I read I Will Teach You To Be Rich by Ramit Sethi before I read The Richest Man in Babylon (see previous post). However, I Will Teach You To Be Rich (IWT) can be taken as building on many of the principles in The Richest Man in Babylon (RMB). IWT is RMB for the 21st century.
Summary of the book
IWT is split into 6 sections:
1. Get out of debt first
Don’t save or invest until you’ve got out of debt. Interest rates on credit card debts far outweigh any possible gains from high-interest savings accounts or investments in equities or bonds. Eg. a 26% interest rate on your credit card balance is going to be bigger than the interest of 2% you might get on your savings account or the 10% annual return you might get from your investments.
Sethi gives the reader exact scripts for negotiating lower credit card interest rates to help you pay off your debts faster.
2. Set up no-fee, high-interest bank accounts
This is much harder to do now in the post-2008 low-interest rate world. Still you can find no-fee accounts and accounts with more attractive rates. As of writing, check out the Santander 123 current account which pays 3% on balances up to £20,000.
(Update from May 2020, Marcus by Goldman Sachs probably has the best savings interest rate at the moment at a paltry 1.20%)
3. Open an investment account
Savings will only get you so far. You need a return above inflation to keep your money. In the UK, that’s about 2%.
Historically, over the long-term, equities return around 8% per year.
The enemies of good long-term investing are things that eat into your profits.
- Taxes and
- Poor investments.
Pick a low-cost investment account (like Hargreaves Lansdown).
Pick a tax-free account like a Stocks and Shares ISA (again see Hargreaves Lansdown)
Most managers lose against the market. Instead, beat 85% of managers by just ‘buying the market’. This means investing in index tracker funds which have the advantage of being lower cost than active managers. Again, remember that fees eat into your returns.
4. Conscious spending
Track where your money is going. Stop spending money on things you don’t want. Spend money on things that you value.
5. Automate your financial system
We aren’t rational creatures. We have limited willpower. Take this fallibility out of the equation by setting up automatic mechanisms to move money through your system, from salary to investments.
6. Get your investments right
Invest your hard-earned savings wisely. Invest according to your age. When you’re young, lean more heavily to equities, and reduce your exposure when you’re older.
Follow successful asset allocation (i.e. the split between your asset type – equities, bonds, cash, property).
Sethi recommends David Swenson’s asset allocation split. Swenson is the legendary Chief Investment Officer of Yale’s Endowment Fund.
What can we learn from I Will Teach You To Be Rich?
I Will Teach You To Be Rich is filled with practical and genuinely helpful, detailed advice.
I took two main insights from IWT.
First off, the overarching framework for getting rich.
(1) Get out of debt.
(2) Save as much as you can.
(3) Invest these savings according to a proven asset allocation like David Swenson’s.
(4) Rebalance the asset allocation periodically.
Secondly, and more importantly, how Sethi recognises the reality of how we as humans are irrational and often our own worst enemy in working towards our goals.
So the overarching framework makes sense. We know it makes sense. So why isn’t everyone rich? Because it’s hard and requires discipline. We’d rather spend the money. Sethi’s advice doesn’t rely on willpower and self-discipline. He advocates automating and systematising.
Set up your bank accounts to automatically transfer money to a savings account and your investment account. This way, it’s not relying on you to remember to transfer the funds across.
I’ve automated my savings and investments. Every month, I get paid into my current account. The next day, I’ve set an automatic rule for the next day to sweep £500 to my investment ISA, which then has automatic instructions to invest in equity funds and bonds. (Read about how I’ve set up my automatic investing through Hargreaves Lansdown here.). I follow the David Swenson asset allocation that Sethi recommends.
His argument for following a great like David Swenson is persuasive. In essence, why would I think I was more qualified to allocate assets than an investing great?
I definitely recommend this book. My biggest problem was having a ‘head in the sand’ approach to my personal finances. This book gave me the framework to take control of my money and peace of mind was worth way more than the cost of a paperback. I’ve actually bought more copies to give to friends and family.