I Will Teach You To Be Rich..... Starting With Conscious Spending

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FACT: You cannot become rich wealthy without controlling your spending....consciously. 

I cross out rich because, in my eyes, rich is temporary and is seldom beneficial long term.  Many athletes, celebrities and lottery winners are rich, but if they do not practice conscious spending, then they are not rich for long.

According to a 2010 study by researchers at Vanderbilt University, the University of Kentucky and the University of Pittsburgh, the more money you win in the lottery, the more likely you are to end up bankrupt.  As a matter of fact, according to this study published in The Review of Economics and Statistics, many of them become bankrupt within 5 years of scoring a big win.

The average professional athlete in the United States will make more in one season than most of us earn in our entire lives.  However, according to Wyatt Investment Research, 78% of NFL players, 60% of NBA players and a large percentage of MLB players file bankruptcy within five years of retirement.

Most people's stinking thinking causes them to assume that they are broke because they don't make enough money.  However, according to my research, more money does not fix financial problems.

What does, then? CONSCIOUS SPENDING
Of course I'm oversimplifying things a bit.  However, if you read any of the articles or books about the habits of wealthy people with a net worth over a million (especially those who had modest income levels during their working years), you will find that one of the main ways they were able to save and invest their way into millions was to consciously spend on the money they earned, so that a large portion of it could be used to build their wealth.

In chapter 4 of I Will Teach You To Be Rich, Ramit Sethi focuses on conscious spending.  Although Ramit calls it conscious spending and says that he doesn't use budgets, the bottom line is that he does.....and you need to, as well, if you want to be rich and win with money.  He says that conscious spending is deciding where you want to spend your money up front, instead of spending it on random things here and there.  Deciding what you don't love and are not that important to you, so that you can cut back mercilessly on those things, in order to have money to spend luxuriously on those things that are important to you.

So here are the steps that Ramit suggests to create a Conscious Spending Plan:

Step 1: Create 4 major buckets where your money will go. 

Step 2: List every expense that you can think of that falls under the 'Fixed cost' category and fill in the dollar amounts for each.  A good rule of thumb is that your fixed costs should be 50-60% of your take-home pay. 

Once you've gotten all your expenses filled in, add 15% for unexpected expenditures or items you may have overlooked.  According to Ramit, a flat 15% will cover you for things you haven't figured in and you can get more accurate as time goes on.

Once you've got a fairly accurate number here, subtract it from your take-home pay.  Now you'll know how much you'll have left over to spend in the other categories.  Plus, you'll have an idea of a few targeted expense areas that you can cut down on to give yourself more money to save, invest and do the other things you love (See how this kind of sounds like a budget to me?).

Step 3: A good rule of thumb is to invest 10% of your take-home pay for the long-term.  For the record, long-term investing typically means 401(k), Roth IRA and other retirement-type savings vehicles. 

Calculate the amount and automate it.

Step 4: Short-term savings could be things like Christmas gifts, a vacation, a wedding or a down payment on a house.  This should be no more than 5-10% of your take home pay.

Calculate the amounts for the various accounts and automate a separate savings account for each.

Step 5: Feel free to spend whatever is left on whatever tickles your fancy!  If you want to use that money to invest more, do it.  If you prioritize travel over early retirement, hit up every country in the world.  Sky is the limit!  You can spend guilt free because all of your obligations are already taken care of. (Word to the wise: Just don't overdraft)

I should mention that if you don't make enough to fit in these to categories, you need to do one of two things:

1. Find a way to cut back some of your expenses.
2. Find a way to make more money.

Ramit offers some great ideas in his book on cutting expenses, negotiating higher salaries and freelancing.

Read my previous blogs for more information about Ramit Sethi's, I Will Teach You To Be Rich.  Below is an outline of the topics covered in previous chapters and a link to my blog post about each chapter/topic.

• Week 1: Optimize Your Credit.....Cards
• Week 2: Optimize Your Bank Accounts
• Week 3: Get Ready To Invest

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I Will Teach You To Be Rich And Get Ready To Invest

I Will Teach You To Be Rich And Get Ready To Invest

 

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Week 3: Get Ready To Invest

Open your 401(k) and Roth IRA -- even with just $50

 

I am reading I Will Teach You To Be Rich by Ramit Sethi.  This book provides a 6-week step-by-step guide to getting your finances in order to become rich. 

