This article is an excerpt from the Shortform book guide to "I Will Teach You to Be Rich" by Ramit Sethi. Shortform has the world's best summaries and analyses of books you should be reading.
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What major financial milestones have you gone through in your life so far? Did you get a promotion? Take out a mortgage? Pay off your student loan? Maybe, started investing?
There are a few financial milestones that most people in their twenties and thirties need to consider—like paying for a wedding, negotiating a salary at a new job, and buying a house. Knowing how to navigate them is crucial for financial stability.
In this article, you’ll learn the best way to approach those milestones, starting with paying down your student loan.
Most people who graduate from college do so with a hefty amount of student loan debt. That debt can feel demoralizing, but don’t worry: Studies show that investing in your education is a solid financial decision because it significantly increases your earning potential over a lifetime. Beyond that, student loan debt tends to have a much lower interest rate than credit card debt, which means you can (and should) start investing even before fully paying off your student loans.
Investing and Student Loans
If you have student loan debt, there are three ways you can approach investing: invest aggressively, pay off your debt aggressively, or combine the two.
- If you want to start investing aggressively right away, you certainly can, as long as you’re still making the minimum payment on your student loans each month. This is a smart decision if your student loans have particularly low interest rates, because the money you make from the average 8% annual return on your investments will more than make up for the money you lose due to accrued interest on your loans.
- There can be an emotional cost to focusing on investing, because it will take longer to pay off your loans and you might feel like they’re hanging over your head. If that’s the case, you can divert the money you would have invested toward your loans to pay them off earlier. However, if your loans are large and it will take years to pay them off, keep in mind that not investing during those years could cost you in the long run because you’ll miss out on the earnings from compound interest.
- Overall, Sethi recommends taking the best of both of these approaches by paying slightly more than the minimum on your student loans each month while still investing aggressively with the rest of your money. That way, you can speed up the process of paying off your loans while still taking advantage of investing early and letting your money compound for longer before retirement. With this approach, you don’t need to worry about interest rates because student loans tend to have interest rates that are roughly the same as the average market return of 8% (which means you’ll pay about the same amount whether you keep accruing interest on your loans or miss out on interest earnings in the stock market).
Money and Family
As you work through the advice in this book, you might be tempted to share your financial wins with your loved ones. If you do, keep in mind that money is a fraught subject, and you might notice some uncomfortable or negative reactions from your friends and family. Try not to take any negative comments personally—remember, people tend to react based on their own invisible scripts around money, which aren’t always logical.
At some point, you may also need to have tough conversations with your family about their finances—especially if your parents are in debt. This can be a particularly difficult conversation to have because it reverses the typical parent-child roles; parents are used to helping their children with money, so the idea of their kids helping them can be tough to swallow.
If you suspect your parents are in debt and you want to help, it’s important to approach the subject carefully and compassionately. Start by asking questions about money in general (not about their debt specifically), like how they learned about personal finance or what their ideal financial situation would be. Starting with general topics like these often helps parents warm up to talking about their finances with their children at all. If that goes well, you can move onto more specific questions about their investments, credit cards, and savings.
As you approach these conversations with your parents, keep in mind that they may not be willing to talk about money at all—and even if they are, they may not be ready to accept your help with their finances. If that’s the case, don’t force it. As difficult as it might be, whether they take control of their finances is ultimately their decision.
Money and Marriage
How much you choose to talk about money with your family is up to you—but if you have a serious romantic partner, conversations about money will be impossible to avoid. In this section, you’ll find advice for three common sticking points when it comes to love and money: talking about money with your partner, paying for a wedding, and prenuptial agreements.
Talking About Money With Your Partner
Before you can dig into the nitty gritty of your personal financial situations, you and your partner need to get comfortable with talking about money at all. That might be especially difficult if you’re not used to being open about your finances, or if you know that you and your partner have very different financial situations (for example, if one of you makes more money or has more debt than the other). However, if you approach the conversation with an open, humble, and nonjudgmental attitude, discussing money doesn’t have to be a scary thing.
