7 Money Rules That Seem Wrong But Actually Build Wealth

I've learned something from helping people take control of their money for 20 years. The advice that sounds smart is often the exact thing that's keeping you broke. Buy a house, cut back on lattes, follow your passion, and make sure you have a budget. Wrong. I'm going to share seven counterintuitive money rules that actually build wealth. And they're the same rules that made me a multi-millionaire Now, I'm going to warn you right now. Some of these might make you uncomfortable. You might even disagree with me or get mad in the comments. But here's the thing. The people who actually take the next 10 minutes and watch the full video and follow the advice, they are the ones who are going to live a rich life. Most people think the path to wealth is about cutting back on everything. Stop going out, cancel subscriptions, make your own coffee, and live like a monk for the next 50 years so maybe you'll have enough money to spend when you're 80. I don't believe that at all. I don't follow it. I think it's bad advice. I actually think you need to spend more, but just not on everything. This is what I call conscious spending. Spending extravagantly on the things you love, while cutting costs mercilessly on the things you don't. Let me tell you what this looks like in real life. I drove a 2005 Honda Accord for 19 years. 19 years. I could have gone out and bought any number of cars in cash. But cars are not important to me. But you know what I would spend my money on? Luxury hotels. I love beautiful hotels. I took my wife and my mom and my aunt to the Oberoi Hotel in Rantanpur. We went on a tiger safari. I went to Amman, Tokyo. We had an amazing time. I will spend a lot of money on a hotel because I love the hospitality and the design. But I just don't care about certain things like cars. And this is important because travel is one of my money dials. It's an area of life where my spending makes me really happy. I actually want to turn the dial up. Meanwhile, my car, I turn that dial way down. It's functional, gets me from point A to B, and that's it. Now here's what's fascinating. Most people actually do the opposite of what actually works. They try to cut back 5% on everything. 5% on coffee, 5% on clothes, 5% on groceries. And you know what happens? They're not very good at it. And they feel guilty about every single purchase they make. So they don't actually save any meaningful amount of money. And they're not even enjoying their lives. Meanwhile, they are spending a ton of money on stuff without considering the true costs. Compare that to my friend Lisa. She spends about $5,000 a year on shoes. That's roughly 15 pairs at over $300 each. She makes a healthy six-figure salary. She maxed out her 401k and her Roth IRA. She's got money automatically going to investment accounts every single month, hitting her savings goals. And because she lives in a tiny room in a shared apartment, because she's not home that often, she doesn't care about having a fancy place. By living modestly in one area, she's saving roughly $400 a month compared to her co-workers. That's $4,800 a year. And this is a great example of turning the dial up on things she cares about and turning it down on things she doesn't. That is conscious spending. Notice you don't have to agree with her. You might think spending money on shoes or hotels or personal trainers is worthless. That's totally fine. The key to spending extravagantly is you have to choose. You probably cannot have the best of everything. And that is why prioritizing becomes a really important skill. This is why I want you to identify your money dials. These are the areas of life where spending money brings you disproportionate joy. Here are 10 common money dials. In order. Eating out. Travel. Health and wellness. Convenience, which happens to be my favorite money dial. Experiences. Freedom. Relationship. Generosity. Social status. And self-improvement. Pick one or two, maybe three maximum. These are the areas where you plan to spend more. But you can also see that there are areas of life where you can cut costs mercilessly. So here's your action step. Identify your top one or two money dials. What areas of your life, if you could spend more money, would genuinely make you happier? Then look at your spending from the last three months and ask yourself, am I actually spending on these things? Or am I spending a bunch of money on random stuff that doesn't actually matter to me? By the way, the most common place that people spend unconsciously is eating out. And when we actually add up how much they eat out, it is by far the most common accidental expense. Eating out includes coffee, restaurants, delivery, door dash, all of it. If you think you eat out twice a week, it's probably actually six times. The magic number is three times more than you think. It's quite shocking. Rule number two. Run the numbers before you buy a house. America's number one religion is home ownership. In fact, we have sacred phrases that we just repeat based on faith. You've heard these phrases like, if you rent, you're throwing your money away. Or I want to build equity. But here's the truth. Renting can actually be a better financial decision than buying. And I am proof. I'm a multi-millionaire. I rent by choice. And I have made more money renting for the last 20 years than I ever would have made owning. In fact, I rent in two places. One in California, one in New York. And here's why. The place I'm renting right now would cost me more than twice as much to own. Let me give you a made up number. Let's pretend I was paying $5,000 a month in rent. It would cost over $10,000 a month to own this very same or equivalent property. That's thousands of dollars every single month that I am investing instead of throwing away on interest, property taxes, and maintenance. Let me give you a real example. There's