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Ramit Sethi: Being rich isn't all about money

'I Will Teach You to Be Rich' author talks money to Gen Xers

By

Ramit Sethi, author,
'I Will Teach You to Be Rich'
I Will Teach You to Be Rich

I Will Teach You to Be Rich

Want to buy $200 jeans? $400 shoes? A weekend trip to Vegas? Great. Ramit Sethi, "I Will Teach You to Be Rich" author and company founder, speaks to the under-30 set on how to automate, invest and earn more so you can buy the things you love.

Bold. Young. Successful. Uber-educated and financially savvy. Yup, that's Ramit Sethi. He's the founder of the company I Will Teach You to be Rich, author of the eponymous book (a New York Times best-seller), and developer of a new online course, Earn1K. But can he really lead everyone to riches, even when they're loaded down with debt?

CreditCards.com: We shared a panel at the Commonwealth Club, talking about the financial issues Gen Xers face. This is your demographic, but do you really think the under-30 set has such unique money attitudes and issues?

Ramit Sethi: Yes, people in their 20s and 30s have totally different financial concerns than people in their 40s and 50s --- usually to eat out and drink a lot more. Instead of pooh-poohing it or lecturing them to cut back on lattes (which is pointless), I focus on helping them automate their money so they can spend guilt-free on the things they love.

Want to buy $200 jeans? $400 shoes? A weekend trip to Vegas? Great. Here's how to automate, invest and earn more so you can buy the things you love.

As we get older, we have predictably different concerns, like buying a house, saving for our kids' education and retirement.

CreditCards.com: With so many personal finance books on the market, why do you think yours resonated?

Sethi: I tried to do a few things differently:

  • Eliminate the same old advice that most "experts" give (which never works), such as "keep a budget," "stop spending on lattes" and "buy a house -- it's the best investment!"
  • Get ultra-specific. When others say, "Negotiate your fees," I included word-for-word scripts and direct phone numbers to call. When I read other books that were vague about the best accounts to invest in, I named names -- including the ones I love AND hate.
  • Understood key psychological barriers to managing money. When people think about "managing their money," they unconsciously summon all kinds of associations -- mostly negative. It's too easy to focus on the tactics, but I wanted to dig into the psychological aspect, too. That's why I spend a chapter on automation (since we want our money to automatically do the right thing). That's also why I started with credit cards: because we all have credit cards, we all hate them, and we could all get BIG WINS by optimizing them.

The key here is nobody wants to become a financial expert. Nobody cares about learning what bonds are or why asset allocation is important. They simply want their money to work for them and then get on with their lives.

CreditCards.com: Regarding the "I Will Teach You to be Rich" title and company name....it's misleading in a way, isn't it? You don't necessarily mean monetary wealth, right?

Sethi: Money is only a small part of living a rich life -- but it's an important one. That's why I laugh when people say, "Are you rich?" What does rich mean? Is it a number? Is that number different if you're 28 ... or 58? If you live in Manhattan ... or Kansas?

I know plenty of people who earn $100,000-plus who are not rich, and plenty of nonprofit employees who are. Rich is not a number, it's about living a rich life.

But it is important to automate and optimize your money so you can focus on the important things -- whether that's travel, friends and family, or even buying that nice car you've always wanted.

CreditCards.com: Where did you get these wild ideas? Stanford, your parents, friends, life experiences?

Sethi: Are they really wild?? I'll tell you how I got started...

When I was in high school, coming from a middle-class family with four kids, my parents told me that if I wanted to go to college (which I had to, because I'm Indian), I'd have to get scholarships. I applied to over 70 scholarships, and I still remember my first one: They wrote the $2,000 check to me, which I promptly invested, losing 50 percent of it in a couple months.

...It is important to automate and optimize your money so you can focus on the important things -- whether that's travel, friends and family, or even buying that nice car you've always wanted.

After that, I decided to learn about money so I didn't lose the rest. I read the books and magazines, watched the TV shows and realized there are a few simple steps to getting rich -- and a lot of hype. 

At the same time, I was studying psychology and persuasion, and learning what REALLY motivated people to change. So I was in disbelief when I saw the same, tired old advice being peddled by "experts." Buy a house! Stop spending money on lattes. Focus on savings only (not earning more).

