calling those bastards!), go here: https://www.redplum.com/tools/redplum-postal-addremove.html

Lastly, should one of these links no longer be valid, the FTC has a good recap of the above here: http://www.consumer.ftc.gov/articles/0262-stopping-unsolicited-mail-phone-calls-and-email

Each of these registrations is free, and with the exception of the mail-in credit offer removal in step 1, can be done in about 5 minutes online (with a valid email account for activating some links they’ll send you to confirm removal.)  If at any time you decide you actually WANT to receive junk mail/telemarketing calls etc, you can change your preferences with each organization.

Just follow the instructions for each removal link, and in the time period that it takes for your name to be removed from each list, you should be on your way to lessening your burden of everyday time-wasters and consumption encouragers.  After completing steps 1-3, complete step 4: grab a beer and reward yourself with a little of the future time you’ve saved.

The two most important books you’ll ever read on becoming (and staying) wealthy

If I had to choose any two books to recommend to people who want to become financially independent, what do you think they would be?  Maybe Warren Buffet’s excellent biography ‘Buffett: The Making of an American Capitalist’by Roger Lowenstein?  Perhaps Buffet’s compilation of Berkshire Hathaway letters to shareholders.

Surely at least ONE of the books would be written by or about a famous investor, or contain at least for key insights into stock-picking, real estate, how to be successful in business or another get rich plan?  Judging from the tone of this article, you can probably guess that the answer is “no” — and you would be right.

The first book that I believe gives the best advice on how to be successful in your financial life (and how to make your children successful as well) was written by two professors who set out to study millionaires.  What they found surprised them.  In ‘The Millionaire Next Door’, the authors discovered that those with over a million in assets were NOT the people driving expensive vehicles, renting high-priced downtown apartments or drinking Dom Peringnon.

Instead, many of the millionaires they studied had the following seven traits, which the authors flesh out further in the book:

1. They live well below their means.

2. They spend their time, energy, and money in ways leading to wealth.

3. They do not worry about social status, preferring financial independence.

4. They did not receive a lot of financial help from their parents.

5. Their own adult children are not financially dependent upon them.

6. They target opportunities that benefit from large amounts of spending.

7. They work in the right jobs, often for themselves.

I believe, as do many others, that the most important of these commonalities is number 1 – living well below your means.  I think the authors might agree with that priority when they write: “Being frugal is the cornerstone of wealth building. … [F]ew could have ever supported a high-consumption lifestyle and become millionaires in the same lifetime.”

After reading “The Millionaire Next Door,” you will have seen the blue print for attaining wealth. However, implementing that plan is the hard part. Living below your means, regularly investing (and rarely taking capital back out), and foregoing some of the perks that TV commercials and rap songs have convinced us we “deserve” takes discipline, faith, and hard work.  This difficulty is why I believe the second most important book to read with respect to wealth building is Elaine St. James’ ‘Simplify your Life’.

St. James’ lays out 100 ways to simplify your life.  The idea is that as Americans in our modern world we’ve become to obsessed with “keeping up with the Jones’s”, buying bigger houses, flashier cars, and working longer hours to pay for it (while starving our retirement funds, I might add.)  Her goal is to show people the way to reduce their consumption while simultaneously increasing their happiness.  She recommends “selling the damn boat” and consolidating your investments to help reduce the time, money and worry in one’s life.

While St. James’ book is not dedicated solely to reducing your expenses and making you wealthy, it gives the proper framework to get the most out of life without rampant consumerism.

Taken together, I believe “The Millionaire Next Door” and “Simplify your Life” will show you the plan to wealth, and then help you execute it.  Start living cheaply right now and check ’em out from your local library for free!

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