a place at 776 Bryant Street in Palo Alto. In 2018, it sold for $2.15 million. If you bought that place with 20% down today at 7% interest rates, your monthly loan payment alone would be $11,400. Add in property taxes and insurance, and your real monthly cost would be closer to $13,000 to $14,000. Let's also not forget all these other expenses like maintenance, transaction costs, and opportunity costs, and on and on. That number just pushes the total cost higher. You know what the same unit rents for? The current estimate is below $5,000 a month, less than half. This is true in virtually every expensive city in America. Palo Alto, Menlo Park, Santa Monica, Manhattan, especially the very expensive parts of Manhattan. But Ramit, what about equity? Well, let's talk about it. Pull up an amortization calculator. Have you ever heard of that? An amortization schedule? Look at where your money actually goes when you own a house. For the first 20 years of a typical 30-year mortgage, most of your payment is going to interest, not equity. Interest. Remember that phrase people use? Renters are throwing money away. It's actually more accurate to say homeowners are throwing money away on interest. You know, many people think that if they bought their house for $500k and they sell it 10 years later for $800k, they made $300,000 in profit. That's just simply not true. They just don't understand math. Let me show you a real example. You buy a condo in New York for $3.695 million in 2021. Two years later, you sell it for $3.8 million. And so that sounds pretty good. It appears you made $155,000 in two years. That sounds like amazing. You know, when I read these numbers, I laughed because I knew that they lost money. Because the reality is that with $155,000 gain on the sale, the owner actually lost more than $795,000 due to transaction costs, maintenance, taxes, opportunity costs, meaning the money that they put for the down payment that could have otherwise been invested, and about $224,000 in interest. Let me say that again. They sold the house for more than they bought it for, and they still lost almost $800,000. While the person who bought the house is at Home Depot buying a new water heater, the renter is building serious wealth automatically. Now, look, I'm not saying you should never buy a house. My wife and I will almost certainly buy a house one day, but I'm going to do it with my eyes wide open. I'm going to carefully run the numbers, and I'm going to know, quite candidly, it's going to be a terrible financial decision. And I'm okay with that because I'm going to be doing it for other reasons, lifestyle reasons. Maybe I want to customize the backyard, but I am never going to mislead myself into thinking, this is a great financial decision. It's not, especially in the cities that I am going to buy it. So before you buy a house, I just have one thing to ask you. That's it. This is my major message. Run the numbers. If you're going to make the biggest financial purchase of your life, you need to understand what opportunity cost means, and amortization. You need to understand your alternative. You need to know whether buying or renting is a good financial decision, and then you can factor in all the non-financial decisions. In addition, I recommend you follow these five steps and save yourself a big headache. These are my guidelines for knowing if you're ready to buy a house. First, make sure you plan to live there for at least 10 years. That way you can amortize or spread those massive transaction costs over many years. Second, I recommend you have 20% down on top of your emergency fund. Doesn't mean you have to put 20% down, but it's a very powerful signal to yourself and to others that you have the skill to save money, which as a homeowner you will certainly need to do. Step number three, ensure your total monthly housing cost is less than 28% of your gross income. You could stretch it a little bit, especially in expensive cities, but the higher you go, the more risk you are taking on. I will tell you right now, most people have never calculated even that number. Number four, be okay with the idea of your house value going down. House prices do not only go up. House values do not only go up. Sometimes it's okay if they go down. You need to be okay with that. And number five, ask yourself, do you actually want to buy? Why do you want to buy? Don't just do it because somebody told you. Don't just do it because you think it's a natural next step. It's the biggest decision of your financial life. Make sure you know why you are doing it. If you cannot check all those five boxes, in my opinion, you are not ready to buy and that is perfectly okay. I'm not ready to buy because I don't pass number five. I don't want to buy right now. Neither does my wife. And so it's up to you to make the right decision for you. Here's what nobody's telling you. Renting can actually be an amazing financial decision and it can be a superior lifestyle decision. If something breaks, text the landlord. You want to move? Move at the end of your lease. No realtor fees. Bliss. In fact, not even having to talk to a realtor for the rest of your life would be one of the happiest things that I could do. And just as an example, here's a list of things that my landlord sent over to me of repairs they were going to proactively make. By the way, if you're watching this right now and you're thinking, hey, I really need to do something about my money, but I don't actually know how to plug these numbers in, then I recommend you join my money coaching program. My money coaching program will walk you through setting up your entire financial system in 48 hours. No theory, not someday, right now. You'll get live calls with me. You will get access to my AI, which will personalize a plan for you, plus a community that pushes you to get unstuck with your money, and a step-by-step plan for investing, paying