Vampires are scary, but being broke at 30, well that gives us the chills.
MainStreet is not alone on this one: just recently Gen Y personal finance guru Ramit Sethi's I Will Teach You To Be Rich hit No. 1 on Amazon.com, momentarily knocking off the popular teenage vampire series, Twilight.
Sethi spoke with MainStreet about his blend of no-nonsense money management and college dude humor that has resonated with his mostly early 20s and 30s audience.
MainStreet: How did you get started writing about personal finance?
Ramit Sethi: I come from a very middle class family. [In high school] my parents told us “if you want to go to college, you have to get scholarships.” So I applied to over 70 scholarships. I got a few of them, but one in particular was a scholarship for $2,000 which they sent a check for directly to me. So what did I do? I turned around and invested it in the stock market. I lost half my money within a matter of months. I was just putting it in whatever company I thought was going up and down a lot. I didn’t realize investing is much more than just picking whatever company you think is cool and then putting a bunch of money in it. I certainly learned that lesson and afterward, I resolved to learn more about personal finance before I lost more of my money. I started reading and realized it’s actually pretty simple.
So what’s the big secret to financial success?
A lot of people think money and personal finance is about someone saying "No!" But it’s actually much more empowering because you can spend extravagantly on the things you love if you cut costs mercilessly on the things you don’t.
How can young people start saving (and spending) successfully?
The first thing we have to do is start managing our own money. The problem is we have too many choices. You wake up every day and you say to yourself, “Should I buy that latte?” “Should I pay off my debt?” “Should I rebalance my portfolio?” And given all those options we become overwhelmed and inevitably just do nothing.
You can’t out-frugal your way to being rich. Saving $3 extra a day is not going to make the difference. The big wins come from focusing on your credit, automation and investing. What I wanted to do with the book is just strip it down and say, “What are the most important things? Let’s pick two that really matter."
I can tell you right now, as a typical 26-year-old, what I spend the most on is going out with friends and eating out at restaurants. Don’t think, “Oh, I’m not going to order a Coke every time I got out.” That will save you $2. Who gives a damn about two bucks? What I would rather focus on is cutting my spending on eating out by 20% and going out to bars by 35%. If I can do that, I can generate hundreds of dollars extra in cash flow per month.
Are people losing track of their finances as a result of the recession or are they becoming more interested in money management?
Some people respond in a constructive way. They’ll go online or get a book and they’ll start learning that there are other ways to do this than pulling every dollar out of the market. Other people will respond in an emotionally fearful way. They think there are only two levers to pull when it comes to investing: put your money in or pull your money out. That’s one of the most short-sighted things I could imagine. If you resign yourself to fear and just pull your money out, all you’re doing is locking in your losses and becoming a follower.
How do you react to friends or family who, in an extreme scenario, are now fearful of the economy and banking in general?
The emotional side is interesting. With the book I try to focus on the psychology of investing and saving. Sometimes something as simple as not having a pen at your desk can profoundly affect you. It can cost you $3k or $5k because you don’t fill out a form on time. Last night I was talking to somebody who was paying over $500 a month extra for healthcare, because he didn’t have a fax machine. He can’t fax his new form in. And he’s been doing it for over a year. You can’t just say this guy is lazy, because every one of us does it to some extent.
To combat the emotional side, I say things like “We don’t have to worry about you investing today. Let’s focus on setting up an automatic savings plan.” Each month, instead of feeling bad by actively sending money to a savings account, just automate it so you don’t have to do anything. That way by default you’re doing the right things.
As part of it, I tell people they need to put 15% on guilt-free spending on the stuff that they love. Some personal finance sites position it as a will power game. They say, “If you try harder, you can win the personal finance game!” Which is very similar to: “If you just try harder, you can lose more weight.” That doesn’t work 95% of the time. Forget will power, let’s automate it and use psychology against ourselves.
Is the concept of getting rich the right way to frame personal finance overall? Isn't it more important to be responsible with your money?
I absolutely believe anyone can be rich and it’s not about your earnings.
The problem is most people have not even thought that far about what "rich" means to them. People ask me if I’m rich and I say, "Yeah," which kind of surprises them because they weren’t expecting a simple one word answer. Being rich means different things for different people, so I picked the name on purpose. But let’s just both acknowledge that the name of the site sounds like a big fat scam (laughs).
Speaking of scams, sometimes you see personal finance books where the author is holding back a lot of good info in order to milk it out into a series. Any plans for five sequels?
Screw that! Read the book and you’ll see I put all the good stuff in there. There is nothing that I held back. There are scripts on exactly what to say on the phone to negotiate credit card fees. All the automation techniques are in there. It’s the book that I would feel proud giving to anyone that wants to get started or get to the really advanced level.
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