Earlier this month, I wrote how food and personal finance are similar. Now check out a few excerpts from yesterday's New York Times Magazine article on nutrition, which also has lots of parallels to money:

Humans deciding what to eat without expert help — something they have been doing with notable success since coming down out of the trees — is seriously unprofitable if you’re a food company, distinctly risky if you’re a nutritionist and just plain boring if you’re a newspaper editor or journalist. (Or, for that matter, an eater. Who wants to hear, yet again, “Eat more fruits and vegetables”?) And so, like a large gray fog, a great Conspiracy of Confusion has gathered around the simplest questions of nutrition — much to the advantage of everybody involved. Except perhaps the ostensible beneficiary of all this nutritional expertise and advice: us, and our health and happiness as eaters.

Naïvely putting two and two together, the committee drafted a straightforward set of dietary guidelines calling on Americans to cut down on red meat and dairy products. Within weeks a firestorm, emanating from the red-meat and dairy industries, engulfed the committee, and Senator McGovern (who had a great many cattle ranchers among his South Dakota constituents) was forced to beat a retreat. The committee’s recommendations were hastily rewritten. Plain talk about food — the committee had advised Americans to actually “reduce consumption of meat” — was replaced by artful compromise: “Choose meats, poultry and fish that will reduce saturated-fat intake.”

A subtle change in emphasis, you might say, but a world of difference just the same. First, the stark message to “eat less” of a particular food has been deep-sixed; don’t look for it ever again in any official U.S. dietary pronouncement...“Eat less” is the most unwelcome advice of all, but in fact the scientific case for eating a lot less than we currently do is compelling.

Sort of how like you rarely hear financial "experts" recommending the most time-proven strategies of all: Live beneath your means, save aggressively, invest early, and continue learning about money. It's just not sexy, is it?

The full New York Times article: Unhappy Meals.

J.D. at Get Rich Slowly (a great personal-finance blog), writes:

This Friday, January 26th, you can receive free, professional retirement advice by phone courtesy of Kiplinger’s Personal Finance:

Get free, personalized answers to your financial questions. For the fifth time, we are joining with the National Association of Personal Financial Advisors (NAPFA) to sponsor Kiplinger’s Jump-Start Your Retirement Plan Days. From 9 a.m. to 6 p.m. eastern time on Friday, January 26, NAPFA members across the U.S. will be standing by to take your calls and answer your questions.

Normally, these fee-only planners, who are well versed in investments, taxes, insurance, estate planning, and retirement and college saving, charge clients $100 to $250 an hour. But on Jump-Start Days, you pay nothing — not even for the phone call. Just dial 888-919-2345.

Our retirement hotline is a public service that is offered to all, not just Kiplinger’s subscribers. If your questions can’t be answered on the spot, you may be referred to resources on the Internet that will help you find the information you need.

A few weeks ago, a couple of friends and I were talking about where we want to travel this year, and one of them said something that surprised me. "You probably wouldn't approve, but I want to go to the Caribbean this year."

Huh? Why wouldn't I approve?

I thought about this in a pensive stare for many moments, taking the form of Rodin's Thinking Man and wishing that I had a pipe and perhaps a tweed jacket. Then I figured it out. Apparently, I'm the personal-finance guy to some people. And, I realized with a sinking feeling, to many people, "the personal-finance guy" means "the guy who tells me I can't do stuff because it costs too much money."

Nothing could be further from the truth. Now, I will call your ass out when you're being stupid about money. But I'm not the finger-wagging parent who tells you not to spend money on lattes. Instead of taking a simplistic "don't spend money on expensive things!!!" view, I believe there's a nuanced approach to spending. Today, I'm going to tell you about 3 friends who are spending lots and lots of money on things you might consider frivolous--like shoes and going out--but I'm going to tell you exactly why I think they're perfectly justified.

But first, let's talk about a couple of things.

Frugality. There are plenty of blogs on frugality. This is not one of them. I think you can have lots of fun debating the minutiae about which grain of rice is cheaper, but it doesn't really get you much further towards your goals. Also, most Americans are not brought up with the idea of frugality. I've been in a car with friends who were so hungry that they had to pull over and get food even though we were only 5 minutes from home.

For me, writing a blog on frugality would be like trying to convince an ankylosaurus to dance a god damn jig. As a result, I don't believe that frugality is very sustainable for a lot of people. Yes, maybe we'll stop buying those lattes (or whatever), but something else will take its place. In my opinion, unless there's a fundamental mindset from a young age, it's hard to change the I-want-it-now habits. Whether you agree with me or not, that's why I don't write a blog based on where to find the cheapest laundry detergent.

Finally, and this is the most important, frugality alone doesn't get you to your goals. It's a helpful but not sufficient condition. So I take another approach of trying to write about money holistically, while urging you to make your own decisions about what's important enough to spend a lot on, and what's not.

2007 is the year of conscious spending. THE PROBLEM IS HARDLY ANYONE IS DECIDING WHAT'S IMPORTANT AND WHAT'S NOT! DAMNIT! That's why 2007 is the year of conscious spending, in which I want you to consciously decide what you're going to spend on. No more "I guess I spent that much" when you see your credit card statements.

The simple fact is that as young people, most of us are not spending consciously. We're spending on whatever, then reactively feeling good or bad about it. Every time I meet someone who has a prescriptive budget (aka, "Here's how much I want to spend on X this month), I'm so enchanted that my love rivals Shah Jahan's for his wife Mumtaz Mahal (look it up).

Today I'm going to write about people who spend a lot on things that most people consider absurd. This article is not a rationalization for absurd spending habits. PLEASE. If you walk away from this article with your hands triumphantly over your head saying "I'M PERFECT!!!" then you are a moron and your parents are probably very sad. But if you look at the idea of conscious spending--of people who have paid themselves first, then used the money they have left over to do what they want with it--then your parents will be very happy and probably live longer. Man, I can't believe I just used your parents' longevity to convince you to read.

Ok, let's get to it.

My three friends

The shoe lover. My first friend is a girl who spends about $5,000/year on shoes. Since expensive shoes cost about $300-$500 each, this is around 10 or 15 shoes annually. "THAT'S RIDICULOUS!!!" you might be saying. And on the surface, that number is indeed large. But I think iwillteachyoutoberich readers can look a little deeper. This girl makes a very healthy six-figure salary. She has a roommate, eats for free at work, and doesn't spend much on fancy electronics, gym, etc. In fact, her job provides many of the amenities other people pay for.

She loves shoes. A lot. And so, after funding her 401(k) and a taxable investment account (she makes too much for a Roth), she has money left over. Now here's where it's interesting. "But Ramit," you might say, "it doesn't matter. $500 shoes are ridiculous. Nobody needs to spend that much on shoes! You're just saying it's ok because...well, I don't know. But it's too much!!!"

I see eloquence does not reign rule today. But I want to take that statement apart. First, I bet most people who are astounded at the price of her shoes haven't even done what she's done. To the people who would criticize someone for spending $5,000/year on shoes: Have you funded your 401(k) and started outside investment accounts? Do you keep a strict budget of how much you spend? Second, when you have extra money lying around (extra = after reasonably maxing out your investment options), what's better: Making a strategic decision to spend on what you love? Or just spending it on random things here or there and eventually watching your money trickle out?

This girl loves shoes. And after planning for her long-term and short-term goals, she has money left over. This is why it's so surprising that people pass judgment when they see others buying things like expensive shoes. This girl has her shit together. And I think she's right on.

The partier. My second friend spends over $21,000/year going out. "OH MY GOD, THAT'S SO MUCH*#%(#%(#%!" a couple people said yesterday. Let's break it down, though. Let's say you go out 4x/week--to dinners and bars--and spend an average of $100/night. I'm being conservative with the numbers here, since a dinner can run $60/person and drinks could be $12 each. I'm not including bottle service, which might cost $800 or $1,000. (He lives in a big city.) That's easily $400/week.

Now, this guy also makes a healthy six-figure salary, and he's similarly invested quite a bit in his 401(k) and outside investments (including real estate). The key here is that he works such long hours that he's only really free Friday and Saturday nights. And so he goes out. Hard.

In just a couple years, this guy has saved more than almost any of my friends. He's also spent more on going out than anybody I know. And although $21,000 sounds outrageous on the surface, you have to take context into consideration. For example, look at his spending by percentage: Just for easy calculations, if we assume that this guy makes $210,000/year net, his going-out budget is roughly 10% of his income. For my friends who make $35,000/year, you can be damn sure that they're spending more than $3,500/year ($67/week) on going out.

The subscription nut. The third friend is a tech guy who has a Tivo subscription, Rhapsody subscription, cable/Internet connection, gym membership, Netflix account, magazine subscriptions, and a couple of monthly online accounts. Now, when I wrote Guess How Much Your Subscriptions Cost?, the point was to highlight how we systematically discount the cumulative effect of our subscriptions. In other words, we forget to add them all up to see the total amount--which is usually a LOT. That's why companies love, love, love subscriptions.

Anyway, I showed my friend my article, and he just shrugged. I started to get angry and use a line I've always wanted to use--"Do you know who I am?"--but he then explained that his subscriptions came out of his entertainment budget, which he'd carefully thought about and revised every few months. And, not surprisingly, he has a savings plan that is automatically deducted from his paycheck.

The point here is that, whether or not I agree with his subscriptions, he'd thought about it. He'd sat down, considered what he wanted to spend on, and was executing on a plan. That's doing more than 99% of the young people I've talked to. Shit, if he had decided he wanted to spend $8,000/year on furry donkey costumes and Faberge eggs, that would have been great. At least he has a plan.

An analysis
I know a lot of people are going to start screaming at me for things they disagree with, so I want to try to take it step by step. Then you can send your criticisms to youarestupid!!!@iwillteachyoutoberich.com.

Most of us are not consciously thinking about our spending. By that, I mean we're not being proactive about planning where our money should go. We're going through our 20s doing whatever, and inferring our spending patterns from the bills we get at the end of the month. We not only lack a prescriptive budget ("I want to spend 20% on my retirement account, 10% on savings, 20% on going out..."), we even lack a descriptive budget ("where the hell is my money going?"). (More about budgets and asset allocation.) And so I completely understand the sickening feeling we get when we see our bills, or the guilty feeling we have when going out to a dinner with friends.

We're also looking at surface characteristics and making stupid judgments. 'You spent $300 on jeans!' 'Why do you shop at Whole Foods?' 'Why did you decide to live in that expensive area?' I know we all wonder these things about our friends because I do, too. And, in fact, most of our judgments are right: Because young people are not carefully considering their financial choices in the context of their long-term goals--e.g., we're not paying ourselves first and we're not developing an investment/savings plan--when you think your friend can't afford those $300 jeans, you're probably right. I've tried to be less judgmental about this. I'm not always successful, but I'm trying to work on the fact that the sticker price doesn't matter--it's the context around it. You want to buy a $1,000 bottle of wine? And you already saved $50,000 this year at age 25? Great! But if your friends are going out four times a week on a $25,000 salary, I bet they're not consciously spending.

The friends I wrote about above are an exception to most people our age.

They have a plan. Instead of frivolously spending money without a holistic goal, they took a few hours, wrote down where each % of every $ should go, and then built an infrastructure to do it automatically. They spend less time worrying about money than most people! These are people who already know about ING and their credit cards and basic asset allocation. They're not experts, but they got started a while ago.

To me, this is an enviable position to be in, and it's exactly what iwillteachyoutoberich is about: cutting costs on what you don't care about, and spending extravagantly on the things you do. The problem is, we all want to have it now, so we make short-term decisions. We also use simplistic goals like "Oh, fine, no more lattes!" I hate when people say that, because (1) it's usually thought of as a panacea, and (2) for the people who have to make that pledge, it's usually such a part of their routine that hoping for long-term behavioral change is hopeless. What if I suggested that you could be doing what one of these friends are--spending whatever you planned without thinking twice--and it would make perfect financial sense? And you wouldn't feel guilty about it?

I know that sounds good. But the catch is, there are no stupid, simple secrets like "no Starbucks." You need to work to change your spending habits for a year, or maybe 2 or 3. Would you be prepared to work that long to get to a place where you knew exactly what you're spending, and you could spend extravagantly on the things you value?

You can. It takes a plan. And it's really as simple as that.

"But Ramit..."

"These people probably spend hours every day managing their money"
Nope. I asked them how much time they spent, and not surprisingly, it's just a few hours a month. Two of them set up an automatic infrastructure so that money is automatically moved from one accout to another as paychecks come in. Once you set your infrastructure up, you'll spend less time managing your money than most people do. And you'll have more of it, too. The simplest way to do this is to set up a high-interest savings account (let me know if you want a $25 referral to ING -- more about ING/setting up your accounts) and automatically deduct money from each paycheck.

"I'll never make six figures in my early 20s"
THAT'S NOT THE POOINT!! PLEASE DO ME A FAVOR AND DON'T GET CAUGHT IN THE DETAILS. That's exactly what I wrote about in The Shrug Effect. Here are some better suggestions:

• Think about it by percentage ("what percentage of my income am I spending going out?").
• Think about it in terms of goals ("how much do I need to save for a down payment on a house in 5 years?").
• Just look at yourself and say, what am I already spending a huge amount on? And what would I really like to be spending on? A good way to do this is to say, If I had all the money in the world, what would I like to do? Then figure out how to do it. But remember, pay yourself first instead of just spending on things you want.

Still, there is some truth to what you said. If you're making $40,000, your lifestyle is just going to be different than someone making $190,000. That's just a fact. But whatever your income is, I guarantee you can live better on it by having a spending plan.

"Yesterday, you wrote that you just moved to San Francisco and you're paying 2x the rent. Why would you do that? Shouldn't you live beneath your means?"
Good question. I still am. In my 2007 resolutions post, I wrote that in 2007, I'll make more, save more, and spend more than ever before this year. I created an asset allocation to save and invest more money (both in the stock market and in my own businesses), and then I looked at what I had left over. And I consciously decided that the higher rent, parking, eating costs, etc, was worth it.

One additional point is that money isn't just here to be saved and scrimped and pinched. It's here for us to enjoy. And I love living in SF. When you consciously spend, you can say "it's worth it" after having actually considered the alternatives using numbers, not foofy emotions.

"I have identified a fatal flaw in your reasoning. Yes, your friends may have maxed out their 401(k)s, but they could still invest more. And since every dollar we save now is worth a lot later, your dumb friends are actually losing tons of money!! HAHA!!"
Touche. Yes, technically you could always save more. But when your money becomes oppressive to you, that's when you stop respecting it. If I were saving 95% of everything I was earning and not enjoying any of it, would I really have an incentive to respect my own self-set goals? As someone commented earlier today, personal finance has a lot more to do with "personal" than with "finance."

And so, as a personal example of my finances and decision-making for moving to SF, I definitely could have taken the extra money and put it towards more investments. But after making my asset allocation, I'm happy with how much money I'm putting away. I don't want to blindly just save more and more with no good reason. Conscious spending is about putting your money in the best places that make the most sense for you.

I think the comments on this post are going to be very interesting. I want my major takeaway points to be very clear:

1. Conscious spending is about making a plan on how you want to spend your money.
2. Most of us are not spending consciously--we're just spending whatever and then getting the bills at the end of the month.
3. Why should we spend consciously? If your plan is forward-thinking, you'll be able to pay yourself first by automatically saving/investing part of each dollar that comes in. You also won't feel guilty when you go out, or buy shoes, or whatever, because it will be an explicit part of your goals. And if you structure your system to pay yourself first, in a few months, you'll start to see it add up. Imagine where you'll be one year from now.

Thanks for reading. And please tell your friends.

From the New York Times:

According to the Census Bureau’s 2007 Statistical Abstract of the United States, most college freshmen in 1970 said their primary goal was to develop a meaningful life philosophy. In 2005, by contrast, most freshmen said their primary goal was to be comfortably rich.

Well, on one hand that makes me disgusted, but it's sure good for traffic!!! Ugh.

Related: Why Do You Want to be Rich?

Update: I stand corrected, sort of. Elizabeth writes: "I don't know if you went back to the actual census statistics (PDF) but this was an unfair comparison by the NYT. Or maybe the NYT just didn't bother to look at the original data and only took what the census bureau had given them in their press release . If this was the case that was lazy fact-checking by the journalists. We should be considering why there was such a jump in the 70s to 80s and not 70's til now-- as nothing really changed from then until now.

My apologies for not digging into the data myself, but she's right: It appears there was a huge change from wanting to develop a "meaningful life philosophy" to wanting to be rich from the 70s to the 80s--and it's remained relatively stagnant since then. Also, this is why I love the people who read iwillteachyoutoberich.

Jam writes:

i've been approached by a colleague to think about investing in abbfund.com.

i'm not very good at this sorta thing. Never invested before and all that.

i would very much appreciate your feedback on what you think about this setup.

I write back:

i looked at the site for 2 seconds and searched "abbfund" on google, and i wouldn't go near it

I dunno, maybe it's the HUGE CAPITALS about the REFERRAL SYSTEM or PAY-4 PROFIT SYSTEM (it really says that) that makes me wary. What do I know, though.

