I’ll be honest: there was a time when looking at my bank account or discussing finances stirred up anxiety.
“How am I going to make enough money? Can I make money work for me?”
Yes, you can. Money absolutely can and should support your quest to live an abundant life.
The challenge for the vast majority of us is that we usually don’t learn what it takes to navigate finances. Money is considered taboo, not fit for polite conversation.
In fact, 44% of Americans said in a survey that personal finance was the most challenging subject to discuss. Most people said it was more difficult to discuss than politics, death, or religion.
But how are you supposed to learn about a topic when you’re usually discouraged from talking about it?
In this episode of the Mindvalley Podcast, Vishen Lakhiani interviews Ramit Sethi to break this taboo and share how to start investing your way to success.
Ramit Sethi’s 7 Strategies on How to Enrich Your Finances
As the New York Times bestselling author and founder of the blog I Will Teach You to be Rich, Ramit’s frank and effective approach to money has attracted 1,000,000 readers a month. Fortune Magazine covered Ramit in a 6-page profile spread next to Warren Buffet due to his no B.S. take on finances.
And because he merges psychological insights with specific systems, he’s helped at least 20,000 people achieve financial success.
So how did he figure this all out?
When Ramit’s parents told him that he needed to find a way to finance college himself, he wondered how he could apply to as many scholarships as possible to receive the maximum benefit while working the minimum amount of hours required. He ended up creating a system that enabled him to apply to 60+ scholarships.
But when his first check from the scholarship came in the mail, he decided to invest half of his money in the stock market.
… And promptly lost it.
He was still able to pay his way through Stanford University but through this minor fiasco, he became even more interested in how money works and how to make it work for him.
Now, he’s sharing 7 strategies on how to live a rich life here.
1. Define What a Rich Life Means to You
We might hear from family members that if we want to be financially secure, then we have to sacrifice our lattes and vacations.
People, especially suited-up financial experts on TV, love to tell others what they shouldn’t do.
But the question we need to ask ourselves is what works for us, not what doesn’t work for them.
This starts with asking yourself a simple question:
“What does a rich life mean to me?”
While it may be tempting to answer, “a million dollars,” take a moment to question if that’s really true. After all, you might be living a simple life somewhere cheap, and that could be more than you need. Or you might be living in Hong Kong or New York City, where a million bucks won’t help you make it that far.
And, truthfully, thinking only about money leads to a pretty impoverished life. A rich life includes money, yes, but also your wellbeing, your relationships, your experiences, and your pursuits.
Money is an important part of a rich life, but it’s a small part.-Ramit
For Ramit, a rich life goes beyond money and includes three other factors:
- Making a positive impact on the world
- Enjoying healthy and happy relationships
- Challenging himself
Perhaps these ingredients also contribute to your rich life. Spend a moment and write out a quick vision of what matters to you. Only you know what makes you tick.
2. Understand the Psychology of Money
Are you obsessing over what you don’t have and what you shouldn’t spend your money on? Or are you investing in yourself and planning for the future?
It was at Stanford that Ramit first became interested in how our psychology influences money.
He learned that there are two basic mindsets that we have when it comes to money, and both end up affecting your outcome.
When you have a scarcity mindset, you tend to believe that you never have enough money. It always feels like it’s running out, no matter what your bank account says.
When you have an abundance mindset, you know there’s always enough money. Your bank account might not have much in it (though this is less likely to be true) but you are confident in your ability to make more and provide for yourself.
Below are some clues to see which category you fall under.
You might have a scarcity mindset if you:
- Always focus on short-term costs;
- Congratulate yourself on paying less;
- Evade taxes;
- Feel consistent anxiety over your finances;
- Believe money is evil;
- Feel unlucky or restricted by your funds.
You probably have an abundant mindset if you:
- Focus on long-term results;
- Value investing in yourself;
- Know the price of doing business;
- Believe you can always earn more;
- Understand the value of money;
- Appreciate what you have.
If you’ve identified clues that you might have a scarcity mindset, it’s not too late to make the switch. It takes conscious effort to change your subconscious beliefs but over time you’ll see results.
3. Focus on Big Wins
Focusing on big wins is not only part of an abundant mindset; it’s also a strategy that reinforces and amplifies what works in your life.
So what is a big win?
