The finances of relationships, weddings, buying a car, your first house, and more
I’ll never forget the conversation I had with my then-girlfriend (now wife), Cass. It was right before Thanksgiving and we’d decided it was time to talk about kids, marriage, money—the big things.
I told you I love systems, so true to form I created an agenda with my talking points. Here it is:
Number of kids |
Wedding |
||
When? |
Where to live |
||
Names of kids |
Lifestyle—who works? |
First up was getting engaged. We’d been dating for years and Cass was ready to get married. In fact, she said, “I’d really like to be engaged by Q1 of next year.” This was the moment I fully realized I’d found the love of my life: when I heard her speaking about our relationship in financial quarters.
We talked about how many kids we wanted to have, who would work, where we wanted to live, and the kind of lifestyle we wanted to lead.
Toward the end of the conversation, I took a deep breath and said something I’d been thinking about for a long time. “There’s one other thing I want to talk about. It’s important to me that we sign a prenup.”
More on that in a moment.
In this book, I’ve written about money, which I believe is a small but important part of a Rich Life.
What about the rest?
What about challenging conversations about love and money, like the one I had with Cass? Or the decision to buy a house? Or negotiating your salary? Once you’ve automated your finances, what’s next?
Living a Rich Life happens outside the spreadsheet. It’s tempting to tinker with online calculators and asset allocations for years and years, but at a certain point—especially for my readers who have followed my lessons and automated their money—there’s a point where you got it right. You won the game. Now it just takes time, patience, and feeding the system.
The next layer of a Rich Life isn’t about recalculating your returns from compound interest. It’s about designing the lifestyle you want. Kids? Taking a two-month vacation every year? Flying your parents out to meet you? Increasing your savings rate so you can retire in your forties?
I’m writing this from a safari lodge in Kenya—part of a six-week honeymoon that Cass and I are taking. One of our dreams was to invite our parents for the first part of the trip in Italy—to treat them and create new memories together. It was truly an unforgettable Rich Life experience.
For me, a Rich Life is about freedom—it’s about not having to think about money all the time and being able to travel and work on the things that interest me. It’s about being able to use money to do whatever I want—and not having to worry about taking a taxi or ordering what I want at a restaurant or how I’ll ever be able to afford a house.
That’s just me. Being rich probably means something different to you.
Now it’s time to focus on designing your Rich Life.
Student Loans—Pay Them Down or Invest?
The Federal Reserve reports that the average college graduate has around $35,000 of student loans—and those of you carrying such debt may find it an impediment to achieving your Rich Life. But the surprisingly good news is that student loans were probably an excellent financial decision.
Statistics clearly show that college graduates far outearn those with only a high school diploma. (That said, you should take responsibility for researching college majors and their average salaries.) Please don’t listen to the pundits who have jumped on the bandwagon of saying student loans are “evil” and you should skip college. God, if I hear this nonsense one more time, I’m going to jump up and beat someone with an onion. (That way it’s unclear why they’re crying.)
We already talked about getting out of student debt in Chapter 1, but there’s one additional question I constantly get asked: “Should I invest or pay off my student loans?”
I used to have anxiety wondering how I would ever be able to pay off my student loans, have savings, and have a retirement plan. Now my student loans are almost entirely paid off, I have savings accounts (plural), have two retirement accounts, and have no stress around those things. I have all of it automated, and I know how much money comes in, where it goes, and how much goes out.
—Deanna Beaton, 30
Investing vs. Paying Off Student Loans
It can be difficult to hear the drumbeat of “Invest early!” when you’re scrambling to pay $500 or $1,000 toward your student loans each month. But when it comes to paying down your loans or investing, you really have three choices:
■ Pay the minimum monthly payment on your student loans and invest the rest.
■ Pay as much as possible toward your student loans and then, once they are paid off, start investing.
■ Do a hybrid 50/50 approach, where you pay half toward your student loans (always paying at least the minimum) and send the other half into your investment accounts.
Technically, your decision comes down to interest rates. If your student loan has a super-low interest rate of, say, 2 percent, you’d want to pursue option one: Pay your student loans off as slowly as possible, because you can make an average of 8 percent by investing in low-cost funds.
However, notice I said “technically.” That’s because money management isn’t always rational. Some people aren’t comfortable with debt and want to get rid of it as quickly as possible. If having debt keeps you awake at night, follow option two and pay it off as soon as possible—but understand that you could be losing lots of growth potential just so you can be more comfortable.
I recommend you take a close look at option three, and here’s why: The interest rate on most student loans these days is similar to what you’d get in the stock market, so frankly your decision will be a toss-up. All things being equal, the money you stand to make by investing is about the same amount that you’ll pay out in interest on your student loan, so basically it’s a wash. It won’t really matter whether you pay off your student loans or invest, because you’ll get roughly the same return. Except for two things: compound interest and tax-advantaged retirement accounts. When you invest in your twenties and early thirties, you get huge benefits from compound interest. If you wait until you’re older to invest, you’ll never be able to catch up on those earnings. Plus, if you’re investing in tax-advantaged accounts like 401(k)s and Roth IRAs (see Chapter 3), you’re getting gains from tax benefits. That’s why I would consider a hybrid split, paying off your debt with part of your money and investing with the rest. The exact split depends on your risk tolerance. You could choose a fifty-fifty split to keep things simple, but if you’re more aggressive, you’ll probably want to invest more.
Love and Money
After you know the basics of personal finance, it’s easy to live in the spreadsheet. What’s harder is knowing how to navigate money with the people around you: your friends, your parents, your partner.
There are infinite situations where love and money play out: eating out with the friend who never tips, realizing your parents are in debt, or combining money with your new partner. I believe mastering love and money is one of the most complex—and rewarding—parts of a Rich Life.
That’s why I want to spend some time talking about how to handle money with the people around you. Sure, there are some easy formulas you can use for situations like splitting rent when one partner earns more than the other.
But that’s just the spending. I believe the real challenges—and opportunities—lie in the softer discussions. For example, should you tell your friends how much you earn? What about your parents? What’s the role of money in getting married? Should you get a prenup?
I don’t have all the answers, but I’ll tell you exactly what I’ve chosen to do—and why.
Ignore the Noise of Money Advice
Now that you’ve mastered the basics of personal finance, you’re going to notice how “noisy” the world of money is. There are your uncle’s “hot stock tips,” random money-management apps, and your friend’s scoffing that you haven’t used a certain obscure tax-avoidance strategy (LOL when you get financially judged by someone who can’t save enough to buy a bag of jelly beans).
Everyone’s got advice. Everyone has a different way they handle money. Some know more than others, but everyone has an opinion on what you should do. Suddenly you’ll be hyperaware of how other people handle their money.
You’ll also notice that as soon as they hear that you’ve taken control of your money, they’ll begin to act weirdly—making excuses for why they can’t do it, putting your efforts down.
■ “Ugh, it’s impossible to get ahead . . .”
■ “Retire? LOL! I’m going to have to work forever . . .”
■ “Must be nice to have savings like you . . .”
I’ve had over fifteen years to think of comebacks. Here’s my fantasy.
Ramit’s fantasy SITUATION: Someone who absolutely sucks at personal finance and is deeply in debt starts telling me how I “need” to drop everything I’m doing and invest in real estate, Bitcoin, and other assorted idiotic suggestions.
COMEBACK: I look up from my Thai papaya salad, lower my fork, use a cloth napkin to wipe my lips, examine them from head to toe, and say, “Why would I take advice from you?” The music stops, everyone in the restaurant claps, and the chef comes out to shake my hand and give me free dessert.
After years of hearing these comments, I’ve learned what’s really going on. When you first begin taking control of your money, people will notice. (Candidly, you’re probably talking about it more than before. You know the saying “How do you know if someone is vegan? Don’t worry, they’ll tell you.” Same with taking control of your finances. My suggestion: Be mindful of how you discuss money and who you discuss it with.) By mastering your money, you’re disrupting the normal relationship pattern you’ve had with others, which makes them uncomfortable and causes them to react in odd ways. Don’t take it personally. Smile and say, “Thank you.” As the people around you get more comfortable with the new you, the comments will gradually fade away.
But at that point, you’ll be hearing other noise: the chaos of advice on the internet. As my readers get more comfortable implementing the IWT system, they start to seek out more information on investing and personal finance. Maybe you end up on reddit or investing forums. Suddenly, you’ll be hit with tons of “advanced” tactics that anonymous commenters will urge you to use.
■ “Tax-loss harvesting is the most important thing on earth!”
■ “Wait, you don’t have captive insurance?”
■ “LOL, I can’t believe you still believe in index investing. That’s cute. It’s so obvious that Apple is going to the moon.” (Or is it Tesla? Or Bitcoin? Or ICOs?)
If anything, I’ve learned to have compassion. Remember that just a few weeks ago, you didn’t know much about money. It may have taken you a long time to get mentally ready to even buy a finance book and go through it—and now you understand concepts, like automation and IRAs, that would have seemed foreign just a few weeks ago. The best thing you can do is be a great example to others and, if they want your advice, share this book with them.
Ignore the noise. Remember, investing shouldn’t be dramatic or even fun—it should be methodical, calm, and as fun as watching grass grow. (What you can do with your investments—and your Rich Life—that’s fun!)
Log in to your investment account no more than once a month—that’s it. If you’ve set up your asset allocation and are consistently funding it, stick to your guns. You’re investing for the long term, and when you look back, day-to-day changes will seem like minor blips—which they are.
I understand that you’ll want to seek out more information. Do it. Just keep it in perspective and realize that everyone has an angle but there are no tricks or hacks to long-term personal finance. After you read the hundredth breathless post about how index investing is only for beginners (it’s not), you’ll realize you know more than most of the advice out there. That’s the magic moment: Instead of “living in the spreadsheet,” tweaking random numbers, and searching out endless reddit threads about personal finance, you can spend less than ninety minutes a month on your finances—and instead live your Rich Life outside the spreadsheet doing things that matter.
How to Help Parents Who Are in Debt
This is one of the most difficult situations you may face in your financial life: realizing that your aging parents are in financial trouble.
As likely as not, they won’t come out and admit it (and in my experience with thousands of readers, your parents will never ask for help—it’s too embarrassing). They might drop little clues here and there, saying things like “Money is tight right now.”