PS--Please kill me if one of my iwillteachyoutoberich readers signs up for something like this

Related: I Hate Indian Network Marketers So Much

[Update]: I doubt this is related, but the URL abbfund.com stopped responding about 24 hours after posting this

Ari writes:

Easy to get caught up in the "excitement" of trading stock when you can time the market down to the second. Too bad quibbling about who has the fastest trades entirely avoids the question of whether you should be trying to market time at all.

Send other interesting personal-finance pics to ramit@RamitSethi.com.

Does anyone else find this weird?

...a one-year ARM, at 5.8 percent on average, now costs only a third of a percentage point less than a 30-year fixed-rate mortgage, at 6.2 percent. And ARM holders still face the risk of paying a higher interest rate down the road.

But while there's a new refi boom in swing, not all borrowers are rushing for the security of fixed loans. One in three homeowners refinancing today is choosing the financially riskier interest-only and payment-option ARMs, according to data from Loan Performance.

Many who are doing so may have chosen those mortgages not because they want them but because they can't afford the payments that would come due under a 30-year fixed rate, said Keith Gumbinger, HSH's vice president.

Wow. So these homeowners are simply betting that (1) home prices will continue to rise, and/or (2) interest rates won't rise very much? I'm still learning about real estate, so am I missing something?

"Some may be speculators who want to flip their property when prices improve and want to keep their costs as low as possible in the meantime," the article adds, which could be a good alternative explanation for what's going on.

I'm from Sacramento, which has been one of the hottest housing markets in the country for the last few years (here's some data from 2003). I had lots of opportunities to buy houses with prices that were going up $10,000 per week, where I had to put my name in a raffle just to get the opportunity to buy a house, but I didn't for a few reasons:

1. I don't understand real estate (sounds familiar)
2. I don't understand investing in something when people are getting irrationally excited about it and there's time pressure, which I pointed out earlier this week usually causes bad decisions. Maybe I'm just not that cool
3. I didn't want my cash flow going into real estate. Instead, I took it and invested it in myself and my own businesses, which I'm betting can produce a better return than the stock market or real estate. More on that later

Now, with foreclosures and people stagnant growth in real estate, there are blogs like http://thehousingbubbleblog.com where lots of people are gleeful about the impending doom of the homeowners who made bad decisions. I don't really care about saying I-told-you-so, but I do want to share what happened when I told people I wasn't going to invest in real estate.

"What?" people said. "You'd be crazy not to buy now. You can put $0 down!" People also thought I was misguided when I told them that I'd consciously decided not to invest. 'You must not understand' was a common sentiment I received, along with a pitying look. And more than one person said, "But real-estate prices don't go down." True, over the long term, the real-estate market has done well (not as well as the stock market, though). But the short term can really affect you, especially if your ARM payments jump from $1000 to $1900/month. That's very likely for lots of people when their ARM comes up--and do you think the average family can afford a doubling of their mortgage?

Yet another point for long-term outlook and not investing in stuff you don't understand. I think. Unless I'm missing something.

(Btw, I'm far from an expert in real estate and I'm still learning a lot, so last year I brought in Owen Johnson to write a series of real-estate posts last year on iwillteachyoutoberich.)

Vanessa writes:

I'm in the middle of a real estate deal and have $80,000 to park for one month until I fork it over to the seller, so I thought I'd open a high-interest (5.05%) HSBC account. I began the "15 minute" transaction on Friday morning. For some reason, the bank was not able to complete it online, so it had to verify my existing bank account with two tiny depositions. They didn't show up until today, Monday. Then I called the bank to see what the next step was and I was told that I should receive an email "any day now" and that no one could complete my application. I sent an email and was told that someone would respond to me within 48 hours.

I can practically hear the lost interest ticking away!

I then got back onto the web site, navigated around until I got to the right place, and completed my application. Which still hasn't been verified or anything.

This process seemed so old-school for what should be an easy Internet transaction. Any advice about opening high-interest accounts, or any banks that have a better process?

My response:

Can I be honest? It sounds like you’re being a little impatient. One or two days here or there doesn’t make a big difference—we’re talking about just over 10 bucks a day. I’d encourage you to think long-term and pick the best place that makes you comfortable, not be in a rush to make some money. Even though banks may be Internet based, they have strict security rules that take time for a reason.

Contrary to the idiotic investing magazines and TV shows, getting rich is not a sprint. It's a marathon, and fortunately one in which I can remain in my room, typing away furiously and incurring absolutely zero sweat. If you find yourself under the gun to make a financial decision quickly, I'm willing to bet it's almost always a bad decision.

Here's what I've been hinting about for the last few days: my first ebook!

It's called Ramit's 2007 Guide to Kicking Ass. It includes 5 all-new essays I wrote, plus new essays by some other great personal-finance bloggers. I'm publishing this now because I couldn't wait until 2007.

The guide includes new essays on personal finance, personal entrepreneurship, making mistakes, and more. All of them are completely new, and there's one ridiculous story about who has the most frugal family in the world (read it and weep). Plus lots of ranting, mocking, and tactical tips. I packaged it all up in a PDF designed by Scott Hurff and included a bunch of gorgeous illustrations by Ryan McCulloch.

The Guest Bloggers
J.D. Roth of Get Rich Slowly
Jeffrey Pritchard (JLP) of AllFinancialMatters
Casey Serin of I Am Facing Foreclosure
K of K’s blog

The Table of Contents

• Who Has the Most Frugal Family? An Investigation...Page 3
  
• The Key to Running a Great Project (hint: it starts with an “M”) by Ramit...Page 5
  
• Producers, Consumers, and the Information Diet by Ramit...Page 7
  
• Why Do People Get So Nutty Around Christmas? (large PDF; right-click to download) by Ramit...Page 8
  
• 101 Words on Running More Than One Project at Once by Ramit...Page 11
  
• How to Send an Introductory Email by Ramit...Page 12
  
• Money Day by J.D. Roth...Page 14
  
• Take Advantage of Your Youth by JLP...Page 18
  
• Handling Failure: Dealing with a $2.2 Million Mistake at Age 24 by Casey Serin...Page 22
  
• Building the Team You Already Have by K...Page 26

Get it now
I'm selling this 30-page guide for $4.95. If you like what I've written for the last 2+ years, I think you'll love this. (Maybe a gift for someone else, too?)

Should you buy it? I thought long and hard about charging for this, and I referred back to my old posts on paying for things you value. And if you don't love it, just let me know--I'll refund 100% of your money back.

If you want to distribute this to friends, please buy 2 copies--on your honor.

Update: To pay by check, scroll to comment #46.

Really? Did you say that on January 1 of this year?

Today's date: November 20th, 2006.

<a href="http://www.iwillteachyoutoberich.com" title="No, start today: Get your ass kicked at iwillteachyoutoberich.com"><img src="http://www.iwillteachyoutoberich.com/archives/tomorrow.jpg" width="300" height="200" alt="No, start today: Get your ass kicked at iwillteachyoutoberich.com" /></a>

See Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6 of this series.

I'm thrilled to announce that I've signed a book deal with Workman Publishing for the I Will Teach You To Be Rich book.

Yes! First, I have to say thanks to everyone who reads iwillteachyoutoberich. Every time I get a comment or an email, I hope you know how happy I am. It's the reason I plaster my email address everywhere.

My agent, Lisa DiMona of Lark Productions, is the most positive person I've ever worked with--and she can close deals. Thanks, Lisa! I also look forward to working with Susan Bolotin, my editor at Workman, to make this book something you'll love. And yes--there will be lots of new stuff.

Finally, thanks to my parents, who always told me, "Why don't you write that up? How about submitting it to the newspaper? What's the worst that could happen?"

More details to come later. But for now, thanks!!

Today I want to take a minute to write about my friend Jim. Here's a guy who embodies what I talk about on this site: getting rich by identifying your priorities, being frugal on things you don't care about and spending on the things you do, taking entrepreneurial risks, and realizing the difference between being sexy and being rich.

I went to junior high and high school with Jim, and now he's one of my roommates. Man, as I write this, I realize we've known each other for over 10 years, making me simultaneously amazed and disgusted. Anyway, Jim graduated from Berkeley and now works at a great tech company as a software developer. He found a job he loves. He does entrepreneurial projects on the side. And he's not fancy about managing his finances--he doesn't make a big deal out of it, he just methodically handles his business.

I remember him calling me up a while ago, telling me he had just gotten another raise. "Awesome!" I said. Ironically, that was the same week he moved into an even cheaper place to live. Maybe it's not actually that ironic. Whereas a lot of us take our new raises and spend it, really rich people take those raises, invest them, and continue living on the older wage that they've become accustomed to.

He makes conscious choices about what he spends his money on. Jim has told me over and over that he doesn't care much about living in a fancy place, so he saves money on that. He cooks at home when he can instead of eating out every day. But he loves outdoor stuff--biking, camping, travel. And so he splurges on those things. He has a top-of-the-line bike. He just got back from a week-long trip to New York, just for fun. And he uses his coding skills to do cool things; he's one of the guys I co-founded an education company with (more info), which we spent our own money on but ultimately failed. The downside was a few thousand dollars. The upside was the potential to have a big impact, learn a lot, and possibly make a lot of money (which we didn't). He took the risk.

Too often, we think that our rich friends are the ones with the highest-paying jobs who have the nicest clothes, eat at the nicest places, and have the most glamorous lifestyle. No. Those are the people who spend the most. There's a difference. And a lot of times we think rich means the person who talks about their finances all the time, shows off about the new stock they bought, and uses fancy words like derivatives and options.

Not true.

There's a difference between being sexy and rich.

Jim is already rich (more: Why do you want to be rich?). He can live anywhere, but he lives beneath his means. Although he hates Suze Orman and mocks me for watching her (I love her), he's spent the time to learn about growth and asset allocation and investing. However, if he doesn't know something, he asks people who do. He saves and invests agressively. Best of all, he doesn't live like a pauper: His frugality about the things he doesn't care about allows him to spend a lot on the things he loves. There's a difference between cheap and frugal.

A couple months ago, Jim jokingly asked me, "Why don't you ever write about me on your site?" That surprised me and I thought about it for a while. Too often, personal-finance blogs berate people for failing to plan and manage every aspect of their financial future, or only focus on the outlier issues. It's easy to spend every day writing about the things that we're not doing, and I think I've fallen into that trap a little bit. But I want to celebrate the people who have taken the time to set up their accounts right, thought hard about investing and saving, and created an infrastructure so that it actually gets easier over time. That's rich. Happy 25th Birthday, Jim.

Notice the quotes around the title of this post, because I would never, ever write that myself.

From yesterday's CNN Money article, "What's next for stocks," let me try to shed some light on how these "insights" are conceived:

First, make confusing claim with no clear answer, using qualifying words like "seem":

So where is the market headed next? Not only have recent reports painted a mixed picture of the economy, shaking investor confidence a bit, but after more than three months of gains, stocks seem vulnerable to a bit of a retreat.

Insert obligatory quote from someone saying something:

"After the strong rally we've had, the market was due for a rest," said Ken Tower, chief market strategist at CyberTrader.

Qualify what was written two paragraphs earlier by now predicting the exact opposite:

While more declines could come next week, in the longer term, stocks have a good shot at resuming the upward trend, Tower said.

Add another quote that doesn't mean anything. This time use the qualifying phrases "should," "at least," and "modest":

"Companies are buying back a lot of stock right now, while at the same time, individual investors continue to come back into the market," said Jeff Kleintop, chief investment strategist at PNC Wealth Management. "That should create at least a modest updraft for stocks through the end of the year."

Write a lot of numbers:

All that helped fuel one of the best third quarters on Wall Street in years, and a surprisingly strong October. The Dow hit record closing highs 13 times last month, while the Nasdaq composite and S&P 500 closed at their best levels in more than 5-1/2 years.

Finally, talk about confusing stuff that distracts you from the fact that this article is a meandering mess:

But recent reports have pointed to a slowing economy, including the weakest economic growth in more than three years in the third quarter, as well slowing activity in manufacturing and housing, and no growth in productivity.

Those reports sparked some selling, but also bets that if the economy is slowing so much - and inflation continues to moderate - the Fed can start cutting rates as early as the first quarter of next year.

[...]

In the early part of next week, Wall Streeters will be focused on Tuesday's mid-term congressional elections.

Hope that helps. The full article is here, but don't bother.

Casey points me to You Can Learn a Lot From a Rich Girl, a breathtakingly good article filled with insights about the dumb things we do with money:

The author (I don't know who it is) writes about Marilyn, the "rich" girl:

Driving home from the bar one evening, my friend Marilyn confided in me that she was afraid. In six months, she would be graduating from grad school and her parents were going to cut her off financially for the first time in 26 years. Marilyn works twice a week (8 hours total) waiting tables to pay for pot and shoes, but everything else from her rent to her groceries has been paid for by her parents. Marilyn, at 26, doesn’t know how to balance a checkbook and has no idea what a gallon of milk costs. On top of that, she managed to secretly charge up some credit cards to the tune of $12,000 and that debt alone was overwhelming her. She couldn’t imagine what it would be like when she had to pay all of her own bills, plus the credit card debt. She fucked up big time and rather than admit that to her parents (who amassed their wealth through careful, responsible investments) she was desperately confiding in her older friend hoping for a magic solution to her problems.

On young people buying expensive clothes, going out extravagantly, and not realizing how much we can really afford:

I’ve spoken to a lot of college kids lately who regularly spend $200 for a pair of blue jeans. When I ask them how long it takes for them to earn that kind of cash, the answer usually falls in the realm of a week or so. At this point, I will stress that not even the very wealthy spend an entire weeks worth of salary on one article of clothing. College kids disagree because they’ve seen wealthy people wearing more expensive clothing than their jeans. So I explain that while they may wear more expensive clothing, that it doesn’t constitute a week of their salary. Normally, they earn the price of expensive jeans in an hour, often less. On the off chance that the kid understands the picture that I’m trying to paint for him, he expresses shock that I would suggest he should never spend more than $8 (his hourly wage) on a single article of clothing….or alternatively buy significantly less clothing. But most of the time, the idea that they might be living well above their means only confuses them and they just stare at me blankly.

And on the cluelessly stupid way we act about Christmas gifts:

Every Christmas we go over to her house bundled up in sweaters and jackets, swathed in a layer of blankets because she can’t afford to turn the heat up. But everyone will be plowed with the presents that she couldn’t control the impulse to buy. It pains me to see and I just want to say to her to please take back the bracelet and the sweater and the gift certificate and the 20 presents you bought the children that will most likely be donated to charity without them ever playing with them because they have so much already and please, turn your heat up.

Read the full article here: You Can Learn a Lot From a Rich Girl. And if you're the author, please get in touch.

Regular readers know that I'm not especially enthusiastic about investing in real estate (see here and here for examples of why), so this post won't come as a big surprise.

But it's not just about why I think stocks are better. Many of you have been hearing about the blog http://www.iamfacingforeclosure.com, written by a 24-year-old guy named Casey Serin who "bought 8 houses in 8 months across 4 states with no money down" and is now facing foreclosure. He has openly admitted to lying on his loan applications (to get more in loans), and to bringing his total debt to about $2.2 million ($140,000 of that is in unsecured debt like credit cards). In the meantime, he's been blogging about his situation. His blog has gotten the attention of USA Today, the San Francisco Chronicle, NPR, and more.

There's a twist to this story that nobody else knows: I know Casey Serin. We went to high school together. In fact, we ran the computer club together, which is how I got to be the cool guy I am today.

That makes this a weird post to write--not only because he's done some really shady stuff that really pisses me off, but because he's not just a one-dimensional character who deserves our scorn: He's actually doing a lot of good, too. And that makes it hard to describe what I really think of the situation.

The story with me actually begins about a month ago, when I got an email from Casey out of the blue. I hadn't heard from him since high school 6 years ago. (Emails reprinted with permission.)

From: Casey Serin
To: [BCC list]

Hi Ramit

I hate SPAM too! You're receiving this because you're in my personal mailing list. You're a friend, family or an acquaintance or past co-worker or client. If you don't want to receive occasion updates from me please use the automatic unsubscribe link at the bottom. Thanks!

Long time no talk! Yes I have not been good at updating everybody and keeping in touch. So here is a 1) quick update about what I've been up to, and 2) an opportunity to put your money to work with us in the real estate business

[...]

This January I quit my job to do real estate investing full-time. Together with partners in the area we buy and sell houses for fast gains and we also hold property for appreciation. In the first part of the year I personally bought 7 houses in 4 different states. It's not all easy - there is definitely a learning curve. It helps to have experienced associates to help me along.

Now what??

We have a unique opportunity to continue to expand the real estate business. Because of the market reversal in California there is going to be many people in trouble with their loans. People have been buying more home then they can afford or refinancing like crazy. Foreclosures are already on the rise and they are going to sky-rocket in the next several years.

There is an opportunity to 1) help people out of trouble and 2) make some money. Service and integrity comes first though. I know what its like to be behind payments and face foreclosure. I refuse to be a "shark" investor.
It must be win-win, or no deal.

Want to participate?

Do you have money that's sitting in an account somewhere earning an embarrassing 1-3%? Are you comfortable with your retirment money sitting in a volatile stock-market?

Maybe you're not investing at all. Are you comfortable trusting social security to take care of your retirement?

Invest your money with us and get 24% fixed return secured by real estate.
We use your money to buy and fix houses improving the area and helping sellers in distress.

