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by
Ramit Sethi
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April 4 - July 15, 2020
The Paradox of Choice: Why More Is Less: … As the number of investment funds in a pension plan offered to employees goes up, the likelihood that they will choose a fund—any fund—goes down. For every 10 funds added to the array of options, the rate of participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money-market funds.
Two-thirds of Americans are overweight or obese, and the average American is nearly $7,000 in debt. In the UK the average debt is nearly £5,000, excluding mortgages.
In 2008, when the global financial crisis really erupted in the stock market, the first thing many people did was pull their money out of the market. That’s almost always a bad move. They compounded one mistake—not having a diversified portfolio—with a second: buying high and selling low.
The 85 Percent Solution: Getting started is more important than becoming an expert.
investment isn’t about being sexy—it’s about making money, and when you look at investment literature, buy-and-hold investing wins over the long term, every time. Forget what that money TV station or finance magazine says about the stock-of-the-month. Do some analysis, make your decision, and then reevaluate your investment every six months or so. It’s not as sexy as those guys in red coats shouting and waving their hands on TV, but as an individual investor, you’ll get far greater returns.
by the time I went to buy my own car, I had been steeped in a rich tradition of negotiating. I knew how to make unreasonable demands with a straight face and never take no for an answer. I took a more modern approach, however: Instead of spending a week going from dealership to dealership, I simply invited seventeen dealers in northern California to bid against one another for my business while I sat at home, watched The Real World, and calmly reviewed the e-mails and faxes as they came in. (For more about buying a car, see page 244.)
credit is one of the most vital factors in getting rich,
establishing good credit is the first step in building an infrastructure for getting rich. Think about it: Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of pounds on these purchases.
One of the key differences between rich people and everyone else is that rich people plan before they need to plan.
if you don’t have good credit, it may be difficult to get an affordable home loan—even if you have a high income.
Avoid cash-back cards, which don’t actually pay you much cash.
Compare cards online. The best way to find a card that is right for you is by researching different offers online (try www.moneyfacts.co.uk). In most cases, the simplest credit cards are offered by your bank, so this is often a good place to look. They’ll connect with your bank account and you can choose from a variety of options, including credit limit, rewards, and more.
Two or three is a good rule of thumb. (The average American has four credit cards.)
The vast majority of people don’t need to pay any annual fees on their credit cards, and because free credit cards are so competitive now, you rarely need to pay for the privilege of using your card. The only exception is if you spend enough to justify the extra rewards a fee-charging account offers. (If you do pay an annual fee, use the break-even calculator on my website to see if it’s worth it.)
For anyone who has a lot of credit cards (especially if they have not used them for some time) the advice would be to close one or two of the accounts down, to bring down their available credit. If you only have one or two cards, you might be better off increasing your credit limit.
In fact, there are lots of tips for people who have very good credit. If you fall in this category, you should call your credit cards and lenders once per year to ask them what advantages you’re eligible for. Often, they can waive fees, extend credit, and give you private promotions that others don’t have access to. Call them up and use this line: “Hi there. I just checked my credit and noticed that I have a 900 credit score, which is pretty good. I’ve been a customer of yours for the last four years, so I’m wondering what special promotions and offers you have for me… I’m thinking of special
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Call your credit card company and ask them to send you a full list of all their rewards. Then use them!
My advice is to look for an account that consistently pays a reasonable interest rate on credit balances and where the bank gets a high rating for its customer service.
Steer clear of packaged accounts (that charge a monthly fee of £8-£12 in return for extras such as travel insurance) unless you’re absolutely sure you’ll save money by taking one. Generally, the banks have a tendency to exaggerate how much the benefits are worth.
If you’re worried about security, remember that the first £50,000 of your savings (per individual, not per account) is covered by the Financial Services Compensation Scheme. It’s an independent safety net if a bank or building society fails. Be aware that currently, the £50,000 limit applies to each banking licence. Some banks that are members of the same group (such as Halifax, Birmingham Midshires and Bank of Scotland), share a banking licence; others don’t. The financial regulator, the FSA, is looking to simplify the compensation rules, but as I write this, it hasn’t changed them.
if your money were sitting in one of those accounts, you’d actually be losing money every day because inflation is over 2 percent. That’s right: You may be earning 0.1 percent interest on your savings account, but you’re losing 2.4 percent every year in terms of real purchasing power.
Banks generally pay a higher interest rate for online savings accounts—currently 2 to 3 percent, which would produce £20 to £30 interest per year on that £1,000, compared with as little as £1 per year on a branch-based savings account.
There is one downside to having an online savings account: It can take a few business days to access your money. Typically, if you want to withdraw your money, you’ll log in to your online savings account, initiate a free transfer to your current account, and then wait three to five days for it to happen.
Before you go about finding the specific banks and accounts you want to use, take a minute to consider the bigger picture of how you want to organize your accounts.
Your bank shouldn’t nickel-and-dime you through minimums and fees. It should have a website with clear descriptions of different services, an easy setup process, and 24/7 customer service available by phone.
with a cash ISA you save tax and can get access to your money when it suits you.
you need to optimize your current and savings accounts. This means you shouldn’t be paying fees or minimums. The key to optimizing an account is talking to an actual customer-service rep, either in person or on the phone.