off debt, and getting your money to work for you so you can finally take that vacation you've been wanting to for years and years. If you're done thinking about it, you've watched enough videos, and you're ready to make a plan, the link is below, or you can scan this QR code. Okay, now for rule number three. Budgets are a waste of your time. Are you guys sick of random financial experts telling you to keep a budget? Track your spending. You gotta know where every single dollar goes. Use this app, color code your spreadsheets, and God forbid you don't track the price of russet potatoes. Why are you wasting your time doing this? Budgets don't work. That's why so few people actually follow them. And I can prove all this with one simple question. Have you ever actually stuck to a budget for more than two weeks? Of course not. Almost nobody does. In my opinion, here's why budgets fail. They're based on restriction and guilt. You set these arbitrary numbers, $200 for groceries, $50 for entertainment, and then you feel like a moral failure every time you go over them. And what's worse, you have to laboriously track these numbers. You look at this massive spreadsheet, and what does it tell you? Oh, I guess I spent that much last month. Does it tell you when you can take a vacation? I have a better way. It's called a conscious spending plan. Instead of tracking every single penny and playing small, you get to decide ahead of time where you want your money to go. You then set up a system that automatically sends money to the right place. And you can spend whatever's left over guilt-free. Let's look at how this works. A conscious spending plan has four buckets. You only need to know four key numbers. Fixed costs, 50 to 60% of your take-home pay. This includes your rent or mortgage, utilities, debt payments, groceries. These are the things you need to pay for no matter what. Next category, investments, 10% of your take-home pay, ideally more. This would go towards 401k, Roth IRA, any investment accounts. This is where the real wealth is created. You should spend way more time on this category than how much freaking blueberries cost. Savings goals, 5 to 10% of take-home pay, ideally more. This is for specific things that you are saving for. An emergency fund is usually the first thing. It could be a down payment on a house. It could be a vacation you're going to take next year. And finally, my favorite one of all, guilt-free spending, 20 to 35% of take-home pay. This is everything else. This is the thing you enjoy. Going out, eating out, travel, movies, clothes, whatever you want based on the money dials that you prioritize in rule one. And you don't have to feel guilty about it. It's actually called guilt-free spending because you are already handling your fixed costs, your investments, and your savings. Okay, Ramit, how is this different from a budget? That's a very valid question. Here is how a budget sounds. Make sure you track every single thing that you spend. I want you to spend at least two hours a month recategorizing and moving things into different categories. Now you have this extremely complicated spreadsheet. Some of the cells are red. Some of them are green. Here you go. P.S., you have to do this for the rest of your life. When you look at that budget, what does it tell you? Do you know how many people I've spoken to on my podcast who spend hours every single week with their budget? And then I ask them, what does this tell you? And they go, I don't know. I go, why are you doing this? They go, I don't know. I thought you're supposed to. I go, no, why are you doing it? And it almost always turns out they are doing it because it gives them a sense of control. Guys, I don't want you to feel a sense of control. I want you to live a rich life. Instead of a budget which looks backwards, a conscious spending plan looks forward. You decide how you want your money to be allocated. Then you have the flexibility on how you want to spend it. For example, if you have $1,000 a month on guilt-free spending and you decide I want to spend $900 one night at a hotel, God bless. It's up to you. Nobody's going to judge you for it. It's your money. It's your guilt-free spending. You can also be flexible because you only have to track four key numbers. And if you are achieving those four key numbers, you are successful. One is exhausting. One treats you like an adult. Budgets look backwards. Conscious spending plans look forward. And most importantly, a conscious spending plan lets you focus on the big items to live a rich life. You will never trip and fall your way into a rich life by tracking the price of sunflower seeds. Here's what I want you to do instead. Put that budget aside. In fact, tear that thing up and celebrate lighting it on fire. Instead, create a conscious spending plan. All of this can be done with my free template. You can download it. I'll put the link below. So stop budgeting. Start living. Which leads us to rule number four. Buy the damn coffee. This famous calculation in the personal finance world drives me insane. These personal finance experts love to trot it out. Guys, if you save $5 a day by making coffee at home, that's $150 a month, which is $1,800 a year. And if you invest that for 30 years at 7%, you'll end up with $170,000. Is it true? Does the path to wealth begin with cutting back on lattes and making your own coffee at home? Almost certainly no. Because while you are agonizing over a $5 coffee, you are almost certainly missing the things that actually matter. The 5 to 10 big wins in life. The ones worth $20,000, $50,000, $150,000. In addition, very few people actually cut back on their morning coffee and then take all that money and invest it. That's not the way people work. They enjoy their morning coffee. It is a ritual. It's something that feels good. And it requires you to make an active decision every single day for 30 