Personal Finance: 10 Money Rules From Ramit Sethi

Good evening. Tonight we are talking about my money rules. And I have 10 of them and I'm going to share them with you and then I'm going to go into detail on them. Now, first off, let me show you what these money rules are. And remember, these are my money rules, not yours. I already know what's going to happen. I start talking about how I do this and that, and then the first thing people say must be nice. Ho. Ramit. Stop it. Just stop. These are my money rules. I'm showing you them because I want to show you what I develop for myself and then I want to hear what your money rules are for yourself. Okay? So here they are. I'm going to hold them up to the screen and I'll screenshot them. I'll link them or, I don't know, just screenshot. Yeah. All right, so that's. So that's it. That's the end of this video. Have a nice night. No, let's talk about them. So I'm going to read them off first and then I'm going to go into detail as to why I came up with these. Rule number one, always have one year of emergency fund cash. Rule number two, save 10% and invest 20% of gross income minimum. Rule number three, pay cash for large expenses like an engagement ring, wedding dream, honeymoon, 20% down minimum on a house. Rule number four, never question spending on books, appetizers, health, or donating to a friend's charity FundRaiser. Rule number five, business class on flights over four hours. Rule number six, no limit for spending on health, like a personal trainer or education, like courses, events, etc. Rule number seven, buy the best and keep it for as long as possible. Rule number eight, earn enough to work only with people I respect and like. Rule number nine, marry the right person. And rule number ten, prioritize time outside the spreadsheet. Okay, just from listening to these rules 1 through 10, what do you notice? What do you notice? Some of the things that I would notice if I were sitting in your chair might be. First of all, who the hell has money rules? The fact that there are rules in and of themselves is interesting. And I wonder, how did this person come up with these rules? So we're going to talk about that. I noticed that things like business class on flights over four hours, that would have been inconceivable to me several years ago. So these rules change over time. Okay. And I also noticed that some of these are a bit confusing. Like, why does this guy keep on mentioning appetizers? What's up with that and marry the right person. What does that have to do with money? So these are some of the things that I might notice. But my question to you is, what do you notice before we start working down the list, Cas, are there any comments on what people notice? No, there are no comments. All right, great. Then I get to do the favorite. My favorite thing, which is I'll just talk. That's what I was put on this planet for. Alright, so I want to talk to you about how do I come up with them? And then we'll work down our way down the list. So I think that in life, for the important things, everybody should develop a point of view. And I believe that a point of view is one of the rarest things on the planet. And those important things in life might be money, might be relationships, it might be health, it might be parenting. There's a few things, probably fewer than 10, that are really important enough that you develop your own philosophy. And every time I meet someone who has a philosophy on one part of their life, I just love it. I've met parents and, and they parent in a style that's a bit surprising to me. But I love hearing the way they think about it because they have thought about it and they have written down or encapsulated their beliefs into a few bullet points. So with money, which is part of my business at I Will Teach youh Be Rich, I have developed my own philosophies about spending and saving. And so what this allows me to do by narrowing it down. Every day we wake up, there's a million decisions we can make. Should I eat out? Should I buy this new iron? We're going to grocery shop, Should I go to this store or that store, et cetera. And by coming up with a few key beliefs, Suddenly I eliminate 99.9% of decision making and I can go back to the important things in life. Just to give you an example with number two, save 10% and invest 20% of gross income. The way that that flows into my life is if I am doing that, then I don't really have to worry about spending at a general level. Why? Because I'm following my rule. And these rules, if followed correctly, lead me to the right place for me. So that means suddenly, if I'm wondering should I buy this extra large salad or whatever, I should never be asking that question. Instead, that's a $3 question. I should be asking this 30,000 or 300,000 or even more questions. Am I correctly saving 10% and investing 20%. That is a big question. Going for an extra large drink is a $3 question. Okay, so that is why I came up with this and that is why I would challenge you to come up with your philosophy or your own money rules.

We got some responses.

Okay, what do they say?

Okay, first one, they're personally tailored to your values. And you they're not compelling. Cookie cutter.

Correct.

Your rules are more about people than just money.

What's money for? At a certain point you've covered the basics. You got to use it for the things you love. Great observation.

Your roles reflect your values and personal experiences.