To make these conversations easier, start with general questions—like how your partner thinks about money in general, how their parents talked about money, or what their ideal financial situation would be. Put them at ease by being vulnerable and sharing something about your own finances (for example, if you know you tend to overspend in a certain area, or if you’re stressed about your credit card debt). That vulnerability will encourage them to share openly in return. This conversation doesn’t have to happen all at once—it might take place over the span of several weeks. Either way, remember that the goal is for both of you to get comfortable talking about money and helping each other prioritize your financial health.
Once you and your partner are comfortable talking about money in general, it’s time to dig down into specifics. Sit down with your partner and openly discuss your salaries, savings, spending habits, debt, and financial goals. Here’s an example of how you could approach this conversation.
First, start by talking about your short- and long-term financial goals. This could be anything from taking a vacation next year to going back to school or supporting your aging parents. You should also get clear on the kind of lifestyle you’re hoping to live—will you spend thousands every year at bars and restaurants, buckle down to save as much as possible and reach FIRE at 35, or something in between?
Once you’ve both had a chance to share your goals, discuss your spending habits. Again, you can put your partner at ease by going first. Show them your plan for spending, including any areas where you feel you could improve, and ask for their feedback. Talking about your plan will naturally open the door to discussing your debt, savings, and investments (since you’re making automatic payments to all those accounts each month). At this point, you can also talk about how you’ll handle joint expenses if one person makes more money than the other (for example, if you make more than your partner, you might split the rent payment 60/40 instead of 50/50 so that you’re both putting the same percentage of your monthly income toward rent).
Finally, when you’ve worked through all the details together, end the conversation on a positive note by setting up a few savings goals together, like a tropical honeymoon or a bigger apartment. As you continue having conversations about money, you can get more specific about these goals.
- This has the added benefit of making it easier for you to bring up concerns about your partner’s spending habits down the line. If you’re worried that your spouse is spending too much, you can remind them of your joint goals (and how important those goals are to both of you) rather than directly accusing them of spending too much and making them feel judged or attacked.
Paying For a Wedding
Studies show that the average American wedding costs somewhere around $35,000—and that the average American thinks their wedding won’t cost nearly that much. But when it comes time for the big day, most people end up paying far more than they planned on all the details that go into a wedding. Those costs can add up quickly, and they can even put you into debt if you don’t plan ahead.
Instead of assuming that you will somehow beat the average and have a truly simple, low-budget wedding, take those statistics to heart and start saving for your wedding now—even if you’re not engaged. You may feel silly doing it, but you’ll be far better off than if you just assume you’ll somehow have an extra $35,000 on hand when the time comes. Plus, if you don’t end up spending that money on a wedding, you can always put it towards a different savings goal.
To figure out how much you should be saving for your future wedding, start by estimating when you want to get married (for reference, the average age at marriage is 27 for women and 29 for men). Then, use that estimate to figure out how long you have to save, and divide the total wedding cost by that number.
- For example, if you’re 24 and you plan to get married at 29, you have five years (or 60 months) to save up enough money. Assuming you’re paying for the entire wedding yourself, that means you need to save $583.33 every month for the next 60 months.
Prenuptial agreements (or “prenups”) are legal contracts that two people sign before getting married that dictate how their assets will be divided in the event they get divorced. Typically, people only sign prenups if one partner has a much higher net worth than the other, or if one partner owns a business. That way, if the relationship ends and things get contentious, the richer partner won’t lose the wealth they accumulated prior to the marriage as part of the divorce settlement.
There is a cultural stigma against prenups: They’re considered unromantic because people see them as a sign of doubt that the marriage will last. It’s true that no one wants to think about the possibility of divorce before they’re even married, but it’s also important to keep in mind that marriage isn’t just about love—it’s a binding legal contract. And like any other legal contract, it’s important to make sure you’re protected from potential losses before signing.
If you own a business or have significantly more wealth than your partner and you do decide to sign a prenup, you’ll need a plan for how to bring up the subject with your partner while still reassuring them that you don’t intend to ever have to use it. Before springing that conversation on them, make sure that you and your partner are comfortably talking about money on a regular basis and that you’re both completely transparent about your own finances. Then, when you’re ready to talk about prenups, here’s how to do it:
- First, reassure your partner that you’re marrying them because you want to be with them forever and that you don’t see divorce in your future. You may need to come back to this point several times as the process unfolds—especially once lawyers get involved.