Benefits to becoming our private lender:

* we pay fixed 24% interest on your money - reliable returns

* compounded monthly - your interest is making interest and it grows exponentially

* secured by real estate - just like a bank, YOU get a mortgage against our properties to protect your investment

* start with as little as 10,000

* may use your 401K or IRA account - get tax advantages

* your money doubles every 3 years

* 10,000 grows into 100,000 in 10 years

Worst case scenario...

If we can't pay you back, you get a good property. We only put your money into a house that has at least twice the equity as the amount you're investing. We only invest into nice properties in good neighborhoods. If something were to happen to our business you can normally just sell the house at a discount and get your money out. What stock or mutual fund is going to give you THAT kind of security?

Limited opportunity...

We can only take a certain number of private lenders. Get back to me soon so I can explain in more detail.

Also please forward this to anybody else who may want to get a high return on their money. We pay referral fees!

Anyway...

I would love to hear from you either way. Lets catch-up!

You can imagine my disbelief in getting this email. Here's an old acquaintance who I haven't heard from in years, and he pitches me the shadiest-sounding financial "opportunity" I've ever heard of. "Fixed 24% interest on your money - reliable returns"? Oh really? Give me a break. When I read that, I immediately knew this "offer" was BS, but just to play along, I asked him what the risks of his idea were. He replied:

From: Casey Serin
To: Ramit Sethi

1) Getting into a bad deal. Minimize with experience. I've been investing full time since Jan of this year and dabbled part time for about a year before. I've already made my share of mistakes and learned from them. (Good blogging material!) So I'm still pretty new but not BRAND new. To fill in the gaps in my knowledge I work with other experienced investors who help me and partner on deals with me. That's the "we" part.

2) Private lender needs his/her money out early. Minimize with having other lenders on stand-by. I would not try to keep a private lender locked-in. If I can find another lender to take their place then I'll give back the money plus interest without any fees.

3) Seller is afraid we won't make their payment. Minimize with education.
First of all, most sellers I deal with are about to loose their house and already have 2-5 late payments on their record. They don't have much to loose, especially since I'll give them money for their equity. Better then loosing the property, getting a foreclosure and getting no money. Second, if I'm investing 10K+ into a deal why would I not make the payments and loose my investment? I'm catching up their loan, improving their credit and helping them get a fresh start. The seller has much more to gain then they have to loose

Ok, now I knew for sure that this was definitely a scam. I said no thanks and politely passed on the offer.

Here's where it gets even more interesting. THE VERY NEXT WEEK, I received another email from Casey.

I haven't told everybody the full story about the recent problems in my real estate business. I feel like I need to share my experience and tell it how it is. So I started a blog: www.IamFacingForeclosure.com

As I learn my lessons and find solutions I will be writing about it. Hopefully this will help others out there who may be going through the same thing.

Also let me know if you have any buyers for my properties. I'm ready to sell them below what I owe via a shortsale to avoid foreclosure.

Those who received my email about Private Money - please forgive me for giving you a false impression. Getting high returns lending on real estate deals is a good thing - you should do it. However, I didn't fully explain MY situation. I made it seem like I had everything together. Well, as you can see, I'm not a very safe bet right now. As I recover from this thing and rebuild my business I hope to gain your trust over time. Then if you still want to get great returns we can talk. In the mean time I can refer you to other investors who already have a solid track record.

Thanks for your support.

Now this really made me mad. Casey had tried to sucker people into a scam real-estate deal less than a week before he admitted he was going through foreclosure. I was fortunate enough to recognize his pitch as bullshit, but what if someone had gotten conned into it? Financial scams on unsuspecting people make me furious. So I read through his site. It turns out that he had bought multiple houses in different states (hoping to flip them quickly), lied on his applications to get his loans approved, and had grossly miscalculated how much it would cost to renovate and flip them. Bad move. His debt is now over $2 million.

But this isn't just a 1-dimensional character who deserves our scorn. I know Casey and he's actually a very nice and sincere guy. We met at a Starbucks a couple weeks ago (he had been invited to give a talk at UC Berkeley), and he filled me in on the details. If you read through his blog, you'll see that he's being completely honest about what he did wrong, and he's accepting responsibility for his situation--despite the thousands of angry comments on his blog. It seems that there are lots and lots of people angry about the housing bubble, both from the people who made stupid choices and screwed themselves by being greedy and the "I told you so" people.

Things have been going all right for him. He's managed to sell one of his houses, and his press attention has been sending thousands of people to his blog. In fact, Robert Kiyosaki (author of Rich Dad, Poor Dad, which I reviewed here) heard about Casey's story and invited him to meet in Phoenix.

Will Casey get out of debt without having to declare bankrupcy? I don't know. I honestly don't know what to make of this situation. But I do think a few things: First, Casey really messed up by trying to con people into joining his stupid real-estate "opportunity." That was a scam, pure and simple, and every single one of you needs to beware of that in the future--no matter if your age-old high-school friend pitches you, or your best friend. A scam is a scam. Second, Casey did at least acknowledge his wrongdoing a few days later and invited people to his blog to view his progress. He's been remarkably positive despite the horrendously negative comments he's getting. Even when I met him, he knew exactly the situation he was in, and he was still positive about the future. I think that's pretty impressive. And I'm pretty amazed by what he's done in 2 months: He's created a great blog to share what he did wrong, and he's gotten massive media attention to spread the word.

Is it really right to be starting a blog when you're over $2 million in debt? Honestly, I wouldn't be doing it. I'd be doing every single thing I could to sell those properties and (this may be the only time you ever hear me say this) get a stable job. Sometimes, you need to bite the bullet. But he's chosen a different path and I guess we'll see how it goes.

For now, I don't really have any more conclusions or thoughts. Just check out his blog and see for yourself: http://www.iamfacingforeclosure.com (you can start at Why I am Facing Foreclosure).

--
This is a blog on personal finance and personal entrepreneurship for young people. To see more articles from iwillteachyoutoberich.com, check out my table of contents (over 300 posts), my RSS feed, and my newsletter.

From another blog I read, Paul Kedrosky's Infectious Greed:

The purpose of this email is to let you know that we are making our 1,800 stock research reports available for free to all users visiting our investment web site, Morningstar.com, for the next two days: Tuesday 10/31 & Wednesday 11/1.

I thought your readers might be interested in our stock research “open house.” It is a great opportunity for them to get our buy/sell opinions on 1,800 companies for free. Please note that users will need to register with our site before they can access our stock research.

I read these investing reports on the toilet--as entertainment. Now you can go behind the curtain and see that there aren't any secrets to investing, and that high-priced research doesn't mean higher ROI.

As Warren Bufett noted,

"Almost everything we learn is from public documents.... We do not find it particularly helpful to talk to managements.... The numbers tell us a lot more than the managements. We don't give a hoot about anyone's projections. We don't want even want to hear about it."

He had even greater scorn for analysts: "I don't read any analyst reports. If I read one, it's because the funny pages weren't available. I don't know why anyone does it."

After I wrote The World's Easiest Guide to Understanding Retirement Accounts, I got a bunch of emails asking about the fees to open a retirement account. It's true, lots of places require you to fund your retirement account with $1,000 or $3,000 to get started (e.g., Vanguard does). But there are other options. Summer writes:

I actually just started my Roth IRA with the T. Rowe Price Retirement 2040 fund a couple weeks ago. It's so easy! Plus, with automatic allocation, you only need $50 a month to fund it (no coming up with the $1000-$3000 up front).

I don't own anything at T. Rowe Price, but I've heard good things about them from a number of people.

How to Avoid Investing Mistakes. Everything on this web page by Fidelity is correct and important. And yet, every day I see hundreds of pages like this by Schwab, Fidelity, ETrade, Vanguard, and every other financial company--pages that make me yawn and want to ignore my personal finances. Why don't they resonate with us? And why don't companies pick up on this?

Seriously, they're not. Read more at All about stocks and bonds.

To post this image on your blog, MySpace, etc:

<a href="http://www.iwillteachyoutoberich.com""><img src="http://www.iwillteachyoutoberich.com/archives/bonds.jpg" width="200" height="300" title="Seriously, they're not. More at iwillteachyoutoberich.com" /></a>

I really do. Yesterday I was listening to the radio and NPR was running its pledge drive to raise money. I love NPR, but I have to admit that I was about to change the station because, well, that's what's easy. But then they mentioned that some company was doubling every pledge made that hour.

Bam! That's all it took, and I picked up the phone and made my pledge. It wasn't too big, but it felt GREAT knowing it was being doubled. Same with my previous post about the dollar-for-dollar match for Hurricane Katrina.

Usually we only hear about leverage in real-estate terms, but some of you work at places that double your donations and match your 401(k) contributions. That's leverage. Use it. It's really powerful, often with no additional work from you.

PS--Can you think of any other real-life examples of leverage?

Let's start the week off right: with me getting really angry and threatening to throw heavy things at people.

Guys, I am so tired of hearing about young people sabotaging themselves by being cheap. Not frugal, cheap. (There's a difference.) Let me tell you why using an example from the recent IWillTeachYouToBeRich chat I recently held.

During the chat, someone asked me what I was going to do with the site in the future, and I mentioned how I was interested in using different types of media like podcasts, videos, etc. There was a lot of enthusiasm: "Yeah, Ramit!" they said, "you should do it!"

Then I decided to test the lovey-dovey emotions that we were all feeling. See, I've been getting lots of requests to do a regular podcast, but it's a lot of work to do a really good one. That's why I've been playing with the idea of charging for them.

Oh, man. When I mentioned this in the chat room, people went apeshit. They were dead set against it, and I watched the mood go from Kumbaya-happiness to dark indignation. Curious, I thought. Actually, I thought it was completely stupid, and here's why:

Before I went nuts, I asked people, why not charge? And the reasons I got back were so breathtakingly absurd that I actually stripped out people's names.

person1: don't charge though
person2: yeah, please don't charge
person3: I have universtiy debts to pay for... =... O(
person4: It feels punitive
person5: your good karma will come back to you muliplied if you do not charge
person6: because people dont want to pay lol my guess is you will lose many readers if they have to pay
person7: No charge....comeon! you cant ask us to pay to learn saving :)
person8: one thing that would concern me if you charged is that the quality of material would need to match the fee
person9: i think you should charge. you weed out the ppl who aren't willing to make basic investments in their investments
person10: dont charge
person11: frankly your latest work hasn't been great ;(
person12: we cheap :P don't charge. we hear to save money here XD
person13: suze orman does not charge for her show
person14: Dude, there are people who CAN'T pay. (Me, for example, here in Bangladesh, I don't have a way to pay for stuff in the web.)
person15: you've been giving out quality information for free, i think i've gotten used to it...
person16: Charging is not a succesful business model for editorial content on the web, currently
person17: people dont know what the advice is worth before getting it but you have to pay first
person18: you will NOT attract new audience members by charging....existing ones, maybe
person19: Payment is a barrier between the reader and the important information; I would think you of all people would understand how dangerous it is to erect even minor barriers for people.

Seeing this really pissed me off. In fact, these reasons are so ridiculous that I almost took out a sledgehammer and smashed my monitor, Hollywood-style.

Listen, if I decide to charge for podcasts--which I haven't decided yet--then you can decide if they're valuable enough to pay for. But please don't use dumb excuses like "How can you expect me to pay when I'm trying to save?" and "I'm used to free stuff."

The truth is that most young people don't understand the value of money. Ooh, yeah, I said it. We don't differentiate between cost and value. We'll happily spend money eating out, drinking, or going to movies, but when it comes to paying for content or other valuable items--things you consider an investment--we balk. We've gotten used to everything being free, and when things start costing money, the result is a panicked "no way!" reaction. How do I know? Because I'm a young guy, and a few years ago I was saying stupid stuff like the above quotes, too.

When I was younger, I tried to save money on everything, whether it was a Coke or a major purchase like an iPod. I understand being on that end of the gradient. Now that I'm earning money, though, I see the value in spending money on things beyond eating out. Person9's comment spoke to me:

"person9: i think you should charge. you weed out the ppl who aren't willing to make basic investments in their investments"

Frankly, if you'd told me to spend more money on certain things back then, I would have ignored you. But hopefully you're smarter than my past self. Also, you might have read enough on this site to know that spending on the things you love is perfectly ok.

Ben Casnocha put it well when he wrote this:

"What are the best corners to cut? In the Google cafeteria, the food is awesome, and the chairs and tables are pieces of shit. That's a great example of cutting the right corners."

Right on. Today, I see young people sabotaging themselves all the time by being cheap about the wrong things. "I'm not going to buy that book! It costs $27.95!" they say, not realizing that the book could inspire them to do something that would make them $10,000. That's a 357x return. Or, "I'm not going to spend $15.00 on the more expensive cellphone plan--that's ridiculous!" No, what's ridiculous is you then not monitoring your usage and ending up spending $58.00 in overage fees in one month.

"But Ramit," you might say, hiding behind a wall because of the mallet I am holding on this angry Tuesday, "how do I know that $30 book will pay off? What if I don't get anything from it?" Jesus Christ, you don't know! That's called taking a risk! Unfortunately, I see a lot of people nickel-and-diming the really important things that could pay off explosively.

Instead of being guided by the invisible hand of stupidity, take some conscious control of your spending. Are you just spending on eating out? When was the last time you spent money strategically to try to gain something useful? Yes, it's actually good to spend money on things you value. Yes, it's important to spend money on things that will benefit you financially, intellectually, whatever. Yes, I'm encouraging you to spend money on certain things! In fact, here are some of the subscriptions and things I've spent money on:

• A subscription to Before & After Magazine, to improve my design skills
• A subscription to the Rhapsody music service, because I like finding new music without having to wait
• A Rowenta iron, because I love ironing

This point of this isn't to brag about how much I spend on stuff. Heh, frankly, it's not that much in the grand scheme. And it's a little different than my posts on Irrational But Good Things To Buy and Cost vs. Value. The point is to differentiate between spending on fun, and spending on things you consider investments.

In the quotes from the chat above, one guy said something like, 'How can I spend money on a podcast when you expect me to save?' Let's get real here: Assuming the podcast (or whatever) is worth paying for, then you need to think more about whether it's an investment or a simple cost. Does it have the potential to make you happy? Beyond that, could it give you the potential to make more than the cost of the podcast? Is there a trial or a refund policy? Is there some magical way of of judging if you think the content will be good (like maybe 2 YEARS OF POSTS?!?)?

This post isn't just about my hypothetical podcasts, and it's not about going to buy that iPod/coat/car you've really been wanting. It's about not being cheap. It's about using your money strategically by realizing what's an investment and what's not. So here's what I want you to do. This week, go find something valuable you want to spend money on--and then go buy it. Yes, I'm telling you to go spend money on something you love and something that will benefit you in some way. Do me a favor and add a comment here telling us what you bought. Bonus points if you spend money on something that will turn your money into 10x what you spent (e.g., a good business book or buying lunch for your mentor to get his advice). Remember: You control your spending.

---
If you're new to IWillTeachYouToBeRich, check out my table of contents, RSS feed, and email newsletter. You can also add this blog to your My Yahoo page.

Don't be a moron. If you check your stocks every day and worry about the daily variations in your net worth, you're being dumb.

Now, if you enjoy reading Smart Money and Forbes and watching chairs being thrown on CNBC, then by all means--go for it as a hobby. But remember, their "secret stock ideas" are designed to sell copies. And the pundits? Their stock picks are usually no better than chance.

Most long-term investors don't need to check on their investments every day. The daily changes in stocks are almost always noise, plain and simple, and few 30-year returns were determined by the news of one day. In fact, I read a quote from the president of ETrade saying how, a few years ago, almost half his customers logged in once a day to check their stocks. "That's crazy," he basically said, noting that most people don't need anywhere near that level of activity. (If you can find this quote, please let me know.)

As with most things, it's not about being sexy, it's about doing enough to get where you want to go. Wow, you have 450 personal-finance magazine subscriptions! You must really know what you're talking about!! The same goes for blogs. Do you seriously think that the person reading like 50 personal-finance blogs is actually doing anything?

Give me a break and keep it simple: You need to build up a good infrastructure so you know what kind of asset allocation you want (stocks, funds, real estate, whatever), and then make sure you're roughly on target. You need to occasionally monitor your investments to see how they're doing. And you may want to set up automatic alerts through your broker/Google news to keep you informed on major news in the company. How often should you manually check on things? Probably every few months, with a major review every year. But not every day.

Relax. Once you get set up right, investing is easier than you think. Last month, I spend a few hours a month looking after my investments. That's less time than I spent watching Law & Order reruns yesterday.

To post this image on your blog, MySpace, etc:

<a href="http://www.iwillteachyoutoberich.com" title="If you check your stocks every day, you're dumb. Think long-term."><img src="http://www.iwillteachyoutoberich.com/archives/daily.jpg" width="300" height="200" alt="If you check your stocks every day, you're dumb. Think long-term." /></a>

See Part 1, Part 2, Part 3, and Part 4 of this series.