Discussing their situation may be among the most challenging conversations you’ll ever have—and one of the most necessary. Your parents have spent decades raising you and have formed patterns that are very difficult to change. You are more likely to bring up money than they are. And you have the perfect excuse—this book. Like this: “Mom, I’ve been reading this book on personal finance. I learned a lot of things I never knew. How did you learn about money?” Watch the floodgates open.
If your parents are in debt, it can be very tough on your relationship with them. Your biggest challenge is not going to be coming up with a technical personal finance solution for their problem. Instead, it’s going to be asking lots of questions, listening carefully, and deciding if they actually want help, and if they’re ready to receive it.
If they do, great! You can help them. But if they don’t, one of the most difficult things you’ll ever do is respect their decision, even as their situation might become increasingly dire.
In my experience, if you approach the topic of money with your loved ones in a careful, compassionate way, they’ll open up to you.
Every situation is different, but here are some questions you can ask. (Remember: Tread gently. Nobody likes talking about money—especially if it means having to admit to their kids that they need help.)
■ Where did they learn about money? What did their parents teach them?
■ If they could wave a magic wand and be in any financial situation, what would it be? (Let them dream here. If they say “win the lottery,” encourage them. What would that mean? What would they do? Then get more realistic: “Okay, let’s assume you can’t win the lottery. What would your ideal situation look like five years from now?” Most parents have pragmatic dreams.)
■ How much do they make per month? How much do they spend?
■ What percentage of their income are they saving? (Almost nobody knows this. Be reassuring, not judgmental.)
■ Do they pay fees for their bank accounts and credit cards?
■ What’s their average monthly credit card balance? Out of curiosity (use that phrase), why isn’t it zero? How could they get it there?
■ Do they have any investments? If so, how did they choose them?
■ Do they own a mutual fund or funds? How much are they paying in fees?
■ Are they maximizing their 401(k)s, at least contributing as much as their company matches?
■ What about other retirement vehicles, like a Roth IRA? Do they have one?
■ Do they read iwillteachyoutoberich.com? NO? WHY NOT, DAD?!?! (Note: I highly recommend that you scream this really loudly at them.)
Your parents might not have answers to all these questions, but listen closely to what they do tell you. I’d encourage you to take the 85 Percent Solution approach and figure out one or two major actions they could take to improve their financial situation. Maybe it means setting up an automatic savings account, or focusing on paying off one credit card so they can feel a small sense of accomplishment. Think back to when you didn’t know anything about money and it was incredibly overwhelming. Now you can use what you’ve learned to help your parents make small changes that will have big results.
Should You Tell Your Parents and Friends How Much Money You Have?
Years ago, I started to feel that I should talk to my parents about money. My business had grown. I’d become more financially secure than I’d ever imagined. And when my parents asked how business was going, I’d answer in generalities—“Things are good!”—when in reality, I knew that sharing a single revenue number would be more specific than anything else I could say.
I called my friend Chris for advice.
“Should I tell my parents?”
Chris is an author who was raised in a household similar to mine. He instantly understood what I meant.
“Why do you want to tell them?” he asked. I told him it would answer a lot of questions I felt were beneath the surface. Am I doing fine, financially speaking? Did my parents do the right thing by moving to this country? Are they proud of me?
But I was nervous because I thought sharing specific details about my success might change my relationship with my parents. “It might get weird,” I said, using a loaded word that anyone with ethnic parents will understand. Chris, more than almost anyone else, knew what it was like to grow up as an Asian kid with frugal parents, then earn more than you ever imagined.
Ultimately, I realized that I wanted my parents to know I was doing fine—that they’d prepared me for life, that I’d learned their lessons, and that they didn’t need to worry.
Chris pointed out that I’d been thinking a single number would communicate all of this, but in reality, I could assure my parents in lots of different ways. I could simply tell them my business was doing well. I could thank them for teaching me the discipline to grow a business. And I could do the thing that’s most meaningful to parents: spend time with them.
Chris was right. He taught me that my intention was right, but I didn’t have to get into exact dollar figures to communicate that I was secure. In reality, my parents don’t care about the number in my bank account—they just want to know that I’m happy (and of course that I’m married and having kids—these are Indian parents I’m talking about).
The next time I spoke to my parents and they asked how things were going, I took extra time to thank them for everything they’d taught me and told them that, thanks to them, I was fortunate enough to have a dream business that let me live an incredible life.
My lessons:
■ As you become more financially successful, your relationships with others might change. Be aware of it. (For example, I’m hyperconscious about different people’s ability to spend on a dinner or vacation. If I’m meeting a group of friends for dinner, I’ll always pick a restaurant that we can all easily afford. My nightmare is choosing a place that makes them feel financially pressured.)
■ You might be tempted to share specific numbers. If it’s with your spouse or a very close friend or family member, okay. But beyond those people, ask yourself why: Is it to communicate that you’re doing well? Or is it to subtly show off? Are there other ways of communicating this? Remember, sharing numbers without context is a bad move. Your intention might be good, but to someone who earns $60,000, telling them you’re on track to have a $1 million portfolio (or much more) doesn’t communicate safety and security. It communicates arrogance.
Talking Money with Your Significant Other
My fantasy is to host a TV show where couples have their first conversations about money together. No, I’m not going to mediate it. I’ll just be sitting in the background stirring the pot with crazy money questions (“What’s a money secret you haven’t told your partner yet?”), eating chips and salsa, grinning as I watch the nervous hands, the sweaty foreheads, and the stammering words. Damn, I live for this shit. HBO, give me a call.
Sure, you and your boyfriend or girlfriend might have had an occasional chat about money. But when you’re getting serious—maybe you just moved in together, or you just got married and you’re merging your finances together—it’s important to spend some time talking about your money and your financial goals. Talking about money with your partner might sound awkward, but I promise you it doesn’t have to be painful. As corny as it sounds, it can actually bring you closer together—if you know what to ask and you stay calm.
The specific tactics aren’t as important as your attitude going in.
The key is to be nonjudgmental and to ask lots of questions. Here are some sample questions:
■ “I’ve been thinking about my personal finances a lot and I’d love to get on the same page with you. Can we talk about it?”
■ “How do you think about money? Like some people like to spend more on rent and other people like to save a certain percentage. I think I overspend on eating out. Speaking broadly, what are your general thoughts about money?” (Notice that I started off broad, then offered examples, then offered a confession about an area I’m not great in. Start by being vulnerable with your own finances.)
■ “If you could wave a magic wand, what would you be doing with your money? For me, I know I should be investing in my 401(k), but to tell you the truth, I haven’t filled out the paperwork yet.” (Another admission—only if true, of course.)
■ “How should we use our money together? Have you thought about whether you’d want to change anything?” (This is where you can discuss how you share expenses, if you’re saving toward joint goals, or what fun things you want to use your money for.)
Notice that we’re not getting into the tactics of different investment options or making each other feel bad about things we “should have done.” The goal of this conversation should be to agree that money is important to both of you and that you want to work together to help each other with finances. That’s it—end on a high note!
The Big Meeting
This is the big day when you both lay bare all your finances and work through them together. But remember, it’s not really such a dramatic step, since you’ve been slowly working toward this for weeks.
It should take about four or five hours to prepare for this meeting. You’ll each want to bring the following:
■ A list of your accounts and the amount in each
■ A list of debts and what the interest rates are
■ Monthly expenses (see table for details on how to determine this)
■ Your total income
■ Any money that is owed to you
■ Your short-term and long-term financial goals
My wife and I did this with our finances. We started with the big picture—how much we earned and how much we’d saved—and over the course of many months, we went deeper into our accounts and our attitudes toward money. (It probably won’t take you that long to explore your accounts, but to fully understand each other’s money attitudes can take years.)
When you sit down, put the paper aside and start by talking about goals. From a financial perspective, what do you want? What kind of lifestyle do you expect? What about vacations in the next year? Does either of you need to support your parents?
Then look at your monthly spending. This will be a sensitive conversation, because nobody wants to be judged. But remember, keep an open mind. Show yours first. Ask, “What do you think I could be doing better?” And then it’s your partner’s turn.
Spend some time talking about your attitudes toward money. How do you treat money? Do you spend more than you make? Why? How did your parents talk about money? How did they manage it? (One of my friends has horrible money management skills, which is confusing because she’s so disciplined and smart. After years of knowing her, one day she told me that her dad had declared bankruptcy twice, which helped me understand the way she approached her finances.)
The most important goal of this conversation is to normalize talking about money, which is why we want to keep it as light as possible. The second goal is for you both to get to a “baseline” of money management, making sure you’re each saving and investing and paying off debt (if applicable). Essentially, you want to work through this book with your partner. You can get to all the complicated stuff, like joining accounts together, later!
Now, in the spirit of keeping this upbeat: I want you to set up a few short- and long-term savings goals, such as a year-end trip. At this point, it’s probably better not to run through all the numbers for a really large purchase, because that can get overwhelming. Just establish a savings goal or two and set up an automatic monthly transfer for each of you. Longer term, you and your partner should work together to get on the same page with your money attitudes. When you set a goal together (“We’re going to save enough to put a $30,000 down payment on a house”), you’ll both be able to commit to working toward it.
When One Person Earns More Than the Other
Once you and your significant other start sharing expenses, questions will invariably come up about how to handle money on a daily basis—especially if one of you has a higher income than the other. When it comes to splitting bills, there are a few options.
The first, and most intuitive, choice is to split all the bills fifty-fifty. But is that really fair to the person who earns less? They’re spending disproportionately more, which can lead to resentment and, often, bad money situations.
As an alternative, how about this idea from Suze Orman? She encourages dividing expenses based proportionately on income.
For example, if your monthly rent is $3,000 and you earn more than your partner, here’s how you might split it up:
dividing expenses based on income |
||
You |
Your partner |
|
Monthly income |
$5,000 |
$4,000 |
Rental payment |
$1,680 |
$1,320 |
(5,000/9,000 = 56%) |
(4,000/9,000 = 44%) |
|
There are lots of other options. You can each contribute a proportional amount into a joint household account and pay bills out of that. Or one person can cover certain expenses, like groceries, while the other handles rent.
