Tag: Financial Independence

I recently saw the interview of Ramith Sethi and Tim Ferriss and decided I wanted to read his book.

Personal finance is taboo. People avoid talking about finance, making it tough to learn. That’s why I decided to read this book. After finishing it, I realized there were still many financial decisions I had not optimized for. I hope it can help you optimize your finances too.

Would you rather be sexy or rich?

1. Being fat is similar to having debt. How do you lose weight? By eating less and exercising. How do you lose debt? Cutting costs and earning more.
2. Not counting calories is akin to not tracking spending.
3. Invest early to take advantage of the power of compounding interest. The best time to start investing was 20 years ago. Today is the second-best time.
4. Start by automating your payments and opening investment accounts.
5. Buy-and-hold investing wins over the long term, every time.

Optimize your credit cards

1. The majority of people haven’t formally learned about personal finance before. Many don’t even look at their finances for whatever reason. Therefore, most people are playing the financial game wrong.
2. Being in debt is normal, but do not accept the status quo; pay it off as fast as possible. More people than you imagine don’t even know how much they owe.
3. Debt is almost always manageable if you have a plan and take disciplined steps to reduce it.
4. An advantage of using credit cards instead of cash is that you automatically create your transaction history to track, organize and analyze your spending later.
5. Credit cards are great if you consistently pay them on time.
6. They can have great perks. Make sure to know what they are.
7. Keep track of the rewards you earn and use them.
8. Set up automatic payments for your credit card.

Beat the banks

1. The critical difference between checking and savings accounts is that savings accounts technically pay more interest, but the difference is too little to matter.
2. People lose money when their money is sitting idle in their savings accounts. Inflation erodes the real purchasing power of your cash.
3. Banks are allowed to gift you money if you complain. Fees can be negotiated. Call your bank to negotiate terms.

Get ready to invest

1. Albert Einstein said, “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.”
2. You should invest your cash to fight inflation.
3. Open an investment account to access the most significant money-making vehicle in the history of the world: the stock market.
4. Full-service brokerages are usually traditional banks that advise and manage your portfolio and offer other services like estate planning, retirement advice, tax optimization, etc. They charge high fees for transactions.
5. Discount brokerages are nearly synonymous with online brokerages. They don’t advise. The only service they tend to offer is trading through them, but they don’t advise you. It is built for the masses. They charge low fees.
6. Open an account with discount brokerages (I opened mine with Interactive Brokers) because you can invest in the same stocks but with lower fees. To learn, open an account and invest a low amount, maybe $1,000, and invest it in the Vanguard Total Stock Market ETF (Ticker: VTI). Open it even if you cannot invest high amounts right now.
7. Set up automatic monthly contributions to your investment account.
8. Dollar-cost averaging is investing regular amounts over time (let’s say monthly) rather than investing all your money at once. This is a hedge against any drops in the price. If the fund drops, you’ll pick up shares at a discount price. By investing over time, you avoid trying to time the market.
9. If you live in the US, invest through a 401(k) or an Individual Retirement Account (IRA) for tax advantages.
10. Beware of the added fees of robo advisors.
11. If you want a financial adviser, pay them by the hour, not as a percentage of assets under management.

Conscious spending

1. Plan your expenses ahead of time.
2. Make conscious decisions on what you want to spend money on. For example, I like spending money on low leverage tasks that save me time, like cleaning and cooking.
3. Cancel your subscriptions and pay “á la carte.” For example, don’t pay for a gym subscription if you can pay for one-time use. When you do the math, you end up paying less. Beware of monthly subscriptions.
4. Make a spreadsheet with all your income and expenses.
   1. Start adding your income.
   2. Then add the monthly costs (annual costs divided by 12).
   3. Categorize them. Include rent/mortgage, groceries, restaurants, vacations, utilities, medical insurance, car payment, transportation, debt payments, subscriptions, entertainment, clothes, internet, gifts, taxes, etc. Make sure to review your historical expenses to cover all categories. Have a line item with 15% of all expenditures for unexpected, unforeseen expenses.
   4. Analyze your expenses and write the next steps to reduce expenses, especially the biggest items.
   5. Organize them in order of magnitude.
5. Income – Expenses = Free Cash Flow (FCF). FCF is the most important metric to follow. Use it to save and invest.
6. Track your spending weekly.
7. There’s a limit on how much you can cut, but no limit on how much you can earn.
8. When you gain more income, try not to increase your standard of living and bank the rest.
9. Increase your income by adding value to your company and asking for adjustments in your compensation.