years. Every morning, you have to consciously choose not to buy the coffee. That's over 10,000 decisions. So you're asking me to exercise a superhuman level of discipline and I'm still only saving $1,800 a year? No, thanks. We need to account for how human beings actually behave. Here are the big wins I recommend you actually focus on. Number one, negotiating your salary. A $10,000 raise is worth more than a decade of skipping coffee. And please don't tell me you can't negotiate. Negotiation is a skill. Sometimes it works. Sometimes it doesn't. But almost nobody has built the skill. I have videos on how to do that on this channel, as well as my newsletter will show you how. Number two, reducing your biggest fixed costs. For most people, that's housing and cars. Now you can save $5,000, $6,000 or more a year by making a smart decision here. But I will admit it's tough to change housing and cars once you have already locked it in. Number three, optimizing your investment fees. That 1% fee you're paying to a financial advisor, that could cost you hundreds of thousands of dollars. In fact, over your lifetime, roughly 28% of your returns will go to your financial advisor in fees. If you really want to keep a financial advisor, find one who charges a flat fee or an hourly fee. Or you can do it yourself, most people with a simple portfolio, by switching to low cost index funds. I cover all of this in my book. Number four, paying off high interest debt aggressively. Every dollar you put towards a 27% credit card is a 27% return. It's incredible ROI. Number five, automating your finances. Set your system up once so that you're automatically saving and automatically investing every single month and it runs forever. You will not have to think about it on a daily basis. These are big decisions that actually move the needle. They're worth tens of thousands, hundreds of thousands of dollars to you. And once you've got your big wins handled, enjoy that coffee. Rule number five, passion is not really the key to earning more money. It's weird that most people think you have to wait for your passion to fall down from the sky in order to know your life's purpose. But if that is your approach to life, you're probably going to be waiting for the next 80 years. The truth is, once you get good at something, you often become passionate about it. And that is often where the money is found. You know, when I was in college, I was not passionate about a Roth IRA. I don't wake up even today, 21 years later, saying, oh, Roth IRA, so cool. Let's talk about the tax advantages versus a traditional. But once I started helping people with their money, something interesting happened. The better I got at it, the more I enjoyed figuring out how it all works. So you don't need to wait until you're ready. The market doesn't care about that. In fact, the market doesn't care about anything in your head. In fact, get a tight shot of this. I'm about to give you some advice that's going to change your life. Nobody cares about you. Maybe your grandma and your mom and dad care about you, okay? But the market does not care. The market cares about value. That is why if you focus on falling in love with the people that you are helping, whether it's your customers as a small business owner or your coworkers and your boss at work, that is how you can increase your value and get paid way more. Let me give you three specific ways to increase your income by building skills, not chasing passion. Strategy number one, negotiate a raise at your current job. I got to tell you, most people just simply never ask for a raise. They just sit around and hope that their boss will notice their hard work and reward them. That's not how it works. Here's what to do instead. Three to six months before your next review, sit down with your boss, make a formal meeting request, ask what it would take to become a top performer. Get specific. What projects do I need to do? What results do I need to drive? What are the key metrics? Send an email summarizing what you talked about, and then every two weeks, send an update reiterating what you talked about and how far you're progressing against those goals and deliver on those things. Document it all. When review time comes, you're not asking for a raise based on your feelings. You walk in with actual data. I've had students of mine negotiate $5,000 raises, $10,000 raises, even $25,000 raises using this approach. Strategy number two, get a higher paying job. If your current company doesn't have room for growth, I recommend you find one that does. But here's the key. Don't just apply to jobs online and hope for the best. Use what I call the shadow job market. These are jobs that are typically filled through referrals and networking, even though they may be posted somewhere publicly. How do you get them? Reach out to people who have your dream job. Send them a message. Hey, I'm really interested in your career path. Would you be open to a 15 minute call to share your experience? You'll be surprised at how many people will say yes, and any one of those conversations could lead to your next opportunity. They will certainly give you behind closed doors insights on how that company and industry works. Strategy number three, start a side business. Remember the market rewards value, not passion. Can you write? Businesses need copywriters. Can you design? They need graphic designers. Can you organize? Busy professionals will pay you to organize their homes or offices. Now, I know what you're thinking. Ramit, none of this works with AI. Do you know that we still have people we pay for copywriting? I have hired personal organizers. We pay graphic designers. The very video you're watching has all of those things being paid for right now. What just happened is you are counting yourself out before you even try. Now, you don't need these special advantages. What you do need is to identify