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

by Ramit Sethi

The truth is that the vast majority of people don’t need a financial adviser to help them get rich. We need to set up accounts at solid banks, automate our day-to-day money management (including bills, savings and, if applicable, paying off debts). We need to know about a few things to invest in and then we need to let our money grow for thirty years.

Cynics don’t want results; they want an excuse to not take action. Ironically, even if they win their own manufactured argument, they lose overall, because they’re stuck in the prison of their own mind.

Remember: in relationships and work, we want to be better than average. In investing, average is great.

Spend extravagantly on the things you love and cut costs mercilessly on the things you don’t.

There’s a limit to how much you can cut, but no limit to how much you can earn. I have readers who earn $50,000/year and ones who earn $750,000/year. They both buy the same loaves of bread. Controlling spending is important, but your earnings become super-linear.

Build a collection of “spending frameworks” to use when deciding on buying something. Most people default to restrictive rules (“I need to cut back on eating out . . .”), but you can flip it and decide what you’ll always spend on, like my book-buying rule: if you’re thinking about buying a book, just buy it. Don’t waste even five seconds debating it. Applying even one new idea from a book is worth it. (Like this one.)

Part of creating your Rich Life is the willingness to be unapologetically different. Once money isn’t a primary constraint, you’ll have the freedom to design your own Rich Life, which will almost certainly be different from the average person’s. Embrace it. This is the fun part!

The truth about credit cards lies somewhere between these two extremes. As long as you manage them well, they’re worth having. But if you don’t completely pay off your bill at the end of the month, you’ll owe an enormous amount of interest on the remainder, usually about 18%. This is what’s known as the annual percentage rate, or APR. Credit card companies also tack on a whopping fee every time you miss a payment – usually around £12.

People love to pick sexy investments and use fancy terms like “distressed securities” and “EBITDA” when they focus on getting rich. But they often ignore something that is so simple, so basic, that it just doesn’t seem important: their credit. Ironically, credit is one of the most vital factors in getting rich, but because it’s hard to wrap our minds around it, we often overlook it entirely. It’s time to wake up and pay attention to it, because 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 thousands of pounds on these purchases. Credit has a far greater impact on your finances than saving a quid a day on a coffee.

There are two main components to your credit (also known as your credit history): your credit report and your credit score. These boring terms can actually save you tens of thousands of pounds over your lifetime, so listen up. This is an example of a Big Win – worth paying attention to. Your credit report gives potential lenders basic information about you, your accounts and your payment history. It tracks all credit-related activities (e.g. credit cards and loans), although recent activities are given higher weight. Your credit score is a single, easy-to-read number between 0 and 1,000 that represents your credit risk to lenders. It’s like CliffsNotes for the credit industry. The lenders take this number (higher is better) and, with a few other pieces of information, such as your salary and age, decide if they’ll lend you money for credit like a credit card, mortgage or car loan. They’ll charge you more or less for the loan depending on your score, which signifies how risky you are. But each lender also has its own scoring system, so different lenders might give you a higher score.

CREDIT SCORE VS CREDIT REPORT What your credit score is based on: What your credit report includes: 30% payment history (How reliable you are – late payments hurt you) ▪ Basic identification information 30% amounts owed (How much you owe and how much credit you have available, aka your credit utilisation rate) ▪ A list of all your credit accounts 15% length of history (How long you’ve had credit) ▪ Your credit history, or whom you’ve paid, how consistently, and any late payments 10% new credit (Older accounts are better, because they show you’re reliable) ▪ Amount of loans 10% types of credit (For example, credit cards, student loans – varied is better) ▪ Credit inquiries, or who else has requested your credit info (other lenders) Get your free credit score at experian.co.uk, equifax.co.uk or transunion.co.uk. ▪ Get your free credit report at experian.co.uk, equifax.co.uk or transunion.co.uk.

Why are your credit report and credit score important? Because a good credit score can save you thousands of pounds in interest charges How? Well, if you have good credit, it makes you less risky to lenders, meaning they can offer you a better interest rate on loans.

One of the key differences between rich people and everyone else is that rich people plan before they need to plan.

As you can see, a high credit score can save you tens of thousands of pounds over your lifetime (or more if you live in a high-cost-of-living area). While other people spend many hours cutting coupons, agonising over generic brands at the supermarket, or beating themselves up over a latte, they’re failing to see the bigger picture. It’s fine to keep a close eye on your expenses, but you should focus on spending time on the things that matter, the Big Wins.