- Second, take responsibility for your decision. It might be tempting to blame it on your lawyers, but being dishonest will only make the process harder.
- Third, explain your reasons for wanting a prenup (typically because you want to protect the business you built before your marriage).
- Fourth, don’t be afraid to get help. Talking about prenups can bring up a lot of difficult emotions for both of you, and a professional marriage counselor can help give you the tools to communicate those emotions in a productive way.
Negotiating a Higher Salary
Now that we’ve talked about money and relationships, let’s talk about how to handle money issues at work—specifically, how to negotiate a higher salary at a new job. Technically, you can use the tactics in this section to negotiate a raise at your current job, but the best time to negotiate your salary is the moment you get hired because you have more leverage. The company most likely spent thousands to recruit you, and they’ve communicated that they think you’re a valuable asset. Negotiation is your way of showing your new employer that you know your value and you expect to be compensated accordingly. Here are Sethi’s top tips on how to negotiate a higher salary:
- Make the negotiation about the company, not about you. In other words, emphasize the value you’ll add to the company rather than how much your salary will cost them. Be specific about what you bring to the table and keep the conversation focused on why they’re getting a great deal by hiring you, even at a higher salary point. You can drive this point home by sending the hiring manager a comprehensive list of how you plan to excel in your new role.
- Leverage other job offers. If you’re actively job searching, you’ll most likely have at least one other offer. Mention this during your salary negotiation so that the hiring manager knows you’re not afraid to walk away if she can’t come up with a fair number. (However, if your other offer is from an inferior company, don’t name names—just give a description of the industry.)
- Negotiate total compensation, not just money. Don’t be afraid to ask for vacation days or stock options as part of your overall compensation.
- Be friendly. Smile often and remember that your goal is to come up with an agreement that works for both of you. This is a cooperative process, not a battle with winners and losers.
- Let them make the first offer and don’t reveal your salary. If they ask your current salary, politely but firmly redirect the conversation. Making the first offer and revealing your salary both give the hiring manager a baseline number, which makes it easier for them to make a lowball offer rather than an offer that reflects the real value of the position.
- Practice, practice, practice. Ask your friends to play the role of hiring manager and drill you with the hardest questions they can think of. You’ll feel awkward at first, but try to take it seriously. Run through the negotiation process several times until you feel more comfortable asking for what you want.
Another financial milestone on the horizon for many young people is buying a car or a house. These “big-ticket” items are important because they’re a unique opportunity to save money—so much so that if you do it right, you can save so much on these purchases that you won’t need to worry about saving on smaller things like groceries or clothes. In this section, you’ll learn how to approach these big purchases in a way that will save you money in the long run.
Buying a Car
The first step to buying a car is figuring out your actual budget. To do this, look back at your plan for expenditure to see how much you can afford to put toward the costs of owning a car every month. This isn’t just a car payment: You also need to include insurance, gas, parking, and maintenance (these expenses will vary based on where you live and how you use your car). In other words, if you plan to spend around $500 total per month on your car, you can probably afford an actual car payment of roughly $200 per month—or $12,000 over five years.
Choosing a Car
The next step in buying a car is choosing the right car for your lifestyle, budget, and tastes. To do this, start by thinking through your priorities when it comes to transportation. If you love cars and enjoy driving, you may want to push your budget to buy the fanciest model you can afford. On the other hand, if you see your car as just a tool to get from one place to another, you may be able to find a reliable car for less than your monthly budget and use the savings for something you really care about.
When you’re deciding what car to buy, keep in mind that the single best way to save money on a car is to drive it for as long as possible—ideally, over 10 years—because the real savings don’t start until after you’ve paid off the car in full. That means that when you’re looking to buy a car, you should choose one that is reliable enough to last over a decade (and since you’re going to be driving it that long, make sure the car you choose is one you really like).
