Finance 104 – Budgeting: Ramit Sethi’s ‘I will teach you to be rich’

What does your “rich life” look like?

That is the principal of Ramit Sethi’s financial advice and best-selling book “I Will Teach You To Be Rich.” He wants his readers to visualize where they want to be and break down what that actually costs – it is usually less than people expect.

Ramit’s key advice is to not stress about $5 coffees or clipping coupons, but rather create an automated system and financial plan that is low maintenance.

Ramit’s budgeting style and handling of finances is very different from Dave Ramsey’s Financial Peace and EveryDollar methods. The main difference between the two is that Dave recommends a micro approach to finances, while Ramit recommends a macro approach.

Here, the idea is to spend consciously, automate your savings and bills, and track your finances like your fitness.

1) Spend Consciously

Ramit’s book begins by stressing the need to be conscious about your spending habits. Are you buying that new car, going on that vacation, or updating your wardrobe because you want to or because that is what everyone around you wants to do?

Unlike other approaches, Ramit’s financial plan allows you to splurge, guilt-free, on the things important to you, whether it be designer shoes, a fancy car, or a new wardrobe. However, he wants you to be sure to spend on what you want to spend on.

Also, think about that area you suspect you “spend too much on.” Should this be the item or service that you cut back on?

2) Automate your Savings

Ramit recommends the approach of: 50-60% of your spending on Fixed Costs; 10% on Investments; 5-10% on your savings; and 20-30% on guilt-free spending.

You should automate your finances, because your willpower is limited. Eventually, you will lose willpower and stop saving for that new house or pay off that debt, because you want to enjoy something today. By automating your savings and using sub-accounts, you give your money purpose without the need to manage your accounts on a daily basis.

Ramit outlines a simple method on his website in the free materials where he recommends taking the following automated approach to split up your salary:

  • 5% into your 401(k) account (to take advantage of employer matching)
  • 95% into your checking account to be split up more
    • 5% into your savings for big items: Wedding; Down Payment; Dream vacation
    • 5% into a Roth IRA/other retirement account
    • Remaining 85% split between:
      • Bills: things that can’t be put on the credit card like rent and utilities.
      • Credit Cards: Regular Bills; Netflix/Gym memberships; and Guilt-Free Spending.
      • Debt: Choose your “pay-off date” and that is your goal to be debt free. Then, allocate enough money to make it happen.

As shown above, by simply allocating your paycheck to different accounts automatically, your finances will take care of themselves and you only need to focus on tweaking.

3) Track your finances like your Fitness

Despite your finances being automated, you do need to track and review them regularly. Just like if you are exercising to lose weight or build muscle, track your progress.

Also, set goals. If you have debt, set a “pay off” date. This is the date where you will have that credit card or mortgage paid off. By setting a goal with a defined date, you are more likely to achieve that goal and be motivated to make it happen.

Additional Tips.

Have a “Stupid Mistakes” account. Ramit describes this as an account to cover any unexpected expenses that may show up.

Set up sub accounts for major expenses and put away small amounts each month. That potential car repair for $400 could be saved for in $30 monthly increments to lessen the financial blow when it occurs.

Negotiate your debts and bills. Don’t be afraid to look up how to request lower interest rates, decreased service costs, and other options. Ramit offers a step-by-step approach to handling this.

Finally, spend on what you love. Enjoy your money because you earned it!

For more information and free resources, check out Ramit’s website, I Will Teach You To Be Rich.

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