The key takeaway here is to discuss it, come to an agreement that feels fair (remember, fifty-fifty is not the only definition of “fair”), and then check in every six to twelve months to make sure your agreement is still working for both of you.
What to Do if Your Partner Spends Money Irresponsibly
This is the most common complaint I hear from married readers. “Ramit,” they write, “my husband spends way too much money on video games. How are we supposed to save money? When I tell him this, he tunes me out and the next day, he’s buying something else.”
The solution is to elevate the conversation beyond you and your partner. If you keep trying to tell your partner not to spend money on something, he or she will resent it and ignore you. People absolutely hate to be judged for their spending, so if you continue making it personal (“You can’t spend that much on shoes each month!”), you’ll get nowhere.
Instead, keep it simple—the food analogy is to stop discussing how much dessert they eat and instead to agree on filling your plates with mostly vegetables and protein first. Turn here in Chapter 4 and look at how much it costs to save for common purchases like vacations, Christmas gifts, or a new car. Then have a conversation about what your savings goals are and how much you need to save to reach them—and come to a savings plan that you both agree on.
If you do this, the next time you have an argument about spending, you can steer it away from you and your partner and instead refocus on the plan. Nobody can get defensive when you’re pointing to a piece of paper (rather than pointing at the other person). It’s not about you deciding to splurge on a fancy dinner or them paying extra for a direct flight. It’s about your plan. Note that you and your partner will almost certainly have different approaches to reaching your savings and investing goals. For example, you might want to prioritize spending on organic food, while your partner might prioritize travel. As long as you both reach the goal, be flexible on how you arrive there. By focusing on the plan, not the person, you’re more likely to be able to sidestep the perception of being judgmental and work on bringing spending in line with your goals. This is the way handling money is supposed to work.
The $35,000 Question: Why We’re All Hypocrites About Our Wedding (and How to Save for Yours)
After the first edition of this book was published, I went on book tour across the country. I met readers in cities like New York, San Francisco, and Salt Lake City. I’ll never forget a young woman I met at my Portland meetup.
She came up after my talk and said, “I just wanted to thank you for your advice on weddings.” I was thrilled. She told me she’d set up a sub-savings account for her wedding and was automatically saving for her wedding every month.
I got excited. I love seeing real people who’ve applied my material. I asked if I could take a quick video where she shared her story.
Suddenly, she got visibly uncomfortable.
I could tell she was not into it, but I couldn’t figure out why. So I asked her. She looked down and said, “Because I’m not even engaged yet.”
Think about that: She thought it was “weird” to save for her wedding because she wasn’t engaged yet—that she would get judged by people.
I LOVED IT!
You know what I think is weird? NOT saving for predictable expenses you know will be coming. It’s too far off or too big to think about—so we avoid planning for the very items that will make a massive impact on our finances. These are the Big Wins.
Buckle up, because I’m about to break down my perspective on weddings—one that lots of people think is “weird.” But I don’t care if people think my techniques are weird. I care about designing our Rich Lives, together.
Of Course Your Wedding Will Be Simple
When my sister called me to tell me that she’d gotten engaged, I was out with my friends. I ordered champagne for everyone. When my other sister told me she was getting married a few months later, I ordered another round. Then I found out they were each having both an East Coast wedding and a West Coast wedding—for a total of four Indian weddings in a few months! Damn, this shit just got real.
That’s what got me started thinking about weddings. The average American wedding costs almost $35,000, which, the Wall Street Journal notes, is “well over half the median annual income in US households.” Hold on: Just wait a second before you start rolling your eyes. It’s easy to say, “These people should just realize that a wedding is about having a special day, not about putting yourself in crippling debt.”
But guess what? When it’s your wedding, you’re going to want everything to be perfect. Yes, you. So did I. It’ll be your special day, so why not spend the money to get the extra-long-stemmed roses or the filet mignon? My point isn’t to judge people for having expensive weddings. Quite the opposite: The very same people who spend $35,000 on their weddings are the ones who, a few years earlier, said the same thing you’re saying right now: “I just want a simple wedding. It’s ridiculous to go into debt for just one day.” And yet, little by little, they spend more than they planned—more than they can afford—on their special day. Look, there’s nothing wrong with wanting your day to be perfect. Let’s just acknowledge it and figure out how to achieve our goals.
So What Should You Do?
Knowing the astonishingly high costs of weddings, what can you do?
I see three choices:
Cut costs and have a simpler wedding. Great idea, but frankly, most people are not disciplined enough to do this. I don’t say this pejoratively, but statistically: Most people will have a wedding that costs tens of thousands of dollars.
Do nothing and figure it out later. This is the most common tactic. I spoke to a recently married person who spent the previous eight months planning her wedding, which ended up becoming a very expensive day. Now, months later, she and her husband don’t know how to deal with the resulting debt. If you do this, you made a huge mistake. But you are in good company, because almost everybody else does it too.
Acknowledge reality and plan for the wedding. Ask ten people which of these choices they’ll make, and every single one of them will pick this one. Then ask them how much money they’re saving every month for their wedding (whether they’re engaged or not). I guarantee the sputtering and silence will be worth it. Then again, I live for uncomfortable conversations.
If you think about it, we actually have all the information we need. The average age at marriage is about twenty-nine for men and twenty-seven for women. (I’m assuming a heterosexual marriage because we have more long-term data.) We know that the average cost of a wedding is about $35,000. So, if you really are committed to not going into debt for your wedding, here’s the astonishing amount you should be saving, whether you’re engaged or not:
How much should you be saving for your future wedding? |
||
based on the averages if you’re a woman: |
||
Your age |
Months until wedding |
Monthly amount needed to save |
22 |
60 |
$583.33 |
23 |
48 |
$729.17 |
24 |
36 |
$972.22 |
25 |
24 |
$1,458.33 |
26 |
12 |
$2,916.67 |
27 |
1 |
$35,000 |
based on the averages if you’re a man: |
||
Your age |
Months until wedding |
Monthly amount needed to save |
22 |
84 |
$416.67 |
23 |
72 |
$486.11 |
24 |
60 |
$583.33 |
25 |
48 |
$729.17 |
26 |
36 |
$972.22 |
27 |
24 |
$1,458.33 |
28 |
12 |
$2,916.67 |
29 |
1 |
$35,000 |
This can be intimidating, but I think of it differently. This is an eye-opener. Remember that these numbers are averages. You may decide to get married earlier, later, or not at all. I got married at 36! The key point here is that when you plan ahead, time is on your side. |
||
Most of us haven’t even conceived of saving this amount for our weddings. Instead, we say things like:
■ “Wow, that’s a lot. There’s no way I can save that. Maybe my parents will help . . .”
■ “My wedding won’t be like that. I’m just going to keep it small and simple . . .”
■ “I’ll think about it when I get engaged.”
■ “It would be weird to start saving for a wedding. I’m not even engaged yet . . .”
■ “I guess I have to marry someone rich.” (I’ve heard people say this, and they were only half joking.)
More commonly, though, we don’t think about this at all: one of the biggest expenditures of our lifetimes, which will almost certainly arrive in the next few years, and we don’t even sit down for ten minutes to think about it. Something’s broken here.
Surprising Wedding Math
I set up a simulation to see which levers were the most powerful in reducing wedding costs. To be honest, I thought reducing the number of guests would produce the biggest result.
I was wrong.
Interestingly, changing the number of guests doesn’t change the cost as much as you’d imagine. In the example on the next page, reducing the head count by 50 percent reduces the cost by only 25 percent.
Beyond the obvious—negotiating for better prices on the venue and food—the best suggestion I’ve heard about cutting wedding costs is to tackle the fixed costs. One of my friends, for example, actually flew in a photographer from the Philippines for his wedding. It sounds extravagant, but even with the flight, he saved $4,000. In another example, my sister had her invitations designed and printed in India for a fraction of what it would have cost in the United States.
Sample wedding Costs |
||
Variable costs |
150 guests |
75 guests |
Open bar/person |
$20 |
$20 |
Lunch/person |
$30 |
$30 |
Reception/person |
$120 |
$120 |
Subtotal |
$25,500 |
$12,750 |
Fixed costs |
||
DJ |
$1,000 |
$1,000 |
Photographer |
$4,000 |
$4,000 |
Rentals: tables, chairs, linens |
$1,500 |
$1,250 |
Flowers |
$750 |
$600 |
Hotel for guests |
$750 |
$750 |
Invitations |
$1,000 |
$750 |
Rehearsal dinner |
$1,500 |
$1,500 |
Honeymoon |
$5,000 |
$5,000 |
Dress |
$800 |
$800 |
Limo |
$750 |
$750 |
Rings |
$5,000 |
$5,000 |
Bridesmaids’ gifts |
$4,000 |
$4,000 |
Misc. |
$2,000 |
$2,000 |
Subtotal |
$28,050 |
$27,400 |
Grand total |
$53,550 |
$40,150 |
Should You Sign a Prenup?
One of my friends recently hosted a “prenup night,” where he invited several high-net-worth individuals to discuss their thoughts on prenuptial agreements. Among the people he invited—men, women, single people, married people, and a lawyer to answer common questions—one wrote back declining the invitation.
“Dude, this is the last thing I’d ever come to,” he said. He was married and had signed a prenup years earlier. When my friend asked why, he replied, “Imagine taking the person you love, then introducing lawyers to communicate with each other for months . . . all to create a contract of what happens if you get divorced. It was the worst time of my life.”
I didn’t have as bad an experience, but the financial conversations with Cass during the months when we developed our prenup were the hardest I’ve ever had. In fact, before getting into a serious relationship, I never thought I would have a prenup: I didn’t know anyone who had one, I didn’t think it applied to me, and I didn’t like the idea of “planning to fail.”
But I changed my mind. My wife and I signed a prenup. After months of researching it, hours of discussion, and tens of thousands of dollars of legal fees, this is what I learned.
The first thing I wondered is: Who needs a prenup? In pop culture, it’s celebrities, industrial tycoons, and wealthy heirs—three groups I’m not a member of.