Yes. And you can see that with, for example, books. I love books. I wrote books. I love them. So I'm going to prioritize those more. Pretty much. Very few people will have books or appetizers in theirs. Just doesn't make sense. But those are part of my heritage, so of course they're important to me. Notice, Cas that I don't have anything about cars on here. Yeah, I don't really care about cars. And I don't have something like buy the newest computer every year. In fact, quite the opposite. Buy the best or headphones. Buy the best and keep it for a long time. I believe that I live that. So great observations. All right, what do you say we work down this list and talk about why? All right, so rule number one. Always have one year of emergency fund in cash. So I'm more conservative in many ways when it comes to finances. I want to make sure that I set myself up so that if something catastrophic happens, I don't have to worry about my finances. We are seeing that happening right now. Now I typically don't. I didn't recommend a one year emergency fund for most people. Typically it was three to six months. I have recently recommended that everybody have a one year emergency fund. You have to understand why I recommend that and you also have to understand the trade offs. So I chose a one year emergency fund because I've built up enough income and net worth. Yes, I might be sacrificing a little bit of returns, but I'm doing fine in terms of investing. I want to protect my downside. Okay, downside protection. For most people, if they think about a one year emergency fund, it's overwhelming, it's a lot of money. And also there's a trade off where they're just keeping money in cash and not investing it. So that's a trade off you'll need to consider. Although my recommendation is now everybody to have a one year emergency fund. Liquid, I keep it in a high yield savings account. And you can do the same thing with yours. The key principle here is to always plan for the best and the worst. Now if something bad happens, like a global pandemic, if you are laid off, you have to remember you're not the only one who's going to be looking for a job. So is everybody else. And so with a one year emergency fund that's liquid and available, you know that at least you're going to buy yourself some time. You can cut your expenses, you can get creative with your earnings, and you will buy yourself some breathing room. So that is the reason, and that is first, because we always want to make sure we have a roof over our heads and enough to eat. Number two is growth. It shifts very quickly into growth. Save 10% and invest 20% of gross income, minimum. Okay, what am I doing here? So I want to save 10% because I can use that savings as I cover in my book for things like my emergency fund. I can also use it for things like vacation things, a down payment on a house, things that I know will be coming up in the future. Invest 20%. I'm investing more because especially if you're younger, every dollar you put into investments is going to be worth many, many, many times more. So a lot of people who are new to money, they save a lot and they feel really good, but they're actually just treading water because the real money is generated from investments. That is why I prioritize investments higher than savings in terms of percentages. Now, why did I say gross income? Some people do percentages based on gross, some do it on net. Net is what you have after taxes. That's really up to you. I like to live life in some ways on hard mode. Like I said, I want to be conservative. So it's like people who run with a weight vest. You know, you've seen some people, they run with a weight vest or they train at elevation. Why? Because when they go back down to normal life without a weight vest or back in normal elevation, it's a lot easier. So if I'm choosing gross, that means I have to save and invest more money. Now, you don't have to do that. I just choose to do that because it forces me to get aggressive. I also want to point out that if you run a business, this number could be very different for you. Now, this is a little bit more of an advanced concept. Most people who have a 9 to 5 job, they, let's just say that for easy Math, they make $1,000 a month. So, so they could take 10% put in savings, 20% put in investments. But a business owner might pay themselves a salary, but once every year, once every couple years, they take a huge distribution. So that distribution could actually pay for 1, 2, 3, 4 years of your contributions. So again, that's a little bit more of an advanced concept. But business owners who are slightly more sophisticated will know what I'm talking about. So what I'm saying is that my income could be lumpy. That's okay, I can figure it out on the back end. Alright. Oh, final thing. Why, why am I talking about this? If I save 10% and I invest 20% or more, I know that I'm doing great on the income and growth side. That is awesome. And that means if it comes to sitting out at a restaurant and ordering a cheesecake or an apple piece, I'll just get both. It doesn't matter because I know that the big question, the 30,000 or $300,000 question is already being automatically handled. And this is one of the most important rules here. Pick a rule where if you just follow this, you are doing the right thing financially. This is the crux of the rules. It's really important. Okay? That's rule number two. Rule number three. Pay cash for large expenses like a wedding, honeymoon, etc. And 20% down minimum on a house. I probably shouldn't have used the word cash because people think that I'm literally handing over, you know, like $10,000 in cash. No, what I mean by cash is that I'm not going into debt, right? I'm still going to pay with a credit card because I want to accrue rewards and consumer protection. But it means that I have the cash available to be able to go and, for example, buy a ring or pay for a wedding or a honeymoon. Okay? And with a house, again, very conservative. 20% down minimum, if not more. Now a lot of people will say, well, why would you pay that much down? You know, interest rates are low, all that stuff. Fine, you can choose maybe to put 5% down, but have the remainder in cash. But that's a very, very advanced concept. Most people frankly choose to put 5% down because they don't have the cash. You do not want to do that. If you go to buy a house and you can't put 20% down, you're not ready to buy a house. Okay? And I talk about this extensively in chapter nine of my book, you will discover lots of phantom costs you never expected. Oh, your roof. Oh, the backyard landscaping, on and on and on. And if you've just been planning that your mortgage is it, you made a big mistake. So again, play conservative. Be able to pay for the big things in cash. That's my rule, and therefore I'm already thinking 10 years ahead. What are the expenses that we are likely to have in 10 years? Cas, what do you think we might incur big expenses in 10 years?