Week 1 focused on optimizing your credit.
Week 2 focused on opening and optimizing your bank account.
Week 3 focuses on teaching you to get ready to invest.

This chapter will discuss why you should invest and the best way to start investing your money and how to set up the process in a week.

THE WHY
A millionaire is not a person who makes $1 million or more per year.  A millionaire is someone who's net worth is $1 million or more.

On average, millionaires invest 20 percent of their household income each year.  Their wealth isn't measured by the amount they make each year, but by how much they've saved and invested over time. 

Investing is the single most effective way to get rich!

THE HOW
Step 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100% of the match.  This is free money and there is, quite simply, no better deal.

Step 2: Pay off your credit card and any other debt (excluding any primary home loans you may have outstanding).  If you can't pay this off immediately, set up a plan to pay off your debt within a specific amount of time.

Step 3: Open up a Roth IRA and contribute as much money as possible to it, up to the maximum allowed by the Internal Revenue Service.

Step 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it, up to the maximum allowed by the Internal Revenue Service.

Step 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there.  Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it's starting a company or getting an additional degree, there's often no better investment than your own career.

*Please note that my philosophy varies slightly from what Ramit suggests in his book.  My how, which takes into account Dave Ramsey's Baby Steps, would be the following.

Step 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100% of the match.  This is free money and there is, quite simply, no better deal.

Step 2: Pay off your credit card and any other debt (excluding any primary home loans you may have outstanding).  If you can't pay this off immediately, set up a plan to pay off your debt within a specific amount of time.

Step 3: Open up a Roth IRA and contribute as much money as possible to it, up to the maximum allowed by the Internal Revenue Service, but no more than 15% (minus the % you have already contributed to 401(k)) of your income.

Step 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it, up to the maximum allowed by the Internal Revenue Service, but no more than 15% (minus the % you have already contributed to 401(k) and Roth IRA) of your income.

Step 5: If you still have money left to invest, open a regular nonretirement account  and put as much as possible there.  Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it's starting a company or getting an additional degree, there's often no better investment than your own career.
              5a: If you have children, open an ESA or 529 plan to save for their college education.  If not, skip to 5b.
             5b: Use all extra money to pay off your home early.  If you don't have a mortgage, skip to 5c.
             5c: Open a regular nonretirement account and put as much as possible there.  Also, consider investing in yourself: Whether it's starting a company or getting an additional degree, there's often no better investment than your own career.


BUY BOOKS HERE:

I Will Teach You To Be Rich by Ramit Sethi

The Total Money Makeover: A proven plan for financial fitness by Dave Ramsey

My 7-Step Holiday Spending Strategy

MY 7-STEP HOLIDAY SPENDING STRATEGY

 

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 This year, we decided to come up with a spending strategy for the holidays.  So far, we have had one hiccup in our planning......we should've planned to have all holiday funds available by Black Friday.  I will admit, my planning assumed that we would not need any holiday spending money until December.  This left us without a spending plan when we found great deals during Black Friday.  We ended up spending our own "fun" money and unaccounted for joint money.  No bueno!

 

Aside from the one misstep above, I do believe our holiday shopping plan will run smoothly for the remainder of the year.

 

Rule #1: No going into debt for gifts.  If we don't have the cash saved, we don't buy.  Period.

Now, I present to you "My 7-Step Holiday Spending Strategy."

STEP 1: Make a budget and savings plan
We decided on a $500 budget and started a SmartyPig account to save the $500 over time.  The savings goal was started in October.  Next year, we will start planning a little earlier.
* Please note that this $500 budget does not include what my husband and I will spend on each other's gifts.  Our gifts to one another does not come out of our joint banking account, but rather is purchased with our own "fun" money that we receive bi-monthly.

STEP 2: Finalize your holiday list and categorize/prioritize
We created a list of everyone we wanted to buy gifts for and assigned each person a maximum dollar amount that we would be willing to spend.  We discussed possible gifts for each person.  For the record, we set Selah's (our daughter) budget at $100.  We also set our budget for holiday cards at $100.  This leaves about $300 for others.

STEP 3: Redeem points in the form of gift cards (credit card, Ebates, uPromise)
I went to all of my online credit card accounts and rebate accounts to redeem any rewards or money that I had accrued over the past year.  I was able to redeem a $25 Gap gift card with my Citi Thank You points, which were accrued over the past year for using my various Citibank accounts.  Gift cards and money redemptions can be used in addition to the $500 we budgeted.