As I researched further, I found that most people don’t need a prenup unless one of you has a disproportionate amount of assets or liabilities relative to the other—or there are complications like one of you owning a business or having an inheritance. Ninety-nine percent of people don’t need one. I learned that, in movies and on TV, prenups are portrayed as the tool that one person (the wealthier one) uses to screw the other. In reality, a prenup is an agreement on assets that were accumulated before the marriage, not just what’s jointly accumulated during the marriage—plus an agreement on what to do if the marriage ends.
I own a business, of course, so technically I should have one, but the decision went deeper than numbers; it went to identity. Am I the kind of person who should get a prenup? I remember calling my dad and asking him if Indian people ever got prenups. I was 100 percent sure he would be against it, since we’d never talked about prenups—ever—and my dad is very relaxed about money. Imagine my shock when he said, “No . . . I don’t think so. But I can see why people do it.” In retrospect, I think I was looking for my dad to validate my doubts by saying, “No way! We don’t do that.” When he didn’t, my mind was blown.
As I talked to more friends and told them that Cass and I were getting serious, a surprising number of them—especially the entrepreneurs—said, “You’re getting a prenup, right?”
I started to pay attention.
The next thing I realized was that the best information about prenups isn’t available publicly. For example, I tried searching for sample agreements and found virtually nothing. Much of the information online is written by anonymous redditors or, at worst, factually wrong. I later discovered that because prenups are, by definition, customized, high-stakes legal agreements for wealthy individuals, there is no incentive to publicize how they actually work. Take what you read online with a grain of salt.
I realized that in most other parts of life, we plan ahead: our investments, buying a house, where we want to live, getting a raise at work. But somehow, magically, when it comes to our relationships, we’re told that planning ahead is “unromantic.” As one divorced friend admitted, “I never thought I’d have to use this agreement. But I’m glad I signed it.”
Finally, after researching it for months, and because I was bringing a business and a much higher net worth to the marriage, I made the decision that I wanted to sign one.
Marriage is about finding a partner you love and want to spend the rest of your life with. It’s also a legal contract with significant financial ramifications. I plan for other financial contingencies, so after getting educated and consulting lots of experts, I realized that—of course—I should plan for the largest financial decision I’d ever make. As one friend said, “We signed our prenup at our best to prepare for the worst.”
How do you talk about this? Most of the information online is about how to bring up the issue with your significant other (and it’s almost always from the perspective of “how a guy should bring this up without making his female partner angry”). Some common advice recommends blaming your lawyers (“They made me do it!”). I hated this approach.
Here’s what I did.
Cass and I jointly decided to have a conversation about our future: kids, marriage, money, the works. In that conversation, I brought it up: “There’s something I want to talk about, and it’s important to me. It’s important to me that we talk about a prenup and sign one before we get married.”
Cass sat back, clearly not expecting this. “Wow,” she said. “I’m just absorbing this.”
We talked more and I told her why I wanted us to sign a prenup.
I reassured her that I planned for our marriage to be forever. “I love you and I’m excited to get married and be with you for the rest of my life.”
I told her why we were even talking about this. “Because of a few decisions and a lot of luck with my business, I’m coming to this relationship with more money than most people. I don’t think we’ll ever need to use a prenup, but it’s important to me that I protect the assets I’ve accumulated before we get married.”
I emphasized marriage was about creating a team. “When we get married, we’re a team. I want you to know I’ll look out for you, and I know you’ll look out for me.”
I emphasized our lifestyle. “You and I grew up almost the same. Both our moms are teachers. You see what I spend my money on—it’s not sports cars or bottle service. It’s basically living a comfortable life (with a few nice things). I love sharing this lifestyle with you and with our families.”
But I was firm about wanting to sign a prenup. “I’m proud of what I’ve accomplished with my business and finances. It’s important to me that I protect those assets in the worst case that we separate.”
Notice that:
■ I started by emphasizing that I love her and want to spend my life with her.
■ I took responsibility for bringing this up. It wasn’t my lawyers or accountants or anybody else forcing me to. This was something I wanted and it was important to me.
■ I spent the majority of the time talking about why I wanted a prenup (not how it’s structured or the numbers).
Cass told me she was open to it and she wanted to research more. And thus began a multi-month conversation about our prenup. We talked about what money meant to us, we circled back to why I wanted one, and when we dug in to the actual numbers, we talked about what those numbers meant.
At one point, Cass said, “You know, I’ve been really open with my finances. I feel a little uncomfortable because I don’t really know anything about your finances.”
DUH. I’d never actually walked her through my numbers. In fact, only my bookkeeper and accountant knew everything. That was a big mistake on my part. I shared my numbers with her that same day.
We talked about how we would travel: What if I want to stay at a nicer hotel and she wants to save money?
We talked about our businesses: Mine has been around for many years, while hers is just starting up. What if she didn’t hit her numbers one month? Or for three months in a row? What if my income decreased?
We talked about risk and security. How does money make you feel? Do you need a certain amount in your bank account to feel safe? Are you risk-averse? I’m willing to bet your partner thinks about risk and security differently than you do. Find out.
In retrospect, I really should have started our conversation six months before I proposed. I would have shared my finances with Cass earlier and spent a lot of time talking about what money means to each of us. For me, money represents hard work and luck. It also represents the opportunity to design our Rich Life—together.
I’d been thinking about money for fifteen years, especially as my assets began to grow. Cass had not. I was more casual about certain expenses, knowing that my financial team would figure out how to categorize and reconcile them down to the last penny. Cass was not.
I would have taken the time to gradually discuss different money issues regularly—not just telling her some of my financial decisions, but also asking about hers. For example, “I’m calling my bookkeeper to prepay my taxes. Here’s why I like to do that” and “How do you decide what to spend money on and what’s not worth it? Here’s how I think about it.”
That way, money wouldn’t be a surprise that was “sprung” on her. It would have been normal to talk about it regularly.
As the months went on, things got really tough. I felt resentful; she felt misunderstood. We both felt stuck—and this is when Cass brought up the idea of getting help. The minute she suggested it, I agreed: We ended up seeing a counselor who helped us navigate the tricky emotional issues of money. Imagine getting new conversational tools to talk about your hopes for money, your fear of money, your pride in money, and ultimately what your marriage will be about. This was immensely useful. We should have done it earlier. I’ve heard there are counselors who specialize in financial counseling, but we were in a rush and we found our counselor on Yelp.
In retrospect, I would have talked through how to manage our lawyers. Your lawyer naturally wants to protect you from every contingency, while your partner’s lawyer wants to protect them. But ultimately, you need to manage them, not let the lawyers lead the process.
Prenups dictate the terms of what happens in the case of divorce. What happens to your premarital assets (money you’ve earned before you marry)? What if you’ve bought a house—who moves out? How fast? What if you get divorced in one year? Twenty years? What if you have kids?
These are complex topics. There are prenups, postnups, amendments, and so much more. There are no easy formulas, which is why you need the help of lawyers.
Ultimately, we signed an agreement that we’re both satisfied with.
Going through this process, I was shocked at how nobody talks about this publicly—it’s completely taboo. Yet when I started discussing it privately with friends and advisers, I discovered that a surprising number of people actually had one! I want to shine a light on this topic and encourage you to discuss it openly with your partner.
The prenup process taught me more about how we both think about money than anything I’d ever done. We both hope we never have to use it.
Work and Money
Fundamentally, there are two ways to get more money. You can earn more or you can spend less. Cutting costs is great, but I personally find increasing earnings to be a lot more fun. Because most of our income comes from work, it’s an excellent place to optimize and earn more. In fact, negotiating your salary at a new job is the fastest legal way to make money. Your starting salary is even more important than you think, because it sets the bar for future raises and, in all likelihood, your starting salary at future jobs. A $1,000 or $2,000 salary increase, in other words, can equal many times that over your career. Now let me show you how to get thousands by negotiating for a better salary.
Negotiating Your Salary, I Will Teach You to Be Rich Style
In Chapter 4, I wrote about asking for a raise at your current job. But the single best time to negotiate salary is when you’re starting a new job. You have the most leverage then, and—with some basic preparation—you can earn $5,000 or $10,000 in a simple ten-minute conversation. Thousands of my students have used my YouTube videos, courses, and the scripts below to increase their salaries.
When I coach people on negotiation, I pretend to be the hiring manager and ask the toughest questions they might get. When we’re finished—four to five hours later—they’re exhausted and cranky. But the people I’ve coached end up negotiating, on average, $6,000 more in salary. On my website, we offer a course that includes videos of actual negotiations and word-for-word scripts—but for now, let me give you some of our best material right here.
Negotiating is 90 percent about mindset and 10 percent about tactics. Most people don’t believe they should negotiate. They’re afraid of being “rude” or of having the employer rescind their offer. That almost never happens, especially because the company may have already spent up to $5,000 recruiting you. If you negotiate, you explicitly communicate that you value yourself more highly than the average employee. Are you average? If not, why would you settle for an average salary?
Because of your book, and subsequent teachings, my salary has gone from $25,000 a year to $80,000 a year. It doesn’t matter if it’s a yard sale, buying a car, or getting a higher salary, I hit negotiations hard and prepared. I get something extra, whether it’s time or money, every time I negotiate. Your book set me on that path.
—Jason Flamm, 35
The basics of negotiating are very simple:
1. Remember that nobody cares about you. Most new employees come to the table talking about how much they want to make. To be totally honest, as a hiring manager, I don’t really care what you want to make. Personally, I’d like to be fed octopus ceviche on command. So what? When you’re negotiating, remember this: When it comes to you, your manager cares about two things—how you’re going to make him or her look better, and how you’re going to help the company do well.
Negotiating tactic: Always frame your negotiation requests in a way that shows how the company will benefit. Don’t focus on the amount you’ll cost the company. Instead, illustrate how much value you can provide the company. If your work will help them drive an initiative that will make $1 million for the company, point that out. Tie your work to the company’s strategic goals—and show the boss how you’ll make her look good. Highlight the ways you’ll make your boss’s life easier by being the go-to person she can hand anything to. And remember that your company will make much more off your work than they pay you, so highlight the ways you’ll help your company hit its goals. Your key phrase here is “Let’s find a way to arrive at a fair number that works for both of us.”
2. Have another job offer—and use it. This is the single most effective thing you can do to increase your salary. When you have another job offer, your potential employers will have a newfound respect for your skills. People like others who are in demand.