Most of the best rewards cards have fees. Are they worth it? You should run the numbers to decide, which takes less than 5 minutes. Here’s a quick rule of thumb: if you spend thousands per month on your credit card, the rewards are usually worth it. But if you spend more modestly or you’re not sure whether you want to pay a fee, spend a few minutes doing a quick analysis by searching for “credit card rewards calculator”. Plug in your numbers and you’ll quickly see which rewards cards are worth it for you.

Some hotels will give you five hundred points for every night you waive housekeeping. So if I’m travelling alone, I get a room with two beds. I switch beds, switch towels and I get my five hundred points.

If you’re booking travel or eating out, use a travel card to maximise rewards. For everything else, use a cashback card.

The card I use for travel and eating out is the Chase Sapphire Reserve. For everything else, I use an Alliant cashback card. And for business, I use a Capital One cashback business card. For extra benefits, I have an Amex Platinum card.

Remember, there are other sources of credit besides credit cards. These include instalment loans (such as car loans), personal lines of credit, house equity lines of credit, and service credit (such as utilities). Your credit score is based on your overall sources of credit.

depends on how long you’ve been managing credit. The less information in your credit report, the higher the prominence of each new report. For example, if you only have one credit card in your name, when you open another account, the weight of that action is more than it would be ten years down the line.” In short, pick two or three great cards, maximise rewards sensibly and remember that these cards are just one part of your overall financial infrastructure.

1. Pay off your credit card regularly. Yeah, we’ve all heard it, but what you may not know is that your debt payment history represents 35% of your credit score – the largest chunk. In fact, the single most important thing you can do to improve your credit is to pay your bills on time.

If you miss even one payment on your credit card, here are four terrible, horrible, no good, very bad results you may face: 1. Your credit score can drop 50 points or more, and some mortgage lenders will reject people with any missed payments. 2. Your APR can go up to 24%, or higher. 3. You’ll be charged a late fee, usually £12 but it can be higher. 4. Your late payment can trigger rate increases on your other credit cards as well, even if you’ve never been late on them. (I find this fact amazing.) Don’t get too freaked out: you can recover from the hit to your credit score, usually within a few months. In fact, if you’re just a few days late with your payment, you may incur a fee, but it generally won’t be reported to the credit bureaux.

Try to get fees on your cards waived. This can be a great way to optimise your credit cards, because your credit card companies will do all the work for you. Call them using the phone number on the back of the card and ask if you’re paying any fees, including annual fees or service charges. It should go a little something like this: YOU: Hi, I’d like to confirm that I’m not paying any fees on my credit card. CREDIT CARD REP: Well, it looks like you have an annual fee of £25. That’s actually one of our better rates. YOU: I’d rather pay no fees. Can you waive this year’s annual fee? Earlier I mentioned that it can be worth paying annual fees for rewards cards. This is true – but why not ask? Remember, credit card companies compete ferociously with each other, which can benefit you. Call them a month before your new annual fee kicks in and ask them to waive it. Sometimes it works, sometimes not. If you decide that your credit card fee isn’t worth it, ask your credit card company what they’ll do for you. If they waive your fees, great! If not, switch to a no-fee card. I suggest you do this at the same credit card company to simplify your life – and so you don’t have to close one account and open another, which will temporarily affect your credit score.

call your credit card company and ask them to lower your APR. If they ask why, tell them you’ve been paying your bill in full on time for the last few months, and you know there are a number of credit cards offering better rates than you’re currently getting. (See page 64 for a sample script.) In my experience, this works about half the time. It’s important to note that your APR doesn’t technically matter if you’re paying your bills in full every month – you could have a 2% APR or 80% APR and it would be irrelevant, since you don’t pay interest if you pay your total bill each month. But this is a quick and easy way to pick the low-hanging fruit with one phone call.

Keep your main cards for a long time, and keep them active – but also keep them simple. Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score. Don’t get suckered by introductory offers and low APRs – if you’re happy with your card, keep it. Some credit card companies will cancel your account after a certain period of inactivity. To avoid having a card you rarely use shut down, set up an automatic payment on it. For example, I set it up so that one of my credit cards pays a $12.95 monthly subscription through my current account each month, which requires zero intervention on my part. But my credit report reflects that I’ve had the card for more than five years, which improves my credit score. Play it safe: if you have a credit card, keep it active using an automatic payment at least once every three months.

