Sunday, April 19, 2009

Personal MBA Update

I just finished reading "I Will Teach You To Be Rich" by Ramit Sethi this weekend and it was a pretty impressive book. Ramit Sethi maintains the blog; one of the blogs that I enjoy and follow. The book is targeted towards 20 to 30 somethings early in their financial journey, however I would say that it is a solid read for anyone that doesn't know where to start on their financial journey.

For me this book didn't offer any mind blowing technical knowledge. Any college graduate majoring in business possesses the basic knowledge imparted by this book. But I think that is what Ramit intended! Personal finance isn't book smart hard, it is discipline and will power hard. Where Ramit's book sets itself apart is the well thought out general theorem and the overall practicality of the advice. Anyone who doesn't know anything about personal finance could pick up this book and, with some self discipline, be on their way to reaching their financial goals.

I must say that part of the reason I liked the book is that I agree with about 99% of what Ramit preaches. Ramit just does a hell of a lot better job at tying in all his beliefs and concepts into one book. The only area that I disagree with the book about is regarding real estate. And it is not so much disagreement, since the more I read his passage on real estate the more I think I know the message he is trying to portray. He is trying to say that your house is not an investment and buying a home may not be the best choice for everyone. I would say that your house is not an investment while you are living in it, however when you are buying it you should treat it as such. I am a big proponent of the value of real estate and am excited to get my next property, and I think that although the book's advice is solid and warranted it may scare off some younger people who should be looking to buy a home or purchase an investment property. The section is pretty short so maybe I am just overreacting.

The book does an awesome job of formulating a system that works, both numerically and more importantly psychologically. This is where young people will really relate. He is not saying to cut out all the fun in your life. He recommends a system to save a certain amount, and reaffirms that it is OK, nay almost encourages, you to blow the rest on things that you enjoy. Whether that is food, vacations, or shoes is irrelevant. I couldn't agree more and I currently practice a very similar system. You can read more on my mentality on my money tips post here.

Overall, the book kicks ass. The read is easy, there are some funny off color remarks, and the theory parallels my own which I think (although biased) is pretty solid. I will likely recommend it to my buddies and acquaintances that are looking for a place to start. It is also a great book to have on the shelf to make sure you are sticking with those good habits. Check the book out. Here are my notes from the book.