Dan Portnoy and Tim Grahl were nice enough to interview me for their Business Opportunities Podcast last week. Here's some of what you'll hear in the podcast:

5:53 -- Who am I to say I will teach you to be rich?
7:12 -- There's no secret to getting Rich
8:30 -- What does being Rich mean?
10:00 -- Dan and I mock those stupid stock suggestions we get by email
10:35 -- After you figure out what Rich is, what then?
11:00 -- I plug my own 1-hour talks (more info: seminars.iwillteachyoutoberich.com)
11:58 -- Growth through different types of investments
12:27 -- The single most important part of getting Rich (I meant to say "bad decisions," not "decisions," oops)
13:15 -- I give some advice for entrepreneurs on personal finance, finding mentors, and more

Listen to the interview here.

Two years ago today, on August 17, 2004, I wrote my first post for I Will Teach You To Be Rich.

Today, I took a minute to catch my breath and look back over the last couple of years. Good god, I had no idea what I was getting into when I wrote my first post (which you'll notice still has 0 comments). Here are some stats I just dug up:

Number of posts: Over 300
Number of comments: Over 2,000
Number of ads run on or off the site: 0
Number of people I've given my 1-hour talk to in person: Over 4,000 around the country
Emails received and replied to: Thousands (I lost count)
Growth: I don't know how this happened, but iwillteachyoutoberich.com receives more visitors before noon each day than I received in all of May 2005

The traffic is cool, but who really cares about that. Today, I think this blog has some of the smartest readers of any blog, anywhere. Check the comments and I think you'll agree. Notice the lack of trolls and the actual conversation that goes on!! How novel!!

As I've written this blog, I've tried to keep a few simple things in mind: Getting started is more important than being the smartest person in the room. It's ok to make mistakes. Read a lot so you know when to call BS, but not too much--action is more important than reading. Ordinary actions get ordinary results. And there's a difference between being sexy and being Rich.

This year, there's much, much more to come. I have an entire series planned on getting your dream job (how to find the best job, how to out-interview anybody, and how to win at work), more advanced and beginner topics on investing, more posts on personal entrepreneurship, more talks around the country, and a couple of big announcements to come.

Anyway, I just wanted to say thanks for reading, commenting, and emailing. I know it's hard to dig through some of the older posts, so today I went through and picked 5 of my favorite posts from each category. Take a look. And thanks for being with me.

Introductory Articles
Why do you want to be rich?
The Best Decision vs. The Financially Smart One
Cheap versus frugal
A big fear I have of this site
2006 Makeover, Step #4: Open your retirement accounts

Investing
An analysis of 1000+ IWillTeachYouToBeRich survey responses-- and some new decisions (Best feedback ever)
Dumb: "Don't invest; you can't beat the pros"
All about stocks and bonds
All about mutual funds
Read Warren Buffet's letters

Miscellaneous
What are we doing on this site?
I bought a tie (I love this post because of how angry the comments are)
Cost vs. value: Why I bought a new car (Sorry guys, but I stand by what I wrote)
Probably one of the best comments this site has ever gotten
Boy am I stupid

Personal Entrepreneurship
Barriers are your enemy
We love to debate minutiae
Your College is Not a Technical School
On greed and speed
The Myth of the Great Idea

Saving
Here's how I set up my financial accounts
Letting your parents manage your money is dumb
The Power of Compounding
Time is NOT money--at least, not yours
Cook at home, you lazy bastard

To stay up to date, you can subscribe to my RSS feed and newsletter.

I've lost a lot of money in the stock market recently.

I'm an optimist, but seeing a lot of money disappear isn't the most fun thing. So after the latest drop in stocks over the past few weeks, I thought I'd share my thoughts here.

As I've written before, if you invest, you're going to lose money at some point. That's ok--especially when you're young, because time helps mitigate loss if you have a good investment. But ideally, it shouldn't be happening very often, and when it does, it still sucks.

Now check this out: I was listening to some personal-finance pundits talking about the recent down market, and more than one of of them said the equivalent of, "If a stock drops 8% (or 10%, or 12%), I'm out of there." What the hell?

Here's the example one of them gave. Try to figure out the answers before you go on:

"If your stock does down from 100 to 50, what percentage have you lost?

Now, to get back up to 100, what percentage does your stock have to increase?"

Answers: It's gone down 50% and it has to increase 100% just to break even. (If it only increased 50%, it would be at 75.) Most beginning investors get this wrong.

It's a good lesson, but I think one-size-fits-all advice is dumb. I went roaming around to find some data to prove otherwise, so check out this Apple graph I took from finance.yahoo.com:

Now, let's just eyeball it. Clearly, the stock has done very well in the last few years. But let's look at the period from 1995-1998, during which time Apple dropped from about 17 to about 10. That is a big, big loss of about 41%.

But because I cherry-picked this example to prove my point, I know that's not the whole story. Apple closed at $67.98 yesterday, and it's split twice since that low point in 1998.

Now there are a few things about this example: First, if you really think stock-picking is about looking at charts and guessing--especially retroactively--then you are going to lose a lot of money for being a moron. This is just a superficial analysis to give an example. Second, had you sold when Apple was down, you would have missed out on a lot of money.

"But Ramit," you might say, "I wouldn't know it was going to go up at that time! I did the best I could." Well, true. In hindsight, everything's clearer.

"But Ramit," you might say, "when should I sell a stock then?" I've written about that here.

"But Ramit," you might say, "what are you saying? You told us you lost a lot of money. So are you just going to let your money sit there? Isn't this just an excuse for being lazy and overly optimistic that your stock picks are really good?" Now this is a good question. It's possible I'm committing lots of cognitive and decision-making errors. What you need to ask yourself is, "Are these still good companies and good investments?" If so, and you have the risk tolerance and time to ride the storm, great.

If not, your options are more limited, which is why it pays to invest earlier. In fact, if you think the companies are good companies, they're on sale right now.

I want to show you something that hardly anybody knows. It's research from Standard and Poor's, the S&P behind the S&P 500. In 2002, they released an astonishing finding that made most investors' jaws drop: During a 10-year period they studied, if you missed the best days of that 10-year period, your returns would be cut in astonishing ways. For example,

• If you missed the best 5 days of that 10-year period, your return would be down 22.65%.
  
• If you missed the best 10 days, your return would be 37.65%
  
• And it just gets worse for missing the best 15, 20, and 30 days of a 10-year period.

Here's a pretty picture:



That's from a PDF by Mercury Advisors, but you can find more here and here.

If you think you can figure out exactly when those 10 days will fall in 10 years, then you are much smarter than I am. Don't try to time the market.

But don't just sit around, either: If you suffer a relatively big loss in your portfolio (how big? you'll know when it happens), it would probably be dumb to just saunter around outside with your hands in your pockets, whistling and skipping. Take some action:

1. I spent part of last weekend doing an analysis on my current holdings to see if they still meet my investment criteria. (They do, except one company, which I'm not sure I would invest in knowing what I know now.)

2. If I had properly diversified my investments, I wouldn't have been hit as hard as I was. I'd been meaning to diversify into more non-tech stuff, including international funds, so I'm treating this as a kick in the ass to get this done. If you already have stocks, you can do this by either adding more money in different areas, or shifting current holdings to new areas.

3. Also added to my to-do list: Writing about decision-making theory and cognitive biases sometime in the future.

I have the data from my survey below! Reading these made me want to laugh, cry, and vomit. Also, if my mom didn't read this site, I would tell you a couple other things it made me want to do. Anyway, this was the first time I've tried to understand more about you--and man, was I surprised. The analysis is long, but I really encourage you to take a few minutes to read it to see where I'm going with this site.

Methodology: I surveyed over 1,000 readers of http://www.iwillteachyoutoberich.com during the last 48 hours.

Age: About 1/3 of you are recent grads. Huge surprise: The second-largest demographic is 30-39 years old. I had no idea.

Gender: About 77% of you are males, 23% female. This makes me sad for many reasons.

How often you read this site: RSS readers overwhelmingly read iwillteachyoutoberich every day, while www.iwillteachyoutoberich.com visitors mostly read it a few times a week.

How long you've been a reader: The majority of you are new readers within the last 6 months. This jives with my traffic data. I've seen most of my growth in the last 6-9 months.

Newsletter subscriber? According to this data, over half of you are. Don't believe it, though; it's a self-selection factor (e.g., the people who replied to my request to fill out the survey are the same people who are likely to sign up for the newsletter. Sign up here--free--and get articles I never write for the blog.) I know for a fact that my newsletter has only a fraction of the total number of readers of this site.

How you heard about iwillteachyoutoberich.com: Most people heard about this site from another blog. Second up was Google, and then a bunch of other sites followed (Digg, delicious, etc). One of these days, I need to optimize the crawlability of this site for search engines (if you can help, let me know).

Location: My survey question was flawed, making it hard to properly analyze this, but most of you live in the US. There are a ton of international readers, though.

What do you like about IWillTeachYouToBeRich?
The answers to this question warmed my very heart. The vast majority of you like my writing and you talk about my posts using words like "straightforward," "not condescending," "funny," "honest" and "I trust you." Many of you mentioned appreciating that I kick people's ass to get up and start doing something. A few of you didn't like my jokes, but I just dismissed you as not funny. Most of you like when I mock stupid people. Delightful!!

Some responses to What do you like about IWillTeachYouToBeRich?

"Direct tone, not condescending but humorously blunt at times. The investment advice is great and really takes the mystery out of things."

"You are reachable; I think you have emailed me back with support within 30 min of emailing you. This takes up your time and energy, and you get nothing...I know I am not alone when I say, if I ever have any way of helping YOU out, I would do it at the drop of a hat."

"I enjoy Ramit's writing style and straightforward/practical advice...I also greatly enjoy his rants, which are hilarious."

"Pertinent honest information. Nothing I don’t need. No annoying ads running throughout the page. Ramit has taken the task of educating people like me for free, devotes much free time to it, is smart enough to know that it will benefit him in the long run and doesn’t have to make it an instant source of income."

"Practical, down to earth. no lame "quick fixes."

"You just helped me realize that I'm not the only person in the world with finance sensibility... but we are few in number. You also spoke with me on the telephone regarding entrepreneurship and some business ideas. That is absolutely steller. Who else would do that?"

"Your angle -- targeting kids. God! I wish somebody had grabbed ME by the scruff of the neck when I was 23. And that you keep the steps of your plan simple simple simple. It's a no-brainer to follow. And that you are literate. Woohoo! I haven't found a mispelling or grammatical sollecism yet. Will you be MY son?"

For What do you like about IWillTeachYouToBeRich?, see all 746 responses (opens new window).

What 3 things could I do to make it better?
More posts. The #1 response to this question was "More posts." That makes me happy and also sad. I really thought I was posting a lot! On one hand, it's flattering to hear that you want to read more. But I also have to be realistic about how much I can post--especially long articles that take lots of time to write. It's the same as working out: You can start off by running 20 miles a day and lifting 200lbs, but you'll burn out in a week, and that's worthless. I'd much rather exercise less but make it sustainable--just like with writing this blog. Though it may seem like I write off the top of my head, it takes a lot of planning and research.

I also discovered that you know exactly when I write a post that's sub-par (e.g., the I Got a New Tie post). Anyway, I'll try my best to post as often as possible, but please be patient and remember I have a lot of other stuff going on, too.

Look and organization of the blog. The #2 response was to improve the look and organization of this blog. About 5 million of you complained about the ridiculous scrolling on iwillteachyoutoberich.com. As a usability guy, this is important to me. It's also something I've been meaning to do but, honestly, it worked and I've had more important things to do. Anyway, I'll bump this up in my to-do list. Coming up: A better archive system (god, I know), easier readability, and better commenting. Once you get hundreds of posts up, it starts to get hard to manage.

Stay on topic or expand? A lot of you wanted me to write more about entrepreneurship. Others wanted me to stay on topic and write more about personal finance, including more advanced topics. So here's the deal: I have tons and tons more to write on personal entrepreneurship. I also have more stuff to write about personal finance, especially now that lots of you have started getting your accounts in order. I'll try to do a little of both, but it's always tough to strike a balance between staying on personal finance and expanding onto other things I think are cool. I'll use my judgment, but I've never been someone to stay on one thing forever.

More planning. One interesting thing I learned was that lots of you want consistency: What's coming? Can you run a regular series on Fridays? How did you get a new speaking gig? I've decided to do something like this starting in the next couple of weeks, so stay tuned. In general, I'll try to be more transparent about what's coming and what I'm working on.

More consistency. I'll follow through with longer series I run, like the 2006 makeover series. I'll also be more disciplined about sending out newsletters more often.

Recommendations for services and sites. This really surprised me: Lots of you want recommendations for services I've used, like bank accounts, credit cards, insurance, etc. I've been VERY hesitant to write about specific companies for fear that you'd think I was selling out to some company. But from this feedback, it seems like I've earned enough trust to talk about services I like and hate. Actually, I've had a ton of positive feedback from my post on ING and other high-interest savings accounts, so I'll try to share my experiences with you about companies I like--and don't like. You also mentioned wanting me to link to other blogs/sites I read. No problem. Finally, I was really happy to see a couple responses about writing about women and money. This has been on my mind for a long time, and it's on my to-do list.

Things I won't do. But...there are some things you wanted that I just won't be doing. Some people want specific stock recommendations. Sorry, I don't do that. Others want me to write about getting out of debt. Frankly, I think one of the unique parts of this site is that I don't treat everyone as if they have tons of debt. I'm writing about looking forward, not looking back, so I won't be spending lots of time on debt-reduction strategies. If you're looking for that, there are lots of good blogs. I'd also recommend Suze Orman's latest book.

Others want me to write about older issues, like for people who are 30+. Well...I'll do a little of this, but frankly, I'm not 30, so I'd prefer to focus on younger people. Older people: Please realize that lots of this is applicable to you, even if specifically mention young people (and I mocked you in one of my recent posts for being arthritic). About a trillion of you wanted me to write more articles. I'll try, but blogging is one part of my life, not all of it, and I'd rather post nothing than some stupid link to the new Fed rates or Emigrant Direct's latest security feature. Finally, I'm not going to treat you like idiots. A number of people asked me to write shorter articles and to include fewer links so they wouldn't get "distracted." That is moronic.

Some responses to What 3 things could I do to make it better?:

"More Ramit: Instead of making small posts apologizing for an absence from that blog, take the time to give the world an update to what you've been doing. I realize lots of business dealings are sensetive information but lots of people, myself included, would love to hear Ramit's latest and greatest conquests or involvements from time to time."

"Lately, there have been a lot of articles that seemed off-topic to the original theme that I got to know."

"More frequent or consistent posts. You're kind of inconsistent. I'd like to know I can count on you for a post every day, every other day, every third day, twice a week, whatever."

"Run more scenarios...for example if you have 1000 dollars right now, "this is what I would do"...."

"Make the table of contents easier to navigate."

"More series(es) (and stick to the series with a regular update. "Monday Money Management", or similar, for a month would be nice. I think you tend to get distracted from longer series and would do well to keep a structure.)"

"Having more links to other good web sites. Introducing other good weblogs."

"More articles on personal finance and investing. - Less articles on why its important to invest now. I think you've written too many already. - Not everyone who reads your blog is right out of college or ~23-24 years of age."

For What 3 things could I do to make it better?, see all 631 responses (opens new window).

Tell me a story. How has the IWillTeachYouToBeRich blog changed your attitudes or behavior about being Rich? One specific example would be great.
Over a year ago, I wrote a post called "A big fear I have of this site," in which I talked about how I was afraid lots of people would read the site but take no action. I'm so, so happy that this isn't the case.

You're doing all kinds of things after reading my blog: Being more frugal. Saving money. Opening the right accounts. Investing money. Learning about asset allocation. Debating your friends about what Rich means. Thinking about money choices. And being CONSCIOUS about what you do.

I love this, so rather than talk about it, I'll just show you some quotes from real people--just like you and me--who've started on the way to being Rich.

"I like creating a budget and sticking to it. So when I budget $50/month for eating out, I almost always stick to it. After I read your post about paying a little extra every now and then because we can afford it, I did some reflecting. I've convinced myself (with help from your blog) that I should splurge every now and then. I also went on two vacations the past two weeks and loved every second of them. I hadn't taken a vacation in almost 8 months and after coming home I realized that I need to treat myself to a vacation way more often. The day after coming home I was at work and went to your blog to see that you had posted about doing things now. I can't agree more and am definitely going to do more things now since I have the time and can afford to do them."

"You have caused me to stop waiting around, remove all barriers, and take financial control of my life. I have begun actively investing, set up a high-interest savings account, maxed out my 401k, begun setting up my own business, and focusing on the things I want to do in life. "

"I really liked your barriers post...I ended up going back to the gym to work out because of it."

"Reorganized my banking accounts to the "inbox - outgoin fixed payments" account (includes money transfers to the other accounts), the 'go ahead, spend everything in here daily living' account, and the 'short term' savings account, and the 'retirement' account. My entire money flow situation has never been easier and requiring less of my time than it has been since doing this."

"At the bank, I happened to remember the blog you had written about having your bank sevice charges waived - "sometimes all you gotta do is ask". So, I told the bank lady "Hey, my dad's been a customer here for so many years and blah blah blah, could you give me a discount on the exchange rate?". She consulted with her boss and knocked off 10 paise from the Forex rate! I saved Rs 500 that day."