If you already have an account at a bank you like, but they’re charging a monthly fee, try to get them to waive it. They will often do this if you set up direct deposit, which lets your employer deposit your paycheck directly into your account every month.
She just asked them if they would waive the ATM fees while she was there. “No problem,” they said. She saved more than $250 just by making a phone call! Remember, with a customer-acquisition cost of more than $200, banks want to keep you as their customer. So use this information to your advantage, and next time you see any fees levied on your account, make the call.
We’ve covered this, but it bears repeating: employer pensions are great because with virtually no effort on your part you get to put pretax money to work. What this means is that since you haven’t paid taxes on the money yet, there’s more of it to compound over time. On top of this, your company might offer a very lucrative pension match, which amounts to free money that you’d be insane not to take. If it’s a final salary scheme, you don’t even have to worry about how well the stock market performs—your pension will be based on your salary, not investment performance.
ISAs don’t get the same tax break as pensions, but they’re still pretty good if you’re looking to save tax. Unlike pensions, ISAs don’t give you a helping hand from tax relief on the money you pay in, but you don’t pay any extra tax when you cash in your ISA. Not a penny. What you do get is the chance to cash in your ISA whenever you want to, without paying a penalty (although if the stock market has just fallen through the floor, you could lose a chunk of money).
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.
My shoe friend lives in a microscopic room because she’s hardly home, saving her hundreds per month. My partyer friend uses public transportation and has exactly zero décor in his apartment. And my nonprofit friend is extraordinarily detailed about every aspect of her spending.
he started working out a lot: going to the gym in the morning, running during the day, then hitting the gym again at night. Needless to say, this fitness program didn’t last long. Do you know people who get so into their idea du jour that they go completely overboard and burn out? I would rather do less but make it sustainable.
Saving with a goal—whether it’s tangible like a house or intangible like your kid’s education—puts all your decisions into focus.
Having a goal means that you are working toward something concrete. It gives you a reason to make those tradeoffs. You don’t just think of that $5 saved as $5—instead it is something that gets you closer to your goal of having $20,000 for a down payment on a home. It changes the entire motivation for saving.
After my friend opened a separate account, he told me that this step alone changed his whole perspective about saving money for his down payment (once he accomplished that goal, he planned to use the account to save for his annual vacations and his emergency fund).
I’d pick the two big wins—two items that I spend a lot on, but know I could cut down with some effort—and focus my efforts on them.
There’s one important thing to remember when you get a raise: Maintain your current standard of living. Too many people get a raise at work and say, “Great! I’ll go on that vacation!” Sure, you can do that. Then, “I’ll buy that new sofa I’ve been wanting!” Uh oh. And then, “I think I need those new shoes. What? I’ve been working hard!” And then you want to kill yourself because you’re swirling into a downward spiral of spending.
encourage you to save and invest as much of it as possible, because once you start getting accustomed to a certain lifestyle, you can never go back. After buying a Mercedes, can you ever drive a Toyota Corolla again?
If you want to build wealth over your lifetime, the only sure way to do it is to get your plan on autopilot and make everything that’s financially important in your life automatic…. I recommend that people automate a handful of things in their financial lives. You can set it up once in less than an hour and then go back to your life.
When it comes to investing, fees are a huge drag on your returns.
if the market returns 8 percent, actively managed funds won’t return at least 8 percent more than three-fourths of the time. In addition, when combined with their high expense ratios, actively managed funds have to outperform cheaper, passively managed funds by at least 2 or 3 percent just to break even with them—and that simply doesn’t happen.
if you’re investing for the long term, the best time to make money is when everyone else is getting out of the market.
Asset allocation is your plan for investing, the way you organize the investments in your portfolio between stocks, bonds, and cash. In other words, by diversifying your investments across different asset classes (like stocks and bonds, or, better yet, stock funds and bond funds), you could control the risk in your portfolio—and therefore control how much money, on average, you’d lose due to volatility.
Investing in only one category is dangerous over the long term. This is where the all-important concept of asset allocation comes into play. Remember it like this: Diversification is D for going deep into a category (for example, buying different types of stocks: large-cap, small-cap, international, and so on), and asset allocation is A for going across all categories (for example, stocks and bonds).
Bonds act as a counterweight to stocks, rising when stocks fall and reducing the overall risk of your portfolio.
And honestly, if you’re twenty-five and just starting out, your biggest danger isn’t having a portfolio that’s too risky. It’s being lazy and overwhelmed and not doing any investing at all.
tracker funds would offer better performance to individual investors. Actively managed fund managers could not typically beat the market, yet they charged investors maintenance fees and incurred tremendous amounts of taxes on their frequent trading.
Lifecycle funds are simple funds that automatically diversify your investments for you based on age. Instead of having to rebalance stocks and bonds, lifecycle funds do it for you. If more Americans owned lifecycle funds, for example, far fewer retirees would have seen precipitous drops in their retirement accounts, because the lifecycle funds would have automatically changed to a more conservative asset allocation as they approached their golden years. Lifecycle funds are actually “funds-of-funds,” or collections made up of other funds, which offer automatic diversification.
