I Will Teach You To Be Rich

I recently read ‘I Will Teach You To Be Rich’ by Ramit Sethi and it was definitely a game changer for me. I have always been interested in controlling my finances but I have never been able to. As soon I get paid, I end up buying silly things or spending enormous amounts on stuff I don’t even remember. Ramit has laid out various steps to be followed in 6 weeks that will guarantee you control of your finances and set you up for life. However, not all information provided is valid to and these are some of the main takeaways I got from the book that resonated with me;

1.      Debt Clearance

2.      Automating your savings and investments

3.      Conscious spending plan

4.      Money Dials

Debt Clearance

If you have debt, you should first know how much you owe and where. Most people aren’t even aware of how much they owe let alone who they owe. You have to start paying off your debt aggressively as it negatively affects your credit score. Your credit score is very important and is usually what banks use to determine how much interest to charge you when you take out a loan and if you’re actually a credible person to loan money to. There are two methods that famous financial advisor, David Ramsey suggests to use when clearing debt.

There are:

Debt Snowball- You pay the smallest debt amount first and work your way up regardless of the interest rate

Debt Avalanche - You the biggest debt first and then work your way down to the smallest debt.

Conscious Spending Plan

There is a difference between being frugal and being cheap. Most people confuse the two..don’t worry, I did too. People who are frugal care about spending on what they love and cutting costs on what they don’t while people who are cheap are always looking at the cost. The table below summarizes the differences

FRUGAL	CHEAP
They care about value	They care about cost
It only affects them	It affects others
They think long term	They think short term
They are willing to spend on items they care about	They are unreasonable

When you’re frugal, you are able to use a conscious spending plan that focuses on the necessities, your investments, savings and ultimately your guilt free spending. Below is Ramits Conscious spending plan and also the one I am following.

RAMITS CONSCIOUS SPENDING PLAN

PERCENTAGE	TYPE
50-60 %	Fixed costs like rent, food, clothes
10%	Investments
5-10%	Savings
20-35%	Money dials /Guilt free spending

Money Dials

What are money dials? These are the things that you will gladly spend on without feeling the pinch.   The more money you make, the more you dial in by spending more. So, the question is, what is your money dial? What is that thing that you can spend extravagantly if you were to triple your income? For me it will be eating at very expensive places like Sankara..there is that ambience and service that you can’t anywhere else except there. Once you figure out what your money dials are, you can cut cost mercilessly on the things you don’t like. The money dials go hand in hand with the conscious spending plan under the category of guilt free spending. Money allotted to that category can be spent without worrying about overreaching as money for saving and investments have already been allocated for.

Automating Your Investments and Savings

The biggest win for reading this book is gaining the fundamentals for automating your investments and savings. Ramit suggest having your money flowing into various accounts immediately when you get paid. This can be done by talking with your bank agent and setting up those accounts so that money flows into them once cash hits the accounts. For simplification, I modified Ramit’s system. The money will be flowing as follows

Your salary first enters your Current Account and then it is distributed into the following accounts:

1.      Investments Account

2.      Savings Account

3.      Guilt Free Account

The investments account will house a percentage of the money that will be used for investing. Depending on how aggressive you want to invest, it can range from 20% to 60%! of your salary. The money will flow from this account to your various investments e.g. money market funds, equity funds, stock etc. For optimization, it’s better if they are automated so you don’t have to worry about whether you invested in a given month or not.

The savings account will have all your savings. The emergency fund can fall under this account or it can have its own account. If you want to save for short- or long-term goals, the savings account will have that sorted. If your bank allows, you can have sub savings where each goal is catered for. So, if you’re planning to save for a car and wedding, the money will hit the savings account and then further split into those two-sub savings.

Now for the fun part; the guilt free account. This account will house the money you want to spend on your given money dials or guilt free pleasures whatever they maybe. You can pay for a Ksh 30,000 suit or lunch so long as your savings and investments are catered for. So, this account allows you to go all out without having to worry about a thing and spend extravagantly on the things you love.

I suggest having separate bank accounts for these as it will be easier to automate. Once money hits the Investments account, it is further split into your various investments. Once it hits the Savings Accounts, some of it goes to the emergency fund, the rest is put according to what you are saving for be it a car, wedding etc. I recommend putting your money in a fixed deposit if you are saving for long term. This way, the principal will earn interest and you will get more money at the end of the period. Finally, the money that goes into guilt free spending account can be spent on whatever you want, however, once it ends, you have to wait till the next time you are paid.