Nobody’s perfect. Despite my warnings, I understand that accidents happen and you might miss a payment at some point. When this happens, I use my Asian heritage to beat the companies by negotiating with them, and you can, too: YOU: Hi, I noticed I missed a payment, and I wanted to confirm that this won’t affect my credit score. CREDIT CARD REP: Let me check on that. No, the late fee will be applied, but it won’t affect your credit score. (Note: if you pay within a few days of your missed bill, it usually won’t be reported to the credit agencies. But ask to be sure.) YOU: Thank you! I’m really happy to hear that. Now, about that fee . . . I understand I was late, but I’d like to have it waived. CREDIT CARD REP: Why? YOU: It was a mistake. It won’t happen again, so I’d like to have the fee removed. (Note: always end your sentence with strength. Don’t say: “Can you remove this?” Say: “I’d like to have this removed.”) At this point, you have a better than 50% chance of getting the fee credited to your account. But just in case you get an especially tough rep, try this. CREDIT CARD REP: I’m very sorry, but we can’t refund that fee. I can try to get you our latest blah blah marketing pitch blah blah... YOU: I’m sorry, but I’ve been a customer for four years and I’d hate for this one fee to drive me away from your service. What can you do to remove the late fee? CREDIT CARD REP: Hmm... Let me check on that... Yes, I was able to remove the fee this time. It’s been credited to your...

Think balance: for most people, having two or three credit cards is perfect. If you have a special reason to have more cards – for example, if you own a business or are intentionally maximising temporary sign-up rewards – great. But if you find yourself swamped with the number of cards you have, close the inactive ones. As long as you have good credit, the long-term impact will be minimal and you’ll sleep easier at night with a simple financial system you can easily keep track of.

I request a credit-limit increase every six to twelve months. Remember, 30% of your credit score is represented by your credit utilisation rate.

6. Use your credit card’s secret perks! Before I get into rewards programmes, let me say this: just like with car insurance, you can get great deals on your credit when you’re a responsible customer. In fact, there are lots of tips for people who have very good credit. If you fall into this category, you should call your credit cards and lenders once a 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 checked my credit and noticed that I have a 750 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 fee waivers and special offers that you use for customer retention.”

Did you know that credit cards automatically give you amazing consumer protection? Here are a few examples you might not know about: ▪ Section 75 of the Consumer Credit Act protects you if you buy goods costing between £100 and £30,000. If the goods don’t arrive, aren’t of suitable quality or the supplier goes bust, you can make a claim against the credit card warranty. ▪ Extended warranties: some cards extend the warranty on your purchases. So if you buy an iPhone and it breaks after Apple’s warranty expires, your credit card could still cover it up to an additional year. You normally have to register gadgets within a specified time limit. ▪ You may get free travel insurance if you pay for your holiday with your card. But check the excess levels, how much medical cover you have and whether winter sports are included. ▪ A number of exclusive credit cards (generally those that charge a hefty fee) come with a concierge service. They can track down hard-to-find concert or sports tickets, classic cars or plan your holiday for you.

Always Track Your Calls to Financial Companies Unfortunately for you, credit card companies are very good at using BS late fees to increase their revenues. Unfortunately for them, I’m giving you a script for getting these fees reversed (see page 42). One of the best ways to improve your chances of having fees waived is by keeping track of every call to your financial institutions, including credit card companies, banks and investment companies. When I call to dispute anything, I open a spreadsheet that details the last time I called them, whom I spoke with and what was resolved. If only criminals were as diligent as I am. Create a spreadsheet that looks like this: The Pocket Tracker for Tracking Credit Card Calls

Whenever you make a call regarding a dispute on your bill, you wouldn’t believe how powerful it is to refer back to the last time you called—citing the rep’s name, the date of the conversation and your call notes. Most credit card reps you talk to will simply give in because they know you came to play in the big leagues. When you use this to confront a credit card company or bank with data from your last calls, you’ll be more prepared than 99% of other people—and chances are you’ll get what you want.

PRIORITISING YOUR DEBT Snowball method: lowest balance first Standard method: highest APR first How it works Pay the minimum on all cards, but pay more on the card with the lowest balance. Once you pay off the first card, repeat with the next-lowest balance. Pay the minimum on all cards, but pay more on the card with the highest interest. Once you pay off the first card, repeat with the next-highest-APR card. Why it works This is all about psychology and small wins. Once you pay off the first card, you’re more motivated to pay off the next one. Mathematically, you want to pay off the credit card that’s costing you the most first.

As you know, current accounts let you deposit money and withdraw money using debit cards, cheques and online transfers. I think of my current account like an email inbox: all my money goes in my current account, and then I regularly apportion it out to appropriate accounts, like savings and investing, using automatic transfers. I pay most of my bills with my credit card, but the bills that I can’t pay with my card – like rent or my car payment – I pay directly from my current account using automatic transfers.

To me, that’s the perfect time to start: when the stakes are low. Build the right habits when the amounts are small – with the right accounts, with automatic saving and investing – so that when your income increases, your habits are rock-solid.