Negotiating tactic: Interview with multiple companies at once. Be sure to let each company know when you get another job offer, but don’t reveal the amount of the exact offer—you’re under no obligation to. In the best case, the companies will get into a bidding war and you’ll profit while watching two multinational firms rumble over you. I can think of no better way to spend a casual weekday.
3. Come prepared (99 percent of people don’t). Don’t just pick a salary out of thin air. First, visit salary.com and payscale.com to get a median amount for the position. Then, if you can, talk to people currently at the company (if you know someone who has recently left, even better—they’ll be more willing to give you the real information) and ask what the salary range really is for the job. Finally—and this is important—bring a plan of how you’ll hit your goals to the negotiating session.
Negotiating tactic: Most of the negotiation happens outside the room. Call your contacts. Figure out the salary amount you’d love, what you can realistically get, and what you’ll settle for. And don’t just ask for money. Literally bring a strategic plan of what you want to do in the position and hand it to your hiring manager. Do you realize how few people come to a negotiation with a plan for their role? This alone could win you $2,000 to $5,000. And, of course, it allows you to negotiate on the value you’re going to bring to the company, not just the amount they’ll pay you.
4. Have a toolbox of negotiating tricks up your sleeve. Just as in a job interview, you’ll want to have a list of things in your head that you can use to strengthen your negotiation. Think about your strong points and figure out ways you might be able to bring them to the hiring manager’s attention. For example, I often ask, “What qualities make someone do an extraordinary job in this position?” If they say, “The person should be very focused on metrics,” I say, “That’s great that you said that—we’re really on the same page. In fact, when I was at my last company, I launched a product that used an analytical package to . . .”
Negotiating tactic: Have a repertoire of your accomplishments and aptitudes at your fingertips that you can include in your responses to commonly asked questions. These should include the following:
■ Stories about successes you’ve had at previous jobs that illustrate your key strengths
■ Questions to ask the negotiator if the conversation gets off track (“What do you like most about this job? . . . Oh, really? That’s interesting, because when I was at my last job, I found . . .”)
5. Negotiate for more than money. Don’t forget to discuss whether or not the company offers a bonus, stock options, flexible commuting, or further education. You can also negotiate vacation and even job title. Note: Startups don’t look very fondly on people negotiating vacations, because it sets a bad tone. But they love negotiating stock options, because top performers always want more, as it aligns them with the company’s goals.
Negotiating tactic: Your line is “Let’s talk about total comp,” which refers to your total compensation—not just salary, but everything. Treat them each as levers: If you pull one up, you can afford to let another fall. Use the levers strategically—for example, by conceding something you don’t really care about—so you can both come to a happy agreement.
6. Be cooperative, not adversarial. If you’ve gotten to the point of negotiating a salary, the company wants you and you want them. Now you just need to figure out how to make it work. It’s not about you demanding more or them screwing you for less. Negotiation is about finding a cooperative solution to creating a fair package that will work for both of you. So check your attitude: You should be confident, not cocky, and eager to find a deal that benefits you both.
Negotiating tactic: The phrase to use here is “We’re pretty close . . . Now let’s see how we can make this work.”
7. Smile. I’m not joking. This is one of the most effective techniques in negotiation. It’s a disarming technique to break up the tension and demonstrates that you’re a real person. When I was interviewing for college scholarships, I kept getting passed over until I started smiling—and then I started winning a bunch of them.
Negotiating tactic: Smile. Really, do it.
8. Practice negotiating with multiple friends. This sounds hokey, but it works better than you can imagine. If you practice out loud, you’ll be amazed at how fast you improve. Yet nobody ever does it because it feels “weird.” I guess it also feels “weird” to have an extra $10,000 in your pocket, jackass. For example, one of my friends thought it was too strange to practice negotiating, so when he faced a professional hiring manager, he didn’t have a prayer. Later, he came to me like a clinically depressed Eeyore, whining about how he didn’t negotiate. What could I say? This lack of practice can cost, on average, $5,000 to $10,000.
Negotiating tactic: Call over your toughest, most grizzled friend and have them grill you. Don’t laugh during the role play—treat it like it’s a real negotiation. Better yet, videotape it—you’ll be surprised how much you learn from this. If it sounds ridiculous, think about the benefits of not only the additional money, but the respect you’ll get from your boss for a polished, professional negotiation.
9. If it doesn’t work, save face. Sometimes the hiring manager simply won’t budge. In that case, you need to be prepared to either walk away or take the job with a salary that’s lower than you wanted. If you do take the job, always give yourself an option to renegotiate down the line—and get it in writing.
Negotiating tactic: Your line here is “I understand you can’t offer me what I’m looking for right now. But let’s assume I do an excellent job over the next six months. Assuming my performance is just extraordinary, I’d like to talk about renegotiating then. I think that’s fair, right?” (Get the hiring manager to agree.) “Great. Let’s put that in writing and we’ll be good to go.”
When I first read the IWT book (around 2012), I was making $10.25 per hour, working full-time at a hotel front desk. After reading your section on negotiation, I negotiated my first raise. Not a crazy raise, but I wouldn’t have gotten it if I hadn’t read your book. Money Made: $520. I’ve used your advice to negotiate two raises since then, once to go from $35,000 to $42,000, and once to go from $40,000 (I moved jobs and started in a new field) to $50,000. Money Made: $7,000 + $1,000 (YTD). So in raises alone, I figure I’ve made about $8,500 due to buying your book.
—Elizabeth Sullivan-Burton, 30
If you want to learn more about negotiation, I’ve put together a package of in-depth negotiation videos and tips. Check out iwillteachyoutoberich.com/bonus/ for details.
Five Things You Should Never Do in a Negotiation
1. Don’t tell them your current salary. Why do they need to know? I’ll tell you: So they can offer you just a little bit more than what you’re currently making. If you’re asked, say, “I’m sure we can find a number that’s fair for both of us.” If they press you, push back: “I’m not comfortable revealing my salary, so let’s move on. What else can I answer for you?” (Note: Typically first-line recruiters will ask for these. If they won’t budge, ask to speak to the hiring manager. No recruiter wants to be responsible for losing a great candidate, so this will usually get you through the gatekeeper. If the gatekeeper insists on knowing, I recommend you play ball, realizing you can negotiate later.) And in New York, asking for your current salary is actually against the law.
2. Don’t make the first offer. That’s their job. If they ask you to suggest a number, smile and say, “Now come on, that’s your job. What’s a fair number that we can both work from?”
3. If you’ve got another offer from a company that’s generally regarded to be mediocre, don’t reveal the company’s name. When asked for the name, just say something general but true, like “It’s another tech company that focuses on online consumer applications.” If you say the name of the mediocre company, the negotiator is going to know that he’s got you. He’ll tear down the other company (which I would do too), and it will all be true. He won’t focus on negotiating, he’ll just tell you how much better it will be at his company. So withhold this information.
4. Don’t ask “yes” or “no” questions. Instead of “You offered me fifty thousand dollars. Can you do fifty-five thousand?” say, “Fifty thousand dollars is a great number to work from. We’re in the same ballpark, but how can we get to fifty-five thousand?”
5. Never lie. Don’t say you have another offer when you don’t. Don’t inflate your current salary. Don’t promise things you can’t deliver. You should always be truthful in negotiations.
Case Study
How My Friend Got a 28 Percent Raise by Doing Her Homework
I helped my friend Rachel, who’s twenty-five, negotiate a job offer, and at my request, she wrote up the process. Here’s what she said:
First the big picture: I got a 28 percent raise in base salary, which comes out to more than $1,000/hour based on how much time I spent getting the job. Plus stock options, which at least allow me the luxury of dreaming about being a gazillionaire.
I’ve applied to, and been ignored for, many, many job openings—more than I care to share. Despite this, I decided to jump back into the job market a few months ago after doing marketing for a large hotel in San Francisco. I found a marketing manager position on a website and through it I sent in a résumé, which snagged a phone interview, which was followed by an in-person interview, which was followed by an offer letter.
Sounds like a cakewalk, right? Actually, the VP of marketing told me that I had the least experience of anyone she was interviewing—then she hired me anyway. I can’t pinpoint exactly why I was successful in getting this job in contrast to all of my past attempts, but I can think of a few things that probably made the difference. My strategies weren’t rocket science, but they involved time and effort, two things that definitely make a difference in separating you from the pack.
1. I broke down their job posting line by line and wrote down my skills and projects I’d worked on that directly related to their description.
2. I researched their website extensively, read articles about the company, and looked up the management teams’ backgrounds so that I could speak knowledgeably about the company and why I was a good fit.
3. I prepared a spiel about my somewhat eclectic résumé, which can look unfocused if not set in the proper context.
4. I called an expert on startups, finance, bargaining, and a half dozen other things to get some outside counsel. Ramit gave me some key advice, including “Tell them you want to get your hands dirty” and “Suggest three things you would do to improve/enhance their marketing efforts.” Yes, he does talk just like he writes on his blog.
5. I actually took Ramit’s advice, which is where a lot of my work came in. I dreamed up three proposals for generating greater interest at trade shows, better responses to direct marketing efforts, and increased name recognition in the general population.
Wow! So the interview must have gone really well, right? Not quite . . . and Rachel’s description of what she did is a classic case of turning a missed opportunity into a chance to win.
I never actually found a good opportunity to mention my ideas (this despite a four-hour interview). I emailed the proposals to my potential boss instead. I then individually emailed every person I spoke to that day to thank them for their time. Might have been overkill, but then again, my email flurry may have been the tipping point for my hiring.
My references later told me that the VP had been impressed with my energy and intelligence and had decided she would rather train someone with potential than hire a more experienced, and perhaps less flexible, individual. Three weeks of research and planning paid off with an entirely new career—a pretty stellar return on the investment of my time.
Just notice how this is the exact embodiment of everything this book stands for. Rachel carefully researched her options, took action, reached out to more experienced people for advice, and came in with a presentation that was better than everyone else’s (so much so that she actually didn’t have to negotiate much). And when she didn’t get a chance to show off all of her presentation, she sent it by email—even though some people would think that was “weird.”