"I'd always thought retirement accounts were for old folks, but since your post on them, I've gotten off my ass and opened a Roth IRA. I'm a graduate student looking at several more years of grad school and surviving on fellowhips, but you've got me thinking seriously about my financial future and I am now one of the most financially prepared physics grad students that I know."

"Be interesting by being interested: I do this at parties more now. I used to talk too much about myself especially because I work at Google so everyone is curious about me. *Just do it now: I fixed my toilet flusher instead of just waiting and doing it later: later was worse than now. I also just do it with taking out garbage, etc. Small stuff, but it feels good not to procrastinate."

"I stopped going to Starbucks!"

"Right after Christmas I had close to 3,000 in credit card debt, less than 1,000 in the bank with another 500 in savings and 200 in some Roth IRA I had started 2 years earlier. Six months later, I've paid off all my debt, have 2,000 in the bank, 1,000 in savings and 1,500 in a mutual fund Roth IRA."

For How has the IWillTeachYouToBeRich blog changed your attitudes or behavior about being Rich?, see all 557 responses (opens new window).

My general comments
You are contradictory. Look at these two quotes:

"Go back and delete all the "What's Never Easier Than Now" posts. They read like something on a Hallmark card. Most importantly, they're out of kilter with the sardonic tone often presented in the blog and represent a violation of consistency."

vs.
"I really REALLY liked this past weeks series (and similar ones in the past) "It never gets easier than now."

I found this pattern in tons of responses, and I only expect this polarization to increase as I write more. Somehow, this blog has gotten big enough that when I write something, I get lots and lots of feedback, both positive and negative. In fact, just 10 minutes ago, someone commented on one of my recent posts that it "disappointed" him and that I was losing focus of the blog. And yet, an hour ago, someone sent me the nicest email agreeing with an entire post I'd written. Here's the deal: If I try to be everything to everybody, this blog will start sucking. I'm going to keep my voice and try to post what I find interesting. I'll keep doing surveys to get a broader sense of what you want. But remember: I read every comment and respond to every email. If you have a question, just let me know.

You are smart. Dear god, I have some of the smartest readers online. I know this from reading some of the idiotic knuckleheads on other finance sites, forums, and blogs. In fact, go check out the comments on any typical post of mine--that's often where the most interesting points are, and you'll be shocked by how much intelligent debate is going on. On a few occasions when I've been linked to by other huge sites, you'll quickly notice the quality of comments going down. It's like monkeys invaded iwillteachyoutoberich, and I'm afraid to mock them because they are so rabidly crazy. Anyway, I'm just glad my usual readers are so smart. The downside is that I've had my ass called out more than once when I made a mistake. Why can't you all just be smart, supportive, and deferential?

You want more from other readers. Quite a few of you have asked me to find ways to introduce you all together. I'll be trying to think of different ways to do this.

You want more information than this site can provide. I've never fooled myself into thinking iwillteachyoutoberich.com is the one source of information for young people and personal finance. That's why it confused me when some readers got so mad when I didn't post for a week or so. If I really want to learn about something, I don't only use one source. And if I'm not getting what I need, I take the initiative to find the information myself. I'll do better at this by posting links to other things I read. But please, as much as it hurts me to say it, you should be reading more than just this site. To learn about personal finance when I was getting started, I read books, magazines, web sites, and watched TV shows. As always, diversification is good. And if you do it for a while, you'll learn to spot the BS.

If you really want something fixed, please help! Lots of you are designers, coders, accessibility experts, etc. If you spot something that should be fixed, please let me know if you can help. I've had a few people volunteer to help and I've been thrilled in every single case. In fact, I've been so happy that I've sent some of them consulting gigs afterwards. But more than that, it takes the burden off me and lets me focus on writing.

Most of you don't know about my personal-finance talks. I saw very few comments on my talks. I give 1-hour personal-finance talks to audiences at corporations, universities, and schools anywhere around the country. If you'd like to have me come speak to your group, please visit http://seminars.iwillteachyoutoberich.com. Take the first step and send me an email. If you like my writing, I guarantee you'll like my talk. Seriously, I guarantee it.

You're doing it. This site has somehow become more than just my fun web site for writing things. I still remember when I started this blog: It was after spending about 1.5 years trying to convince people to take my "I Will Teach You To Be Rich" curriculum, to which everyone said "That sounds great!!!" and then would never, ever show up. When I started the blog, I was lucky if I got a few comments. Now, we have people starting retirement accounts, telling friends about how to manage their money, making mistakes (in the good way), and challenging me to learn things I didn't know. As I've always said, you don't have to be the smartest person to be Rich. You just have to get started today. And people have, more than I could have predicted.

Thanks for your feedback. I'm seriously humbled that I've been able to make a small change in anyone's life. If there's one thing you can do for me, it's this: Tell a friend about iwillteachyoutoberich.com. That's it!

This image could be either positive or negative, but I take it in the good way. What if we spent a few hours setting up our accounts right so money flowed automatically from one account to the other? 10 years from now, would those few hours be worth it?

To post this on your blog, MySpace, etc:

<a href="http://www.iwillteachyoutoberich.com" title="http://www.IWillTeachYouToBeRich.com"><img src="http://www.iwillteachyoutoberich.com/archives/worry.jpg" width="200" height="300" alt="http://www.iwillteachyoutoberich.com" /></a>

See Part 1 and Part 2 of this series.

Every time I hear someone say "I'm too busy" to do something, a little puppy dies and I want to stab myself in the eye with a katana blade. I don't think people realize how good we have it right now: We're young, we're only responsible for ourselves, and we can do basically anything we want. If you think about the responsibilities we'll have in 20 years--or even 5--you start to appreciate that doing almost anything will never get easier than it is now.

Here are 9 examples:

Saving money is never easier than now. If you don't think you can save 25%+ of your salary today, think about this: You have no one else you're spending on. And while your salary will go up, the increase won't be commensurate with your expenses--unless you start developing habits right now. Let's think about some of the expenses we'll face soon: insurance, a new home, homeowner's insurance, remodeling, moving costs, a car, car insurance, car repair, medical costs, vacations, giving to charity, giving wedding gifts, giving birthday gifts, giving graduation gifts, a babysitter, diapers, baby formula, kids' sports, and, finally, unexpected expenses. As Chris Yeh wrote, "Just this morning, I calculated that our monthly expenses are about 10X what they were when my wife and I were just a single couple living on our own, mostly due to our two bundles of joy." If you think you'll be able to save more in the future than today, you're out of your mind. Read my site, read others, start a budget, and find a way.

Working out. We're in the best natural shape of our lives. There's a school near my place, and when I run, I see older men sweating like Patrick Ewing after only one lap. I scornfully lap those 72-year-old men over and over again. It'll never be easier than today.

Eating fast food. With that said, our metabolism also makes it possible for us to eat the greasiest, most delicious food on earth without causing our thighs (or whatever) to show it. So maybe we shouldn't feel guilty about enjoying that filthy KFC bowl.

Starting your own business. Here are some common reasons people give for not starting one "right now" that make me thankful I am not a dragon (my sigh would ignite them): "I'll just wait until I save a little more money," they say. Or "I just have to learn some more before I do it." Now, most people won't start their own companies and that is perfectly cool. But for those that want to, there's nothing like learning by doing--and if you fail, what's the worst that can happen at our age? You don't lose your house or wife and kids. You go and...get a regular job. You can always go to the corporate world. Going the entrepreneurial route gets harder and harder.

I faced this exact situation when I was graduating from college: Google made me a great offer, the position was a nice fit, and the people there are really smart. Plus, the food is amazing. But I decided to go the startup route (to PBwiki) because I can always go back to the corporate side. The people at Google couldn't have been more supportive.

Just hanging out with friends. It's easier to go out with friends now than it will ever be in the future. Why? Because we all live in the same general area, live similar lifestyles, and have virtually no responsibilities to anyone else. "But Ramit," you might say, "most of my friends live far away." Even if they live on another coast, we have such few external responsibilities that we can take a weekend trip to most places. Also, on my comedy blog (Things I Hate), I wrote about the people in college who get "married" by only hanging out with their boyfriend/girlfriend. What a huge mistake. Your friends aren't all boring and in serious relationships yet. If you have any married friends, have you ever tried hanging out with them? It's like a giraffe trying to find a pair of lost contact lenses. Impossible. We're young, our friends are young, and we're all pretty available to hang.

Doing your own side projects. Holy christ, we have more free time right now than we know what to do with. "But Ramit," you might say, "I work 12 hours a day and then I study for the GMAT and then I build houses in Guatemala on the weekends. You're full of shit." Let's keep it real: We all have lots and lots of time we use for leisure activities--whether it's watching The Hills (Heidi surprised me on Wednesday), working out, or whatever. The question is, can you track what you spend your time on and redirect it to something you care about? Something that will have an impact for the next 5, 10, or 50 years? The answer is yes. And we'll only get busier in the future.

Taking risks in investing and life. I'm going to describe some fears we have about investing, but you can apply this to anything.

Don't worry so much about losing all your money. Don't worry about not having the optimal asset allocation. Don't worry about your friends making more than you. Worry about not getting started. In my 1-hour talks, I ask young people our age about what would happen if we lost all our money right now. After a couple of inevitable gasps, most people admit that it wouldn't really be that bad. Maybe they'd go live at home for a few months, get back on their feet, and go get another job. But what happens when you're 35 with a husband, 2 kids, and a mortgage? Losing most (or all) of your money would be catastrophic. And if you're 65 and spending your money on pills and bingo, losing your money can be a matter of life and death.

To get higher returns, you incur higher risks. And at our age, we have a huge tolerance for risk--even an appetite for it. And if we invest well for the long term, time can mitigate any short-term losses. No, I'm not telling you to lose all your money. You have to get educated and get started (see a list of all my articles). But if you let a fear of losing money deter you from investing, you're losing the best years of compounding to turn a little money into a lot.

Meeting interesting people. You wouldn't believe how many people are willing to meet to share advice and connections. I meet them all the time, and it's not because I'm some fancy guy (I'm not). It's because I'm young and interested. CEOs, VCs, and even small-business proprietors and teachers are so friendly. I think it's because of 3 things: First, people love to talk about themselves, and I'm interested in their story. Second, people love talking to young people, both to share their experience and to stay connected to young people; for example, last week, I taught a business friend what "Benjamins" are. God I loved it. Third, people love knowing that your intentions are pure and that you got in touch to learn, not to inject some corporate agenda. Who knows what could happen if you just asked?

Traveling. You think when you're 30, you'll be able to take a weekend trip to New York, stay out until 5am, then make it back in time for Monday morning? No way. I'm not 30, but aren't most 30-year-olds plagued with arthritic joints and incontinence? Heh, I hope I don't get in trouble for that one. Anyway, traveling to visit (or live) in other places is unbelievably easy right now. To visit, it costs about $200 roundtrip to anywhere in country. To live, we pick a place, get a job, and it's done. We have no one to answer to, and imagine the amount you can learn by living somewhere else.

Living in situations your parents would abhor. As we get older, we naturally demand a more comfortable living situation. When we travel abroad, for example, we can stay in hostels with no problem. When older people travel, they need a hotel. In college, we lived in like 150 square feet with 2 other people. Older people measure their homes in the thousands of square feet, and they have things like "dens" and "islands" in their "kitchen." (Funny thing: You should have seen some of the parents' horrified faces when they visited Stanford, where the dorms are actually really nice. And then to buy sheets ("linens" to them) at Target? Oh my god!) Ok, that went off on a huge tangent, but the point is that we can live in a way that older people cannot. So whether that's saving on rent by living in a cheaper place, or driving your 10-year-old car, or just realizing you don't need that much...it's never easier than it is now.

---

Next week, I'm going to feature some interesting people and their examples of things that are easiest to do now. Monday starts off with Seth Godin.

But for now, think about it. Is this going to be just another blog article you read and then go on with your day? Or can you think of something concrete, right now, that you want to do because it's easier now than it will ever be?

PS--If you liked this article, check out my table of contents, RSS feed, and newsletter.

It's one thing to pay people to wash your car and mow your lawn. But paying to have your money managed exposes you to a field rife with people who make money off commissions, not off your success. Plus, you adopt a hands-off approach that's just dumb when it comes to your own money. Oh yeah, and it costs tens of thousands of dollars (or more) over the lifetime of a typical investment.

It's not that hard: Sensible buy-and-hold investing means you win. Learn about it.

To post this on your blog, MySpace, etc:

<a href="http://www.iwillteachyoutoberich.com" title="http://www.IWillTeachYouToBeRich.com"><img src="http://www.iwillteachyoutoberich.com/archives/pay.jpg" width="200" height="300" alt="http://www.iwillteachyoutoberich.com" /></a>

See Part 1 of this series.

This is part of a new series of photo posts I'm launching today that will go through the next few weeks. Feel free to send these pictures/posts to your friends--let's get people to think about getting started managing their money.

Use this code:

<a href="http://www.iwillteachyoutoberich.com" title="http://www.IWillTeachYouToBeRich.com"><img src="http://www.iwillteachyoutoberich.com/archives/twenty-three.jpg" width="300" height="200" alt="http://www.iwillteachyoutoberich.com" /></a>

(When I first announced the idea, Todd from DC-Ten.com wrote me and helped out with these images. If you have graphic-design needs, he was great to work with.)

At one of my recent talks, something interesting happened. Before I started the talk, we were all sitting around, just BSing and getting to know each other. All of a sudden, one of the guys started asking me very direct questions (almost antagonizingly so):

• "What are your credentials?"
• "Are you really rich?"
• "So is this class basically just 'save more than you spend, and invest?'"

Now I'm happy to answer the questions, and I did, but the last one made me smile. "Is this basically just save and invest" was said almost scornfully, as if it were completely obvious.

My answer: "Yes!"

Let's be honest. Look at my course syllabus. There's nothing revolutionary on it. The key isn't shocking you with some new strategy I discovered. It's about getting people to get started.

Some people seem to be looking for the secret bullet to making money--the most exotic investment, the sexiest strategy. This is why there are tons of books on making money with different angles ("All debt is bad!" "Buy gold!" etc).

But I think we have to decide between being sexy and being rich. Here's what I said before:

"When you invest, there's a difference between being sexy and being rich. When I hear people talking about the stocks they bought/sold/shorted last week, I realize that my investment style sounds pretty boring: 'Well, I bought a few good stocks 5 years ago and I haven't done anything. All I did was buy more when the price went down.' But investment isn't about being sexy--it's about making money, and when you look at the investment literature, buy-and-hold investing wins over the long term, every time. Forget what CNBC or the magazines say about the stock-of-the-month. Do a rigorous analysis, make the right decisions up front, and then re-evaluate your investment every 6 months or so. It's not as cool as those guys in red coats shouting and waving their hands on CNBC, but as an individual investor, you'll get far greater returns."

The guy at my class seemed to summarily dismiss the "save and invest" strategy--even though it's worked for a very, very long time. I guess it's just not sexy enough.

What is up with The Motley Fool? They used to give great advice, but now it seems like they just try to sell their latest newsletter:

"Need help? You can learn all about Tom Gardner's approach to finding undercovered, undervalued stocks with strong fundamentals and real earnings. If you'd like to subscribe, you can try Tom's complete Hidden Gems service yourself. If you're not 100% convinced he's on to something, just cancel within the first 30 days, and Tom will refund every penny."

I guess they have to figure out some way to monetize it. It's just disappointing for it to be so in-your-face. I agree with a lot of their low-cost, long-term investing strategies, but I don't think I'll be linking to them anymore.

The stock markets dropped a fair amount yesterday and now people are being a little sensationalistic for my tastes. Look at this image from CNN.com last night:

OH MY GOD!!! WE BETTER DO SOMETHING!! Buy! Sell!! ANYTHING!!

Get a life. All of a sudden, a global correction is underway, but I want to give you some perspective:

First, it's a 1-day report. When things have gone bad in the past (this year, the last decade, and the last 50 years), they recovered. So if any of you or your parents are thinking of selling your stocks because of a 1-day report, please call me and let me politely educate you about what a stupid decision you have made. Based on a couple of conversations I've had this morning already, I might not be a good father when my kids make a mistake.

Anyway, let's look to see what Warren Buffett says about situations like this week's market drops. He points out that you should treat good stocks like toothpaste: If its value decreases and you still believe it's going to be a good investment for the long term, it just went on sale. That's a reason to be happy, not sad.

"If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

“A market downturn, doesn't bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity."

Wow. Return to fundamentals? Buy low and hold for many years? Don't chase the media-induced hype? Who would've thought.

A nice post from the Kiplinger blog about boiled shrimp and investing (huh?):

Boiled Shrimp and the Sunk-Cost Fallacy

From an IM chat with a friend yesterday:

Friend: i feel like i should do some research on what to invest in before i open up an account?
Ramit: why?
Friend: when i open the account, won't i have to buy something?
Ramit: that is an interesting question
Ramit: no
Ramit: your money just sits there in an account
Friend: but the interest rate's no good right?
Ramit: ok, so here's the deal
Ramit: savings interest rates are largely bullshit
Friend: ?
Ramit: first of all, it's 2%-4.5% / 12 to get your monthly interest rate
Ramit: for even 10k, thats not very much
Friend: hm
Ramit: second, in a money-market account, your money is sitting there earning a little, maybe 1.5 to 2%
Ramit: and then you can disburse it
Ramit: to stocks, index funds, etc
Ramit: so you dont want to create this barrier by saying, "i better research" cuz chances are you wont
Ramit: send some money
Ramit: let it sit there
Ramit: and once its there, its very very psychologically different
Ramit: you will treat it as "investment" money
Friend: and the money sitting there will prod me to do research
Ramit: YES

Please, be ruthless about removing barriers.

