Buying Lattes Is Not Keeping You From Being Rich

By Paul B. Brown

“I Will Teach You to Be Rich” didn’t get as much attention as it deserved when it was first published a decade ago, and it’s easy to understand why.

The author, Ramit Sethi, who runs a website with the same name as his book, ignored the emotions people have about money, apparently believing that all he had to do was present solid personal finance advice and readers would simply carry it out. Bragging about his own financial acumen didn’t help, nor did his tone, which alternated between hectoring and belittling people who didn’t have a firm grasp on their finances.

Well, he is back with an updated version of “I Will Teach You to Be Rich” (Workman, $15.95). Most of the book’s flaws remain, although he does address the complicated role emotions play when it comes to our money.

The bragging, as well as the frequently unsympathetic tone, remains, although he does warn readers upfront what to expect.

“Listen up, crybabies,” he writes. “This isn’t your grandma’s house and I am not going to bake you cookies and coddle you.”

With that, the gloves are off. He describes many of the people he has encountered with financial problems as “lazy” and calls those he disagrees with — such as people who spend an inordinate amount of time trying to find a slightly higher interest rate on their savings — “morons.”

Mr. Sethi has disdain for people who think they can become rich only by winning the lottery or receiving an inheritance. He says to them: “I hate you.” And the animosity doesn’t end there. “After years of talking to young people about money, I pretty much hate” all of them, Mr. Sethi, 37, says.

But ignore the vitriol, if you can, even though I concede it will probably cost him potential readers. Why should you persevere? Two reasons. Blunt talk could spur you to improve your financial situation. And if you can get past the packaging, the four major points he emphasizes are worth paying attention to.

First, concentrate on the relatively few personal finance decisions that truly matter to your long-term financial health. For example, don’t agonize about whether you can earn a tiny bit more — 2.35 percent as opposed to 2.3 percent — on a certificate of deposit. After all, on a $20,000 C.D., the difference would be just $10 a year. Instead, make sure that the cash component of your overall portfolio is small. It should be just big enough to cover foreseeable emergencies if you are young, he argues.

The rest of your money should be invested, because both bonds and stocks have typically returned substantially more than cash equivalents like C.D.s and money market funds, he writes. And he is correct, assuming you can afford to keep your money invested over long periods and can ride out downturns. Between 1926 and 2017, according to research done by Ibbotson, part of Morningstar, an investment research and management company, large stocks returned 10.2 percent a year and government bonds provided a 5.5 percent annual return.

Second, Mr. Sethi provides solid advice on how to divide your money between stocks and bonds. If you don’t want to spend a lot of time determining your asset allocation, he suggests using target-date mutual funds, investments intended to increase assets over a fixed period of time.

The further away your goal — such as retirement — the more of your money that is invested in stocks. As your goal draws nearer, the fund automatically shifts your money into more conservative investments.

The third thing I like is his concept of “conscious spending.”

“Conscious spending isn’t about cutting your spending on everything,” he writes. “That approach wouldn’t last two days. It is quite simply about choosing the things you love enough to spend extravagantly on — and then cutting costs mercilessly on the things you don’t love.”

Mr. Sethi even suggests a budget for how this might work. You’d spend 50 to 60 percent of your take-home pay on fixed costs such as rent or mortgage, utilities and student debt.

Ten percent would go to your investments, such as your 401(k). Another 5 to 10 percent would be put aside to fund specific large purchases such as a down payment on a house. That would leave 20 to 35 percent to spend guilt-free.

Fourth, Mr. Sethi says it becomes much easier to achieve your goals if you make them extremely specific. Sure, you can simply say you want to retire with a lot of money. But it will probably be easier to remain focused on your retirement if you specify that you want to end up with, say, $1.7 million in retirement savings, in part because you want to spend two months in Tuscany every year once you stop working. (That’s my example, not Mr. Sethi’s.)

While very good, his investment advice is not perfect for everyone. Target date funds, for example, use a one size fits all approach when it comes to asset allocation. You might be able to cobble together exactly what you want, and save a bit on investment fees and expenses, through buying individual low-cost index funds.

And while I love the idea of guilt-free spending, it strikes me that Mr. Sethi is shortchanging the amount of money you should be investing.

The 10 percent he says should put toward retirement is fine if you begin when you are young and your money has time to compound and grow. But if you start later — say in your 40s — it probably won’t be enough to fund the retirement you want. And even if you start young, I would put away at least double the 5 to 10 percent he recommends for major purchases. Houses are expensive. So is paying for college, if you have children. If you increase the amount you save and invest, the less you will have to spend guilt-free or otherwise, unfortunately.

Still, his take on these four ideas is solid and helpful, even if his approach will sometimes leave you shaking your head.

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