Getting rich isn’t about one silver bullet or secret strategy. It happens through regular, boring, disciplined action. Most people see only the results of all this action—a winnable moment or an article in the press. But it’s the behind-the-scenes work that really makes you rich.
How to Save Thousands on Big-Ticket Items
When it comes to saving money, big purchases are your chance to shine—and to dominate your clueless friends who are so proud of not ordering Cokes when they eat out, yet waste thousands when they buy large items like furniture, a car, or a house. When you buy something major, you can save massive amounts of money—$2,000 on a car or $40,000 on a house—that will make your other attempts to save money pale in comparison. Big-ticket items like these, however, are where people most commonly make mistakes. They don’t comparison shop, they overpay because a salesperson cons them into spending too much, and worst of all, they then think they got a good deal. Don’t be one of these people!
It’s strange how many people make an effort to save on things like clothes and eating out, but when it comes to large purchases like cars, make poor decisions and erase any savings they’ve accumulated along the way.
Let me first tell you that the single most important decision associated with buying a car is not the brand or the mileage. Surprisingly, from a financial perspective, the most important factor is how long you keep the car before you sell it. You could get the best deal in the world, but if you sell the car after four years, you’ve lost money. Instead, understand how much you can afford, pick a reliable car, maintain it well, and drive it for as long as humanly possible. Yes, that means you need to drive it for more than ten years, because it’s only once you finish the payments that the real savings start. And by taking good care of your car, you can save even more enormous piles of money over the long term—and you’ll have a great car.
There are four steps to buying a car: Budgeting, Picking a Car, Negotiating Like an Indian, and Maintaining Your Car.
First, ask yourself how buying a car fits into your spending and saving priorities (see Chapter 4). If you’re satisfied with a used Toyota Corolla and would rather put your extra money toward investing for growth, great. On the other hand, if you really love BMWs and can afford to buy one, then you should do it. This is conscious spending, applied.
Once you’ve thought about where your car fits into your priorities, you need to look at your Conscious Spending Plan and decide what you’re willing to allocate toward your car each month. This is the number you keep in your back pocket as the number you can afford to spend up to. Ideally you’ll spend less. (Note: Ignore the random offers for “$199/month.” Those are scammy introductory rates that are simply not real.)
So, knowing that there will be other expenses involved in the total expense of having a car, you want to decide how much you want to spend on the car itself. For example, if you can afford a total monthly payment of $500 toward your car, you can probably afford a car that costs $200 to $250 per month. (For example, when I lived in San Francisco, my monthly car payment of $350.75 actually added up to around $1,000 when I factored in insurance, gas, maintenance, and $200/month in parking.) With a budget of around $200 per month for your car itself, that means you can afford a car that costs around $12,000 over five years. Pretty sobering compared with what most people think they can afford, right? This shows you how easy it is to overspend on a car.
Don’t Buy a Horrible Car
Please, pick a good car. There are some cars that are just objectively bad decisions that nobody should ever buy. For example, has anyone with an IQ over 42 ever consciously chosen to buy a Ford Focus? Sadly, many people I know are seduced by the shiny new cars at the dealership. But it’s important to remember that you’re not just buying the car for today—you’re buying it for the next ten-plus years. I have friends who’ve bought expensive cars. Some of them love cars and they love driving every single day. For others, the “newness” wore off and now it’s just a tool for their daily commute—an expensive tool they regret.
First, any car you evaluate must fit within your budget. This will eliminate most cars automatically. Do not even look at cars you can’t afford.
Second, the car must be a good car. “But, Ramit,” you might say, “who can say what a good car is? One man’s trash is another man’s treasure.” Listen, there is one person who will say what a good car is: me. Here’s what makes a good car:
■ Reliability. When I bought my car, above all, I wanted one that would not break down. I have enough stuff going on in my life, and I want to avoid car-repair issues that cost time and money as much as possible. Because this was a high priority, I was willing to pay slightly more for it.
■ A car you love. I’ve written time and time again about consciously spending on the things you love. For me, since I’d be driving the car for a long time, I wanted to pick one that I really enjoyed driving. And like a dutiful Indian son, I love not having to worry about it breaking down.
■ Resale value. One of my friends bought a $20,000 Acura, drove it for about seven years, and then sold it for 50 percent of the price. That means she got a fantastic deal on driving a new car for seven years. To check out how your potential cars will fare, visit the Kelley Blue Book site at kbb.com and calculate resale prices in five, seven, and ten years. You’ll be surprised how quickly most cars depreciate and how others (Toyotas and Hondas especially) retain their value.
■ Insurance. The insurance rates for a new and used car can be pretty different. Even if they’re only slightly different (say, $50/month), that can add up over many years.
■ Fuel efficiency. It makes a lot of sense to factor this in, especially if you drive a lot. This could be an important factor in determining the value of a car over the long term.
■ The down payment. This is important. If you don’t have much cash to put down, a used car is more attractive because the down payment (i.e., the money you have to pay up front when you buy the car) is typically lower. And if you put $0 down, the interest charges on a new car will be much more. In my case, I had cash available to put down.
■ Interest rate. The interest rate on your car loan will depend on your credit, which is why having a good credit score matters. If you have multiple sources of good credit, your interest rate will be lower. This becomes more important over a longer-term loan. Each car dealership will negotiate differently. Don’t be afraid to walk out if the dealer tries to change the finance terms on you at the last minute. This is a common trick.
Dos and Don’ts for Buying a Car
Do
■ Calculate total cost of ownership (TCO). This means you figure out how much you’ll be spending over the life of the car—these expenses can have a big effect on your finances. Besides the cost of the car and the interest on your loan, the TCO should include maintenance, gas, insurance, and resale value. By understanding even a rough ballpark of how much these “invisible” costs will run you, you’ll be able to save more accurately—and avoid surprises when you get a $600 car repair fee.
■ Buy a car that will last you at least ten years, not one that looks cool. Looks fade, and you’re still going to be stuck with the payments. Optimize for the long term.
Don’t
■ Lease. Leasing nearly always benefits the dealer, not you. The two exceptions are people who want the newest car and are willing to pay a lot for it, and the occasional business owner who leases a car for tax benefits. For most IWT readers, leasing is a bad decision. Buy a car and hold it for the long term. Years ago, Consumer Reports found that buying an average sedan, the Honda Accord, would cost “$4,597 less over five years than leasing the exact same model.” I ran the same calculation with a new model Toyota Camry and found the same thing: Buying would save $6,000 over six years versus leasing—and even more over time.
■ Sell your car in fewer than seven years. The real savings come once you’ve paid off your car loan and driven it for as long as possible. Most people sell their cars far too early. It’s much cheaper to maintain your car well and drive it into the ground.
■ Assume you have to buy a used car. Run the numbers. Over the long term, a new car may end up saving you money if you pick the right new car, pay the right price, and drive it for a long time. See my story on buying a new car.
■ Stretch your budget for a car. Set a realistic budget for your car and don’t go over it. Be honest with yourself. Other expenses will come up—maybe car related, maybe not—and you don’t want to end up struggling because you can’t afford your monthly car payment.
Conquering Car Salespeople by Outnegotiating Them
I’ve seen more than my share of negotiations—including watching my dad negotiate with car dealers for multiple days. I think we actually ate breakfast at a dealership once.
You must negotiate mercilessly with dealers. I have never seen as many people make bad purchasing decisions as when they’re in a car dealer’s office. If you’re not a hardball negotiator, take someone with you who is. If possible, buy a car at the end of the year, when dealers are salivating to beat their quotas and are far more willing to negotiate. Their saliva is your salvation!
I also highly recommend using Fighting Chance (fightingchance.com), an information service for car buyers, to arm yourself before you negotiate. For the price, the service is completely worth it. You can order a customized report of the exact car you’re looking for, which will tell you exactly how much car dealers are paying for your car—including details about little-known “dealer withholding.” For instance, I spent a month on the site researching and planning and then bought my car for $2,000 under invoice. The service also provided specific tips for how to negotiate from the comfort of your sofa. You don’t even have to set foot in a dealership until the very end.
Here’s how I did it: When I decided to buy—at the end of December, when salespeople are desperate to meet their quotas—I reached out to seventeen car dealers and told them exactly which car I wanted. I said I was prepared to buy the car within two weeks and, because I knew exactly how much profit they would make off the car, I would go with the lowest price offered to me. The same day, as I sat back with a cup of Earl Grey tea and three tacos with habanero salsa, responses started rolling in from the dealers. After I had all the offers, I called the dealers, told them the lowest price I’d received, and gave each of them a chance to beat it. This resulted in a bidding war that led to a downward spiral of near-orgasmic deals.
In the end, I chose a dealer in Palo Alto who sold me the car for $2,000 under invoice—a nearly unheard-of price. I didn’t have to waste my time going to multiple dealerships, and I didn’t have to bother with slimy car salespeople. I went into only one dealer’s office: the winning one.
Boring but Profitable: Maintaining Your Car
I know that keeping your car well maintained doesn’t sound sexy, but it will make you rich when you eventually sell your car. So take your car’s maintenance as seriously as your retirement savings: As soon as you buy your car, enter the major maintenance checkpoints into your calendar so you remember them. Here’s a hint: The average car is driven about fifteen thousand miles per year. You can use that number as a starting point to calculate a maintenance schedule based on the car manufacturer’s instructions.
Of course, you also need to have regular oil changes, watch your tire pressure, and keep your car clean. I keep a record of each service I have, along with any notes. When I sell my car, I’ll show the documentation to the buyer to prove how meticulous I’ve been (and charge the buyer accordingly). People often forget this and slap their foreheads when they go to sell their car, only to be negotiated down (by someone like me) for not keeping detailed maintenance records. Don’t let yourself get outmaneuvered by a lack of paperwork.
The Biggest Big-Ticket Item of All: Buying a House
If I asked people, “Hey, would you like to make a hundred thousand dollars in one year?” who wouldn’t say yes? And if I sweetened the offer by saying you’d have to spend only ten hours per week that year to do it, I guarantee every single person I asked would go for it. So why don’t people spend that amount of time researching the biggest purchase of their lives? By doing the research that 99 percent of other people don’t, you can save tens of thousands of dollars on your house over the life of your loan.
