26 Minutes of Brutal Financial Advice (from a Millionaire)

A lot of people say they want financial freedom, but do you really know what that is? Do you really know exactly how much money you need? And do you know how to get there? I've helped millions of people radically improve their finances. And I get messages every single day telling me how they have incorporated it into their lives. So in this video, I'm going to give you the brutally honest financial advice you need to hear if you want to become financially free. Start starting with step number one. Ask the right questions. Now, just 30 seconds into this video, you might be wondering, hey, Ramit, tell me, how much. How much money do I need to be financially free? Is it 1 million, 5 million? 10 million? And I can tell you that you're already asking the wrong question. The truth is, no amount of money will give you financial freedom if you don't actually know what a rich life means. That is why there are so many people who become wealthy and they still chase the next dollar because they never actually asked, what is it all for? So you need to understand your personal definition of a rich life. There's no point chasing a random number without a personal reason behind it. Remember, your rich life is different than mine. That's how it should be. Unlike most people, you shouldn't just pick a number. A number itself is not very motivating, especially when things get difficult. Cell C13 is not going to keep you warm, okay? A rich life has got to be much more aspirational and personally rewarding than some number. And second, you don't even have any idea if it's the right number. Think about this instead. Imagine yourself as financially free. What does that phrase even mean to you? Does it mean being able to leave a job where you don't like or respect your boss? Does it mean being able to set limits on how much you work or potentially start a business where you can travel two or three months a year? Does it mean being able to pick up your kids every afternoon from school? You need to know what your vision of a rich life is before you start chasing money. So the first step is simply knowing what is your vision of being financially free? And the crazy thing is, this is the most important step. And yet it's the one that most people skip over. So much easier just to look at a number. A number makes me feel so good. I love. Numbers are so quantitative. And in America, quantitative goals are so much better than qualitative. Humanities are such a waste of time. What the F are you talking about? You have to understand what your vision is before you start chasing Millions of dollars. Okay, I know I lost half of the people watching this video because they just want me to show a bunch of math and show them some razzle dazzle calculations you can do. You all realize that money is just a small but important part of a rich life. You can make $500,000 a year or $5 million a year and not live a rich life. Alternatively, you can be a teacher, you can make the median income, and you can live a very rich life. So yes, more money is going to help you live a rich life, that's obvious. But you need to understand what that rich life even is. Honestly, if you can't create a vision today for what your rich life is, it's not going to get easier in 10 years. And sometimes we hear words like create a vision and we think it's got to be this thing. We sit, watch the sunset and sketch out the rest of our lives. That's not how it is. Sometimes a rich life can be as simple as I like this pen, I'm going to go on a pen travel journey to Japan, to Norway, and I'm going to find the very best pension could be as simple as. My rich life starts with having a iPhone charger in every single room. But of course, being financially free is bigger than that. And that's why I am emphasizing the importance of setting these big, beautiful goals. So to achieve financial freedom, start by defining what your rich life looks like. Think about it. What would you like to be spending more on and what would you like to be spending less on? What would you like to be doing with your time? What will it feel like when you wake up, when you eat lunch and in the afternoon and when you're with your family or friends? Think about that. In other words, instead of obsessing over a specific dollar amount, focus on what you truly want to get out of life and how your money can support that vision. Start by asking yourself these important questions. How many hours do I want to work each week? What do I want to feel like at different parts of the day, week and year? How do I want to spend my time outside of work? Where do I want to live? Why do I want to live there? And how much money would I need to be able to create this vision of my rich life? Because really, financial freedom is about aligning your money with your personal goals and values. And it has to be done together. One of the biggest mistakes that people make is they say, I'm going to make a bunch of money and then I'll figure out what my Rich life is I. Listen up, you freaks. Would you ever say, oh, I'm going to wait until I'm 55 years old and then I'm going to make some friends? Well, some of the people watching this video probably are doing that right now. That's why you're sitting alone. And if you look at your text message, it's literally completely blank. Since 2008, you haven't received one text except for Capital One saying, here's your login code, 025683. You can't wait until you're 55 to make friends, just like you can't wait until you have money. To create your vision of a rich life. You've got to start now. You've got to build the muscle of envisioning that rich life, of living it, of realizing, oh, my God, I actually don't care about pens, I want something else. I want a beautiful mouse. That's what my rich life is at this stage. And then you can start to develop it. Ultimately, your rich life will always be about not just what, oh, I get to buy some stuff, Fine, I love it. But also who. Who do I get to take with me? Who do I get to delight? Who do I get to surprise? And. And these are skills you've got to learn by doing that. Now, if you don't make your financial goals specific, you're going to end up doing what a lot of other people do, which is simply chasing this elusive number, trying to solve a hole in your soul that will never be solved by Excel and saying, I just need another 250,000. I just need to be able to withdraw 3.2%, not 3.5% per year. Safe withdrawal. 