By Michael J. Wiener
There aren’t many financial gurus willing to call out financial companies by name for their bad behaviour, but Ramit Sethi is one of them. In his book I Will Teach You to be Rich, he promises “a 6-week program that works,” and he includes advice on which banks to use and which to avoid.
The book is aimed at American Millennials; Canadians will learn useful lessons as well, but much of the specific advice would have to be translated to Canadian laws, banking system, and account types. The book’s style is irreverent, which helps to keep the pages turning.
It may seem impossible to fix a person’s finances in only 6 weeks, but this is how long Sethi says it will take to lay the groundwork for a solid plan and automate it with the right bank accounts and periodic transfers. The execution of the plan (e.g., eliminating debt or building savings) will take much longer.
Sethi is rare in the financial world because he will say what he really thinks about banks. “I hate Wells Fargo and Bank of America.” “These banks are pieces of shit. They rip you off, charge near-extortionate fees, and use deceptive practices to beat down the average consumer. Nobody will speak up against them because everyone in the financial world wants to strike a deal with them. I have zero interest in deals with these banks.” For the banks he does recommend, “I make no money from these recommendations. I just want you to avoid getting ripped off.”
People have many reasons why they can’t save and are in debt, but Sethi sees them as just excuses in most cases. “I don’t have a lot of sympathy for people who complain about their situation in life but do nothing about it.” “Cynics don’t want results; they want an excuse to not take action.” He urges readers to “put the excuses aside” and get on with the business of making positive changes.
The first step in the program is to “Optimize Your Credit Cards.” I found it interesting that Sethi focused on credit card perks before he covered eliminating credit card debt. He wants readers to “play offense by using credit cards responsibly and getting as many benefits out of them as possible” instead of “playing defense and avoiding credit cards altogether.” This approach sets him apart from many other experts on getting out of debt. While he does teach methods of eliminating debt, his focus is more on building wealth steadily.
The second step is to open “high-interest, low-hassle accounts.” Interestingly, he wants readers to open a chequing account at one bank and a savings account at another bank. Among his reasons are that the psychology of a separation between accounts makes us less likely to raid savings. Some might think opening a savings account is pointless if they have no money to deposit, but Sethi insists that you need to lay the groundwork now for a better future, even if you’ve only got $50 to deposit.
The third step is opening investment accounts. The author favours very simple investments, such as a Vanguard mutual fund account invested in a target date fund. “Don’t get fooled by smooth-talking salespeople: You can easily manage your investment account by yourself.” Unfortunately, Vanguard mutual funds are only available to Americans. Canadians can find one-fund solutions with certain Exchange-Traded Funds (ETFs).
To create the cash flow to reduce debt and invest, the fourth step is about “conscious spending,” which is “cutting costs mercilessly on the things you don’t love, but spending extravagantly on the things you do.” Achieving this involves tracking spending in different categories, but not traditional budgeting.
The fifth step is to automate money flows for your fixed costs, investments, savings goals, and monthly guilt-free spending money. This “will be the single most profitable system you will ever build.” Doing this step well means you won’t have to think about your overall financial situation on a daily basis. A good automated system will take you where you need to go. If there is money in your guilt-free spending account, then spend it on your desires of the moment. If the money isn’t there, then don’t.
The Myth of Financial Expertise
Sethi devotes a full chapter to “The Myth of Financial Expertise.” He does an excellent job of explaining why a financial advisor can’t help you to beat the market. “Most young people don’t need a financial adviser.” “Some of them will give you very good advice, but many of them are pretty useless. If they’re paid on commission, they usually will direct you to expensive, bloated funds to earn their commissions.”
The last step involves choosing how you will invest. “Investing is not about picking stocks.” “By even considering buying individual stocks because you think you can beat the market or it’s sexier, I want you to take all your money, put it in a Ziploc bag and light it on fire. At least you’ll be skipping the middleman.” “With automatic investing, you invest in low-cost funds—which replace worthless, expensive portfolio managers.”
“Leasing [a car] nearly always benefits the dealer, not you.”
“Real estate is the most overrated investment.”
“Investing in the stock market has trumped real estate quite handily.”
“Student loans can be a great decision,” but “many predatory colleges and graduate schools lie to young Americans about the actual value of their degree.” You need to do your own research into whether the degree you’re interested in will lead to a good-paying job.
This is a fun but serious book designed to teach American Millennials to manage their money well and meet their own definition of a rich life. Canadians can get value from the book as well, but they’ll have to do some extra work to modify the aspects specific to the U.S.
Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007. He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Jan. 25, 2021 and is republished on the Hub with his permission.