a skill, package it, and find people who are willing to pay for it. And before we talk about rule number six, I suggest if you're watching this right now and you are not yet subscribed to this channel, hit that subscribe button and turn on notifications. I'll be sharing more videos and resources just like this so you can get notified as soon as we release the next one on building your rich life. Rule number six, you don't need a brilliant idea to start a side business. There's a lot of people who think about starting a side business. They want to make passive income or they want to get paid without having to trade time for money. But do you know what stops the vast majority of people? They are waiting for a brilliant idea to fall from the sky. Like they're walking around like this. Where's the idea? Just like trying to catch rainwater except it's ideas from heaven. That's not how it works, guys. I'm an entrepreneur. I've been running my business for 21 years. I talked to a lot of people who want to start a business. When I asked them why they haven't started one, the number one response is I don't have an idea yet. So I ask them, what do your friends come to you for advice about? What do they think you're really good at? And suddenly you'll see them light up. Well, my friends are always asking about how I keep my apartment so organized or fly across the world on vacations and pay no money because I know how to use my points. That's an amazing business idea right there. Oftentimes you'll find people are obsessed with finding the perfect idea. They're waiting years for inspiration to strike. And they're actually afraid of simply looking inside and saying, what am I good at? What do my friends think that I'm great at? They come up with these random excuses like, well, there's already other people teaching you how to pay for flights using points. Good. I want to start a business where there's lots of competition, because that means there's lots of customers. And the truth is you don't need an idea. You need a lot of ideas. And more importantly, you need a system. People think starting an idea means quitting your job, spending thousands of dollars on a website, and then working 80 hours a week. That's not true. You can start a side business while keeping your full-time job. You don't need a fancy website. You can start with an email. And some of my most successful students work 5, 10, 20 hours a week on their side business and make an extra $2,000, $5,000, $10,000 a month. Here's some boring business ideas that are actually making people real money. Tutoring kids in math or SAT prep. Professional organizers charging $50 or $100 or more per hour. Styling people for workwear or job interviews or professional events. Editing resumes. Teaching people how to plan Disney vacations or doing it for them. Of course, none of those businesses are especially sexy. But you know what I think is sexy? Profit. That's what matters, not how cool and unique is this business. I don't want a unique business. I want a business that pays. So here's what I want you to understand. You probably already have everything you need to start. You have skills. You have knowledge. You have experience. The only thing you're missing is a system to turn those things into income. So here's your action step. Write down three skills you have that other people struggle with. And then ask yourself, would somebody pay to learn this or to have me do it for them? If the answer is yes to even one of those things, you have a business idea. And now for rule number seven, stop worrying about pennies. Focus on the big wins. I find that most people waste their time with money because they are desperately trying to control random things like tracking the price of bread, but ignoring the things that actually matter. Wealth. Real wealth comes from leverage and it comes from calm, long-term decisions. It rarely comes from cutting back on the price of pickles. And when it comes to earning serious money, I'm talking hundreds of thousands of dollars, millions of dollars over the course of your career, there are a few key things that matter. Number one, time. This is why you should start investing as young as possible. Number two, your returns. This is why you should focus on low-cost, long-term investments such as index funds for the most part. Three, the amount that you contribute. Even adding an extra hundred dollars a month can be worth tens and tens of thousands of dollars over the long term. More than any amount you save on coffee for your entire life. Those three things matter. That's the big win philosophy. Here's an example of the big wins in action. Credit scores. Your credit score determines the interest rate that you get on major purchases like a house or a car. The difference between a good credit score and a great credit score can save you tens of thousands of dollars over the life of that mortgage. And how do you get a great credit score? By doing a few simple things. Paying your bills on time. Especially automatically. Keeping your credit utilization low. And in general, not closing old accounts. Or basically having long-term proof that you are a good credit risk. That's it. It's not very sexy, but it can be worth tens of thousands of dollars to you. And here's the biggest win of all. Starting early. Let's say you start investing $500 a month at age 25. By age 65, assuming 8% returns, you'll have about $1.7 million. But if you wait until age 35 to start, just 10 years later, you will have only $745,000. That's less than half. Those 10 years cost you a million dollars. Do you see how you have been wasting time playing small on things that are in front of you but are not that important? And in order to grow your wealth, you have to avoid these major traps that you will encounter. Watch this video next to see the traps that I want you to cut out of your life to get to your rich life faster.