I Will Teach You To Be Rich, is another great entry level book to the topic of personal finance similar to Your Money Or Your Life.
I’ve chosen to highlight the topics of:
• Conscious spending
• The power of defaults
• Buying cars and houses
Conscious spending revolves around the idea of being very intentional with where you spend your money and ruthless with where you save or make cuts to your budget as well.
To put this in context, for example, I may enjoy going out to dinner a couple times a week and to allow myself to do this I cut back on other areas of my life that I just don’t get that much out of. One of these areas I’ve cut could be my car, instead of driving a brand new car I opt to drive one that is ten years old that I bought in cheaply in cash. Because I saved money on the costs of my car (no loan, cheap on fuel, cheap to run and repair) I can dedicate that saved money to funding my fancy dinners, or whatever the area of spending I get more satisfaction from happens to be.
Few people realise the importance of conscious spending, but by realising which areas of your life bring you the most value and by starting to maximise them, this combined with making cuts in areas you don’t care about can have some powerful repercussions in your life.
We touched on the power of defaults previously in The One Thing – Book Summary – Multitasking, Habits and Time Blocking but in a nutshell, under stress or when our willpower is exhausted we all revert to our default behaviours. Often these behaviours can be destructive and we need to be aware of our own default settings, especially in regards to our own personal finance defaults.
Finally the last section of highlights looks at two of the areas which represent the biggest areas of spending in our lives, cars and houses. Saving money by cutting your cable or switching where you shop is great, but few choices and actions will impact your financial life as much as your choices around how much you paid for your car/s and housing situation.
There are a ton of answers you need to find and numbers you need to look at before you plonk down a huge chunk of change on a 20+ year mortgage. Do yourself a favour and make sure you go into the deal with your eyes wide open and this last section of Ramits’ book can really help with that.
Conscious Spending
• Spend on What You Love
• Frugality isn’t about cutting your spending on everything. That approach wouldn’t last two days. Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on—and then cutting costs mercilessly on the things you don’t love.
• A Conscious Spending Plan involves four major buckets where your money will go: Fixed Costs, Investments, Savings, and Guilt-free Spending Money.
• MONTHLY FIXED COSTS Fixed costs are the amounts you must pay, like your rent/ mortgage, utilities, mobile phone, and student loans. A good rule of thumb is that fixed costs should be 50–60 percent of your take-home pay. Before you can do anything else, you’ve got to figure out how much these add up to.
• LONG-TERM INVESTMENTS This bucket includes the amount you’ll send to your pension and ISA each month. A good rule of thumb is to invest 10 percent of your take-home pay (after taxes, or the amount on your monthly paycheck) for the long term.
• SAVINGS GOALS This bucket includes short-term savings goals (like Christmas gifts and vacation), midterm savings goals (a wedding in a few years), and larger, longer-term goals (like a down payment on a house).
• GUILT-FREE SPENDING MONEY After all that spending, investing, and saving, this bucket contains the fun money—the stuff you can use for anything you want, guilt-free. Money here covers things like going out to restaurants and bars, taxis, movies, and vacations. Depending on how you’ve structured your other buckets, a good rule of thumb here is to use 20 percent to 35 percent of your take-home income for guilt-free spending money.
• Try focusing on big wins that will make a large, measurable change. In fact, I focus on only one or two big wins each month.
Specific Savings Advice
• It’s Hard to Save Unless There’s a Reason
• MAKE THE TRADEOFFS WORTHWHILE.
• SET UP A SPECIFIC ACCOUNT.
• USE THE ENVELOPE SYSTEM TO TARGET YOUR BIG WINS
What If You Don’t Make Enough Money?
• NEGOTIATE A RAISE
• GET A HIGHER-PAYING JOB
• DO SOME FREELANCE WORK
Irregular Expenses
• Known irregular events (vehicle registration fees, Christmas gifts, vacations). There’s an easy way to account for this type of irregular event. Under Savings Goals, you allocate money toward goals where you have a general idea of how much it will cost. It doesn’t have to be exact, but try to get a rough ballpark figure and then save every month toward that goal.
• Unknown irregular expenses, these types of surprises fall under your Monthly Fixed Expenses because no matter how hard you try to avoid them, there will always be unexpected expenses.
• Get your paycheck, determine what you’ve been spending, and figure out what your Conscious Spending Plan should look like.
Summary
• Optimize your spending.
• Pick your big wins.
• Maintain your Conscious Spending Plan.
THE POWER OF DEFAULTS
• We know people are incredibly lazy and will do whatever requires no work—often at their own financial expense.
• How much more money do we lose from inaction overall?
• The key to taking action is, quite simply, making your decisions automatic.
• Your money management must happen by default.
• You’ll be making your contributions to your savings and investing accounts grow passively—with no action required.
Buying Cars And Houses
• 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.
Dos and Don’ts for Your First Car
Do:
• DO YOUR RESEARCH
• CALCULATE TOTAL COST OF OWNERSHIP
• Besides the cost of the car and the interest on your loan, the TCO should include maintenance, gas, insurance, and resale value.
• BUY A CAR THAT WILL LAST YOU AT LEAST TEN YEARS,
Don’t:
• PERSONAL CONTRACT PURCHASE OR LEASE.
• 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.
• STRETCH YOUR BUDGET FOR A CAR. Set a realistic budget for your car and don’t go over it.
Here’s what makes a good car:
• RELIABILITY.
• A CAR YOU LOVE. I’ve written time and time again about consciously spending on the things you love.
• INSURANCE. The insurance rates for a new and used car can be pretty different.
• FUEL EFFICIENCY.
• hedge your bets and consider a very fuel-efficient, or even a hybrid, car.
• THE DOWN PAYMENT.
The Biggest Big-Ticket Item of All: Buying a House
• Buying a house is the most complicated and significant purchase you’ll make, so it pays to understand everything about it beforehand.
WHO SHOULD BUY A HOUSE?
• houses really aren’t very good investments in general.
• 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.
• 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—
• 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.
• I urge you to stick by tried-and-true rules, like 25 percent down, a 5-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross pay.
• If you make a poor financial decision up front, you’ll end up struggling—
Myths About Owning a Home
• “PRICES ALWAYS GO UP IN REAL ESTATE” (OR, “THE VALUE OF A HOUSE DOUBLES EVERY TEN YEARS”). Not true. We can see this now in a very obvious way with the recent real estate crash.
• “YOU CAN USE LEVERAGE TO INCREASE YOUR MONEY.”
• 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 ALWAYS TRADE DOWN AND USE MY PROPERTY AS MY PENSION.”
• If you’re going to trade down you’ll still need to live somewhere
• By the time you’ve paid your estate agent’s fees, stamp duty (on both the property you’re selling and the one you’re buying), lawyer’s fees and removal costs, you might have very little to show for it.
• Save as much money as possible for a down payment.
• If you save 25 percent or more, you should be able to access the most competitive deals. 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
• Calculate the total amount of buying a new house.
• Get the most conservative, boring loan possible.
• Watch out for fees.
• The smaller the mortgage, the higher the effect of fees on the real cost of the loan.
How to Tackle Future Large Purchases
• Acknowledge that you’re probably not being realistic about how much things will cost—then force yourself to be.
• Bite the bullet, sit down, and make a realistic plan of how much your big purchases will cost you in the next ten years.
• Set up an automatic savings plan.
• Assume you’ll spend £ 20,000 on your wedding, £ 15,000 on a car, £ 15,000 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.
• You can’t have the best of everything, so use the P word.
• Priorities are essential.
• For the things you decide aren’t that important, beg, borrow, and steal to save money:
• 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.