- Why money and food are similar: We don't track calorie intake. We don't track spending. Eat more than we know. Spend more than we realize-or admit. Debate minutiae about calories, diets, and workouts. Debate minutiae about interest rates and hot stocks. Value anecdotal advice over research. Listen to friends, our parents, and TV talking heads instead of reading a few good personal finance books.
- You don't have to be an expert to get rich. You do have to know how to cut through all the info and actually start.
- Info glut; too much info leads to decision paralysis
- ....As the number of mutual funds in a 401(k) plan offered to employees goes up, the likelihood that they will choose a fund-any fund-goes down. For every 10 funds added to the array of options, the rate of participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money market funds. I made a note that I do the same thing at NJ diners. There are 200 number choices and I can't even begin looking because I am too overwhelmed.
- The single most important thing a person can do to be rich is to start early. See Time Value of Money Chart on page 5
- "Why does just about everything written about personal finance make me want to paint myself with honey and jump into a nest of fire ants? Personal finance advice has been geared toward old white men and taught by old white men for far too long. I don't understand why newspaper columnists continue to write about tax-optimization strategies and spending less on lattes, hoping that young people will listen. We don't care about that. We care about knowing where our money's going and redirecting it to go where we want it to go. We want our money to grown automatically, in accounts that don't nickel and dime us with fees. An we don't want to have to become financial experts to become rich.
- A lot of financial problems are caused by one person - you!
- For all those that blame gov't, CEOs, evil banks, etc. have any of them ever read even 1 personal finance book?
- More important to start than to spend exhaustive amounts of time researching the best fund in the universe
- Instead of "how much money do I need to make?" say "what do I want to do w/my life and how can I use money to do it?"
- Why do you want to be rich? What does being rich mean to you?
- Our biggest purchases are made on credit. Good credit is the first step in building a good financial infrastructure.
- One key difference between rich people and everyone else is that rich people plan before they need to plan.
- Table on page 17 showing how credit affects what you pay.
- While other people spend many hours cutting coupons, growing food in their gardens to save on grocery bills, or being frugal with lattes, they're failing to see the bigger picture. It's fine to be frugal, but you should focus on spending time on the things that matter, the big wins.
- If you pay your entire bill on time, its actually a free short term loan (credit cards) easy to track spending free warranty extensions and rental car insurance
- Avoid card offers in the mail.
- Avoid cash back offers because they don't pay, travel is better
- Friends brag about saving $10 on clothes while you silently save thousands by improving your credit score
- Pay on time, its the most important thing you can do. 35% of your score depends on it.
- Automate payments. You can get email and you can adjust the amount to pay in full.
- Eliminate fees - negotiate a lower APR - keep cards a long time and keep them active.
- Get more credit if you have no debt for a better credit utilization rate - 30% of score
- Use your rewards
- Avoid closing your accounts. You have less available credit and the same amount of debt.
- Pay down student loans
- Albert Einstein "Compounding is mankind's greatest invention because it allows for the reliable systematic accumulation of wealth."
- Ask your friends how much they have invested
- Millionaires invest 20% of household income each year. Wealth is measured by how much they have saved and invested over time.
- The Ladder of Personal Finance: 1. Contribute just enough to get 401(k) match. 2. Pay off cards and any other debt 3. Open Roth IRA and max it out 4. Go back to 401(k) and go above the match level up to the limit 5. Invest a non retirement account, pay extra on mortgage, invest in yourself
- Its not budgeting, its a conscious spending plan - Spend and invest enough and spend the rest guilt free
- Fixed costs 50%-60% Investments 10% Savings 5%-10% Guilt free spending 25%-30%
- websites on pg 109
- Americans love experts but being an expert is supposed to be all about results
- In 2001 Frederic Brochet ran a wine study. 57 experts evaluated on red and one white wine. After tasting the two they described red as intense, deep and spicy which are common to red wine. They described the white as lively fresh and floral which are also common. Not one expert picked up the fact that they were the same wine. The red was just some of the white wine with food coloring.
- You can beat the so called experts on your own but it takes guts because you have no one else to blame but yourself
- In an S&P study from 1983-2003 the market had an annualized return of 10.01%. During that period if you missed the best 20 days your return would be 5.03%. If you missed the best 40 days your returns would equal 1.6%. The only solution is to invest regularly putting as much as possible into low cost diversified funds.
- Yale's David Swenson said "Ive got 20 professionals here in New Haven devoting their careers to identifying high quality active management opportunities. An individual who devotes a couple of hours a week in the evening, at most, trying to compete with institutions that have armies of people out there? It just doesn't make sense."
- Survivorship bias does not include funds that fail. Only survivors.
- The perfect stock picking record. Email 10,000 people half about stock A and half stock B. If A goes up eliminate stock B group and email stock A group about C and D. Do the same again. And again. You now have 1250 people who see that you can pick two stock successfully. Each cycle is awed by the ability of the advisor. Don't trust the experts.
- Blogs on page 152
- Ask an actively managed fund or broker only one question, "What were your after tax after fee returns for the last 15 to 20 years?" They will not give you a straight answer because they will be admitting that they didn't beat the market.
- Warren Buffett "Be fearful when others are greedy, and greedy when others are fearful."
- 90% of your portfolios volatility is a result of asset allocation
- William Bernstein "Since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control."
- Your investment plan is more important than your actual investments
- "I believe that 98 or 99% - maybe more than 99% - of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs." Warren Buffett
- "When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long term index investor," Mark Hulbert
- "The media focuses on the temporarily winning active funds that score the more spectacular bulls eyes, not index funds that score every year and accumulate less flashy, but ultimately, winning scores." W. Scott Simon
- Links on page 197
- is craigslist for startups

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