Ramit Sethi: 9 Skills That Turned Him Into a Multimillionaire
When it comes to finances, a ton of advice is floating around. You might think you need to make a budget and track your expenses. You should try to save as much as you can. Skip the morning Starbucks.
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If you’re looking for advice that works, Ramit Sethi, a personal financial expert and author of the New York Times bestseller “I Will Teach You to Be Rich,” shared nine lessons that helped him become a multimillionaire. These lessons might seem somewhat counterintuitive, but they may help you take control of your financial situation.
1. Knowing How To Spend
Most people agree that saving money is a sound financial practice. However, Sethi warned that being too frugal can end up costing you in the long run. Being able to spend is a skill that helped him become as wealthy as he is.
Sethi explained that an 80-year-old who has spent their whole life pinching pennies to save millions will not suddenly know how to spend. Most people don’t realize that if you spend your entire life restricting yourself and worrying about money, the habit won’t go away.
In many cases, people devise an ultimate savings goal by picking a random number like $1 million. Determining a number you think will be “enough” may seem like a good plan, but ultimately, you might feel like your savings are never enough. It’s important to learn how to spend time enjoying your life in the moment instead of oversaving.
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2. Spending To Save
It might sound counterintuitive, but spending more money can sometimes save you money in the long run. In fact, being able to use your money to buy back time can be a great way to end up with more in the bank.
An obvious example of this is hiring someone to perform some tasks for you at work. However, there are other subtle ways to take advantage of this skill. Buying direct flights instead of cheaper flights with transfers for your next trip will save you time. Hiring a cleaner or nanny will also free up your calendar a bit.
What you do with this extra time is up to you. You may want to use it just to relax. That way, you can focus more intensely when you have to work. Your extra time could also lead to opportunities to earn more income.
3. Knowing When To Rent or Buy
Owning a house with a white picket fence has always been a huge part of the American dream, but according to Sethi, buying doesn’t always beat renting. When a monthly rental price is the same as a monthly mortgage payment, most assume that buying a house is the better option.
Sethi advised that you exercise some caution in this type of scenario and learn when to rent and when to buy. He explained that most people don’t realize the actual cost of homeownership. Before purchasing, you should run a buy vs. rent calculation first.
When you buy a property, you must pay the monthly mortgage price, but additional costs, like property taxes, maintenance and transaction costs, will also apply. These extra costs can raise your monthly fee by 30% to 50%.
When considering whether to rent or buy, Sethi offered some sage wisdom: A rent payment is the maximum you will pay. A mortgage payment is the minimum.
4. Not Fearing Debt
Being debt-free often means having much less stress, but sometimes it isn’t the best financial move. While most people try to get out of debt as fast as possible and pay their mortgage ahead of schedule, Sethi explained that there may be a reason not to. Remaining rational without a fear of being in debt is a very advantageous skill.
If you’re paying a very low monthly interest rate on your mortgage, like 2% or 3%, it may make more financial sense to invest the money you would use to pay off your mortgage instead. Calculate if you’ll make more by investing your extra money over the long term rather than paying off your mortgage faster.
5. Controlling Your Own Finances
Many people depend on financial advisors to make their financial decisions, but it may cost a lot more than you think. Being in control of your own finances can save you a lot of money in payments and fees. However, if you do have a financial advisor, understanding how much you pay them is crucial to accumulating wealth.
You can easily track your expenses when a financial advisor charges an hourly rate or per project. However, if they charge you a percentage, your expenses can amount to hundreds of thousands of dollars over time. Sethi calculates that a fee as low as 1% can cost you up to 28% of your lifetime returns.
Contact your financial advisor and make sure you’re aware of how they’ve structured your fees.
6. Being Conscious of What Pays the Bills
Doing something you love is important, and these days, there seem to be so many ways to monetize your passion. However, it’s important to realize that passion alone won’t pay your bills. Understanding what you can do to make money is a crucial skill for building wealth. If you want to start a business, Sethi suggested looking at three things to generate profitable ideas. They are:
What you’re good at
What you enjoy doing
What people will pay you for
The third aspect is vital. Ask yourself if there is a market for your passion project or if you’re better off pursuing it as a hobby. On the bright side, Sethi also noted that you often get passionate about things you’re good at. So, putting in hard work toward something can generate passion and money simultaneously.
7. Avoiding Financial Pressure
Contrary to popular belief, money can make you happier. At least, Sethi seems to think so. He said that people who put financial pressure on themselves to limit their spending can cause unneeded stress.
Instead of waking up and asking yourself what you will say no to today, you can focus on hitting four numbers: your fixed costs, savings, investments and guilt-free spending. Those who shift their focus onto the bigger picture find themselves with fewer limits and more opportunities to enjoy life. Learning this mindset will help you become rich.
Sethi also recommended spending on things that make you happy. Determine areas for spending that excite you, like travel, eating out or self-improvement. Indulging in these areas will make it easier to cut back on other areas that you’re less excited about.
8. Understanding the True Expense of a Monthly Cost
One of Sethi’s biggest warnings is that you should never make a purchase based on a monthly cost. Doing this can have negative financial ramifications for months or years. The skill of understanding what you’re actually paying over the long run is something many consumers don’t possess.
In a monthly payment structure, the seller can simply add more time to reduce the monthly price. For the buyer, the danger of this is that they feel like they can afford anything, even when the reality may be the opposite. Months or years in the future, you will still be paying for that expensive purchase and wondering where your money went. Seeing through this tactic and sticking to things you can afford will benefit your financial future.
9. Managing Money
While it’s important to know your spending habits, tracking your spending and managing your money aren’t the same thing. A very detailed spreadsheet that tells you exactly what’s going on with your finances may give you a feeling of control, but it may also be a waste of time.
The ability to manage your money efficiently is the final skill to learn. Sethi said that managing money is picking high-value things to focus on. Some examples are:
Can I improve my savings rate?
Can I invest more each month?
What is my asset allocation?
Keeping your finances simple often leads to better results. He suggested having no more than two credit cards, one checking account and savings accounts you’ve named with their purposes.
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This article originally appeared on GOBankingRates.com: Ramit Sethi: 9 Skills That Turned Him Into a Multimillionaire
