Ramit Sethi - CreativeLive - Personal Finance

Posted on October 17th, 2012

Notes from the CreativeLive Course Money + Business: Essentials for Creative Entrepreneurs by Ramit Sethi - October 17, 2012

Your checking account - treat it like an email inbox and set automatic filters.

Marketing headline - people don’t want to know about money, instead “I will teach you to be rich” sounds much more exciting.

Session 1 - Personal Finance Basics

1. You don’t have to be the smartest person in the world to be rich

Read these 3 books:

Note:

  • Spend extravagantly on the things you love as long as you can afford them
  • We compare ourselves to other people - why am I not as successful as…

2. Personal finance is at least 50% psychology

  • How does thinking about money make you feel?
  • Example: Having money in the bank makes me feel secure
  • Freedom from worrying about buying little things
  • Our childhood affects how feel about money now

3. Why is changing our behavior so hard especially when it comes to money?

We need to figure out how to create a behavioral change.

Dumb advices:

  • Keep a budget - most people fail within the first 2 weeks. Budget makes us feel bad about ourselves - awareness of how much you spend. Budge is backwards looking
  • No more lattes - saving $4 will not really help you in a long-term
  • Invest in gold and commodities
  • Too much information can lead to “no action”

Useful belief to have - the world is going to continue getting better.

You don’t just need more information - you need a system. A system makes up for our lack of willpower or when we are tired.

3 Steps Money Plan:

1. Ignore useless advice from TV and magazines.

2. Use the 85% solution to start taking action

  • What is one thing that you keep on saying that you should be doing but your are not?
  • Dreaming about running 3x/week rather than actually running 1x/week.
  • Read the book The Power of Habit
  • 85% solution: it is better to get 85% there rather than dream about it 100%. Same principles applies to money.
  • Things will not be perfect as you wish, but they will be much better than if you just dream about them
  • Tuner strategy - start saving just $20/month and with time increase it to $40, $50, and more

3. Be brutally honest about your behavior

  • Example: I want to wake up earlier in the morning
  • Our past behavior is a good predictor of our future behavior
  • Don’t dream about what you plan to do and instead work around the schedule that you have
  • Focus not on the tactic but on getting the goal done

Your Conscious Spending Plan

Where specifically do you want to spend your money monthly?

1. Where do you think you are spending your money?

  • Rent, Entertainment, …

2. Where are you actually spending it?

  • Use Mint.com
  • Is there a difference between what you think and what actually happens?

3. Where do you want to be spending it?

  • How would you design your life?
  • Allow your emotions to guide you, don’t just use logic.
  • Example: 25% of home pay on clothing.
  • In an ideal scenario where would your money go?

Biggest insights so far

  • Money is less about math and more about behavior.
  • Behavior comes fist, attitude follows. Take the first step.
  • Use simple 1 week tests to create or change your behavior.
  • Test your behavior to see how you can change it and track it.
  • Find something that works and use more of it.
  • Our childhood beliefs about money influence our present behavior.
  • Become aware of your childhood beliefs/scripts about money.
  • Most financial experts focus on saving rather than talking about how to earn more because they don’t know how.
  • Changing behavior and beliefs about money is more beneficial than just saving.

Session 2 - How to cut costs and optimize spending

CEO Model

C - Cut costs E - Earning more O - Optimize your spending

C - Cut Costs

Frugality is important to an extent.

The Philosophy of Big Wings

  • Focus on the big things and get them right.
  • What are you big wings?
  • Example: starting to invest early.
  • Getting a well paid job or starting a well paid business.
  • Another version of the Pareto’s 80/20 Principle

Two headed savings approach

  • Pick the 2 biggest discretionary areas of spending and cut costs
  • Camera gear, clothing, eating out, etc
  • Discretionary - things you have the ability to cut down
  • Aim to cut those costs by 30% over a six months period
  • Example: $1000/month - goal is $700/month
  • What are your two biggest spending areas?
  • How can you cut them down?
  • Many people who are in debt don’t know how much they owe because knowing your debt is scary

Phantom costs - invisible costs associated with an expense

Honda $350/month - car payment but the actual payment with other expenses was $1000 Armani suite requires dry-cleaning for maintenance.

Clothing example

  • What triggers your shopping behavior.
  • Limit your exposure to malls and places with sale.
  • Shopping can be a form of stress management. How does your body feel?
  • Shopping can be a form of happiness - reward.

Housing

  • Rent vs Mortgagee
  • Take your mortgagee and add 50% more
  • If you account for all phantom costs in the house - insurance, taxes, maintenance, home improvement, you will discover that buying a house is much more expensive than renting a house even if you see it as an investment.
  • Ramit rents by choice. Do the math. More info with math is in his book.

O - Optimizing your spending

Things you can negotiate:

  • Sometimes you can negotiate your credit debt down
  • Credit card - late fees
  • Cable
  • Cell phone company

Negotiating Script

“Times are tough.” Also, if you’ve done your homework, you can say, “X company is offering a better deal. I’d hate to have to switch just over a few bucks. What can you do for me?” If they won’t budge, ask to speak to supervisor, who may have the power to make changes.