Here are the accounts I use and how I’ve set them up to work together. MY ACCOUNTS. All my money goes through my interest-bearing Schwab online current account. Deposits happen through direct deposit or by taking a photo of a cheque and depositing it through the Schwab app. MY SYSTEM. My finances work on a monthly cycle and my system automatically disburses money where it needs to go. I’ve set up accounts to draw from my current account. For example, my Capital One 360 savings account automatically withdraws a certain amount every month from my current account, as does my investment account (more about these in Chapter 3). For rewards, tracking and consumer protection, I pay my bills using my credit card. The credit card is automatically paid in full every month by my online current account. For cash expenses, I use the Schwab ATM card to withdraw money at any ATM nationwide. All ATM charges are automatically reimbursed at the end of the month. Generally, I use my Capital One 360 account as a receiver, not a sender: I rarely transfer money out of there unless I need to cover a temporary shortage in my current account or want to spend savings money on something important, like a vacation . . .

I would not encourage anyone to use a standard Big Bank savings account. Online savings accounts let you earn more interest with lower hassle.

Say you realise your current account charges you fees and you want to switch. When you call, they tell you they can’t offer a no-fee account. Are you going to accept that? Hell no. Go on the offensive. Here’s what to say. YOU: Hi. I noticed that my current account has fees. I’d like my account to have no annual fees, free transactions and no minimum balance, please. BANK REP: I’m really sorry, but we don’t offer that kind of account anymore. YOU: Really? That’s interesting, because [competitor] is offering me that exact deal right now. Could you check again and tell me which comparable accounts you offer? (Eighty per cent of the time, you’ll get a great account at this point. If not, ask for a supervisor.) SUPERVISOR: Hi, how can I help you? YOU: (Repeat argument from the beginning. If the supervisor doesn’t give you an option, add this:) Look, I’ve been a customer for X years, and I want to find a way to make this work. Plus, I know that your customer- acquisition cost is hundreds of pounds. What can you do to help me stay a customer? SUPERVISOR: What an astounding coincidence. My computer is suddenly allowing me to offer the exact account you asked for! YOU: Why, thank you, kind sir. (Sip Darjeeling tea.) The bank has already spent a lot of money to land you as a customer and doesn’t want to lose you over something as small as a £5 monthly fee. Use this knowledge as leverage whenever you contact any financial company.

1 Open a current account or assess the one you already have (1 hour). Find an account that works for you, call the bank (or go in) and open the account. If you’ve already got one, make absolutely sure it is a no-fee, no-minimum-deposit account. How? Open your last bank statement or, if you don’t have that, call your bank and say: “I’d like to confirm that my bank account has no fees and no minimums whatsoever. Can you confirm that?” If you discover you’ve been paying fees, use the negotiating tactic on page 83 to get your account switched to a no-fee, no-minimum- deposit account. Be aggressive in threatening to leave if they don’t switch you. 2 Open an online high-interest savings account (3 hours). You’ll earn higher interest and it’s psychologically powerful to have your savings account separate from your current account. You’ll be much less likely to dip into your savings if they’re not immediately reachable through your normal banking. Spend a couple of hours researching accounts; make sure you check the rate and how consistent the rates offered by accounts have been in the past. To see a more comprehensive list, go to moneysavingexpert.com or which.co.uk. 2a Optional: open an online current account (2 hours). This isn’t a absolutely necessary, but if you’re ready to be more advanced and earn a higher interest rate, go ahead and do it. Remember, the main benefits of an online current account are a high interest rate and fewer tricky fees. If you don’t love your current...

Rather than earning a little interest, like most people do in their savings accounts, you can earn around 8% per year over the long term by investing. Over the twentieth century, the average annual stock market return was 11%, minus 3% for inflation, giving us 8%.

To put that in perspective, let’s assume that you have £1,000 at age 35 to put somewhere. Let’s also assume that your savings account returns 3% on average, and that you can get 8% returns, net of inflation, over the long term in your investments. Now watch this. If you just dropped that money into a savings account, what would it be worth thirty years later? While that £1,000 would have grown to £2,427 on paper, inflation would have also “dragged” your returns down. So while it appears you did well, when you factor in inflation your money has the same purchasing power as it did thirty years ago. Not good. But there’s a twist. If you’d invested your money, it would be worth over £10,000 – ten times more! – eclipsing the drag of inflation and giving you incredible results. And that’s just from a one-time investment.