Other factors to keep in mind when choosing a car are insurance costs (which will vary based on whether the car is new or used), gas mileage, and resale value (you can look up the resale value of any car using Kelley Blue Book). You’ll also need to consider the down payment, which is the money you pay for the car up front rather than on a monthly basis. In general, the down payment for used cars is lower than for new cars.
Negotiate From Home
Once you know the exact car you want, start by doing your research. Look online to find out how much car dealerships pay for the exact car you’re looking for (Sethi recommends a service called Fighting Chance for this purpose). Once you know how much they pay, you can use that knowledge to avoid being scammed by dealers.
When you’re ready to buy, wait until the end of the month, when salespeople are trying to meet their quotas and are more likely to give you a good deal. Then, reach out to a handful of dealerships through their websites, tell them what car you’re looking for, and ask them to quote you a price. Then, when you have those quotes in hand, call up each dealership and tell them the lowest offer you received from another dealership. Every salesperson you speak to wants to be the one to close this sale, so they’ll bid against one another for your business, which means you get to field lower and lower offers from the comfort of home (you’ll only have to visit the dealership in person at the very end to sign the paperwork).
After you drive your shiny new (or new-to-you) car off the lot, remember that you need to make it last at least a decade. That means that regular car maintenance is key to saving money on your car in the long run. Get in the habit of taking your car in for regular maintenance and keeping a record of each service. That way, when you eventually sell the car, you’ll be able to charge more because you can prove that the car has been well-maintained.
Buying a House
A house is probably the biggest single purchase you’ll make in your lifetime—and if you come prepared, you can save over $100,000. However, before you commit to buying, think about whether home ownership makes sense for your financial situation.
If you own your home, you’ll be responsible for everything a landlord covers when you rent: insurance, property taxes, general upkeep, and fixing anything that goes wrong. That means that even if your mortgage payment were the exact same as your current rent, the true cost would actually be much higher. On top of that, before you can buy, you’ll have to save up at least 20% of the total cost of the house for a down payment, which is a significant chunk of money (on a $125,000 house, that’s $25,000). Finally, if you decide to buy your home, you’ll need a much larger emergency fund than if you’re renting, which is another cost to account for.
In addition to your finances, home ownership can put a strain on your lifestyle. You’ll pay a fortune in taxes and fees when it comes time to sell your home, which means you may not be able to afford to move to a new city or even a new house for many years, so you could miss out on exciting new opportunities in other places. Plus, unless you’re already very rich, you likely won’t be able to afford your dream home right away. Instead, you’ll be buying a starter home, which may not have the same amenities or even as much space as rentals in the same price range. Before you buy, you’ll have to decide whether the stability of owning your home is worth the financial and social costs.
If you do decide to buy a house, don’t think of it as an investment. After you factor in taxes, fees, and maintenance, real estate only nets an average 0.6% annual return, which can’t hold a candle to the 8% average annual return of the stock market. That doesn’t mean you should never buy a house—it just means you shouldn’t expect to make money off of it.
How to Buy a House
If you decide that home ownership makes sense for you, here’s how to avoid some common mistakes that first-time home buyers make.
First, decide on a budget. You shouldn’t start the process of buying a house until you’ve saved up 20% of the price of the home for a down payment. Once you have that saved up, total up the total monthly cost of owning a house in your price range (including maintenance, taxes, insurance, and so on). That total monthly cost should be no more than 30% of your monthly income.
Next, improve your credit score as much as you can. The higher your score, the lower the interest rate on your mortgage, and the less you’ll pay over the life of the mortgage (typically 30 years).
Then, do your research to find out the true cost of buying a house. You’ll need to account for closing costs for the sale (typically 2-5% of the price of the house), insurance, property taxes, and any renovations the house needs. To make sure you’re not forgetting anything, ask any homeowners you know what surprise costs they encountered when buying their house. At this point, you should check whether any associations you belong to (like credit unions or teachers’ associations) offer access to special mortgage deals. If you’re a first-time homebuyer, check your state and local government websites, which often have perks to encourage people to buy real estate.
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- The small steps you can take towards living a "rich life"
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