Will this always work? Of course not. But remember, these are multi-million- and multi-billion-dollar companies, which anticipate a small number of customers negotiating their rates. And for a few minutes of work, you can save a significant stack of cash.”

  • Remember to build a rapport first.
  • Do not end your questions in Yes/No.
  • Keep your questions open ended, be persisitence and polite.
  • Sometimes a company will just say not and that is OK.

Negotiation keywords

  • Times are tough (I hate to have to cancel)
  • There is a competitor
  • I have been with you for X years

Additional info - Save a Pile of Cash Every Year with These Five Phone Calls

iPhone App - Negotiate It

  • It costs hundreds of dollars for a bank to acquire you as a customer
  • Everyone can negotiate at least one thing today.
  • Always think long-term. Sometimes you may want to waive fees to establish great relationship with a client.

Women chronically under negotiate bys saying:

  • I think
  • Maybe
  • Up tone voice

Strengths that women can use to negotiate:

  • Women smile more
  • Smile more
  • Some women smile too much - flirty - not good

Job Interview

When applying for a job you will be asked about your salary requirements. Respond:

  • “Right now I am just I want to see if this position is right and we can discuss this matter later.”
  • ”I am happy to discuss money down the road but right now I am trying to see if this position is right for me.”

Automating Your Finance

  • Automation is one of best things you can do
  • Automation never gets tired or unmotivated

You need 3 Different types of accounts

  • Checking
  • Savings
  • Investments

Automated Money Flow System

  • Salary - 100% - goes to our checking account
  • 5% is sent your 401K automatically
  • $95 go to your inbox
  • 5% - savings
  • Sub-saving accounts for vacation, wedding,
  • 5% 0 retirement
  • Credit card - regular bills + guilt free money
  • Misc Bills

Examples of a 20 year old spending plan

  • Fixed costs - 50%-60%
  • Investments - 10% - more liquid
  • Savings 5%-10% - locked away for a little while      - Money that you need in the next 5 years vacations, gifts, downpayment for a house, unexpected expenses - medical, house maintenance, car repair, death in the family.
  • Guilt free spending - 20%-25%

Most people have predicable behavior, learn to plan for major expenses in your life:

  • Buying a car
  • Wedding
  • Kids

Session 3 - Investing

  • One of the best ways to increases your wealth
  • Types: passive investment
  • Start investing early. Start with just $50/month
  • Increase the number over time

Investment Steps

1. Pick a reputable investment company

  • Recommended companies: (USA) Vanguard, Schwab, T. Rowe Price
  • One of the biggest determinants of your returns - the costs you pay

2. Set up a retirement account - 401(K)

  • 401(K) - type of retirement account
  • Roth IRA

3. Invest a % of your income into a life cycle fund and leave it alone

  • Adjusts based on your life cycle
  • Detailed info is in the book

Most people don’t need a financial advisor

The Ladder Of Investment

Where does your money go?

  1. Max out 401(K)
  2. Pay off debt
  3. Max out your Roth IRA
  4. Go back to your 401(K)
  5. Open a regular investment account

Real risk - if I don’t put my money into a place where they will grow, I will not have much money when I will be old/retire.

You may be in a bad position in life right now. What actions can/will you take right now to change this situation in one year?

  • You don’t need to be a financial expert to start investing.
  • It is possible to negotiate your student loans (see chapter 1).
  • Set a calendar reminder to check your accounts monthly.

Freelance Income

  • Create an emergency account (bucket) and fill it out over the next six months
  • If something bad happens use your emergency bucket but remember to replenish it
  • Extra money always goes into the bucket
  • It is a good idea to keep this emergency account separate
  • Focus on replicating the 9-5 income as much as possible and then using extra money
  • A savings account is the money you need over the next 5 years or so
  • An emergency bucket is a savings account in frequent use for short-term and mid-term goals
  • If possible, create a savings account while paying out debt

Session 4 - Living A Rich Life

  • Recommended online calculator - whatsthecost.com
  • Look for the Snowballing calculator

One year from now, what systems will you build to allow yourself to live a rich life?

Conclusion

1. Conscious, Guilt-free Spending

  • Challenge yourself to think  differently and behave differently

2. Saving for the things that matter

  • Sub-savings - specific savings accounts for different events

3. Investing in yourself

  • Courses, books, take people out to coffee, coaching, networking, work projects
  • Always keep on investing into yourself

4. Money & Relationships

  • Partners can have different opinions about finance.
  • Financial family systems consist of different opinions
  • Focus on Yes. What do we want to do with the money?
  • How do we do this? What do/did you think?
  • Use open ended questions.
  • Make small, systematic concessions.
  • If you agree on the investment and your partner makes an unplanned purchase, ask your partner - are we still on track to go to our planned vacation to Cuba?
  • Don’t blame the other person. Instead, put the responsibility on them. Allow them to explain. “Hey, I am just curious”.
  • Chapter 9 in the book focuses on joint account for couples.

Questions or comments? Send me an email