Oh, definitely a car.

Okay, good one. So we should probably think about ballpark, what kind of car would we like to get? When do you think we might get it? In fact, let's just do it right now. Let's say we're going to buy a car. I'm just going to make the math easy. Let's say that it's going to be $60,000. Okay, I've never bought a car that expensive. But let's just pretend. When do you think we're going to get a car? Is it going to be next year? No, no. Let's say five years from now. That's 60 months away. I can put $1,000 a month into a sub savings account and at the end of five years we are ready to pay for it in cash. That's the way we would do it. What might be some other big expenses?

Maybe a house.

House. I think we talked about a ten year wedding anniversary.

Oh yeah, we're gonna do a big bash.

Big one. And we got really inspired and we were like, let's, let's really bring our whole family. Let's like make it big. So we start putting some money aside for that every single month. And the longer the time horizon, the less you have to save in order to hit that goal. All right, so that's a more advanced way of thinking in the future and that's where you can put some money towards as well in terms of savings.

And some really nice sweaters too.

That is a given. I'm not waiting 10 years for that. Talking about 10 days. All right, number four, never question spending on books, appetizers, health, or donating to a friend's charity fundraiser. So I created this rule for myself because when I went to college, I paid for Stanford undergrad and grad school with scholarships. And one scholarship that I got was incredibly generous. And they effectively said all of your books are completely covered. They even set me up with an account at the Stanford bookstore and I would get any book I wanted. I didn't even go to the normal register. I went to some other desk and they had my account on file and it was free. So I had free books for five years. That's like. It's like Willy Wonka. You know, that kid who has, like, the fat cheeks and he walks in, he's like, that was me in a bookstore for five years. So any book I saw, it felt like the most freedom I had ever had to be able to walk into what is my paradise, see a book on cults or see a book on personality psychology and say, I'm going to get that. Boom, take it up, read it, it's mine. And when I left college, I wanted to continue that, and I wanted to continue that freedom because it felt so good. And I realized that in the grand scheme of life, unlimited books is not that expensive. It's really not. So I just made the policy for myself. And now whenever I see a book, I follow what I've invented called Ramit's Book Buying Rule. If I ever see a book that's interesting, I click buy. Never hesitate, never equivocate. Similarly, appetizers. When I was a kid, we didn't. We hardly ever ate out, and we certainly did not get appetizers or desserts. We got maybe two pizzas for our entire family, two Cokes to share, and coupons. We always use them now. It feels extremely freeing to be able to go and say, yeah, I'm going to get that appetizer. Or which appetizer looks better, this one or that one? Let's get them both. And so, Cass, do you know my policy when I take my co workers out to eat? Have I ever told you what it is? What is it?

Yeah, they can order anything on the menu.

