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Ramit Sethi, author of I Will Teach You To Be Rich and the same-named blog, answered a few questions recently about managing and automating money. Oh, and he's raffling off Kindles to book buyers.
Sethi is a recent Stanford graduate who jumped into personal finance blogging and writing after facing the murky world of money and investing after college. His I Will Teach You To Be Rich blog, and book, takes a different approach to smarter money management, skipping the "buy fewer lattes" route and aiming at changing your mind and creating a system. The blog has garnered acclaim from lots of financial and other news publications, and has gotten more than a few nods from our own site. And we'd be remiss if we didn't mention that our own Gina Trapani contributed to his new book. We interviewed Sethi by phone last Friday to talk about the compatibilities between productivity and smart money, and a few other topics we'd been waiting to ask.
Oh, as for the Kindles, and $5,000 in cash: Sethi's detailed the rules and keeps listing the winners at his blog, but the basics are that if you buy the book on Amazon, Barnes & Noble or elsewhere between 8am - 4pm Pacific time (PST), forward your receipt to iboughtthebook@iwillteachyoutoberich.com, and you'll be entered to win one of the hourly drawings. Now, onto the interview:
Lifehacker: Most personal finance sites have a name or a theme that carries a certain kind of feel-good charm: Smart Spending, Your Money, that kind of thing. Yours is the most blunt, and kinda cocky, name I've ever heard. Was that intentional, and how'd you come up with it?
Ramit Sethi: It's very intentional. If I'd started a site called, say, Conscious Spending Living, you'd be bored to death by the title alone. Instead, I wanted to create a site that was like you and me sitting around a table together, talking about how this friend's spending way too much money, smart saving plans, the way money or deals trick us ... I really want to show people that this is about becoming rich, not just about money. A part of that is money, but we're also talking about philanthropy, about having time for yourself and your family. Rich can be, for some people, finally having a flexible schedule. Chapter 9 is called "A Rich Life," and it's only partially about money.
Lifehacker: How long ago did you start writing this book?
Ramit Sethi: It's been about two years of Hell writing this thing [laughs]. I wanted to die every step of the way. The blog is about three years old, but when someone new comes to the site, or anyone, really, some days there's a post about weddings, some days taxes, asset allocation, market investing. I focused the book on writing for someone who wanted to get started and go all the way through, every step of making themselves smarter financially ... Basically, I wanted to write this thing that, I would be proud to hand it to someone just coming out of college, who has a bit of money, but doesn't know what to do with it.
Lifehacker: That situation happened to you, and was the inspiration for starting the blog, right?
Ramit Sethi: Exactly. One thing I realized is, a lot of people think personal finance is about willpower, like dieting or exercise. I think that really has not worked over the last 50 years ... People don't realize how many decisions they have to make with their money, every day. With the money you have today, you could pay off debt, reduce a credit card balance, or start investing it. But we don't, usually, because we're cognitive misers.
We can only have enough cognition to do a few things. If we try to work on 50 things, we're not going to do hardly any of them, and that's where my financial advice comes from. Focus on the two areas you have the most problem with in spending. For most young people, that's entertainment spending or restaurants, bars, that. Your goal should be building a system that doesn't make you think, every step of the way, about how you're spending or saving.
Lifehacker: You challenged people to save $1,000 in 30 days—some of it instantly, some by cutting down on monthly expenses. What were some of the most unexpected successes? Did any challengers surprise you with how they saved money?
Ramit Sethi: The first thing that really surprised me was a lot of negative feedback I didn't expect. "This is ridiculous." "Yeah, but you have to go to Stanford to save $1,000." Those types of comments. To save $1,000 in 30 days, you don't have to cut it all from your budget. Optimizing your existing spending, negotiate with your banks. People saved hundreds of thousands of dollars, cumulatively, and that was inspiring.
To get everyone there, I tried to be deeply practical. One of the fastest, most direct way to save money would be for everyone to pack up and move to Kansas, but nobody's going to do that, or even move into a cheaper apartment, in most cases. So I tell people to pick the stuff they're not thinking of. (For instance), I put up a prompted script for calling your car insurance company, and people saved $600-$700 with a 10-minute phone call.
... The other side is earning more. I advise everyone who wants to make more to become a consultant.
Lifehacker: That probably sounds a bit wishful thinking to a lot of people—or at least like a stretch for someone used to a pre-defined, W2 job.
Ramit Sethi: Absolutely. But what you're doing is not necessarily giving up everything and going freelance. You're just sharing your expertise with somebody else and becoming a tutor. Do you speak English? Than you are an expert to someone who wants to learn it. Do you know 4th-grade math? There are people who need that.
Lifehacker: These days, a book titled I Will Teach You To Be Rich sounds audacious. I Will Help You Pay Your Mortgage This Month sounds more like the current climate. How do you think the recession affects the advice you're giving?