Save while sleeping

1. If you invest a little now, you don’t have to invest a lot later.
2. Make all your expenses decisions, and stick to the plan every month.
3. Your transactions should occur automatically.
4. Try to get all your bills on the same schedule to easily track them.
5. Build up a buffer of 3 to 6 months of expenses in your savings account.

The myth of financial expertise

1. It is easy to get overwhelmed by all types of investments you could make in an investment account. Don’t frown.
2. Most people can earn more than “experts” by investing on their own in low-cost funds.
3. Over the long run, the stock market has consistently returned about 8% after inflation.
4. The best long-term solution is to invest regularly in low-cost, diversified funds.
5. “Focus on time in the market, not market timing.”
6. Financial consultants, paid on commission, usually direct you to expensive funds to earn their commission.
7. Higher fees and lower returns are correlated.
8. Over 30 years, a 1% fee can reduce your returns by 28% and a 2% fee by 63%. You should be paying 0.1% to 0.3%.
9. A safe assumption is that actively managed funds will often fail to beat or match the market.
10. Investors would be better served by investing in passively managed funds than more expensive active funds. You could do better, for cheaper, on your own.

Investing isn’t only for rich people

1. Invest automatically the most you can monthly.
2. Do not sell when the market goes down. Keep your regular monthly investments.
3. Financial Independence (FI) is the crossover point when your investments earn enough to fund your expenses automatically.
4. Retiring Early (RE) is when you achieve FI and choose not to work anymore.
5. Together, they form the FIRE movement. Financial Independence + Retiring Early = FIRE.
6. LeanFire is for people who have decided they can live on a “lean” amount of money, often $30,000 to $50,000 a year. They reject materialism and embrace simple living.
7. FatFire is for people who want to spend a lot, but they can because their assets generate so many cash dividends to finance their lifestyle.
8. When you achieve Financial Independence, you’re being paid because of decisions made years ago.
9. Don’t associate investing only with picking individual stocks of a company.
10. Overall, stocks provide excellent returns of around 8% per year. Stocks as a whole generally give excellent returns over time. Individual stocks are less clear.
11. Try not to invest in individual stocks; it’s tough to choose winning stocks.
12. Bonds are safer than stocks, thus with lower returns.
13. Rich and older people like bonds because they want to know exactly how much money they will get next month.
14. If you are wealthy, you’ll accept lower investment returns in exchange for security and safety.
15. The Rule of 72: Divide your 72 / return rate by = the number of years to double your money.
16. Make sure to create a pie chart of your portfolio in a spreadsheet.
17. Have cash in your savings account for emergencies or have very liquid stocks.
18. Cash is the safest part of your portfolio, but it offers the lowest reward. You lose money by having idle cash when you factor inflation in.
19. Use a small part, up to 10% of your portfolio, for “high risk” investing—but treat it as fun money, not as money you need.
20. What about crypto? It is a very high risk. First, get out of debt, then build a solid portfolio and six months of emergency funds. After having all of the above covered, venture into high-risk assets like crypto.
21. Asset allocation
    • It is important to diversify within stocks, but it’s even more important to allocate across the different asset classes — like stocks and bonds.
    • Your portfolio should move gradually from riskier to safer as you age.
    • It is reasonable to have a portfolio made up of primarily stock-based funds in your twenties. It is reasonable to have a sizable portion of your portfolio in stable bonds in your sixties.
22. Types of stocks
    • Small-Cap: companies with a market capitalization (“market cap”) < $1 billion.
    • Mid-Cap: market cap between $1 billion and $10 billion.
    • Large-Cap: > $10 billion.
    • Value: stocks that are cheaper than they should be.
    • Growth: stocks that may grow more than the market.
    • International: companies outside the US.
23. Types of bonds
    • Government: backed by the government. Ultra-safe investments.
    • Corporate: issued by a corporation. Riskier than governments but safer than stocks.
    • Short-Term: less than 3 years.
    • Long-Term: mature in 10 years or more. They offer higher yields than shorter-term bonds.
24. REITs: Real Estate Investment Trusts are public stocks that let you invest in real estate through a single ticker symbol, just like a stock.
25. Mutual funds
    • They are primarily great for investment bankers, not for the buyer of the funds, since they have high expense ratios (management fees).
    • They have the advantage of a hands-off approach because you are diversified within the fund.
    • 75% of mutual funds do not beat the market.
    • Actively managed mutual funds are, by definition, expensive. You have to pay for the salaries of all the operations. Active management can’t compete with the passive management of index funds — the more attractive cousin of mutual funds.
26. Index funds
    • In 1975, John Bogle, the founder of Vanguard, introduced the world’s first index fund. These simple funds buy stocks and match the market. Specifically, they try to match an “index” of the market, such as the S&P 500. In contrast, traditional mutual funds employ an expensive staff of “experts” who try to predict which stocks will perform well, trade frequently, incur taxes, and charge you high fees.
    • Bogle argued that index funds would offer better performance than active mutual funds since mutual funds haven’t beat the market.
    • When you invest in index funds, you typically have to invest in multiple funds to create a comprehensive asset allocation. If you buy numerous of them, you should rebalance your investments to maintain your target asset allocation — usually every 12 to 18 months.
    • With their low fees, index funds are far superior to buying individual stocks, bonds, or mutual funds.
    • Most index funds at Vanguard, T. Rowe Price, and Fidelity offer excellent value. Ramith invests with Vanguard. Learn more with the late founder, Jack Bogle on Index Funds, Vanguard, and Investing Advice.
    • To find index funds, you might try using Vanguard’s screener of funds.
27. Target date funds
    • They are simple funds that automatically diversify between stock and bonds. They also rebalance your investments based on your target retirement date.
    • Target date funds are different from index funds, which are also low cost but require you to own multiple funds if you want a comprehensive asset allocation.
    • These funds have mainly stocks in your twenties and gradually add bonds as you age.
28. Another model that may be interesting to imitate is the Swensen model of asset allocation. David Swensen has managed to get a 13.5% annualized return with his asset allocation.