The big win makes up 85% of what you need to do in order to get to where you want to be. Ramit shares an example of what big wins look like in regards to health. Food and exercise would be two huge wins in this domain. Supplements would not typically be the first thing you want to tackle for the maximum benefit.
The same applies to wealth. Knowing the exact savings account to choose, and saving a few dollars by skipping the lattes, is unlikely to do much good.
Instead, focus on the big wins: landing your dream job, negotiating a better salary, setting up automated financial systems, and deliberately practicing the skills and mindset you need to be successful.
It’s the big wins that matter in life, not the minutia.
4. Know How Much to Save and Invest
Knowing what to save and what to invest is another big win.
If you’re not convinced, ask anyone who’s older than you what they wish they had done earlier. More often than not they’ll say, “I wish I had started saving sooner.”
If you do just these two things right, the rest of life becomes a lot easier financially.-Ramit
So what’s the bare minimum that you should put on your plate?
Ramit suggests you put a minimum of 10% toward savings and 10% toward investments each month. Here’s why.
Saving 10% of your income each month will stockpile some emergency and retirement funds.
Still, you don’t want to forget about the other half of the equation: investments. You want to invest because you don’t make much money from saving but you will through smart investments.
In fact, if you learn how to start investing now, you can expect a 7-8% return over the long-term. This means your investment effectively doubles every 10 years.
5. Plan for PLEs
What are PLEs?
PLEs are Predictable Life Events. These events include (but are not limited to) marriage, buying a home, having children, going on a trip, or investing in a program.
But how many people actually start planning and saving for these Predictable Life Events before they need to?
We know to save for retirement but it usually doesn’t even occur to us to set aside some cash for the other things that will matter to us in the future.
You can do so by setting up an automatic system to put money into a sub-savings account. Ramit actually does this. He started saving for an engagement ring before he had even met his wife.
It might sound wild on the face of it but it’s way more reasonable to save in advance.
After all, there are hidden costs to short-term thinking and hidden benefits to long-term thinking.
6. Diversify and Automate Your Investments
It’s common wisdom to “buy low and sell high.”
But there are a couple of problems with this philosophy. The truth is, as simple as the statement sounds, no one really knows what it means. Even experts have trouble predicting the market.
Secondly, the “buy low, sell high” strategy goes against basic human nature. When tons of people are dumping their stocks, that’s when we feel the pressure to sell. When lots of our friends are swooping up stocks, that’s when we feel the pressure to buy.
So what should you invest in?
Vishen shares in this podcast episode that right after college, he had to make a decision about whether to invest in Walmart or a relatively new company called Amazon. He ended up choosing Walmart… But Ramit chose Amazon. And he profited from it.
How did Ramit pick the winner?
Luck, Ramit says. It might as well have been a flip of the coin. Vishen could’ve been the one to choose Amazon, and Ramit could’ve been the one to choose Walmart.
The moral of this story is that you don’t have to pick the next Amazon or Apple. In fact, most people would be better off not trying to pick the next hot sector or company.
Investing should be like watching paint dry or watching grass grow. If you want excitement… go to Las Vegas.– Paul Samuelson
Ramit suggests that the least risky investment with the highest return for most people is the Target Date Fund. Target Date Funds are automatically diversified, and as you get older, they get more conservative. That’s exactly what you’re looking for in an investment.
7. Know Who’s Selling You the Dream
Warning: You might not like this tip but it could prove useful.
Just as the allure to “discover” the next Google is huge, there are a lot of dreams that look pretty but aren’t profitable.
These dreams include investing in cryptocurrency and buying your own home.
If you want to hear more of the specifics on why cryptocurrency might not be the best investment, check out the podcast episode. Ramit has a lot to say on the subject.
As for real estate, that might be more surprising. Isn’t real estate always a good investment? Well, not quite.
If you do the research, you’ll find that real estate consistently underperforms in the stock market. And if you run the numbers, you’ll find that there isn’t such a huge return on investment after you add in all the other fees.
Now, that doesn’t mean you should completely abandon your dream of buying a house.
…But perhaps you should question who sold you this dream in the first place.
Do you want to buy a house because you want to customize it? Because you want something to pass down to your children?
Or do you want it because you were told to want it?
Ramit believes that buying a home is such a major part of the American dream because there are people who specifically profit from others buying homes — realtors.
Yet only you know what’s right for you. Again, this is why creating your own definition of rich life matters. You get to consciously create your life instead of living on default.