Buying a house is the most complicated and significant purchase you’ll make, so it pays to understand everything about it beforehand. I mean everything. This isn’t a pair of pants at Banana Republic. When you buy a house worth hundreds of thousands of dollars, you should be an expert on common mistakes most home buyers make. You should know all the common real estate terms, as well as how to push and pull to get the best deal. And you should understand that houses are primarily for living in, not for making huge cash gains.
Look, if you buy a house without opening up a spreadsheet and entering some numbers, you are a fool. Remember, if you can save $75,000 or $125,000 over the entire course of a thirty-year loan just by educating yourself a little, it’s certainly worth your time. I’m going to help you figure out if buying a house is right for you, and then I’m going to give you an overview of the things you’ll need to do over the next few months—at least three months, probably twelve—to prepare to buy. I can’t cover all the tips here, but I’ll get you started with the basics.
Who Should Buy a House?
From our earliest days, we’re taught that the American dream is to own a house, have 2.5 kids, and retire into the sunset. In fact, I have friends who, when they graduated from college, wanted their first major purchase to be a house. What the hell? No spending plan, no 401(k), but they wanted to buy a house? When I ask my younger friends why they want to buy a house, they stare at me blankly. “They’re a good investment,” they reply like brainless automatons who are at risk of being smacked by me.
Actually, houses really aren’t very good investments in general. But I’ll cover that in a minute. Back to who should buy:
First and foremost, you should buy a house only if it makes financial sense. In the olden days, this meant that your house would cost no more than 2.5 times your annual income, you’d be able to put at least 20 percent of the purchase price down, and the total monthly payments (including the mortgage, maintenance, insurance, and taxes) would be about 30 percent of your gross income. If you make $50,000 per year before taxes, that means your house would cost $125,000, you’d put $25,000 down, and the total monthly payments would be $1,250 per month. Yeah, right. Maybe if you live in the Ozarks.
Things are a little different now, but that doesn’t explain the stupidity of people who purchase houses for ten times their salaries with zero money down. Sure, you can stretch those traditional guidelines a little, but if you buy something you simply can’t afford, it will come around and bite you in the ass.
Let me be crystal clear: Can you afford at least a 20 percent down payment for the house? If not, set a savings goal and don’t even think about buying until you reach it. Even if you’ve got a down payment, you still need to be sure you make enough money to cover the monthly payments. You might be tempted to think, “Oh, I’m paying $1,000/month for my apartment, so I can definitely afford $1,000 for a house!” Wrong. First off, chances are you’ll want to buy a nicer house than you’re currently renting, which means the monthly payment will likely be higher. Second, when you buy a house, you’ll owe property taxes, insurance, and maintenance fees that will add hundreds per month. If the garage door breaks or the toilet needs repairing, that’s coming out of your pocket, not a landlord’s—and home repairs are ridiculously expensive. So even if your mortgage payment is the same $1,000/month as your rental, your real cost will be about 40 to 50 percent higher—in this case, more like $1,500/month when you factor everything in.
Bottom line: If you don’t have enough money to make a down payment and cover your total monthly costs, you need to set up a savings goal and defer buying until you’ve proven that you can hit your goal consistently, month after month.
Next thing to think about: Are the houses you’re looking at within your price range? It’s funny how so many people I know want to live only in the grandest possible house. Sure, your parents may live in one of those now, but it probably took them thirty or forty years to be able to afford it. Unless you’re already loaded, you need to readjust your expectations and begin with a starter house. They’re called that for a reason—they’re simple houses that require you to make trade-offs but allow you to get started. Your first house probably won’t have as many bedrooms as you want. It won’t be in the most amazing location. But it will let you get started making consistent monthly payments and building equity.
Finally, will you be able to stay in the house for at least ten years? Buying a house means you’re staying put for a long time. Some people say five years, but the longer you stay in your house, the more you save. There are a few reasons for this: When you go through a traditional real estate agent, there are large transaction fees—usually 6 percent of the selling price. Divide that by just a few years, and it hits you a lot harder than if you had held the house for ten or twenty years. There are also the costs associated with moving. And depending on how you structure your sale, you may pay a significant amount in taxes. The bottom line here: Buy only if you’re planning to live in the same place for ten years or more.
I have to emphasize that buying a house is not just a natural step that everyone has to take at some point. Too many people assume this and then get in over their heads. Buying a house changes your lifestyle forever. No matter what, you have to make your monthly payment every month—or you’ll lose your house and watch your credit tank. This affects the kinds of jobs you can take and your level of risk tolerance. It means you’ll need to save for a six-month emergency plan in case you lose your job and can’t pay your mortgage. In short, you really need to be sure you’re ready for the responsibility of being a homeowner.
Of course, there are certainly benefits to buying a house, and, like I said, most American households will purchase one in their lifetime. If you can afford it and you’re sure you’ll be staying in the same area for a long time, buying a house can be a great way to make a significant purchase, build equity, and create a stable place to raise a family.
The Truth: Real Estate Is a Poor Investment for Most Individual Investors
Americans’ biggest “investments” are their houses, but real estate is also the place where Americans lose the most money. Real estate agents (and most homeowners) are not going to like me after this section, but in truth, real estate is the most overrated investment in America. It’s a purchase first—a very expensive one—and an investment second.
If you’re thinking of your primary residence as an investment, real estate provides mediocre returns at best. First, there’s the problem of risk. If your house is your biggest investment, how diversified is your portfolio? If you pay $2,000 per month to a mortgage, are you investing $6,000 elsewhere to balance your risk? Of course not. Second, the facts show that real estate offers a very poor return for individual investors. Yale economist Robert Shiller found that from 1915 through 2015, home prices have increased, on average, only 0.6 percent per year.
I know this sounds crazy, but it’s true. We fool ourselves into thinking we’re making money when we’re simply not. For example, if someone buys a house for $250,000 and sells it for $400,000 twenty years later, they think, “Great! I made $150,000!” But actually, they’ve forgotten to factor in important costs like property taxes, maintenance, and the opportunity cost of not having that money in the stock market. The truth is that, over time, investing in the stock market has trumped real estate quite handily—which is why renting can be a great decision. I rent by choice!
I’m not saying buying a house is always a bad decision. (In fact, I created a sub-savings account called “Down Payment for Future House,” knowing that I will eventually buy.) It’s just that you should think of it as a purchase, rather than as an investment. And, just as with any other purchase, you should buy a house and keep it for as long as possible. Do your homework and then negotiate. And know your alternatives (like renting).
Buying vs. Renting: The Surprising Numbers
I want to show you why renting is actually a smart decision for many people, especially if you live in an expensive area like New York or San Francisco. But first, let’s get rid of the idea that renters are “throwing away money” because they’re not building equity. Any time you hear clichés like that—from any area of personal finance—beware. It’s just not true, and I’ll show you the numbers to proe it.
The total price of buying and owning a house is far greater than the house’s sticker price. Take a look at some sample numbers.
The Cost of Buying a Home Over 30 Years |
|
Purchase price (typical single-family home) |
$220,000 |
Down payment (10%) |
$22,000 |
Closing costs |
$11,000 |
Private mortgage insurance ( 76 payments of 0.5% PMI at $82.50) |
$6,270 |
Interest @ 4.5% |
$ 163,165.29 |
Taxes & insurance ($3,400/year) |
$102,000 |
Maintenance ($2,200/year) |
$66,000 |
Major repairs & improvements |
$200,000 |
Total costs |
$778,408.73 |
|
Note: Mortgage rates change over time. Calculate your own numbers at mortgagecalculator.org. |
|
In the example above, your $220,000 house actually costs you over $750,000. And I’m not even including moving costs, the cost of new furniture, renovations, and the real estate fees when you sell the house—all of which will add up to tens of thousands of dollars.
You can agree or disagree with my exact numbers; regardless, run them yourself. I want you to understand all the phantom costs involved.
When you rent, you’re not paying all those other assorted fees, which effectively frees up tons of cash that you would have been spending on a mortgage. The key is investing that extra money. If you do nothing with it (or, worse, spend it all), you might as well buy a house and use it as a forced savings account. But if you’ve read this far, chances are good that you’ll take whatever extra money you have each month and invest it.
Of course, like buying, renting isn’t best for everyone. It all depends on your individual situation. The easiest way to see if you should rent or buy is to use the New York Times’s excellent online calculator “Is It Better to Rent or Buy?” It will factor in maintenance, renovations, capital gains, the costs of buying and selling, inflation, and more.
Becoming a Homeowner: Tips for Buying Your New House
Like any area of personal finance, there are no secrets to buying a house. But it does involve thinking differently from most other people, who make the biggest purchase of their lives without fully understanding the true costs. Although I may be aggressive with my asset allocation, I’m conservative when it comes to real estate. That means I urge you to stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross income. If you can’t do that, wait until you’ve saved more. It’s okay to stretch a little, but don’t stretch beyond what you can actually pay. If you make a poor financial decision up front, you’ll end up struggling—and it can compound and become a bigger problem throughout the life of your loan. Don’t let this happen, because it will undo all the hard work you put into the other areas of your financial life.
If you make a good financial decision when buying, you’ll be in an excellent position. You’ll know exactly how much you’re spending each month on your house, you’ll be in control of your expenses, and you’ll have money to pay your mortgage, invest, take vacations, buy a TV, or whatever else you want to do.
Here are some of the things you’ll need to do to make a sound decision.
1. Check your credit score. The higher your score, the better the interest rate on your mortgage will be. If your credit score is low, it might be a better decision to delay buying until you can improve your score. (See details on increasing your score.) Good credit translates into not only a lower total cost, but lower monthly payments. The table below from myfico.com shows how interest rates affect your mortgage payments on a thirty-year fixed $220,000 loan.
