Excerpts from The 4-Hour Work Week by Tim Ferriss

What They Don´t Teach You About Money

by Claer Barrett

HABIT NUMBER ONE: Be rational, not emotional

Everyone has a different emotional relationship with money, and this strongly influences our attitude to earning, spending, borrowing, saving, and investing it.

HABIT NUMBER TWO: Make mindful money choices

Being more aware of the choices we are making helps answer the eternal question: 'Where has all of my money gone?'

HABIT NUMBER THREE: Separate and automate

Once you've overcome the hard part and made a financial decision to do something, make it easy on yourself by automating it!

HABIT NUMBER FOUR: Give yourself a goal

This isn't an easy question to answer but it's worth spending some time on, as goals are a powerful motivational tool.

HABIT NUMBER FIVE: Be curious

Being open to learning about aspects of your finances that you don't feel confident about is key to your future success.

HABIT NUMBER SIX: Build your own financial plan

But forward planning is all about nailing the practical aspects of how we get there!

HABIT NUMBER SEVEN: Make time to talk about money

Exploring your own emotional relationship with money first will help you to find common ground to communicate with your partner, friends, and family, and move forward together.

Note: INTRODUCTION

A huge study by Cambridge University found that our attitudes towards money are largely set by the age of seven.

Note: money: it’s emotional p. 14

All too often, their problem isn't with money itself; it's what money has come to symbolize in their lives.

Note: Be rational, not emotional p. 20

Type of people with money:

SPENDY WENDY

They thoroughly enjoy spending money, but the buzz doesn't last for long. They may also feel guilt or shame post-shop. Spendys risk their future happiness by denuding their savings and building up unsustainable debts.

YOLO

The Yolo is prepared to take huge risks to get rich quick, even though they could get broke fast.

GOBLIN

You get more of a kick from saving money than spending it.

SPREADSHEET SLAVE

Careful planners, they feel comfortable using tech to project the figures going forwards, and take a meticulous approach to monitoring their financial data.

JITTERBUG

Often, their fear of making the wrong decision means they end up making no decision, which can cost them in the long term.

OSTRICH

They could be in denial about the state of their finances as they're struggling to deal with other problems in their lives, or feel ashamed of financial mistakes they think they've made, and are too embarrassed to ask for help. But their fear of engaging with money is greater than their fear of being penalized.

Note: Be rational, not emotional p. 25

We're persuaded to spend more money yet we're still convinced that we're saving money and getting a great deal.

Have you spotted any of these before?

Get £15 off if you spend £150
Get 500 extra reward points when you spend £50
Three for £10 (funny how there's only ever two things you actually want)

Note: spend, spend, spend p. 35

'A lot of discounts are total fiction,' he says. 'The original price is just a story they tell to make the discount more tempting.'

If you present shoppers with a choice of two items—a $149 model or a $499 model—they're more likely to be drawn to the cheaper option. But if you introduce the third choice of a whizz-bang gadget priced at $999, all of a sudden, that middle option feels like much better value.

Note: spend, spend, spend p. 36

Plan your spending wisely by using price-tracking tools like Camelcamelcamel, PriceSpy, and PriceHistory to judge how good that discount really is.

Note: spend, spend, spend p. 38

Tiffany's system is called 'Need, Love, Like, Want,' which she says are the four questions you should ask yourself before spending money on anything.

A 'need' is a non-negotiable spend needed to maintain the health and safety of you and your family.

A ‘love’ is what you dream of doing.

A ‘like’ is a purchase that could bring you temporary satisfaction for six months or less.

A ‘want’ is something you're buying for the sake of buying.

Note: spend, spend, spend p. 40

If you focus more on your needs and loves, you're living more of a life. But if you sink too much money into your likes and your wants, you're living less of a life.

Note: spend, spend, spend p. 41

Simply divide this figure by 21 (the average number of working days in a month) and this sum of money is what you're trading eight hours or so of your time for.

Note: spend, spend, spend p. 44

Getting used to setting aside some money for emergencies is a useful skill. Even if it's a small amount, it activates that financial muscle group and over time, this will build into a stronger habit.

Note: SORTING YOUR FINANCIAL SH'T OUT p. 57

The best I can suggest is that when money comes in, immediately split it. (Siphoning off some money for taxes is a good habit to get into. I like to put mine in Premium Bonds.)

Note: SORTING YOUR FINANCIAL SH'T OUT p. 67

If you can spend slightly less than you earn, your finances will be tickety-boo. But if you get into the habit of spending even slightly more than you earn, you will start to build up debts, which swell further with interest.

Note: The debt trap p. 80

The amount of time that it takes you to clear this balance is why you end up paying so much interest. You only borrowed the money once, but you are paying that 21.9 per cent interest charge again and again, year after year. This is what we mean by 'compound interest'—the interest is compounded, or applied again and again to the same debt.

Note: The debt trap p. 85

It's the credit card companies who really understand this. The more debt you have, and the longer you take to repay it, the more profitable a customer you will be.

Note: The debt trap p. 86

The main lesson to take from this is: if you need to borrow money, have a plan to pay it off.

Note: The debt trap p. 92

If you are disciplined, 0 per cent credit card deals can be good ways to clear debt that's built up, or used as a method to fund large essential purchases. The trick is to think about how you're going to pay the money back before you buy anything using the card.

