7 Money Moves That Actually Build Wealth, According to Ramit Sethi
That “smart” money advice you’ve been following all along may actually be keeping you broke, according to Ramit Sethi.
The author of the bestselling "I Will Teach You to Be Rich," Sethi is back with a new YouTube video. In it, he offers seven rules for building wealth, which may seem counterintuitive, but which he says are keys to moving your financial needle in the right direction. They come with a word of caution.
“Some of these might make you uncomfortable,” Sethi said.
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Rule No. 1: 'Spend More on What You Love'
While many of us fixate on clear-cutting non-essentials, Sethi offers a different take. He argued that steps like cutting back on dining out, canceling those subscriptions and making your own coffee at home aren’t necessarily the answer.
“I actually think you need to spend more,” Sethi said in the video. “But just not on everything.”
As an alternative, Sethi suggested a “conscious spending plan” -- spending extravagantly on the things you love, while cutting costs mercilessly on the things you don’t. He offers his ownership of a 2005 Honda Accord as an example. Many would expect a multi-millionaire like him to drive something much newer and fancier. But for Sethi, cars are more about getting from Point A to Point B and less of a priority. So he turns that “money dial” down and keeps driving the Accord.
Luxury hotels are a different story. Staying in them gives Sethi what he referred to as “disproportionate joy,” so he turns that money dial up. It may seem like an overly simple concept, but Sethi claimed many of us cut back unnecessarily on the things that bring us the most happiness, then feel guilty when we don’t hit the mark.
For action steps, he recommended identifying one or two of those money dials, reviewing your spending from the last three months, and asking yourself whether you are spending money on what truly matters. And of course, be sure you are hitting savings goals and maintaining an emergency fund.
Rule No. 2: 'Run the Numbers Before You Buy a House'
Conventional wisdom has long branded renting your home – when you could afford to buy – as throwing your money away. Sethi has rented for the last 20 years and claimed he is financially much better off.
Sethi doesn’t argue that you should never buy a house, but he urged listeners to consider their life situation and motives for buying, and to run the numbers, before making such a huge financial decision. He claimed too many of us throw away hundreds of thousands of dollars on interest, property taxes, and maintenance – money that could be invested or put to other better uses.
Sethi’s key steps to follow before buying:
Make sure you plan to live in the house for at least 10 years. A huge chunk of your payments for the first 20 years will go towards interest, not towards building equity.
You don’t necessarily have to put 20% down, but at least have the 20% -- on top of your emergency fund. It’s a strong sign to yourself and others that you have the ability to save the money you’ll need.
Ensure your total monthly housing costs make up less than 28% of your gross income. Many of us will struggle to hit this goal. But Sethi argues that the higher that percentage goes, the greater the risk you are taking on.
Be OK with the possibility that your house’s value goes down. It happens.
Ask yourself if you really want to buy, and why. If reasons include “it seems like the next step” or “it’s automatically a great investment,” you may want to think again.
Rule No. 3: 'Budgets Are a Waste of Time'
Sethi said budgets fail because they are based on restrictions and guilt, are tough to track, and look backward instead of forward. He suggested incorporating a conscious spending plan here as well.
The basics include:
Decide ahead of time where you want your money to go.
Set up a system that automatically sends money to the right places.
Spend whatever is left over, guilt-free.
Sethi recommended that 50% to 60% of your take-home pay go to fixed costs like housing and groceries. Another 5%-10% should go toward savings, including your emergency fund. Investments such as your 401(k) should take another 10%. That leaves 20%-35% to spend guilt-free, based on your money dials.
Rule No. 4: 'Buy the Damn Coffee'
Rather than agonizing over things like skipping lattes, Sethi suggested focusing more on “big wins” that will actually make a difference. He noted that not many people take any savings from skimping on coffee and putting it to better use, anyway.
Potential big wins:
Negotiating a higher salary. Sethi advised building those negotiating skills and remembering that a $10,000 raise is worth more than a decade of skipping coffee.
Look for ways to reduce your highest fixed costs, usually housing and cars. Sethi conceded that this is tough to do if you’re already locked in.
Optimize your investment fees. Look for financial advisors that charge flat or hourly fees, or do it yourself with low-cost index funds.
Pay off high-interest debt aggressively.
Automate your finances. As previously mentioned, get your money flowing to the right places automatically.
Rule No. 5: 'Passion Isn’t the Key To Earning More Money'
Sethi advised building marketable skills, rather than focusing on passion.
“Once you get good at something, you often become passionate about it,” he says. “This is often where the money is found.”
Key steps in this area:
Working with your boss to create a concrete plan for getting a raise, based on actual data and accomplishments – not just feelings.
Finding a higher-paying job through the “shadow job market” – reaching out to people who have your dream job and landing expertise and referrals.
Figuring out which marketable skills you already have and starting a side business. Sethi says too many of us count ourselves out on this one before we even try.
Rule No. 6: 'You Don’t Need a Brilliant Idea to Start a Side Business'
Think of things you're good at – maybe areas where friends come to you for advice. Do you excel at organization? Finding great deals on travel?
You may think your skills aren’t useful enough, or that too many people are already out there making money off similar things. Sethi argued that good business ideas don’t need to be cool or unique. He offered examples like tutoring, styling, or even helping people plan their Disney vacations.
Action items:
Write down three skills you have that other people struggle with.
Ask yourself, would someone pay to learn this, or have me do it for them?
Rule No. 7: 'Stop Worrying About Pennies and Focus on Big Wins'
Sethi claimed that too many of us fret over small things when we should be putting our energy toward true difference-makers.
They include:
Investing early. The differences between getting started at 25 and 35 can mean hundreds of thousands of dollars.
Returns. Consider those low-cost index funds to maximize your money.
Amounts you contribute to things like your 401(k). Even small adjustments here can lead to tens of thousands more in your coffers.
Sethi also preached smart credit moves, including basics like being sure to pay on time. Strong credit scores will open the door to even more savings.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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