I want to be clear about something: I'm sincerely interested in doing less and less work as I go through my life. That's why I'm always puzzled when I meet people on a career path that will have them working more, not less. That's like being a real-life Mario Brother, where every progressive level you beat means your life gets harder. Why would you do it?

This is why retirement accounts are one of the best investment tools I'll write about on this site. I'll go into the details in a minute, but first let's dispense with some of the reasons that most of us haven't done anything about our retirement accounts yet:

• "Retirement is too far away"
• "I don't have any extra money to save right now"
• "I don't have time right now
• " " (haven't thought about it at all)

I'm not going to preach, but I am going to call your ass out: All of those reasons are dumb. Retirement accounts let you do less work. All you have to do is start now, which I'll show you how to do today. Now that we've acknowledged all these reasons, just read this entire post. At the end, if you're not convinced...don't do anything! Congratulations. But if you want to use one of the best ways to get rich, you'll know what to do.

The magical benefits of retirement accounts
Many people think mistakenly think that retirement accounts are just places for you to save money until you're 65. Actually, they offer you humongous benefits if you agree to save for a long-term horizon. Let's compare regular (taxable) investing accounts with retirement accounts.

Regular investing accounts. When you open up an account at ETrade or whatever, you're generally opening up a regular investing account, which is also called a taxable account. This means that when you sell your stocks, you'll pay taxes on your gains--and if you sell your stocks in less than a year, you'll pay a huge amount (regular income-tax rates, like 15% or 30%).

Let's not get bogged down in the details, okay. As I've written on this site, buy-and-hold investing wins over the long term. And because of the way taxes are structured, you pay a penalty for trading too frequently. See how the pieces fit together? It's paternalism at its best. But there's an even stronger advantage to holding your money for longer--say, until retirement.

Retirement accounts. Retirement accounts, quite simply, give you huge tax/growth advantages in exchange for your promise to save and invest for the long term. Now, this doesn't mean that you have to hold the same stock for 30 years. You can buy and sell shares of almost anything as often as you want. But with a few exceptions, you have to leave the money in your account until you get near retirement age.

Here's how the magical benefits work. In a retirement account, you get big tax benefits. While 10% or 20% may not seem like much in 1 year, when you compound that over 30 years, it becomes a gigantic amount. In fact, start a retirement account next week and two things will happen: (1) You will be more financially prepared than 99% of your peers, and (2) you will be rich. Yeah, I said it: If you start a retirement account in your early 20s and fund it regularly, you will be rich.

Let's look at a simple comparison of investing in a retirement account vs. just investing in a regular, taxable account:

Image from Leggmason.com

Don't worry about the exact amounts. Just notice the difference in how much you earn--especially at the end. A retirement account--whether it's a Roth IRA, 401(k), or something else--lets your money grow at an accelerated rate with hardly any extra work from your end. Now let's get into the details.

Your 401(k)
A 401(k) is a type of retirement account. If you work for a company, chances are you already have a 401(k) offered to you.

Here's how a 401(k) works: You put pre-tax money into the account, meaning you haven't paid taxes on it yet.

Let's look at why that's important. In regular, taxable investing accounts, you pay taxes on your income and then invest it. So for every $100 you make, you might actually only be able to invest $85 of it. 15% (or whatever, depending on your tax rate) goes to the tax man.

A 401(k) is different. You can invest the entire $100 and let it grow for about 30 years. That extra ~15% turns out to make a huge difference as it gets compounded more and more.

401(k) matches
There's an extra benefit, too: Your company might offer a 401(k) match. For example, a 1:1 match up to $2,000 means that your company will match every dollar you invest up to $2,000; therefore, investing $2,000/year really means you're investing $4,000/year. Woah. This is free money and you absolutely, positively need to participate if your employer offers a 401(k) match. It doesn't matter what kind of debt or expenses or whatever you have--if your company offers a match, do it.

So what exactly happens when you contribute money to your 401(k)? Basically, it goes into an investing account where a professional investing company manages it. You can choose from a bunch of different investing options, like aggressive, mixed, international, etc. Honestly, it's like McDonald's for investors: anyone can do it. The hardest part is making the first phone call to HR to get it set up.

Summary of 401(k) advantages: There are a lot
We've covered the advantages of a 401(k) account: You get to put pre-tax money to work (i.e., money you haven't paid taxes on yet, so there's more of it to grow). Your company might offer an insanely lucrative 401(k) match, which you must take. And it's not that hard to set up--your company does most of the work. In fact, you can instruct them to automatically withdraw a certain amount from every paycheck. Don't worry about switching jobs; if you leave your company later, you can take your 401(k) with you. And be aggressive with how much you contribute to your 401(k) because every dollar you invest now is worth many more times that in the future.

Image from firsthandfunds.com

401(k) restrictions
The 401(k) isn't tax-free, though. There are a few restrictions. First, the government has to get its tax revenue sometime, so you'll pay ordinary income tax on the money you withdraw around retirement age. (Remember, though, that all that money has been growing "tax-deferred" for ~30 years.) Second, you're currently limited to putting $15,000/year in your 401(k). Third, and this is important, you'll be charged a big penalty of 10% if you withdraw your money before you're 59.5 years old. This is intentional: This money is for your retirement, not to go out drinking on Saturday. Finally, there are some other esoteric restrictions, but you can read about them from some links I'll give you later.

You can get around the restrictions!
Not to get too complicated, but there are also exceptions to some of the above restrictions that let you withdraw your 401(k) money penalty-free. For example, if you're buying a house or a couple of other things, you can withdraw money penalty-free. But for all intents and purposes, this is money you're putting away for 30 years.

401(k) summary
$15,000 annual limit
Pre-tax money (money isn't taxed at the beginning; it grows until you withdraw and is taxed at the end)
Company matches supercharge growth even more--this is free money you must take

Let's talk about dumb people and 401(k)s in general
A lot of people are dumb. Let's just have a look at some recent findings:

• "One out of four workers simply fails to sign up.
• Only one in 10 contributes the maximum allowed.
• Nearly half don’t contribute enough to get the full company match.
• Many take too much or too little risk, and most fail to rebalance their accounts to manage their risk.
• About half cash out when they change jobs. (Admittedly, this is a squishy statistic. Hewitt Associates research says it’s 42%; Munnell’s research says 55%.)"

Your company wants you to invest in your 401(k)! Yet many people still don't invest, or they invest poorly, or they invest too late in life. Sorry, but we all need to take responsibility for this stupidity.

But they're not the only ones to blame. Your employers and the 401(k) companies make it insanely hard to understand what the hell a 401(k) is, or how to get started. Have you ever read one of their prospectuses? I have, and even though I do this stuff every day, I wanted to jump off a bridge while perusing the latest 401(k) literature so maybe I could try to cram in some more time of reading that incomprehensible garbage. You need all the help you can get with this stuff.

But there's even more blame to go around. The stupid personal-finance media and pundits have overhyped everything money-related. Unfortunately, now we just tune it out--even when it's good for us. When was the last time you heard something about retirement accounts? Probably pretty recently, but you tuned it out because most of what's marketed to us is trash. Finally, the government is a dismal failure at properly educating us on personal finance and retirement issues--even though it's in the government's interest.

Opening your 401(k)
I have to tell you that blaming everyone has a very satisfying quality to it. I really enjoyed that. But realize one thing: Of all the parties I mentioned and want to scream at, the only one you can change is you. Call up your HR representative on Monday and get enrolled in your 401(k). Start an automatic-payment plan so money is taken directly from your paycheck. Trust me, you'll learn to live without it. And if you have questions, leave a comment on this post.

401(k) links

• Fidelity: The basics of a 401(k) plan
  
• Motley Fool: Is Your 401(k) Foolish?

Your Roth IRA
A Roth IRA is another type of retirement account. Every person in their 20s should have a Roth IRA. It's simply the best deal I've found for long-term investing.

Remember how your 401(k) uses pre-tax dollars and you pay income tax when you take the money out at retirement? Well, a Roth IRA is different than a 401(k). A Roth uses after-tax dollars to give you an even better deal. With a Roth, you put in already taxed income into stocks, bonds, index funds--whatever--and you don't pay when you withdraw it.

Here's how it works: When you make money every year, you have to pay taxes on it. With a Roth, you take this after-tax money, invest it, and pay no taxes when you withdraw it. If Roth IRAs had been around in 1970 and you'd invested $10,000 in Southwest Airlines, you'd only have had to pay taxes on the initial $10,000 income. When you withdrew the money 30 years later, you wouldn't have had to pay any taxes on it. Oh, and by the way, your $10,000 would have turned into $10 million.

Think about it.

You pay taxes on the initial amount, but not the earnings. And over 30 years, that is a stunningly good deal.

Roth IRA restrictions
Again, you're expected to treat this as a long-term investment vehicle. You are penalized if you withdraw your earnings before you're 59.5 years old. (Exception: You can withdraw your principal, or the amount you actually invested from your pocket, at any time, penalty-free. Most people don't know this.) There are also exceptions for down payments on a home, funding education for you/partner/children/grandchildren, and some other emergency reasons. And there's a maximum income of $95,000 to make full contributions to a Roth. But you can read about those later.

What's the big takeaway from all those restrictions and exceptions? I see 2 things:

• First, you can only get some of those exceptions if your Roth IRA has been open for 5 years. This reason alone is enough for you to open your Roth IRA on Monday. I want you to research it this weekend, and I want your Roth IRA opened by next week.
  
• Second, starting early is crucial. I'm not going to belabor the point, but every dollar you invest now is worth much, much more later. Even waiting two years can cost you tens of thousands of dollars. Currently, the maximum you're allowed to invest in your Roth IRA is $4,000/year. I don't care where you get the money, but get it. Put it in your Roth and max it out in 2006. These early years are too important to be lazy.

Opening your Roth IRA
It's easy. You can go through your current discount brokerage, like ETrade or Datek. You can also go through an independent service like Vanguard. Call them up, tell them you want to open a Roth IRA, and they'll walk you through it. By the way, if you're afraid of using the phone, you're lame.

Special note: These places have minimum amounts for opening a Roth IRA, usually $3,000. Sometimes they'll waive the minimums if you set up an automatic payment plan depositing, say, $100/month. Other times, you're out of luck. Shop around.

Once your account is set up, your money will just be sitting there. You need to do things then: First, set up an automatic payment plan so you're automatically depositing money into your Roth. How much? Try doing as much as you're comfortable with, plus 10%. Second, decide where to invest your Roth money; it can be in stocks, index funds, mutual funds, whatever. Read my introductory articles for more on how to choose.

Here's a quick illustration of the power of continually adding money to your investment account:

Image from hffo.cuna.org

Roth IRA links

• Wikipedia: Roth IRA
  
• Kiplinger's:
  Why you need a Roth IRA
  
• Motley Fool: The Roth IRA (slightly more technical article)
  
• http://www.ira.com

401(k) or Roth IRA?
The simple answer is both: These accounts, while conceptually different, work together pretty well.

Here's how I think about it. First, I would max out any 401(k) match that my company provides. Second, I'd max out the $4,000 for my Roth IRA. Third, I'd max out the rest of my 401(k), up to $15,000. Finally--if your employer doesn't offer a 401(k), you're not employed yet, or you still have money left over--I'd open a regular, taxable investment account and put money there in stocks, index funds, etc.

Why max out your Roth before your 401(k)? Well, there's a lot of dorky debate in the personal-finance world, but the basic reasons are taxes and tax policy: Assuming your career goes well, you'll be in a higher tax bracket when you retire, meaning that you'd have to pay more taxes with a 401(k). Another common reason for the Roth is that tax rates are considered likely to increase. Remember: Your 401(k) money is taxed at the end, while Roth money is taxed right away and then grows tax-free.

What to do today
It's Friday today. I want you to spend the weekend getting educated about 401(k)s and Roth IRAs. On Monday, I want you to open up your retirement accounts and start funding them. Call your HR department and get your 401(k) squared away. Call a few discount-brokerage firms to get a Roth account, too. Don't worry about where to invest your money just yet. Take it one step at a time and just open your accounts.

Oh yeah, and one more thing: I already anticipate 1 billion comments debating fiscal policy, the effectiveness of Roth IRAs vs. 401(k) vs. Keogh plans vs. SEP IRAs vs. Simple IRAs, and other crap. Please don't waste your time on this minutiae. The problem is not debating the tiny details. The problem is that most people don't have retirement accounts. The problem is that most people don't fund it as regularly as they should, even though $100/month makes a big difference. And the problem is that most people don't open retirement accounts early enough.

So let the fools debate. For you, just get your accounts open.

Rich doesn't happen by accident
Lots of people believe that they'll just get rich somehow. In fact, "more than one in five Americans believe the best way to get rich is to win the lottery.

That's not a joke.

You need to think ahead. And I don't just mean to retirement. Are you going to need a car in a few years? A wedding? A honeymoon? A house? The money for that doesn't just appear. Unfortunately, most people put off thinking about this stuff, which results in them wringing their hands, saying things like "We're always struggling to make ends meet." Some of them (not all, but some) got there because they didn't plan for anything. So get over the initial excuses. Yes, it's hard to pick up the phone. But think about what time you're living in. Here you have a site with thousands of other readers who are in exactly the same boat as you--and even better, the experienced ones will help you through it.

Set up your retirement accounts now. Your future self will thank you.

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Last summer, I lived in a really nice apartment. Frankly, for a guy who feasts on Ramen and has held 2 official business meetings at a Taco Bell this month, it was a little too nice.

But due to some patience, good luck, and negotiating, I got a great deal on a sublet for a few months. And so I lived in luxury while paying not too much.

At the end of the summer, I was deciding whether to move into an actual house or stay in the same apartment building. I figured I'd find out how much a 1-bedroom or 2-bedroom place in my apartment building would cost, so I called the phone number downstairs. You should also know that as you drove into my apartment complex, there was a huge sign that said "Now leasing!"

I called but no one picked up, so I left a message that basically said, "Hi, my name is Ramit and I'm interested in renting a 1 or 2-bedroom place starting in a month. Can you call me back so we can talk about the details?"

Now, this call was a qualified inquiry literally worth thousands of dollars to them--not just for a month of my residence, but for the 12, 24, or even 48 months that I might have lived there. But guess what?

I never got a call back.

The apartment complex automatically lost that money. All for not calling back.

This Failure of the Last Mile happens more than you would think. Sometime it's because of a mistake (someone accidentally deleted the message). Sometimes it's because of laziness (someone didn't want to call back). And sometimes people just don't know about a good idea or recognize that it's knocking on their door.

What if there was such a good idea that you could make thousands of dollars--maybe hundreds of thousands of dollars--by taking a few simple steps?

There is.

You can.

It's called the Roth IRA. I'll tell you all about it tomorrow.

The financially smart decision isn't always the right one. When I say this, it usually irritates engineers and economists, who love to believe that we all behave rationally. This just makes me even more gleeful, resulting in an upward spiral of doom. Seriously, I love messing with them.

Anyway, my friend told me an interesting story the other day: After graduating, he had about $12,000 of debt from college loans at a ~4% interest rate. He also had a good job and about $15,000 lying around in a money-market account. Now, because his interest rate was so low, technically the financially smart decision would be to invest that $15k and pay the minimum monthly payments on his loan, profiting off of the difference. In other words, assuming he could get a 10% return on his investment, he would make approximately 6% (i.e., 10%-6%) because his loan's interest rate is lower than the returns he could theoretically get. Yes, I'm leaving out trading fees/taxes/risk/etc, but you get the point. If he went by the book, he should have invested the money and paid off his debt slowly.

But he didn't do that. He paid the loan off entirely, all at once, despite my loud protests. Why? Because he hates debt. Like really, really hates it.

When I first heard this, I wanted to hit him with a bat, attach him to a long string, push him out of a plane, and then instruct the pilot do to 25 or 50 lazy loops in the sky. I would also make him wear one of those striped propeller hats, just for fun.

But I realized that he made the best decision for himself, even though it wasn't necessarily the financially smart decision. Even though he technically should have made monthly payments, he hates having any debt and it would have been intolerable for him. (You know how certain people act badly with debt? They forget to pay it off, it makes them really uncomfortable, etc? That's him.) His move isn't the right move for most people, but there's a larger point behind it: There are some things with money--e.g., having debt, lending to friends, having money sitting in our checking account--that drive us so crazy that we start doing weird things. The question is, can we recognize it? And then what do we do? My friend was smart to recognize that having debt drove him crazy, and he did something about it. It wasn't the textbook move, but it was probably the right one.

Another friend of mine has had to borrow small amounts of money from her family a couple times in the last few years. Technically, when she paid it back, she should have calculated the time/interest rate and paid back the precise amount. Instead, she just paid back the amount plus $100. There's more to life than interest rates.