Rung 1: Your employer must offer matched pension contributions on your workplace scheme, so take full advantage of it and don’t opt out (which you can). This means that for every pound you contribute to your pension, your company will “match” your contribution up to a certain amount. For example, for easy maths, let’s assume you make £100,000 and that your employer will 100%-match your contribution up to 8% of your salary. This means that you’ll contribute £4,000 and your company will match it with £4,000. This is free money and there is, quite simply, no better deal. Rung 2: Pay off your credit card and any other debt. The average credit card APR is 14% and many APRs are higher. Whatever your card company charges, paying off your debt will give you a significant instant return. For the best ways to do this, see page 62 in Chapter 1. Rung 3: Open up a stocks and shares ISA (see page 109) and contribute as much money as possible to it. (You are allowed to contribute up to £20,000 in 2019/20. For current contribution limits, search for “ISA allowance”.) Rung 4: If you have money left over, go back to your pension and contribute as much as possible to it (this time above and beyond your employer matched contributions). The current limit is 100% of your salary or £40,000 – whichever is the lower. For current contribution limits, search for “pension contribution limits”. Rung 5: If you still have money left to invest, pay extra on any mortgage debt you have and consider investi...

Pension Benefit #1: Using Pre-tax Money Means an Instant 20%-plus Accelerator. Retirement accounts offer you a deal: you promise to invest your money for the long term and, in exchange, they give you huge tax advantages. Because the money you’re contributing isn’t taxed until you withdraw it many years later (that’s why it’s called “pre-tax money”), you have much more money to invest for compound growth – usually 20-45% more, depending on your tax rate. Let’s look at a regular investment account (a “non-retirement account”) first. If you open one of these at any investment brokerage, you don’t get many tax advantages: for every £100 you make, you’ll be able to invest only about £20 of it, because, if you are on the lowest tax rate – as most people are – 20% goes to pay your income tax. A pension is different. It’s “tax-deferred”, meaning you can invest the entire £100 and let it grow for about thirty-plus years. Sure, you’ll pay taxes when you withdraw your money later, but that extra 20% turns out to make a huge difference as it gets compounded more and more.

Pension Benefit #2: Your Employer Match Means Free Money. Your employer must also contribute, meaning you get automatic free money for investing – a win-win situation. How exactly does matching work? Here’s an example: in an auto-enrolment scheme your company can offer a 1:1 (“one-to-one”) match up to 8%. This means your company must match every pound you invest up to 8% of your salary. If you make £60,000 per year and you contribute £2,400 per year (4% of your salary), your employer then matches the £2,400, so your actual investment is £4,800 per year. If you start at age twenty-five and earn 8% on your money, you’ll have more than £1.6 million with the employer match when you retire – or just over £800,000 with no match.

returns. And each year you invest, the difference grows larger. However, be aware that the lifetime tax-free sum has been cut – in 2019 it was £1.055 million, so...

What happens if I really need my money? A pension scheme is a retirement account for long-term investments, not a current or savings account. If you withdraw money before you’re 55 years old, you will incur the severe penalty of being taxed up to 55% on the sum you withdraw. This punishment is intentional: this money is for your retirement, not for your yoga trip to Tulum. That said, HMRC makes a limited allowance for withdrawal before age 55 if, for example, you are in ill-health. If you have been given less than a year to live, you could be permitted to withdraw 100% of your pension.

Will I have to pay taxes when I withdraw my money? Yes. Although your pension is tax-deferred, it’s not tax-free: When you start withdrawing after age 55, you’ll have to pay taxes. But don’t feel bad about paying these taxes, since your money will have been compounding at an accelerated rate for the last thirty to forty years. Because you agreed to invest your money in a pension, you were able to put in about 20% more money to grow for you.

What if I switch jobs? The money in your pension is yours, so if you move to another company, don’t worry. You can take it with you. Here’s how:

ISA providers must allow you to transfer out, but they don’t have to allow you to transfer in, so check before you start the transfer process. Beware that your old provider could charge you exit fees! Some providers don’t charge exit fees, but exit fees can range from £15 to £30 per stock. Your new provider may agree to cover exit fees if they apply, so get haggling. You could save hundreds of pounds.

Let’s first dispense with the idea that saying no to spending on certain things means you’re cheap. If you decide that spending £4 on Cokes when you eat out isn’t worth it – and you’d rather save £10 each week for a movie – that’s not being cheap. That’s consciously deciding what you value. Unfortunately, most of us were never taught how to consciously spend, which means cutting costs mercilessly on the things you don’t love, but spending extravagantly on the things you do. Instead, we were taught to generically apply the principle of “Don’t spend money on that!” to everything, meaning we try halfheartedly to cut back, fail, then guiltily berate ourselves – and continue overspending on things we don’t even care about. There is power in saying no to the things we don’t care about. But there is even more power in saying a big YES to the things we love.