3.2. Okay, it's fine. Risk, risk. The problem is, this is exactly how people get stuck in the rat race. Regret really often comes from not having a vision and from having your money be misaligned with the kind of life that you want to live. So ask the right questions. Only then can you take the practical steps towards true financial independence. Which brings me to step two. Secure your financial base. Now, you can start making steps towards financial freedom today, right now. And it doesn't matter if you make 35,000, $50,400,000 a year. This principle works. You just have to adapt it for your own situation. But first, you need to secure your financial base. You need stability. And stability is not the most exciting thing. When people talk about money, they'd rather talk about infinite banking. But stability is essential. I love stability. I created what's called the tripod of stability. That means three things are super important in my life. I need to make sure they are stable. Work, relationships. And what the hell was the third one? Oh yeah, money that needs to be stable. What does that mean? It means that I'm spending time with my friends and family. It means that my money is invested primarily in low cost index funds. It's automated. And that allows me to take risks in other parts of life. See, there's no financial freedom without financial security. Many of the stories that you hear seem like moonshots. This person got accepted to the NBA. This person sold their company for $55 million. That's fantastic. But I don't build a rich life based on hoping that I'm winning the lottery. No, I'm going to engineer a rich life step by step by step. Even if it feels a little boring at first. This foundation, this long term thinking, it's a total necessity. It's the same principle that is the necessity in money, in fitness, in healthy relationships and anywhere else you're trying to improve your self development. First, the non negotiable the truth is high interest debt, like credit card debt, is one of the biggest barriers to building wealth. If you are stuck paying high interest debt debt like 26.99%, it's going to be very hard to get financial freedom. This is why it always confuses me when people are in $28,000 of credit card debt and they're sitting there talking about generational wealth. Generational wealth. Why don't you pay off your credit card debt first? This is like somebody sitting there in their kitchen going like ramit, I really think we need to add an extra bedroom. It's really going to increase the property value and we certainly need extra space. Our family's growing a. I'm like, your house is on fire right now. Why are you talking about a renovation? Pay off the debt. Okay. Credit cards for many people, give them the illusion of wealth. The problem is they don't really understand how high interest debt works. For example, I understand that I can get roughly 7 to 10% in the stock market, which turns out to be a lot of money. If I could get 26.99%, I would love it. Unfortunately, I can't. Nobody can. Consistently over time, however, you're probably paying 26.99% if you have credit card debt. So if you have racked up any amount of credit card debt, treat it like a red alert. Pay it off as quickly and aggressively as possible. I have lots of videos on this channel that will guide you through the process. And look, it doesn't matter if you have the best investment strategy in the world. If you are drowning in high interest debt, you are stuck and your house is on fire, period. Fix it first. Next, the safety net. Once you've tackled that high interest debt, the next step is to build an emergency fund. Think of it as your financial safety net, covering three to six months of bare minimum living expenses, basically what it would take to keep the lights on. And this emergency fund is what will keep you afloat during unexpected events, for example, a job loss, medical emergencies, or unexpected car repairs. Without this cushion, any financial progress you make could be wiped out in an instant. Now, you might be wondering, how do I start paying off debt or paying for an emergency fund when I don't have any money left at the end of the month? Now, this is a very good question. It's a very common situation for people. I'm not saying you have to start saving $500 a month or $1,000 a month. One of the problems that I consistently see when I look at people's finances is, is that they don't pay themselves first. You've heard this phrase, pay yourself first. Everybody's heard it, but almost nobody does it. And let me tell you what I used to do, because it was a horrible mistake. I used to sit there and work line by line by line with them. You know, somebody's at 116% fixed costs. And I would be like, okay, where do you think you can cut this? And they're like, there's literally nothing we can cut. I'm sitting there looking at a car payment of 1200 bucks a month. Their groceries cost 1600amonth. Their subscriptions are 948. They're like, we really need three gym memberships. And I realized that doesn't work. So I started doing something entirely different. I said, this is nice, esp. We're going to blank it out. I just zeroed the whole thing out. I'm like, you tell me you have this much money, where do you want it to go? And what you will see is that when people are free of the very constraints they have put upon themselves, they will often allocate their money very rationally. They will put money in savings right up front. They will put money in investments right up front. They will carefully control their housing and vehicle costs, because most of us are simply dealing with our finances that have been decided months or even years ago. In other words, sometimes you just need a fresh perspective on your money. Here's another way to look at it. Instead of going by absolute numbers, I need to save $500 a month. Work with percentages. That really helps make your financial