I love the story, "The Emperor Has No Clothes" -- so much so that I devoted an entire chapter to debunking "The Myth of Expertise." What I learned is that personal finance is at least half about psychology. I can give you all the facts and figures, but that rarely motivates change. Yet so many "experts" continue lecturing people on things like budgets and APRs and compound interest.

The common person's reaction: Huh?

Think about it. If people were rational, nobody would be fat and nobody would be in debt. But we are. Why? That's what I cover in the book, which is cleverly disguised as a personal finance book, but is really a master class in behavioral change.

CreditCards.com: What about earning more versus frugality?

Sethi: Well, most Americans could use some frugality, frankly. But cutting back on everything simply doesn't work. There's a limit to how much you can cut -- but no limit to how much you can earn.

Why do 95 percent of personal finance "experts" talk about cutting back on everything ... but rarely talk about earning more? Because they don't know how.

For example, I have students who are earning thousands of dollars every month on the side -- while keeping their full-time job. Some of them have earned so much they've quit their jobs and now they're doing what they love.

We don't talk about this much because it's easier to talk about cutting back on $3 purchases here and there. But we're "cognitive misers," which means we have limited attention, willpower and cognition. If you spend your time worrying about tiny purchases, it's difficult to get ahead by thinking of the BIG WINS.

And earning more is a big win.

CreditCards.com: You studied psychology at Stanford, so you clearly have a penchant for questioning motives and actions. Credit cards are a neutral tool, but just having them makes a lot of people lose all common sense. Tell me about that. 

Sethi: There's a lot of blame to go around for credit cards. I'm not one of the people who believes it's only about personal responsibility, since credit cards are literally engineered to get people to spend more money on them.

However, they can also be immensely beneficial. I put nearly all of my spending on credit cards, which give me consumer protection, an interest-free loan and the convenience of automatically tracking my spending -- not to mention thousands of dollars of travel and cash-back rewards each year.

The key is using credit cards properly. The classic rules still apply: Get a great card, pay it off in full and don't fall for any gimmicks they send you in the mail (e.g., balance transfers). 

CreditCards.com: So in light of that, how do you think that cardholders can maintain control? Some tools, tricks, apps... 

Sethi: I like Mint.com. I also like naming names for excellent and terrible cards.

American Express: Good. I use them myself.

Schwab: Amazing card, but recently closed to the public.

Fidelity 1.5% cash-back: Good. I also use this card.

Citi: Used to be good, but they recently cut benefits on their cards.

Capital One: I would never use their cards. I hear horror story after horror story from my readers about them.

Store charge cards: Never, ever use these. They have extraordinarily high interest rates and can tank your credit if you miss even one payment.

CreditCards.com: What are some final sage words you've got for readers who've read it all, but are still struggling with staying out of the red? 

Sethi: If something hasn't been working, you can't keep doing it and expect different results.

How many of us complain about money for our entire lives...but never spend ONE weekend reading one good personal-finance book?

How many of us sigh and say, "Yeah, I guess I spent that much" or "I really should try to cut back on ____"? 

The trick is not simply "trying harder." It's re-thinking the way you approach your finances.

Automate your money so it's doing the right things by default. That way, you don't have to worry about minor things like paying bills or paying for that morning coffee.

Saving is not enough. Invest in long-term, straightforward investments like target-date funds, which will explode your growth over the long term. No, you can't beat the market. No, you probably don't need fancy investments. Slow and steady wins the race.

Spend on the things you love, guilt-free. Ignore other people who criticize you for your spending. First of all, are they in a better financial position? Second -- and this is critical -- as long as you're automatically saving and investing appropriate amounts, you can afford to spend the rest guilt-free. I suggest specific percentages in my book.

Finally, don't forget about earning more money. Too many people think of their finances as a fixed pie that can never grow. What makes more of a difference -- cutting back on 50 things you love....or learning how to earn an extra $1,000 amonth (as I teach at Earn1k.com)?

Rich is not just about money -- it's about living a rich life.  

See related: Credit to their generation: Generation X, Your first budget in 3 easy steps, Frugality: Just a fad? Or will consumers keep saving post-recession?

 

Published: March 29, 2011



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