How to maintain and grow your system

1. Use www.bankrate.com and www.personalcapital.com for more resources and guidance on personal finance.
2. If you choose to create your custom asset allocation instead of target-date funds, you will need to rebalance your portfolio periodically.
3. It’s great that one of your investment areas is performing well. Still, you want to keep your allocation in check to diminish your risk that one sector isn’t disproportionately larger or smaller than you intended.
4. Rebalancing your portfolio protects you from being vulnerable to a specific sector’s ups and downs.
5. The best way to rebalance is to put more money into the other underperforming assets areas until your allocation is back on track. Another way is by selling the outperforming equities and investing that money in other areas.
6. Pay your taxes, but make sure to use every legal tax advantage you can.
7. Annual financial checklist
   • Review insurance needs.
   • What is your net worth?
   • Revisit your debt payoff plan.
   • Reassess current subscriptions.
   • How much are your fixed costs?
   • Are you revising your expenses?
   • Find ways to create more income.
   • If you have dependents, create a will.
   • Make a plan to use your credit card rewards.
   • Are you investing at least 10% of your income?
   • Negotiate bills and fees: phone, car, internet, bank.

A rich life

1. “For me, a Rich Life is about freedom—it’s about not having to think about money all the time and being able to travel and work on things that interest me.”
2. Investing shouldn’t be dramatic or even fun—it should be methodical, calm, and as fun as watching grass grow.
3. Log in to your investment account no more than once a month.
4. Try not to talk to others about your successes in finances. It creates tensions.
5. Talking money with your significant other
   1. Moving together and getting married are key moments where a financial conversation might come in handy.
   2. You and your partner should agree that financial health is important and agree to help each other improve your finances.
   3. Should we sign a prenup? Most people don’t need a prenup unless one of you has a disproportionate amount of assets or liabilities relative to the other — or there are complications like one of you owning a business or having an inheritance.
   4. The Big Meeting: it is the meeting when you and your partner are transparent about all your finances. Both of you should prepare:
      • A list of your accounts and their balance.
      • A list of debts and their interest rates.
      • Monthly income and expenses.
      • Money people owe you.
      • Your short and long-term financial goals.
      • Ask questions.
        • Are we saving for our wedding?
        • What lifestyles do you expect?
        • Do you need to support your parents?
        • Look at your monthly expenses and ask: what could I be doing better?
        • What is your philosophy on money?
        • How did your parents behave with money?
        • How will we divide expenses?
        • Are we saving for kids?
6. Cars
   1. Calculate the total cost of ownership (including maintenance, insurance, etc.).
   2. Buy a car that will last you at least 10 years.
   3. Study the resale value.
   4. Don’t stretch your budget.
7. House
   1. Do a spreadsheet and analyze everything about the deal: competition, closing fees, insurance, maintenance, taxes, renovations, etc.
   2. Buying a home might not be an excellent investment when you factor in costs like maintenance and property taxes — which renters don’t pay for, but homeowners do.
   3. Begin with a starter house, which are houses that require you to make trade-offs but allow you to get started.
   4. Buy only if you are planning to live there for ten years.
   5. Buy or rent calculator of the New York Times.
   6. Usually, renting makes sense when you add all the random fees to own a home.

This book details a comprehensive step-by-step guide to improving your personal finances. Read it to move further along the path of Financial Independence.

Be aware of your numbers.

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