STEP 4: Strategically place money in Smarty Pig account
At the point when we made our budget in October, we started a SmartyPig savings goal and immediately funded the first $100 into that account.  The plan was to put additional money in on a regular basis, but we got an old tax refund in the mail, which allowed us to not have the burden of having to save money out of our regular monthly payroll.

STEP 5:  Redeem SmartyPig money in the form of transferred cash and strategically selected gift cards
This is the step I am at now.  Unfortunately, I didn't think to redeem the money in our SmartyPig account in time for Black Friday, so we ended up having to spend our own cash or use the joint account when we found great deals during Black Friday.  I intend to redeem the money we have saved by the end of next week.

STEP 6: Purchase gifts through websites during sale cycles through websites like eBates or UPromise....using gift cards obtained at a discount through SmartyPig.....while purchasing in-store at locations that provide better deals in-person. 
Side Note: I just found out about a website called "Shopathome.com" that provides similar cash rebates to eBates and UPromise.  Before I purchase anything online, I check all three websites to determine who offers the largest rebate.
SmartyPig allows you to redeem all or portions of your saved fund in the form of discounted gift cards.

STEP 7: Purchase gifts on my credit card that can not be purchased through the gift cards available through SmartyPig and other discount card sites/venues (Card to be paid off in Full)
Self-explanatory

Let me know in the comments if you have developed a holiday spending plan/strategy for your family.  How did that turn out?  Do you use credit cards for holiday shopping or do you only use cash and debit? 

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Sign up for Ebates here.
Sign up for SmartyPig here.  Mention my referral code: B9F6E44T
Sign up for UPromise here.

I WILL TEACH YOU TO BE RICH…..Starting Today!

Welcome to This is me…..Then!  If you like what you see, subscribe here for free updates, or you can “like” my Facebook page here and receive new posts in your news stream.  Once you like my page, you can choose to see posts in your newsfeed first or receive a notification for each post made.  Thanks for visiting!

 

I WILL TEACH YOU TO BE RICH…..Starting Today!

 

Okay, okay!  WE will teach you to be rich….starting today!

My co-partner in crime is Ramit Sethi, the author of the New York Times bestseller, I Will Teach You To Be Rich.  While he has authored the book, I will be doing the reading.  I will be breaking down theories and steps in the book, as well as providing real life examples and cute little antidotes.

 

SPOILER ALERT:

The key to being rich (according to Ramit) is to set up accounts at a reliable no-fee bank and then automate savings and bill payment, then know a few things to invest in and let your money grow for 30 years.

 

MY TAKE:

It takes a bit (lot) more than that and I will make sure to bring up any areas that Ramit tries to tip toe over.

 

I WillTeach You To Be Rich is broken up into 6 weeks of topics, followed by a set of action steps.  At the end of the 6 weeks, if you follow all of the action steps, Ramit promises that you will be well on your way to being rich…..if you are consistent and faint not.  :-)

 

By the way, this is my November/December read and I will be going through and completing all 6 weeks of action steps by the end of the year.  Feel free to join me each week while I discuss the topic and action steps towards richness, indeed.

 

WEEK 1: OPTIMIZE YOUR CREDIT……CARDS

While there are experts out there (Ahem…..Dave Ramsey) that believe that debt is against the bad and that you avoid it and a credit score at all costs.  My beliefs are more in-line with what is taught by Ramit.

If you do not know how to responsibly use debt, avoid it like a plague (or get some discipline).  However, if you are have the discipline to use your card prudently and to pay off your credit card every month, it can actually be a benefit. 

Even if you have the money in your account, who wants to have that ridiculous hold that hotels put on your account when you use your debit card to reserve your room?  When you rent a car, who wants to pay that ridiculous insurance, when there are really good credit cards out there with exceptional coverage?  When you buy an expensive product and something goes wrong, who wants to wait for the bank to put the money back into your bank account?  Who wants to pay for an extended warranty, when there are credit cards out there who will give you an extra year or two, just for making the purchase on their card?  If I can save major money by utilizing the benefits that only credit (not debit) cards provide and I know that I am going to pay the full balance off that month, I choose credit.

To optimize your credit you must do the following…..THIS WEEK!

