I Will Teach You To Be Rich: No guilt, no excuses - just a 6-week programme that works

by Ramit Sethi

your lifecycle fund will own many funds, which all own stocks and bonds. It sounds complicated, but believe it or not, this actually makes things simple for you, because you’ll have to own only one fund, and all the rest will be taken care of for you.

The criticism of lifestyle funds is that they are a ‘one size fits all’ approach. They will move money away from shares, no matter what the stock market is doing (and if they sell shares after a major fall in share prices, you’ll lose money). But they’re definitely better than keeping the same asset allocation (the same percentages in shares, bonds, cash etc) right up until you retire.

As a young person, I encourage you to pick the most aggressive fund they offer that you’re comfortable with. As you know, the more aggressive you are when younger, the more money you’ll likely have later. This is especially important for a pension, which is an ultra-long-term investment account.

Warren Buffett, the world’s richest man, who in 2004 gave this advice: “Be fearful when others are greedy and greedy when others are fearful.” Or, to put it in more familiar terms, “Buy low, sell high.”

Most funds can’t be left alone for too long, so you’ll need to rebalance every 12 to 18 months. But if you’ve chosen to manage your own asset allocation, you’ll need to rebalance every twelve to eighteen months. Otherwise, within a couple of years, your allocation will be completely skewed.

The best way to rebalance is to plow more money into the other areas until your asset allocation is back on track. How? Assuming your domestic equities now represent 45 percent of your asset allocation—but should actually be only 30 percent— stop sending money there temporarily and redistribute that 30 percent of your investment contribution evenly over the rest of your investment categories.

Every year you get a capital gains tax allowance—a level of profit that you’re allowed to generate on your investments before you pay tax. As I write this it’s worth £10,100 (in the tax year that runs from April 6th 2009 to April 5th 2010). That means you’re allowed to make £10,100 profit before you pay a penny in tax. But any profit you make above that is taxed.

just as pensions are a great way of saving for retirement accounts, stocks and shares ISAs and child trust funds have tax advantages that make them great for saving for children’s education. If you’ve got kids (or know that one day you will) and some spare cash, pour it into an ISA.

I believe being rich is about much more than that. For me, it’s 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 my budget,