goals scalable. So if you're making a low amount of money, then you're investing a low amount. That's okay when you're starting out, but as your income increases with a raise, with getting married or whatever other form of side business, that percentage naturally updates as well. Now, my recommendation to start off is saving 5 to 10% of your take home pay towards your savings goals, which includes your emergency fund. And again, that means that as your salary increases, even if you keep that number at 5 to 10%, the amount you're saving will increase as well. Even better, you can automate all of this. I don't want to be sitting in Excel and typing all these numbers and calculating stuff. I don't want that. Okay? I got other things to do like eat. So you automate this. I'm not kidding when I say that automating your money will be the single most profitable system you ever build. You can get that automation system in chapter five of my book. Again, I got plenty of videos showing you how to do this, so make sure you subscribe. Hit that button right now if you haven't already done it. And speaking of paychecks, one of the most overlooked ways of growing your money is to negotiate a raise at your current job. Remember, there's a limit to how much you can cut, but no limit to how much you can earn. I've got a whole video about that. But let's move on to step number three, putting your money to work. Money is life. Money needs to flow. It's like water. You can't just let it sit there. Let a bunch of mosquitoes feed on it. Money needs to move and you need your money to be moving so that it's growing for you. This is something that is frequently not talked about, especially among middle class and poor people. Wealthy people constantly talk about, invest your money, don't let it sit there. Why would you let it sit all in savings? It makes no sense. So remember how we talked about saving three to six months of expenses? Well, instead of letting that money sit around in a checking account, you want that to be growing in a high yield savings account. Now, these accounts are mostly available at online banks and they typically offer interest rates that are quite a bit higher than traditional savings accounts. So if you're not doing this, you're just letting money sit there and not actually grow for you. Now this Is the perfect example of a small, simple decision with large results. High yield accounts will grow your money a little bit. And I like it. I like that interest. I'm not putting money in a savings account to maximize interest. I'm putting it there to keep it safe. But I want to pick a bank that in general is going to give me a good interest rate. And I'm going to put that money to work. Knowing that real wealth is created by investing money. That means putting your investable money in assets that grow grow over time in things like index funds. Remember, investing is not about getting rich quick. It's not about winning the lottery. It's about building true sustainable wealth over time. So if you're just starting out with investing, start with the basics. Open a retirement account like a 401k at work. Contribute regularly. Invest your money within that account. When my friends and family ask where they should invest their money, I explain to them the importance of a target date fund, which is a really simple way to to invest your money. Now, I like target date funds because they are extremely simple. You don't need to look at PE ratios. You don't even need to rebalance your money, which nobody watching this even knows what it means. You pick one fund, you put your money in there and you simply let it cook. The way they work is they automatically are diversified and they automatically get more conservative over time. So when you're young, they tend to be more aggressive. That's exactly how you want it. As they're older, you want them to shift a little bit to becoming more conservative. You don't want Grandpa invested 99% in the S&P 500. Grandpa needs stability, okay? Grandpa can accept slightly lower returns in exchange for stability, which means, you know, increasing the bond mix, et cetera. When choosing which target date funds to invest in, it's pretty simple. You simply look for for the year you plan to retire. For example, if you plan to retire at 65 and you'll be 65 in 2060, you would look for a 2060 target date fund. You can find these low cost funds at Vanguard, Fidelity or Schwab. I personally use Vanguard. But it's totally up to you. I don't get paid for suggesting any of these companies. It's totally up to you to find a low cost target date fund that might work for you. One other thing about costs, a lot of people mistakenly have this idea that target date funds are super expensive. Guys, that hasn't been true for many, many years. Target date funds are extremely inexpensive. Sure, they do give you slightly lower returns than investing in a Pure S&P 500 index fund. But remember why they are supposed to do that. That's by design. Because over time they become more conservative. And this is important. Most people don't even know what rebalancing is. Much less do they actually rebalance their investments themselves. That means that a lot of people who started investing in their 20s or 30s, they have invested in something super aggressive, which is great. They've made a lot of money. But when the market goes down, and the market will go down, sometimes it goes down 5%, 10%, 15%. They often freak out because they see all of their investments in this one thing, the S&P 500, and they flip out and sell low. That's a bad place to be. You want to understand your risk tolerance. I don't mind that a target day fund has slightly lower returns for my family, for example. Knowing that it automatically handles rebalancing or becoming more conservative over time. All that to say. All you have to worry about is putting as much money as possible and letting it automatically diversify and grow. And over time, compound interest will do its magic. Now, if you want even higher returns and if you are a huge freaking nerd who wants to spend the next 40 years rebalancing your own portfolio, knowing that research shows you will not do this effectively or efficiently, that's