Benefiting from added consumer protection if anything had gone wrong. Here's how I did it:

I paid for the goods on one credit card, and then transferred the balance searching for a deal with the lowest balance transfer fee, and the longest number of interest-free months
When the new card arrived, I cut it in half and sellotaped it to the first statement (so I could not spend any more money on it!)
I divided the balance by the number of interest-free months (eg, £3,000 + 24 months = 125)
I immediately set up a direct debit to pay this amount every month (automate)
By the time the interest-free period ran out, I had cleared the debt in full and crucially not built up any further spending

Note: The debt trap p. 94

Here are two debt-reducing strategies you'll come across:

SNOWBALL METHOD

You list all your debts and pay off the smallest one first, and then the next smallest. Clearing small debts quickly is a psychological boost that gives you the motivation to carry on but this method may not give the biggest interest savings over time.

AVALANCHE METHOD

You work out which debt has the highest interest rate and prioritise that, paying off as much as you can each month while paying the minimum on your other debts. When the first debt is paid off, you then do the same with the next most expensive and continue until all your card debts are paid off.

Note: The debt trap

p. 100

All big debts started off as small debts. The more days per month your balance is in the red, and the deeper the minus figures get, the more those interest charges will really start to add up.

Note: The debt trap

p. 107

If we can increase our level of economising, this gives us more money to put aside every month toward our long term aims.

Note: Hashtag Lifegoals

p. 112

WHAT'S THE BEST WAY OF SAVING A DEPOSIT? A cash savings account paying the highest amount of interest you can find (check Moneyfacts.co.uk for the best rates) but be prepared to move your money every year to keep earning a high rate.

You could risk investing your deposit money in the stock market.

Note: Hashtag Lifegoals

p. 123

It is inevitable that rising interest rates will cause property prices to fall.

If mortgage payments are rising, this is going to affect what people can afford to borrow.

Note: Hashtag Lifegoals

p. 132

'The car industry is utterly reliant on people buying cars they don't need with money they don't have.’

Note: Hashtag Lifegoals

p. 134

Whatever form of finance you choose, make sure you know what you're getting yourself into, and that you pay it off on time.

Note: Hashtag Lifegoals

p. 137

A new car costing £20k could theoretically lose 15 to 35 per cent of its value if you tried to sell it a year later, simply because it's not 'new any more. This is why Dave Ramsey, the fearsomely curmudgeonly US money expert, says nobody should buy a new car unless they're a millionaire.

Note: Hashtag Lifegoals

p. 137

In the financial world, if something looks like a great deal, there's usually a catch

Note: The danger of shortcuts to wealth

p. 142

So you pay to sign up for an expensive course to 'learn the sécrets' of high-stakes trading. They are guaranteed to make money but you may well lose all of yours!

Note: The danger of shortcuts to wealth

p. 148

Your first priority is making a plan to clear expensive, short-term debts like overdrafts and credit cards.

Your second priority is saving some sleep at night money an emergency fund.

Your third priority is saving and investing for the future, balancing your money between the following medium and long-term priorities:

Cash savings goals for the next 1-5 years
Maxing out your company pension
Investing into ISAs

Note: Getting Rich Slowly

p. 161

We need to take some risk for our money to keep pace with inflation over time.

Note: Getting Rich Slowly

p. 165

Golden Rules for investors to reduce the risks of coming a cropper!

Diversify
Keep your money invested for a long time. There are countless studies that show 'time in the market' is better than trying to time the market:
Invest consistently over time
Pay as little tax
Make the most of the 'free money'
Keep fees and charges low

p. 166

Compound interest is the equivalent of a magic potion for growing your wealth over time.

Note: Getting richer slowly

p. 168

One of the golden rules for getting your money to grow as much as possible over the years is to minimise the amount of tax that gets charged on it.

Note: Getting richer slowly

p. 173

It's possible to avoid the Extra Extra Hot tax band if you save more money into your pension.

LEMON AND HERB TAX BAND = £1-12,570

You pay no tax at all on the first £12,570 of your income

MEDIUM SPICY TAX BAND = £12,571-50,270

Your Lemon and Herb layer is still tax-free, but you pay 20 per cent income tax on this next slice of income, known as the basic rate.

HOT TAX BAND = £50,271-125,140

On the next slice of your income, you pay 40 per cent tax. This is known as the higher rate. The Hot tax rate isn’t applied to your entire salary, just the part of it above £50,270

EXTRA HOT TAX BAND = £125,140*

From April 2023, anything you earn above £125,140 will be taxed at the Extra Hot rate of 45 per cent, known as the additional rate.

Note: Getting richer slowly

p. 174

Another way pensions bring you joy is that you don't pay any tax on money that you save into a pension. Think of your pension as a tax haven.

Note: Getting richer slowly

p. 183

You have to pay income tax on the money you earn. The further up the peri-peri tax scale you are, the more tax you will have to pay (it could be 20p, 40p, 45p or even 60p of every pound you earn). But if you invest that money into your pension, the whole pound goes in, and no tax is deducted. This is what I mean by tax relief.

Note: Getting richer slowly

p. 184

Aim to have saved:

30 - 1x your annual salary
40 - 3x your annual salary
50 - 6x your annual salary
60 - 8x your annual salary
67 - 10x your annual salary

Source: Fidelity

Note: Getting richer slowly

p. 190

When you stop working for one company, the money stays invested inside their pension scheme. You can't pay any more money in, but it's perfectly OK to leave it where it is.

Note: Getting richer slowly

p. 191

ISA stands for 'individual savings account' but they are not just for cash savings; their tax-saving benefits are highly prized by investors.

ISAs are more flexible because you can access your money in an emergency.

Note: Getting richer slowly

p. 201

I’ve got my long-term portfolio, which consists of mostly index funds and is the bulk of my stocks and shares ISA by value. But I've also got my short-term dabbles, where I make investments into active funds and sometimes individual shares based on ideas I've seen in the financial press, done some research and made my own judgement.

p. 211

Much of a boss's day is spent dealing with problems. In my experience, they really like to receive good news.