The Effect of Credit Scores on a Mortgage Payment |
|||
FICO score |
APR* |
Monthly payment |
Total interest paid |
760–850 |
4.18% |
$1,073 |
$166,378 |
700–759 |
4.402% |
$1,102 |
$176,696 |
680–699 |
4.579% |
$1,125 |
$185,021 |
660–679 |
4.793% |
$1,153 |
$195,200 |
640–659 |
5.223% |
$1,211 |
$216,022 |
620–639 |
5.769% |
$1,287 |
$243,146 |
|
These numbers change over time. For the latest figures, search for “my FICO loan savings calculator.” |
|||
2. Save as much money as possible for a down payment. Traditionally, you have to put 20 percent down. If you can’t save enough to put 20 percent down, you’ll have to get something called Private Mortgage Insurance (PMI), which serves as insurance against your defaulting on your monthly payments. PMI typically costs between 0.5 percent to 1 percent of the mortgage, plus an annual charge. The more you put down, the less PMI you’ll have to pay. If you haven’t been able to save at least 10 percent to put down, stop thinking about buying a house. If you can’t even save 10 percent, how will you afford an expensive mortgage payment, plus maintenance and taxes and insurance and furniture and renovations and . . . you get the idea. Set a savings goal for a down payment, and don’t start looking to buy until you reach it.
Myths About Owning a Home
“Prices in real estate always go up” (or “The value of a house doubles every ten years”). Not true. Net house prices haven’t increased when you factor in inflation, taxes, and other homeowner fees. They appear to be higher because the sticker price is higher, but you have to dig beneath the surface.
“You can use leverage to increase your money.” Homeowners will often point to leverage as the key benefit of real estate. In other words, you can put $20,000 down for a $100,000 house, and if the house climbs to $120,000, you’ve effectively doubled your money. Unfortunately, leverage can also work against you if the price goes down. If your house declines by 10 percent, you don’t just lose 10 percent of your equity—it’s more like 20 percent once you factor in the 6 percent Realtor’s fees, the closing costs, new furniture, and other expenses.
“I can deduct my mortgage interest from my taxes and save a bunch of money.” Be very careful here. Tax savings are great, but people forget that they’re saving money they ordinarily would never have spent. That’s because the amount you pay out owning a house is much higher than you would for any rental when you include maintenance, renovations, and higher insurance costs, to name a few. Furthermore, 2018 laws reduced the benefit of these tax deductions.
3. Calculate the total amount of buying a new house. Have you ever gone to buy a car or cell phone, only to learn that it’s way more expensive than advertised? I know I have, and most of the time I just bought it anyway because I was already psychologically set on it. But because the numbers are so big when purchasing a house, even small surprises will end up costing you a ton of money. For example, if you stumble across an unexpected cost for $100 per month, would you really cancel the paperwork for a new home? Of course not. But that minor charge would add up to $36,000 over the lifetime of a thirty-year loan—plus the opportunity cost of investing it. Remember that the closing costs—including all administrative fees and expenses—are usually between 2 and 5 percent of the house price. So on a $200,000 house, that’s $10,000. Keep in mind that ideally the total price shouldn’t be much more than three times your gross annual income. (It’s okay to stretch here a little if you don’t have any debt.) And don’t forget to factor in insurance, taxes, maintenance, and renovations. If all this sounds a little overwhelming, it’s telling you that you need to research all this stuff before buying a house. In this particular case, you should ask your parents and other homeowners for their surprise costs or just search “surprise costs of owning a house.”
4. Get the most conservative, boring loan possible. I like a thirty-year fixed-rate loan. Yes, you’ll pay more in interest compared with a fifteen-year loan. But a thirty-year loan is more flexible, because you can take the full thirty years to repay it or pay extra toward your loan and pay it off faster if you want. But you probably shouldn’t: Consumer Reports simulated what to do with an extra $100 per month, comparing the benefits of prepaying your mortgage versus investing in an index fund that returned 8 percent. Over a twenty-year period, the fund won 100 percent of the time. As they said, “. . . the longer you own your home, the less likely it is that mortgage prepayment will be the better choice.”
5. Don’t forget to check for perks. The government wants to make it easy for first-time home buyers to purchase a house. Many state and local governments offer benefits for first-time home buyers. Check out hud.gov/topics/buying_a_home to see the programs in your state. Ask—it’s worth it. Finally, don’t forget to check with any associations you belong to, including local credit unions, alumni associations, and teachers’ associations. You may get access to special lower mortgage rates. Hell, even check your Costco membership (they offer special rates for members too).
6. Use online services to comparison shop. You may have heard about zillow.com, which is a rich source of data about home prices all over the United States. Also check out redfin.com and trulia.com, which give you more information about buying a house, including tax records and neighborhood reviews. For your homeowner’s insurance, check insure.com to comparison shop. And don’t forget to call your auto insurance company and ask them for a discounted rate if you give them your homeowner’s insurance business.
How to Tackle Future Large Purchases
We’ve covered weddings, cars, and houses, but there are plenty of other major expenses that people don’t plan ahead for—just think about having kids! The problem is that, as we’ve seen, if you don’t plan ahead, it ends up costing you much more in the end. The good news is that there is a way to anticipate and handle almost any major expense you’ll encounter in life.
1. Acknowledge that you’re probably not being realistic about how much things will cost—then force yourself to be. If you’ve read this whole book (and taken even half of my advice), you’re probably better at your finances than 95 percent of other people, but you’re still human. Sorry, but your wedding will be more expensive than you planned. Your house will have costs you didn’t account for. Having a head-in-the-sand approach, however, is the worst thing you can do. Bite the bullet, sit down, and make a realistic plan for how much your big purchases will cost you in the next ten years. Do it on a napkin—it doesn’t have to be perfect! Just spend twenty minutes and see what you come up with.
2. Set up an automatic savings plan. Because almost nobody will take my recommendation to make a budget to forecast major purchases, I suggest just taking a shortcut and setting up an automatic savings plan. Assume you’ll spend $35,000 on your wedding, $20,000 on a car, $20,000 for the first two years of your first-born kid, and however much you’ll need for a typical down payment for a house in your city. Then figure out how much you need to save. If you’re twenty-five, and you’re going to buy a car and get married in three years, that’s $45,000/36 months = $1,250 per month. I know, I know. That’s more than $1,000 per month. You might not be able to afford it. Better to know now than later. Now ask yourself this: Can you afford $300? If so, that’s $300 more than you were doing yesterday.
3. You can’t have the best of everything, so use the P word. Priorities are essential. Like I said, it’s human nature to want the best for our wedding day or first house, and we need to be realistic about acknowledging that. But we also need to acknowledge that we simply can’t have the best of everything. Do you want the filet mignon or an open bar at your wedding? Do you want a house with a backyard or a neighborhood with better local schools? If you have the costs down on paper, you’ll know exactly which trade-offs you can make to keep within your budget. If you haven’t written anything down, there will appear to be no trade-offs necessary. And that’s how people get into staggering amounts of debt.
For the things you decide aren’t that important, beg, borrow, and steal to save money: If you’re getting married and you decide location is important, spend on it—but choose the cheapest options for chairs and cutlery and flowers. If you’re buying a car, skip the sunroof so you can get the model you want. And whatever you do, negotiate the hell out of big-ticket purchases. This is where, if you plan ahead, time can take the place of money.
Giving Back: Elevating Your Goals Beyond the Day to Day
Most people spend their entire lives handling the day-to-day issues of money and never get ahead. Oh man, why did I buy that $300 jacket? Damn, I thought I canceled that subscription.
If you’ve followed the steps in this book, you’ve moved past these basic questions. Your accounts work together automatically. You know how much you can afford to spend going out and how much you want to save each month. If something goes wrong, your system lets you easily see if you need to cut costs, make more money, or adjust your lifestyle. It’s all there.
That means it’s time to think about elevating your goals beyond the day to day. Whereas most people may be so consumed with the minutiae of money that they’ve never thought about getting rich (“I just want to pay off this debt”), you can set larger goals of doing the things you love using money to support you.
I believe that part of getting rich is giving back to the community that helped you flourish. There are lots of traditional ways to do this, like volunteering at a soup kitchen or becoming a Big Brother or Big Sister. You don’t need to be rich to give back. Even $100 helps. Sites like Pencils of Promise or kiva.org let you give directly to poor developing communities. (I was very proud that the I Will Teach You to Be Rich community raised over $300,000 for Pencils of Promise, which resulted in building thirteen schools for impoverished children around the world.) Or you can donate to your high school, local library, environmental action groups—whatever means the most to you. And if you’re short on cash, donate your time, which is often more valuable than money.
If you think about it, philanthropy mirrors the very same I Will Teach You to Be Rich principles you read in this book: The simplest step can get you started. Pick an organization to support or a place to volunteeer your time. You don’t have to be rich to be a philanthropist, just as you don’t have to be rich to invest.
The point is that now you’ve got a personal finance system that few others have. This allows you to elevate your goals beyond making it through the daily grind. When you think back to last year, what was the one big thing you accomplished for others? What will it be this year?
If I could hope for one thing from this book, it would be that you become a master of conscious spending—and then apply those skills to helping those around you. Maybe it will be by mentoring a needy kid, or establishing a scholarship, or even just helping your friends manage their money for free. Whatever it is, you’re now in the top tier of investing knowledge. You’ve moved beyond managing your money for short-term goals and you’re thinking strategically about your money and how it can help you to be rich—and how to share that with others.
If this were a movie, it would be raining, violin music would be swelling in the background, and a young soldier would slowly raise his hand to salute an elderly general who has a single tear rolling down his cheek.
A Rich Life for You—and Others
If I’ve been successful, the end of this book is the beginning of a rich future for you. We know that being rich isn’t just about money. We know that most people around us have strong opinions about money yet are clueless with their own. And we know that conscious spending can be fun (especially when it’s automated). But now that you know how money really works, there’s one other thing: Not enough people know about being rich. It’s not some mythical thing that happens only to Ivy League grads and lottery winners. Anyone can be rich—it’s just a question of what rich means to you. You’ve learned it: You know that money is a small, but important, part of a Rich Life. You know life is meant to be lived outside the spreadsheet. And you know how to use money to design your Rich Life.
Would you do me a favor and pass the word along to your friends to help them focus on their goals, too? A Rich Life is about more than money. It starts by managing your own. And it continues by helping others become rich.
I’d like to share some bonus resources with you to help you earn more money. Get them at iwillteachyoutoberich.com/bonus.
And one last thing: Send me an email (ramit.sethi@iwillteachyoutoberich.com, subject: my Rich Life) to let me know one thing you learned from this book. I’d love to hear from you.