totally up to you. You can choose your own index funds. Now, let's talk about index funds. And I want to pay some respect to David Swensen, who was one of my investing heroes. He was a legendary investor. Chief investment officer at Yale university for over 35 years. Basically, he was the man. He pioneered multiple techniques for investing university endowments and he also wrote a book on investing individual investors. Now, the funniest thing is he had access to the best managers, the best investors in the world. So he did a lot of alternative investing at Yale, but when it comes to individual investors, you and me, he basically said, you ought to pick some index funds. He literally said, you will never have access to the same resources that I do. I have full time, highly compensated investment professionals whose only job it is is to source the single best investments and track it. I'm talking about percentage points of his asset allocation. Meanwhile, I have some guy in freaking Kentucky who's always telling me, ramit, I can beat the market. It's not that hard. You just have to do your own research. I'm like, do you understand that high frequency traders literally move their offices and their fiber so that they can be one millisecond closer to the exchange. And, and as I'm saying this, the guy has no. He's got a bagel in his mouth. He has no idea what I'm talking about. I'm like, you have literally no chance of outperforming professional investors like David Swensen and his team. That would be like me. Ramit Sethi, author of I Will Teach youh to Be Rich. Walking up to an NBA game and being like, listen up, you jabronis, I'm gonna show you how to sink three point shots. Stephen, what's his name? Stephen Curry. Stephen Steph Curry. Move out of the way. I got this. Do you realize how absurd that is? I don't even know the guy's name. He's the best three point shooter of all time. I don't even know his name. And I'm like, hey guys, let me go ahead and show you how this works. That's what individual investors do when they talk about beating the market. So just stop, okay? Just freaking stop. All right, now let me go back to David Swensen for a second. Some people want to know, hey, I'm probably going to invest in a target date fund, but can you just explain how I would construct my own portfolio? Okay. Most people candidly should not do this. I'm going to show you why, because it gets complicated. But I want you to understand the theory. I don't want to hide anything from you. I want you to understand what goes into a well diversified portfolio. So here's David Swensen's recommendations. He recommended for an individual investor, 30% domestic equities, 15% developed World International equities. Those are from developed foreign countries like the UK, Germany, France, etc. 5% emerging market equities. That would be like China, India, Brazil, etc. 20% real estate investment trusts, REITs, 15% government bonds. Those are predictable balance risk and 15% TIPS or Treasury inflation protected securities. You can see this is a well diversified individual portfolio. Is it the best? Now there is no such thing as this the best. Okay? It's like saying is that the best workout depends on what your goals are. But we can see that in this Swenson allocation, no single choice represents an overwhelming part of the portfolio. That means his asset allocation, the way he allocates assets, is automatically diversified. Now, the coolest thing about this asset allocation is that you can actually reduce your risk while maintaining an equivalent return. This is about the only example of a free lunch in personal finance diversification. You can also See why this is probably not a good idea for most individual investors to choose. Consider that what if your international equity suddenly grow from x percent to Y percent? Now you need to rebalance your entire portfolio. Are you going to be monitoring your investment portfolio? Are you going to sell your winners? Or are you going to take the money you contribute to your asset allocation and put it into different assets? It becomes very complicated. I'm not saying this to scare you. There are a few people who want to do it on their own. I don't mind that. But I am showing you what it takes to do portfolio construction and this is frankly just scratching the surface. This is really simple stuff. It goes way, way, way deeper. Now, whatever option you choose, a single target date fund, buying your own index funds, or God forbid, picking individual. Don't do that. Just don't pick individual stocks, okay? You're going to lose money. Remember that investing is not a race. You don't need a perfect asset allocation tomorrow. Here's what I want you to take away from that David Swensen asset allocation example. First off, asset allocation is important. It matters far more than how much you spend on groceries or coffee for your entire life. Second, this is quite technical stuff. If you want to spend the next 15 years of your life learning about asset allocation, you can. In fact, you could go on one sliver of that pie chart and spend a lifetime learning about it. But There are some 8020 benefits you can get. A target date fund, in my opinion, is one of those 8020 benefits. You get basically 80, 90% of the returns with almost none of the work. You really want to ask yourself, how much do I want to do this on my own versus how much do I simply want to pick an index fund, a series of index funds, or a target date fund that's going to let me closely mirror, diversification and more importantly, get to my goals. Ultimately, remember this financial freedom is not about a get rich quick scheme. It's not about a quick fix or even picking one winning investment. It's about having a vision for what financial freedom means to you and then consistently slowly investing and saving so that you achieve that goal. Now, earlier I mentioned another video of mine where I show you the exact steps you can take to negotiate a higher salary at work. If you're serious about improving your finances, this advice could totally transform your financial situation. And many of my students have negotiated 5 to $50,000 raises using this material. Take a look.