"But Ramit," anal calculation-loving dorks might point out, "you always talk about budgeting and making smart financial decisions. If she only owed $15 interest and she paid $100, she made a mistake. And now you're writing an article to try to justify what she did!"

printf("get a life dude");

The truth is that your money decisions should (1) get you closer to being Rich and (2) make you feel increasingly confident and comfortable about what you're doing. The minute your financial infrastructure starts making you feel oppressed is the minute you start ignoring it. No, don't be stupid and use this as an excuse to do dumb things ("It makes me comfortable to buy this new $2000 flatscreen TV, so I'll do it! Thanks Ramit!!!"). But if it makes you feel really happy, go ahead and hide $20 in your coat pocket for next season. If having debt absolutely, truly makes you go crazy and do stupid things, you don't always have to go by the book.

Think big picture. What could you do today to make you less hesitant about managing your money for the long term?

This is a repost from an April 17, 2004 (almost exactly 2 years ago!) article I wrote about stocks and bonds. Today: stocks and bonds. Tomorrow, mutual funds and index funds. Then we'll continue on with the financial makeover. And yes, I know my writing style has changed since 2004.

Stocks
When you own a company's stock, you own part of that company. If it does well, your stock will do well. You can buy and sell whenever you want through your broker or self-serve sites like ETrade or Datek.

Inevitably, when I'm teaching the basics of stocks, someone will pipe up and say, "So what stock should I buy?" Let's go through it.

The simplest way to narrow the universe of stocks is to think of companies you like and use. What are 15 companies you use and return to time after time? Think of everything, including food, clothing, services, technology, entertainment, transportation, etc. There, you just went from 5,000 stocks to 15.

A good company isn't necessarily a good stock! Let's think of clothing for a second. What are your favorite places to shop? Abercrombie? Guess? Gap? Ok, take Gap. Let's do a very simple analysis of Gap as a company. It has good clothes that are consistent and stable: Khakis, white shirts, polos, jeans, things that don't go out of style. They appeal to men and women. They have a lot of locations and some great advertising. Hell, I shop there. Unfortunately, good products don't always make a good stock: Here's Yahoo's 5-year stock performance. In this 5-year period, they dropped from a high of around 52 to a low around 8. "But Ramit," you might say, "the entire economy was in a recession." Yeah, but Gap also severely underperformed the market during this time.

The point is that you need a deeper analysis than "I think their khakis are pretty." For that, you need to know:

Trends. Are sales increasing from this time last year? 2 years ago? 5 years ago?
Products. Is the future bright in terms of upcoming product development?
Revenues, profits, growth, earnings per share. The real financial nuts and bolts of a stock, these are intimidating at first. Luckily, many sites will guide you though it.
Insider trading. Are senior executives at the company buying more stocks (indicating they have confidence in the company) or selling?
Management. Is management good? What is the turnover? What is their philosophy and ability to execute?

You can get all of this information online for free. Here are some great sites to start you out.

The MSN Research Wizard will help you analyze a stock step-by-step.

Yahoo Finance lets you view the standard details about any stock.

The Motley Fool is great for first-time investors.

Once you start looking at charts, earnings, balance sheets, etc, you'll start to get a good sense of what's going on. It just takes practice.

Bonds
Bonds are IOUs, like CDs (certificates of deposit). If you buy a 1-year bond, the bank says "Hey, if you lend me $100, we'll give you $102 back in a year." The approximate current rate of return for a 2-year bond is 2.89%.

Advantages: You know exactly how much you'll get when you invest in a bond. You can choose the amount of time you want a bond for (1 year, 2 years, 5 years, etc). Longer time periods yield you higher return rates. Also, bonds are extremely stable, especially government bonds. The only way you'd lose money on a goverment bond is if the government defaulted on its loans--and it doesn't do that, it just prints more money.

Disadvantages: Unfortunately, bonds have significant disadvantages. Because they're so stable (lower risk), the reward on an excellent bond is dramatically less than an excellent stock. Investing in a bond also renders your money illiquid, meaning it's locked away and inaccessible for a period of time. That's usually bad.

With these qualities, what kind of person would invest in bonds? Let's see...extremely stable, essentially guaranteed rate of return, but relatively small returns...who would it be?

If you said "me" and you are in your twenties, I want to punch you.

Actually, it's old people and rich people who find bonds most attractive. Old people need to know exactly how much money they're getting next month for their medication or whatever old people do; they can't stand the volatility of the stock market because they generally don't have much other income to support themselves. Rich people, on the other hand, have naturally become conservative with so much money. Put it this way: When you have $10,000, you want to invest aggressively to grow. When you have $10 million, you want to conserve. So a guaranteed bond at 2% or 3% is attractive--and 3% of $10 million is $300,000 anyway.

Now you see why bonds are exactly the wrong investment for most young people. Also, with a longer investment outlook, you can invest more aggressively to get much higher returns than bonds.

Anger!!!

Friend: i just got into a long long discussion with these two guys, one is one of the smartest i know, they advocated not investing in retirement accnts

Ramit: yeah?
Ramit: whatd they say

Friend: yeah
Friend: they said they don't beleive the growth rate will continue into the fture
Friend: they see the system as unstable
Friend: and likely to fail
Friend: they don't think that your money will make returns over time, and they say investing is great...if you leave an out

Ramit: what does leave an out mean?

Friend: so investment accts = wait until 69.5
Friend: whereas they say don't use retirement, instead just invest in reg marke

Friend: and be able to sell

Ramit: wow
Ramit: your friends are breathtakingly misinformed

Friend: i definitely disagree
Friend: why?

Ramit: there are so many reasons. let me attempt to itemize them:
Ramit: 1. they completely miss the tax advantages of retirement accounts. these are quite simply huge
Ramit: 2. there is an out. you can withdraw all your money anytime. in fact, you can withdraw your principal completely penalty-free.
Ramit: 3. "the market wont sustain itself" is based on...what? certainly not 70+ years of evidence
Ramit: 4. the market may not return the same. this is potentially accurate, although debatable

Friend: ok so
Friend: here is what they said
Friend: 1. Tax advantages are worthless if the market defualts, which they think is very possible, maybe probable
Friend: 2. they didn't say anything, but you have to pay a large 10% penalty right?

Ramit: yes, thats correct, for your INTEREST only if withdrawn early

Friend: 3. they are basing it on all empires previously, so he says we have been only having growth b/c america is a superpower, what if you invest in Great Britain in 1750? after 70 years, your money would have been worthless. All empires fail, america will decline too

Ramit: wow
Ramit: so my argument is simple
Ramit: besides your Friends being stupid
Ramit: they base their whole thing on pie-in-the-sky arguments: "it's probably that the market will completely default." Really? why? what evidence? what are the risk factors of that happening? its extremtyly hard for a government this big to defaul
Ramit: worst of all, they basically put aside huge earning potential for this pie-int-he-sky potential that "might" happen

Friend: yeah
Friend: social secruity

Ramit: they are literally betting with their money that something so stupid would happen
Ramit: you said "tax advantages are worthless IF defaults. blahblah"
Ramit: thats like me saying:
Ramit: WELL ITS JUST ABSURD
Ramit: i cant evn think of an equivalent
Ramit: "its useless to get a college degree because jobs might just stop caring about them"

Friend: they expect, with the rise of other countries + change in social secrutiy, our country will begin a decline
Friend: maybe in our lifetimes, maybe not

Ramit: that is such stupid handwaving nonsense
Ramit: they have no data, just "hunches"

Friend: i guess

Ramit: i could just as well say that "ireland might become superpower #1 because its been so long"
Ramit: i hate that kind of vacuous nonsense
Ramit: the easy way to penetrate their BS is ask one simple question: "what is that based on?"

I am now thinking of adding a category simply called "Dumb" to this blog. Thoughts?

There's no one better to learn about long-term investing from than Warren Buffet. As usual, his 2005 letter to shareholders tells the straight-up truth. What a novel concept--being honest about where you made and lost money to your shareholders! WARREN WHERE DID YOU LEARN THAT?!

Excerpts from his 2005 letter to shareholders (PDF):

On moving quickly
"Forest River, our second acquisition, closed on August 31. A couple of months earlier, on 21, I received a two-page fax telling me – point by point – why Forest River met the acquisition criteria we set forth on page 25 of this report. I had not before heard of the company, recreational vehicle manufacturer with $1.6 billion of sales, nor of Pete Liegl, its owner manager. But the fax made sense, and I immediately asked for more figures. These came the morning, and that afternoon I made Pete an offer.

On honesty
"The hard fact is that I have cost you a lot of money by not moving immediately to close down Gen Re’s trading operation."

On telling jokes in a goddamn financial statement (I love Warren Buffet so much)
"When we finally wind up Gen Re Securities, my feelings about its departure will be akin to those expressed in a country song, "My wife ran away with my best friend, and I sure miss him a lot."

On pointing out how crooked many "experts" are
"It doesn’t have to be this way: It’s child’s play for a board to design options that give effect to the automatic build-up in value that occurs when earnings are retained. But – surprise, surprise – options of that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation "experts,” who are nevertheless encyclopedic about every management-friendly plan that exists."

On fees and why they are stupid
"Indeed, owners must earn less than their businesses earn because of "frictional" costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have. To understand how this toll has ballooned, imagine for a

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.

But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new "beatmy-brother" game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: "Hire a manager – yes, us – and get the job done professionally." These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. "What," the new Helpers ask, "can you expect from such a bunch zombies?"

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives. The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked). A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one."

On philanthropy
"Every share of Berkshire that I own is destined to go to philanthropies, and I want society to reap the maximum good from these gifts and bequests."

Read Warren Buffet's full 2005 2005 letter to shareholders (PDF).

A few days ago, I wrote about Google and all the crystal balls people use when earnings are going to be reported:

Oh no!!!!! Is the Internet advertising market over? Or is it just a slight correction??

I don't know, and neither does anyone else. I just want to point this out: When Google releases its numbers on January 30, the stock will either go up or down. And about 20 minutes afterwards, the pundits will start to talk as if they knew exactly what was going to happen...

Think about this today, January 20: Nobody knows a damn thing about what's going to happen in 10 days. But stay tuned, because it'll be hindsight bias at its best.

Well, the earnings are out. Despite having a monster quarter, Google (GOOG) fell short of analyst expectations and its stock is (currently) down over 16% in after-hours trading.

Here are some screenshots of news coverage.

I don't have pundit reactions yet, but send them to me when you see them and I'll post them here.

Incidentally: As I noted before in When do you sell a stock? ...

Sometimes, when other people sell stocks en masse, they can become immensely attractive because of this short-term stupidity. Refer back to my example of how Ebay dropped 20% in one day because they missed expectations by a penny. If on that day you still thought Ebay was a good fundamental investment, you could have bought it for a discount price.

Disclosure: I bought Google in after-hours trading today.

Ok, so the news is out: Google stock fell about 8.5% in its "largest single-day loss ever" today. Oh no!!!!! Is the Internet advertising market over? Or is it just a slight correction??

I don't know, and neither does anyone else. I just want to point this out: When Google releases its numbers on January 30, the stock will either go up or down. And about 20 minutes afterwards, the pundits will start to talk as if they knew exactly what was going to happen...

If GOOG falls: People will start saying things like "I knew the advertising market was overvalued, and so was Google!!"

If GOOG rises: "I knew that it was just a small market correction and that it was going to go up!"

No they didn't, or they would have bought/sold Google right away. Think about this today, January 20: Nobody knows a damn thing about what's going to happen in 10 days. But stay tuned, because it'll be hindsight bias at its best.

I bet my friend is going to be very unhappy soon. This is a story about her, but first let me tell you a story about my company's board of directors.

We had an exciting deal and we were feeling good. But when we took it to our board members for their advice--they're entrepreneurs with much more experience than we have--they were lukewarm on the idea. Actually, they told us we were being stupid: "If you don't get this deal, you lose. And if you do get this deal, you still lose because the margins are so low. You lose either way!!"

When No Good Can Come of This, I am very wary.

So, back to my friend. She IMd me yesterday and told me that her manager had a hot stock tip and should she get it? The stock had jumped over the past 3 months and he'd tripled his money.

With only that information, I told her that she would be stupid to buy the stock right away. First, is her manager really the best source of information? Second, if it's jumped 3x in the last few months, isn't it possible she'd be buying it high and later selling it low?

Also (god there are so many reasons this is a bad idea):

• Was she going to do any research on the stock on her own?
  
• Is 3 months really enough time to tell anything at all? Look, my arms look big today but that doesn't mean I'll be a muscleman in a month. Christ.
  
• Did my friend understand what the company does, how its products are, and how the competitive landscape is? What about revenues, costs, etc?
  
• And so on

She decided she'd probably invest anyway. Ok, her decision.

But here's the clincher: Even though she has a great income, she is only putting in $500-$1000 for the stock so she can hedge her risks.

This strikes me as pretty weird: If she does really well, she'll wish she had put more money in; in other words, she's hedging herself out of any real success. And if the stock tanks, she loses all her money.

Either way, she loses! No Good Can Come of This.

Now, I see a lot of value in starting slow and not putting all your eggs in one basket. But if you're not putting in more money because you haven't done any research on a stock, that's dumb. By doing a real, fundamental analysis, you can gain at least some certainty/information about the stock. And then, you can decide to either (1) invest a real amount (by her salary standards) or (2) not invest at all.

Yes, investing is a risk. But if your 2 potential outcomes are bad, that's a bad investment.

It's up at Frugal for Life today.

I've been a little lazy about posting these, so if you want to see the last few carnivals, here's the schedule.

What's a Carnival? Flexo's description is better than anything I could write:

A 'Carnival' is a weblog post that brings attention to some of the week's most interesting and informative blogger-written articles on the topic at hand. It is a showcase of weblog posts, submitted by their authors or by casual readers for consideration.

I was in New York for a few days, so back to regular posting.

I ran across this blog entry yesterday, which is pretty thought-provoking:

Ramit Sethi's otherwise-great site I Will Teach You to Be Rich is a classic example of rich-person thinking; he assumes that people in their 20s can afford to take risks in their investments, because if worst comes to worst, we can just move in with our parents. Can all of us who have studiously avoided burdening our parents for the last 5-10 years laugh uproariously together?

The whole article has more thinking: "on becoming a capitalist pig."

She's right, I do think that. But is that wrong?

What do you think?

This is a guest post by Michael Squier.

In the next 5 minutes, I will save you tens of thousands of dollars.

This should be a no brainier, but I’m sure many of you will be disappointed when you find that I’m not talking about a stock pick, or a magic money mutual fund. It’s something that actually exists; it’s your FICO score. If you don’t know what I’m referring to, think it has something to do with sports, or are just plain scared to discuss this topic; read on. Your FICO score is your credit rating and it can make and save you money. There are a few simple tips you need know to take control of your credit score, show it whose boss, and ultimately save you tens of thousands of dollars.

The Stats
The average American’s FICO score is 686. Scores range from 350-850 (citations; more on this later). The average credit card debt is $8,400, with an average interest rate of 13.15%. It takes between 22-24 years to pay this debt off.

Lifelong Grade
If you are reading this article it is my guess that you are striving to be anything but average. I want you to think of your FICO score as a lifelong grade, and even though “C’s get degrees” they will not make you rich. Since you are able to read, I can also surmise that you have gone to school and are able to remember grading scales. I want you to consider your FICO score as a grading scale that will stay with you for the rest of your life. This is your lifelong grading scale.

FICO scores range from 350-850.
780 above = A+
720 - 779 = A-
680 - 719 = B
620 - 679= C
550 - 619 = D
549 below = F

Leading the Curve
The good news is, there is no homework needed to improve your score. There are many different ways to improve your score, but we are going to focus on the major 3. I promise this will not require a finance degree.

1. Make your payments on time. Baring a major catastrophe, you should not spend more than you can afford. If you cannot pay off your credit cards each month, then you are spending too much money. That’s the bottom line. If right now you can’t afford to pay off the full amount, make sure you make your minimum payments each month on time. Lenders report to the three credit bureaus (Transunion, Experian, Equifax) each month. What they are reporting is your ability to pay back your loan, and to pay it on time. If you pay on time, your scores go up. If you pay late, your scores go down. Simple.

2. If you do carry a balance, try to keep your balance less than 40% of your high credit limit. For example, if your credit card limit is $1000, you want to keep your monthly balance under $400. The higher the monthly balance carried on your loans, the more it appears as though you are unable to pay off your debts. Would you lend money to a friend who owed a large amount of money to two other friends? Many lenders won’t either. The higher the carried balance, the more risky you become. The more risky you become, the more expensive your cost of money in the form of higher interest rates. Simple.

3. Don’t close old credit cards; pay them down. This may be different from what you have heard in the past. There are two reasons why you should keep your cards open. The first is that the credit bureaus want to see a long history of on time payments. If you close down that card, then the payment history is erased. Second, if you close your cards then you will affect your overall credit ratio negatively. We discussed this in the last paragraph. If you carry two credit cards with $1000 balance, your total available credit is $2000. Let’s assume one card has a $300 monthly balance and the other has a $500 monthly balance. Your carried balance would look like this: $300 + $500 = $800 monthly balance. $800/$2000 high balance = 40%. If you close down the $300 credit card your equation changes: $500/$1000 = 50%. Your risk has just gone up, which negatively affects your credit score. Pay those cards down. Keep your history for future lenders to view. This will improve your score. Simple.