Yeah. The rule I tell, I tell my coworkers when we get a chance to meet in person. I say, I only have one rule, which is whenever we eat out, if there's anything that even remotely looks good, you have to order it. And for me, the amount that I spend is small, but the joy in personally being able to do that and to be able to do that for my co workers is incredible. So part of creating your own money rules is making them meaningful for you. Nobody else probably has this story, so this doesn't make any sense for you, but for me, I am smiling ear to ear when I see one of my coworkers. I don't know, should I order this steak? It's a little. I've never had. Get it, please.

Well, so that's interesting how, like, when I grew up and even, you know, recently, when I would hear the word rules. Yeah, I would think, oh, it's something bad, something restraint, all that stuff. But like the one you just shared with your co workers about they could order whatever they want is actually amazing. And it's fun, it's interactive. So I think reframing the word rules.

Great, great insight. Yes, Rule. These are my own rules. So of course I want them to feel good and be empowering and give me free. I think it's a great observation, donating to a friend's charity fundraiser. One thing that I have learned is that have you guys ever done a fundraiser, a charity fundraiser? Most people have not, but maybe at one point or another in your life, you will. Maybe you'll do a 5K, maybe you'll do a run for breast cancer, whatever the case may be. And I remember I've gotten these emails from my friends, you know, when I was in my early 20s and, you know, once in a while I would donate, but most of the time I wouldn't. And then I started doing fundraisers, right? And Cass, we did one together. We did a charity fundraiser to raise money for children being separated from their parents at the border. And we sent an email out to our friends. And I have to say that nobody really likes asking for money, right?

And no one really likes to donate.

And no one really likes to donate that. Well, I was going to get to that, babe. Thanks a lot. Thanks for the punchline. So I have to say that because I sell premium products and I have over 40,000 customers, I have no problem selling. And when I am doing it for a cause that I believe in, this money was not going to me or to us. It was going directly to people who needed it. I'm shameless. I told people, look, this is important. I need you to donate. And I watched what happened, right? I'm well versed in conversion and all these things. And it is amazing to see when you are on that side of the table, when you're asking for someone to donate money to something that is meaningful, that you feel vulnerable and you wish people would just donate fast and donate early and donate more than you ask. That's what I wished. And I was really humbled and surprised. Some people came in big. Never forget it. Some people didn't respond to the email or the multiple emails. And I'll never forget that as well. So my pledge from a few years ago was, if someone is asking me for a charity fundraiser and they're a friend of mine or certainly a family member, it's a guarantee I will always donate. That is a rule. Because the money is not going to Change my life. But just when you're on that side of the table and you're raising money, it means everything that someone donates fast. They donate the full amount or they donate more. Simple. All right, Number five, business class on flights over four hours. This is simple. It's something that I wanted. And when I first started off in my early 20s, I scoffed at everyone who's been business class. Oh, so stupid. Why are they wasting money? And then I realized, oh, business class, pretty nice. And so because I could afford it and because comfort was important to me, I just made a rule. Now the rule here eases my decision making because I used to sit there and if it was a one hour flight or a three hour flight, a six hour flight, too many decisions. So here's the blanket rule. Four hours or more. My assistant knows my rule and she knows the exact seat and seat number that I want to fly in and she'll just book it, no questions asked. So that is a policy I've now put into place. It's an awesome policy, but notice that it's also not first class or business class everywhere because I also don't mind sitting on any old seat if I have to. If it's a short flight, right? I'm healthy, I can do it. So part of these rules is not always going 0 to 60, but finding when it's important to you. Alright, that's that. Number six, no limit on spending for health, like a personal trainer or education courses, events, etc. Just like I see a book, if I see a course or an event that looks good, I'm in. Price is irrelevant. I remember when I went to the Disney Institute course. I've been eyeing it for years. I finally was ready. I picked a date, I sent it to my assistant and I said, could you please book this for me, Orlando? I don't even know what that cost. I think it was three to $5,000. But it was important. And there are some things in life I just don't look at the price for. By the way, you have that too. Everybody has it. If you're a parent, whatever diaper brand you like, you could find a diaper brand for half the price, but you still spend on the one you do. If you like a certain type of organic food, you could find something for half the price, but you don't. So all of us have something that is valuable and meaningful to us. For me, it just happens to be education and also health. So when, you know, I wanted to get a personal trainer and I don't want to look on YouTube and I don't want to do it myself. I want a trainer because I want better results, I want faster results and I also want to go in and not have to think about it. So that's important to me. So I use my money to help me live a richer life. Alright, number seven, buy the best and keep it for as long as possible. So I grew up in a family where, you know, we saved them, we had to save a lot of money. We were a frugality based company because there were six of us and my dad was the one going to work and my mom was home with us. But I did get glimmers of buying the best and keeping it. My uncle had, he was a photographer and he had a Leica. And Leica is some of the best cameras in the world. And the lenses are just beautiful. They're functional pieces of art. They're just amazing. And he had given that camera to my dad I think in the 70s. And that camera still works. In fact, that's the camera that I learned to take photos on and develop in the dark room. So started to get a taste for what it's like to have the best, but also to keep it forever. That camera has been in our family for generations and it will continue to be. And so I started realizing there are some things in life that I really care about. I guess when I started off I couldn't really afford the biggest best car, nor did I really care. I bought a Honda Accord. That's a good car. That thing will last forever too. It's been still there, it's 20 years. The thing runs like brand new. So that's it. That's an example. In that case, I did not buy the quote best, like most luxurious. I didn't ball out on my car, but I certainly did buy the most reliable one. Right? Great. Honda Accord. I applied this to my life with when I bought my computer. In fact, Cas. This is something that I shared with you. When you were thinking about what phone to buy, I was like, just get the one with the most storage space.

