A modern classic in the personal finance world, this is a great book for newbies to personal finance, or as a reminder for all of us that have learned the principles, but need reinforcement.
- The single most important thing you can do to be rich is to start early.
- People love to argue minor points about finance, partially because they feel it absolves them from getting started.
- Instead, you need to cut through all the info and just get started.
- Set up accounts at reliable, no-fee banks, and then automate savings, investment, and bill payments.
- Getting started is more important than becoming an expert.
- Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't.
- Before you start, ask yourself: why doo you want to be rich? What do you want to do with your wealth?
- Find out your credit score.
- Pay off your credit card always, on time. Keep your cards for a long time, keep them active, and use less than 30% of their limit (ask for a limit raise if needed).
- Open a savings account with a good interest rate, and a separate checking account, with a low-hassle, no-fee bank. Online banks are often a good option.
- Why a separate savings and checking account? Savings you should only be putting money in, and a checking account is what you use for money you need to spend.
- Open your retirement and no-interest investing accounts. In the US, this is probably a 401(k) and a Roth IRA, while in Canada it's an RRSP and a TFSA.
- You should aim to invest at least 20% of your household income per year. 10% of your take-home pay is another good target.
5 investing steps:
- If your employer offers 401(k) matching, invest enough to take advantage.
- Pay off your credit card and any other debt.
- Open a Roth IRA (or TFSA) and contribute as much money as possible.
- If you have money left, go back to your 401(k) and contribute as much as possible.
- If you still have money left, open a regular nonretirement account and put as much as possible in there.
Yes, you do need a budget. Start with monthly fixed costs, add long-term investments, then you have guilt-free spending money. Tweak this plan as you go. Good benchmarks:
- Monthly fixed costs: 50-60% take-home pay
- Long-term investments: 10% take-home pay
- Spending money: 20-35% take-home pay
- Pay your bills automatically
- Schedule transfers to your savings account
- Schedule transfers to your investment accounts
- Note: think about your scheduling—when you get paid, when bills are due, etc. to make this optimal.
How to save and invest:
- Fund managers and investment managers rarely beat the market (75% of the time they don't), take higher fees, and have incentives that aren't aligned with you (like commissions on specific investments).
- Instead, use an index fund investment service (like WealthSimple, or WealthFront) which is low-fee, and automatically invests in a diversified portfolio of index funds.
- As you get older, your portfolio should probably get more conservative (more bonds, less stocks).
- Create an emergency fund for unexpected events (they WILL happen).
- Negotiate a raise. This is one of the most effective tactics for increasing your savings long-term.
- Buy a car with good reliability, that you will drive for at least 10 years, which has a good resale value, and is fuel efficient. And stay within budget.
Some rules for buying a house:
- Only buy if you're planning to live there for >10 years.
- Only buy if you can afford at least 10% down payment (20% is better).
- Your mortgage is not your only fee. You'll have hundreds more per month in maintenance, insurance, property taxes, etc.
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