As the author of the bestselling book, “I Will Teach You To Be Rich,” money expert Ramit Sethi knows that lots of people envy the rich. But Sethi also knows that focusing on the wealth of others isn’t the way to improve your own finances.
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In a YouTube video, Sethi advised, “Stop idolizing rich people. Start learning from what they actually do.” According to him and several other money experts, envy won’t make you money, but action will. Here are five tips Sethi offers for managing money as the rich do so you can get closer to your own “rich life.”
Rule 1: X-Ray Your Finances
“You can’t manage something you don’t deeply understand,” said Sethi. As he explains it, the wealthy have a deep, top-down knowledge of their finances. Simply put, rich people know precisely how much they have coming in and where it’s going.
You can develop that knowledge by answering seven questions:
- How much do you make?
- How much do you owe, and when will your debt be gone?
- What percentage of your income are you investing?
- What percentage are you saving?
- What percentage goes to housing?
- What types of things do you want to spend less or more on?
- What are your fundamental beliefs about money?
Answer these questions as specifically as possible, and you’ll be ready to start managing your finances like the rich.
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Rule 2: Make Systems for Everything
Sethi believes one of the major differences between the rich and others is that rich people don’t move their money manually. Instead, they create systems that automate savings, investments and minimum payments, allowing them to focus on more important things.
Automated money systems eliminate the need for willpower, so your money goes where it needs to go, no matter what. They also free up significant mental space for more important money decisions, like increasing your income or choosing the best possible investments.
Rule 3: Plan Before It’s Necessary
Sethi said, “Rich people plan for the future and they look forward to it.” However, he believes it’s not the money that makes the rich optimistic — it’s their confidence in being able to create a plan and fulfill it.
Science is on Sethi’s side. Research has shown that specific goals make investors more effective. They develop more resilient strategies, monitor progress and adjust as necessary.
Those dollar-value goals can come from your financial priorities. If you know what you want, like a nice house or the freedom to travel, you can calculate how much you’ll need to save and when.
Rule 4: Follow the 80/20 Principle
The 80/20 principle is a classic rule of economics. It states that 80% of your results come from 20% of your efforts.
According to Sethi, this means less worrying about nickel-and-dime details, such as finding great sales on vegetables or dress shirts. These decisions are unlikely to have a significant financial impact and can consume too much mental energy.
Instead, Sethi wants you to focus that energy on making big changes. Here are the five things he believes make the most difference when focusing on the big picture of your finances:
- Learn the basics of personal finance.
- Invest early and automatically.
- Find a good job and get paid well.
- Have affordable and stable housing.
- Cultivate positive relationships.
Relationships enrich your life and make your resources more meaningful, he explains. They may not make you rich financially, but good people are one of the most important parts of a rich life.
Rule 5: Consider Value Over Cost
Sethi’s final rule: Don’t focus only on the cost of something, but more so on the value. When you focus on value, you consider how something will add to your lifestyle and whether it’s worth the expense.
Pinching pennies is stressful and rarely helps you reach your goals, Sethi stated. Value comes from knowing when an expense will move you forward and then spending that money confidently because you know what it’s worth.
“A rich life is about using money to solve problems,” said Sethi. If you can make that happen, you’re living like the rich.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: Ramit Sethi’s 5 Rules Every Rich Person Uses To Make Money