Yeah.

Remember it's like 300 bucks more, but you will keep it for years. And what was your reaction at that time?

I was like, what? No, I'm gonna get, I'll get the newest model but the lowest storage space. And. But then I was always frustrated because I never had enough room.

Exactly. So for the things that you use day to day, especially the things that are important, your phone, get the best, but then keep it. One thing I find is that people who buy the best often are just flexible, flipping it all the time. Now, if you can afford to do that, okay, fine. But a lot of times they'll say, oh, I'm going to buy these really nice pants, or really nice this, and they wear it for one season and it's over. Or they get the new phone or they get the new house or car. That's a quick way to really spend too much money. When you buy the best, if you amortize it out over three years, five years, seven years, sometimes 15 years, the cost is quite affordable. However, the problem is you have to do the second part, which is to hold it for a long time.

Also with. Because I see this with clients and their clothing and wardrobe. So when you buy the best two, you also have peace of mind that it's not going to give out in one wash or two washes. Like, you know that you're going to have it forever. And it's reliable, too.

I totally agree, and I can speak to that with my own clothing. So having bought really nice sweaters and pants, and then also, I don't need everything to be perfectly nice. I bought some things that are more budget, but when you really put them through wear and tear, you can see the difference. But I think peace of mind goes even beyond that. I had a. I've referred before to my cashmere sweatpants that are probably my favorite piece that I own. And they're just like. They're totally over the top. They feel amazing. I've worn them for, what it's been like, three years. I've worn them thousands of times. The drawstring frayed, and I took it back to the store and I asked them, can you guys give me another drawstring? It's a very particular type of drawstring. It's visually, it has an appeal to it. And they said, okay, it's going to take us a few months to get it from Italy. And I was like, can you guys do something else? And they had a tailor there. He goes, hold on a second. He comes back upstairs. He pulled a shoelace out of one of the shoes. He goes, let me try this. I go, what? He goes, just give me five minutes. He put it in as a drawstring. He's like, I will style it so it looks exactly the same. And they messengered it back to me, like, three days later.

I was like, and it looks really good, too.

It looks amazing. So again, why am I obsessed and why am I smiling so much over these sweatpants? It sounds ridiculous but to me I love them. I know that these things make me happy when I put them on. I've worn them for years. I bought the best. And I also have peace of mind that if something goes wrong I'll be taken care of.

Yeah, and they fixed it so quickly too. They're not doing that at Uniqlo, correct? Yeah.

Okay. Number eight, earn enough to work only with people I respect and like. Notice that this really only tangentially touches on money but it's about the fact that I want to wake up in the morning and be happy with my co workers. I don't want to have to work with someone where when I look at my meeting invite on the calendar the first thing I do is and I think some of us have had people like that in our life where they're just a downer or they're actually abusive at work. I will not stand for it. I have fired seniors.