1.    Know what is on your credit report and know your FICO score.

a.    Go to http://www.annualcreditreport.com and receive a copy of 1 (or all three) of your credit reports for free.  Make sure that they are accurate.  Work to remove all negative credit history over time.

b.    Get your credit score.  You can purchase it from MyFICO and other websites for a nominal fee, but I would suggest getting it for free.  I monitor my credit score through Credit Sesame, Credit Karma and one of my credit cards.

2.    Set up your credit cards

a.    Do you have an active credit card?  If not, do your research and get one (unless, of course, you fall into that undisciplined category).  If no one will have you, find a good provider of secured credit cards that will report your payment history to the credit agencies to help you build credit.  Otherwise, find a card with the most benefits that will fit your lifestyle.

3.    Make sure you are handling cards effectively

a.    Set up auto pay to pay off the full balance each month.  Split the payments to match your paycheck schedule, if necessary.

b.    Get fees waived and negotiate a lower APR, where relevant.

 

c.    Become familiar with the benefits offered by your card and make good use for them, when needed.

4.    Make a plan and start paying down debt (if applicable)

a.    I am a fan of the Snowball Method (as suggested by Dave Ramsey).  List all of your debts from smallest to largest.  Pay the minimum on all the debts, except the smallest debt.  Based on your budget, pay an additional amount on this debt each month.  Once that debt is paid off, move to the next smallest debt.  In addition to the minimum due that you had already been paying, roll the amount that you were previously paying on the smallest debt over to the next smallest debt, and so on and so on, until all of your debts are paid off.

b.    In addition to the snowball method, I am also a proponent of the Snowflake Method.  If you get a side hustle, if you find a penny on the ground, if you get a bonus check or tax refund, etc., etc……apply that extra money to the lowest debt.

*   Personally, we have paid off all of our credit card debt and are currently working on obliterating some rather stubborn student loans (long story…..don’t want to talk about it).  Once that is complete, I fully plan to work Dave Ramsey’s Baby Steps as outlined in his Total Money Makeover book.  We never stopped our 401k contributions, as he suggests, but that is because I did not think it was the best plan of action.  However, that’s another story for another day.

 

I encourage you to go through the 4 steps listed above with me.  Let’s try to get rich together and if it doesn’t work for us, we can all blame Ramit Sethi.

 

BUY BOOKS HERE:

I Will Teach You To Be Rich by Ramit Sethi

The Total Money Makeover: A proven plan for financial fitness by Dave Ramsey

 

 

 

There are few topics in life that I hold near and dear to my heart.  Building wealth is one of them. 

 

I'm not exactly sure how I got here, but the only explanation I can think of is that God gave me this gift.  I did not grow up knowing anyone with wealth or money.  There was just something in me.  I can still remember creating ridiculous businesses as a child where I would get my little brothers to search the entire house and find unclaimed change.  As a reward, I would give them a portion of the money found or some kind of gift and save the rest for myself.  I remember when I got my first job at the age of 16.  I worked a few hours a week at KFC.  I remember saving all my money to buy my sister and I some respectable clothing to wear to school and on the weekends.  I also remember having money leftover long after I quit my job.

 

Anyway, I love when I come across articles that have really good explanations on how to build wealth.  This is one of them (see below).  The only thing I would change is how much you should invest in company-sponsored 401(k)/retirement plans.  I would not contribute the maximum amount they allow, but instead would contribute the maximum amount they will match.  My job will match up to 6% of your salary, but will allow you to contribute much more.  I contribute 6%.  If you want to save additional amounts for retirement, I would suggest a ROTH IRA.

 

Investing

Steps to building wealth

By Bruce W. Fraser • Bankrate.com

Remember playing Legos as a kid? You could quickly take a random pile of blocks and build something solid. The steps to building wealth are not so different, as the process involves a series of small decisions that move us along, one building block at a time.
"It is from those daily decisions that individuals build wealth," says J. Landon Loveall, founder and president of Cumberland Wealth Planners in greater Nashville, Tenn. "What you do now will determine where you are financially 20 years from now."
The steps to building wealth begin with a clear intention to attain it. After all, accumulating money is not a haphazard occurrence, but a deliberate process.
Once you determine that attaining wealth is a priority, focus your energies on maximizing your income, saving a portion of it and investing it for growth. Building wealth also requires you to make decisions on potentially destructive forces that erode wealth, such as inflation, taxes and overspending.