Ramit Sethi: For the people that know about long-term investing, this is basically just a really strong reminder to keep focused on the long-term. You have an emergency fund, and I really hope you're not trying to time the market, because you'll fail over the long term.
... The unfortunate part of this economy is, there is so much gloom and doom in the news. If you watch the news, you'll hear questions and talk about, "Should I take all my money out?" "Where should my money be?" It's overwhelming, so people do what's easy—they read the New York Times, and then complain about it. Or they spend way too much time doing I term debating minutiae, about the stimulus package, who's to blame, predicting when the recover comes. My take is, what did people do to set up their investing accounts? Way too many people feel they only two levers to pull, either investing or pulling money out of the stock market. People need to really learn more about their money, and long-term investing, now, or there's a lot of the same kind of complaining and not much action coming out of it.
Lifehacker: Are you a pretty tech-focused, gadget-hungry guy?
Ramit Sethi: Oh, definitely.
Lifehacker: So how do you rationalize whether a gadget, a new computer, phone, whatnot, are worth the cost, rather than just filling that geeky void?
Ramit Sethi: I believe in paying for value. If you're going to get value out of something, you should pay for it, and you should enjoy it. If you've got your finances in order, for the things you love, you can spend extravagantly on them. If you've set yourself up to automatically invest 5% of your money, set aside money for a down payment on a car in a sub-account, that kind of thing, then go ahead and feel guilt-free when you spend on something that's really important to you.
... At the same time, I will hold something like my iPhone for like 3-4 years, until it doesn't work anymore. You buy the best, and you hold for the long-term. Whether it's a $300 phone, or designer jeans, it's okay to spend if that's what matters, but the flip side is that part of you will always want the best, keep staying up with the newest stuff. It's important to balance those two things. If you find that you're not, either figure out why, just like you'd cut other costs.
Lifehacker: Why is automating your billing so important? I'm cynical, so I might say it doesn't matter if all my bills arrive at the same time, or how many sub-accounts I have set up.
Ramit Sethi: It's a kind of psychology, the same as with dieting. Ask people what they care about in life. They'll clearly say, money. "So you're interested in learning about money and using it better?" "Yeah, sure, I definitely want to do that!" "Okay, so do you max out your 401(k)?" "Oh, no, I really should, but ..." That's free money. Money is so important to people, but the contribution rate for 401(k)s is less than 50%. The way to get around that block is to automate it. You should automatically be enrolled in your work's 401(k), up to their compliance rate. It's the same exact principle with your own money. If you tell yourself, "I really should save for some nebulous goal," you will almost certainly do nothing, and in 12 months, you'll be great at saying you should have. If it's saving itself automatically and your bills are paid, you will not miss that money. If you do, you restructure from there, not from a fake feeling that you're doing everything fine.
What it really comes down to is what my parents tell me all the time: A year from now, you're going to be a year older. What are you going to do?
What that means is, why do we pretend like we won't have things to save for. Why are we all hypocrites about our wedding? We all say we want a "small thing," "nothing big," but the day comes, and it's the best china, the best flowers. And that's fine, but at the same time, if we we were true to ourselves, we would have been puting away money every month from age 20. The fact of the matter is, if you're in your 20s, you're probably going to need money in the next 3-5 years, for a house, a car, things you don't think of day to day. With sub-savings accounts, you'll be ahead of 90 percent of the crowd.
The average Christmas shopper spent $700 on gifts last year, which is down from $900, and that's kind of amazing. But if you pretend like Christmas won't come, you're trying to pull $700 out of one month, December, and that probably means going into debt. If you start saving in January, less than $100 per month, you're covered for Christmas, and you won't feel the expense all at once.
Ramit's 12-minute explanation of automating your finances:
Lifehacker: What's the hardest part of running your blog, and giving out financial advice?
Ramit Sethi: I think it's trying to find ways to create behavioral change. The thing that makes me the happiest, and it basically gives me a birthday present every day, is seeing what kind of behavioral change my blog or my book has affected. It's easy to guilt people into what they should be doing, but to work on high-level attitude changes and hear that it really saved someone money ... that's something else.
So far, I'm really pleased with the blog's reception, the comments ... but it is hard, day by day, to reach people on a level of attitude.
Sethi started his blog
Lifehacker: So, you kind of answered it, but what's the best part?
Ramit Sethi: Real quick, then, it's hearing from someone that, "I decided to go on vacation. I bought a $150 pair of jeans, and it felt fine, because I knew my money was in control."
Lifehacker: That sounds like the ultimate reward of a Getting Things Done system—knowing deep down that your work time was spent efficiently, so you don't worry about how you spend your un-portioned time.
Ramit Sethi: That's exactly right ... For me, every dollar that comes in is routed to the appropriate place. That leaves me free and clear to focus on either my business, my life, or whatever I might want to actually spend on.
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