Building your income

Your income represents the foundation upon which you build lifetime wealth. The higher your income, the greater your potential for accumulating significant assets.
When you're young, the value of your future earnings is your No. 1 financial asset. Find a job you love, invest in educating yourself and keep abreast of changes in your career field.
"The lifetime return for making these investments at this time is greater than saving in Roth IRAs, or any investment, even factoring in the power of compounding," says Certified Financial Planner Joe Alfonso, founder of Aegis Financial Advisory in Santa Clara, Calif.
To stay on top of your field, take advantage of college savings plans with tax-favorable characteristics that are available to students of all ages.
Going hand in hand with earning money is the ability to live within your means and plan for contingencies.
"By far, the most destructive forces to building wealth are inertia, procrastination and, ultimately, magical thinking -- couples passing away peacefully and synchronously just after they spend their last dollar," says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management in Purchase, N.Y. "They simply fail to plan, not only for retirement, but also possible obstacles they will face on the way to retirement."

Saving your money

Saving money is the next step to building wealth. How much you save is a measure of how efficiently you use the wealth-building opportunity in your income. In their book, "The Millionaire Next Door," Thomas J. Stanley and William D. Danko discovered that self-made millionaires are very efficient at turning income into wealth.
Ultimately, it comes down to a balancing act. "The most important decision is how to balance current spending with future savings, or living a good life now versus saving for a great life in the future," says Loveall. Both he and Alfonso advise clients to save at least 10 percent of their annual income.
Rick Kahler, president of the Kahler Financial Group in Rapid City, S.D., would double that to 20 percent or more "until you have six months to one year of living expenses for an emergency fund."
In addition to creating an emergency fund, Kahler, co-author of "Wired for Wealth," advocates opening a separate savings account for purchases of future cars, car repairs, vacations and Christmas gifts. The rest of your income can be spent on current consumption.
"For most people, this means living on 30 to 60 cents out of every gross dollar you earn," he says.
Saving can be an easily accomplished, automated process when signing up to contribute to a workplace retirement plan such as a 401(k). Kahler warns against "leaving money on the table if your employer offers a match on a 401(k) plan. It's like turning down a guaranteed 100 percent return. It's a no-brainer."
He suggests maximizing your contribution. Currently, the contribution limit is $17,500; $23,000 for those 50 and older. If you're truly motivated to build wealth, after maximizing your 401(k), contribute to an IRA. The contribution limit is $5,500; $6,500 for those 50 and older. (The tax deductibility of IRA contributions may be limited if you contribute to a workplace plan and your earnings exceed certain levels.)
If self-employed, set up a retirement plan that will allow you to invest as much as possible. Investing in a tax-sheltered account such as a Solo 401(k) cuts taxable income now and enables you to build wealth by deferring taxes until you take distributions.

Putting your savings to work

Wealth-building strategies include investing in paper assets such as stocks and bonds, buying income-producing real estate and owning a business -- or all three.
Experts generally agree on the importance of such core investment principles as keeping a balanced and globally diversified portfolio, and diligently rebalancing to maintain your investment plan. Maintaining a long-term perspective is also important.
"Successful investing is about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns," says Einberg.
Studies have shown that an asset allocation policy can explain most of a portfolio's investment returns over time. When investing in stocks, diversifying across markets both domestic and international, developed and emerging, is key, says Alfonso. For bonds, closely managing credit and maturity to avoid taking imprudent risk is also important.
Passively managed funds that mimic an index allow investors to build diversified portfolios of inexpensive funds. Actively managed funds generally cost more and are susceptible to style drift, given the leeway managers have in carrying out their investment strategy, says Alfonso.
When choosing investments, your tolerance for risk will likely dictate your asset allocation. Professionals with steady paychecks and generous employer retirement benefits usually can tolerate more risk than a salesperson earning commissions or a young investor starting out -- though young investors can afford to dial up the risk by investing more in equities since they have plenty of time to make up any losses.
Beyond stocks and stock funds, many investors are diversifying into nontraditional asset classes, such as commodities, managed futures, merger-arbitrage and market-neutral or long-short funds, as well as absolute-return mutual funds. These "alternative" funds aim to hold up in all types of markets with less volatility. They also help to fight inflation -- that seemingly benign annual increase in the price of goods and services that actually destroys your purchasing power over time.
While choosing non-correlated assets to increase diversification is important, Alfonso advises investors to stick to a prudent investment strategy, regardless of market conditions. "Keep investment costs as low as possible; net returns will be higher. And, most importantly, never try to time the market."
As famous investor Peter Lynch once said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."