Let’s assume you have followed through on the last three tips, and your credit scores have gone through the roof. You are earning an ‘A+’ on the FICO grade scale. One of the first things you will notice is a change in your mail. Instead of receiving collection company mail, you will start to receive love letters from an unlikely source, lenders. Credit cards will offer you 0% to transfer your balances or to open a card. Car dealers will give you 0% for a new car purchase. If you own a home, banks will offer you interest rates below prime on home equity loans. Money will be thrown at you.

Interest rates are directly related to risk. Having a high grade let’s potential lenders know that you are a low risk. Your low risk is rewarded with low rates. You become valuable. Your ability to leverage money has increased, and your ability to finish rich has taken a turn for the better.

If you are still not convinced that the past 5 minutes have been worth your time, let me give you one last dramatic example. Let’s look at what will most likely be the largest purchase you will ever make, your house. Let’s compare ‘Jack A.’ vs. ‘Jack F.’, and control every other variable that goes into qualifying for a loan, other than FICO score.

Jack F:

Jack A:

Over the life of the loan, Jack A. will save $181,109.25. Tens of thousands of dollars! Simple.

• Michael Squier, the author, is a professional in the world of Real Estate Finance, but he’s much happier drinking wine with his fiancée Rebecca. You can reach him by email with any questions or comments at mpsquier@aol.com.
• Some sites for further information:
  http://www.bankrate.com
  http://www.annualcreditreport.com
  http://www.experian.com
  http://www.transunion.com
  http://www.equifax.com

From Russel Roberts, professor of economics at George Mason University (quoted in the WSJ):

Another airplane passenger story. I'm talking to the woman next to me and she asks me what I do. When I tell her I'm an economist, she says, "Too bad my husband isn't with me today, he'd love to talk to you." "Why's that?" I ask. "He's fascinated by the stock market," she replies. I had to tell her that I knew nothing about the stock market other than the virtues of indexed mutual funds. A useful thing to know -- one of the most useful insights of economics into personal finance -- but it would have made for a short conversation with her husband.

Sigh.

Everybody knows a cheap person, and probably hates them. But I think we often mislabel frugal people cheap. These are just my opinions, but here's what I think differentiates the two:

Cheap people care about the cost of something.

Frugal people care about the value of something.

Cheap people try to get the lowest price on everything.

Frugal people try to get the lowest price on most things, but spend a lot on items they really care about.

Cheap people are inconsiderate. For example, when getting a meal with other people, if their food costs $7.95, they'll put in $8.00, knowing very well that tax and tip mean it's closer to $11.

Frugal people won't order a Coke if they're on a budget, so that when the bill comes, they don't look cheap.

Yes, being cheap and/or frugal can be a cultural quality. I won't spend much more time on this one.

Cheap people keep a running tally with their friends, family, and co-workers. Some frugal people do this, too, but certainly not all.

Because of the fear of even one person suggesting they spent too much on something, cheap people are not always honest about what they spent on something. Neither are frugal people.

Cheap people are unreasonable and cannot understand why they can't get something for free. Sometimes this is an act, but sometimes it's not.

Frugal people will try as hard as cheap people to get a deal, but they understand that it's a dance and, in the end, they don't intrinsically deserve a special deal.

Cheap people's cheapness affects those around them. Frugal people's frugality affects themselves.

Both cheap and frugal people will be more assertive than most people when trying to get a deal. Over the long term, they'll both save more money. But one has a cost, while the other pays dividends.

Cheap people think short term. Frugal people think long term.

There seems to be this belief among a lot of people that the world is rational and that bad ideas won't last long because they'll be extinguished by good ones.

I think this leaves out one big thing: incompetence. And, sometimes, a lack of experience.

You'll hear people say "That was a stupid commercial" and then some smartass will reply, "Well, if it didn't sell, it wouldn't be on TV!"

Not true.

Just because something is a bad/ineffective commercial doesn't mean it will be removed anytime. I once worked in a company, for example, that was doing a horrendously bad job marketing--literally spending hundreds of thousands of dollars a month without bringing in more than a FEW clients--and yet the bad idea wasn't extinguished.

Similarly, one of my favorite psychology studies is about how people are not only incompetent, but they don't know they are incompetent. I love the title: Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Incompetence Lead to Inflated Self-Assessments (read it here).

This is true in personal finance, too. Again, sometimes it's incompetence and other times, simply a lack of experience. But the results are the same: the wrong ones.

WSJ reporter Jonathan Clements recently wrote an article about why people keep their money in actively managed mutual funds with, as he puts it, "wretched records."

What is surprising is the patience of investors in large funds with dreadful results. Yes, some funds will inevitably be below average. But why stick with them?

[...]

One possible explanation is shareholders may be reluctant to cash out because they don't want to pay the resulting tax bill. But I am not buying this argument.

[...]

Poor performance...doesn't prompt existing shareholders to rush to sell. "My guess is that most investors are unsophisticated and they are going to hang on until they need the cash or they meet their goal," Prof. Johnson says.

Full article: Why Otherwise Good Investors Cling To Mutual Funds With Lousy Records (login required).

Just because something has been around for a long time doesn't mean it's good. Daytrading, almost all actively managed mutual funds, and technical trading strategies all come to mind. They can be good, of course. But honestly, over the long term, probably not.

And with personal finance, the majority of Americans have no training or basic knowledge of personal finance. Hopefully we're all getting there together. As a result, we can see that just because an idea has been around for a long time doesn't necessarily mean it's a good idea.

This post is dedicated to the following:

• Parents who tell their kids to invest in government bonds or the safest option in their 401(k)s
  
• Radio-show hosts who tell their listeners to invest in gold or complicated tax-sheltered annuities at the age of 25
  
• Friends who read about a "Hot Stock!!!" in BusinessWeek or Forbes or Fortune and then invest in it without recognizing that publishers have to sell magazines
  

I didn't want to insult this guy's uncle, but after fumbling around for a polite phrase, I just told him that his uncle had no idea what he was talking about. (Oops.) Look, being a CEO doesn't make you an expert on gardening, making spaghetti, or doing my laundry. Same with individual investing and personal finance.

Now, I agree--the guys on Wall Street (and they are almost all guys) work an ungodly amount and know what they're doing. But they don't have the same objectives as individual investors, nor do they go about achieving their goals in the same way. Let me break it down: Wall Street looks for quick profits that are built on fees, existing relationships, and extremely sophisticated sales and trading strategies.

In fact, as Jim Sinegal (CEO of Costco) recently said,

"On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now."

I like Jim!!!!!

Compared to Wall Street, individual investors like you or me should be looking for long-term growth.

In other words, if you try to beat Wall Street at its own game, of course you'll lose. Uncle Billy is at least right about that. But smart individual investors play an entirely different game than Wall Street.

I've said this before and I'll say it again: When someone says, "I don't invest in the stock market. It's too risky!" it's not as if they've carefully weighed the risks/rewards and educated themselves about personal finance. That's like me saying "Honestly, I prefer fossil fuels over energy cells and nuclear energy as a matter of personal preference." I literally have no idea what that means, but I bet I could pass it off as haughty and scoff at you if you disagreed. Ugh.

The people who are afraid of the stock market are almost always the same. Their view is a guttural, emotional reation that is ultimately self-defeating. I can only offer my gold-crusted throne in 15 years as proof.

So when you hear someone saying that you shouldn't invest in the stock market because you can't beat Wall Street--that's why they don't--recognize it for what it is: an excuse to not get educated about properly investing and managing risk over the long term.

And if you've read this far, that's one more excuse you can cross off your list.

Do you ever notice how on The West Wing, they say things like "send that to my office" and "take the meeting and fix it"?

They don't say "my office is in room 314 and my assistant's name is Donna Moss and her extension is x4685."

That's because as we get more experience, we don't worry about logistics as much. It becomes less relevant for us to specify email addresses, dates, etc.

One of my favorite things is reading an article that takes some fundamental assumption we all make, calmly demolishes it with data and statistics, and then handily concludes like Jackie Chan would after beating someone's ass.

Last week, the NYTimes ran such an article.

The housing boom of the last five years has made many homeowners feel like very, very smart investors...

As the value of real estate has skyrocketed, owners have become enamored of the wealth their homes are creating, with many concluding that real estate is now a safer and better investment than stocks. It turns out, though, that the last five years - when homes in some hot markets like Manhattan and Las Vegas have outperformed stocks - has been a highly unusual period.

In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most.

In social psychology, one of the cognitive errors we make is called the availability heuristic--basically, if something is more recent or prominent in your mind, you will weigh it more heavily in your decision-making.

I really like the NYTimes article. It doesn't dumb down the debate by saying that real estate is "good" or "bad," but instead shows how a bunch of factors--inflation, spending on home improvement, the recent housing boom, and the value of having a place to live--affect our impressions of real estate vs. stocks as investments.

I need to look into the data to understand it better, but my gut feel is that this is an excellent analysis because it takes a long-term perspective and discards the stupid emotions that cause us to mistakenly overvalue certain investments ("Everyone is making $200,000 on their home!! We have to buy now!!!").

So do I think real-estate is a bad investment? Of course not. But I want to look into the data so I can answer the question I am getting more and more these days: "What about real estate?"

Read the full article: In the Long Run, Sleep at Home and Invest in the Stock Market

Let's get right into it today.

• If your employer lets you buy company stock at a discounted price, that's cool. So what's the big deal?
• When do you sell a stock?
• Some words on asset allocation, diversification, and your failure to manifest your education. Good god I should be a rapper.
• Active funds vs. passive funds

I love when some brand-new artist has been singing for like 2 years and already has a Best Of album.

Sort of like this!!! So play along for the ride this week.

Let's all take a deep breath and remember back to some of the first posts on this blog.

• All about stocks and bonds, in which I write generally about what stocks and bonds are, how to choose them, and how I genuinely despise you if you're young and think bonds are a good investment.
• All about credit cards: Pretty self-explantory; you're not dumb.
• All about mutual funds. What's the difference between a mutual fund and an index fund? What's the dirty secret of mutual funds that most Americans don't know? What are average return rates? I like this article.

I own some Amazon stock. For the last few months, my Amazon shares were down about 20%.

Over the last 2 days, though, there has been an absolutely humongous jump in the stock.

When it was down 20%, what did I do? I just held the stock. In fact, if I could have bought more, I would have. I thought (and still think) the company is fundamentally good, regardless of any short-term volatility. And now that's it's way up, what will I do? Nothing. Just wait and see. Not as sexy as those guys on CNBC, I know. But I don't need the money anytime soon.

Lots of people ask me about real-estate investing, but frankly I don't know enough to be able to give any detailed advice on it. But Owen Johnson does, and he's agreed to write a week-long series on real estate.

I'm happy to host the Carnival of Personal Finance this week. To remind you, this is where we collect the best of personal-finance articles from around the Internet (read more about it here). Check out all the great articles below by bloggers, journalists, and others! Thanks to everyone for submitting entries.

Phil Town is totally write about our unhealthy obsession with being (overly) financially conservative in Safety Net Nation. Nice job.

Here's an oldie but goodie from FiveCentNickel: Dave Ramsey is Bad at Math. See why nickel thinks Ramsey (a personal-finance radio host, etc) is just plain wrong about paying off debt.

You can retire without Social Security! This is a great, comprehensive article that points out how taking small steps today can make you financially secure for the rest of your life.

Investing: Roth 401k or Traditional 401k? Enough said!

Ryan Williams announces the NetworthIQ blog (NetworthIQ is the "first social personal finance tool"). Check out the introductory article.

A nice overview of some issues surrounding property taxes. Thanks to Flexo from FiveAndTwenty for this.

Jim from Bargaineering.com points out an article on Morningstar's investing courses that help shape your financial knowledge.

Did you ever wonder how much you pay in gas taxes every year? After Washington state hiked their gas taxes to be the third highest in the U.S., Ironman at Political Calculations built a tool to find out just how much was going out of pocket! Very cool.

What's dollar-cost averaging and why is it good? Jeff from RoadToRich.com writes about it in (I love the title) Make your market timing friends feel like crap.

The Happy Capitalist writes about why privacy policies are not all created equal.

Dan Melson writes about a bunch of tax-related issues you should know about in his article, On the Demise of Estate Tax.

JLP from AllThingsFinancial takes a complicated topic and makes it as easy as possible. Check it out: How to Calculate Present Value of an Annuity.

What do you do if you see something you really want? FMF from FreeMoneyFinance suggests the two-day rule.

Something that made me think: "An interesting observation I recently made was that the graph of the US average earnings is a straight line on a linear (non-logarithmic) graph!! This indicates that the wage growth is slowing in US!!!" See the US Average Hourly Earnings Chart.

Jon at Smart Money Daily writes about the surprising lessons he learned playing Cashflow.

Wayne Hurlbert says podcasts are great marketing for books.

And to wrap it up, a nice WSJ article about some personal-finance bloggers you know! (Registration required.)

Check out the schedule for past/future carnivals of personal finance!

I'm happy to host the Carnival of Personal Finance this week. To remind you, this is where we collect the best of personal-finance articles from around the Internet (read more about it here). Check out all the great articles below by bloggers, journalists, and others! Thanks to everyone for submitting entries.

Phil Town is totally write about our unhealthy obsession with being (overly) financially conservative in Safety Net Nation. Nice job.

Here's an oldie but goodie from FiveCentNickel: Dave Ramsey is Bad at Math. See why nickel thinks Ramsey (a personal-finance radio host, etc) is just plain wrong about paying off debt.

You can retire without Social Security! This is a great, comprehensive article that points out how taking small steps today can make you financially secure for the rest of your life.

Investing: Roth 401k or Traditional 401k? Enough said!

Ryan Williams announces the NetworthIQ blog (NetworthIQ is the "first social personal finance tool"). Check out the introductory article.

A nice overview of some issues surrounding property taxes. Thanks to Flexo from FiveAndTwenty for this.

Jim from Bargaineering.com points out an article on Morningstar's investing courses that help shape your financial knowledge.

Did you ever wonder how much you pay in gas taxes every year? After Washington state hiked their gas taxes to be the third highest in the U.S., Ironman at Political Calculations built a tool to find out just how much was going out of pocket! Very cool.

What's dollar-cost averaging and why is it good? Jeff from RoadToRich.com writes about it in (I love the title) Make your market timing friends feel like crap.

The Happy Capitalist writes about why privacy policies are not all created equal.

Dan Melson writes about a bunch of tax-related issues you should know about in his article, On the Demise of Estate Tax.

JLP from AllThingsFinancial takes a complicated topic and makes it as easy as possible. Check it out: How to Calculate Present Value of an Annuity.

What do you do if you see something you really want? FMF from FreeMoneyFinance suggests the two-day rule.

Something that made me think: "An interesting observation I recently made was that the graph of the US average earnings is a straight line on a linear (non-logarithmic) graph!! This indicates that the wage growth is slowing in US!!!" See the US Average Hourly Earnings Chart.

Jon at Smart Money Daily writes about the surprising lessons he learned playing Cashflow.

Wayne Hurlbert says podcasts are great marketing for books.

And to wrap it up, a nice WSJ article about some personal-finance bloggers you know! (Registration required.)

Check out the schedule for past/future carnivals of personal finance!

I'm going to go over a quick fundamental analysis I did a while ago. This covers commodity products, but hopefully the example is broad enough to get you thinking about the right/wrong way to think about simple investment analysis. I'll use Nokia as an example.

The WSJ wrote an article about employer-sponsored stock purchases (i.e., when you get an employee discount to buy shares of your own company). Here's what they had to say:

My friend JRK writes in asking if it's worth it to pay for newsletter subscriptions.

Here's an email I just got. It's a good one. Instead of just trying to answer it myself, I thought I would put it on IWillTeachYouToBeRich and see what other people think. Let's try to get a few good responses up here.

Jim Cramer, the zany host of Mad Money on CNBC, has been empirically rated on his advice. Very interesting findings:

Mr. Cramer is right about 50% (25 out of 51) of the time with his stock market predictions, prone more to headline hyperbole than equivocation.

This is one of CNBC's premiere "experts."

Read more at the original report.

Terri Cullen, who previously covered IWillTeachYouToBeRich in the Wall Street Journal, writes a great new column on making time to manage your finances:

Here's an email exchange I had over the weekend with someone about why loaded funds are one of the worst investments you can make. EVER!&*#%#

Writing this site is a lot of fun for me. I get to go around, meet interesting people, and make fun of things. I once got a free lunch. But still, I'm not sure it makes a big difference.

Just because mutual funds are popular doesn't mean they're the right choice for everyone. In fact, there's a lot of trickery surrounding the entire industry.

From yesterday's Wall Street Journal:

"The study, by Prudential Financial Inc., found that seven out of 10 Americans are more concerned with near- and midterm goals -- paying bills, buying computers, making home improvements -- than saving for retirement."

Nobody should want to be rich just for the money. Here's a great quote from Tim Sanders in his new book, The Likeability Factor.

Success has been redefined. My grandmother, a product of the Great Depression, raised me to value a lifetime of financial security in which I would never lose my home and could afford to send my kids to college, drive a nice car, and enjoy an occasional steak. For the most part, financial security meant being able to maintain one's lifestyle without worrying about going broke.

Today our goal isn't financial security -- we want financial freedom. Freedom from what? Freedom from facing ugly choices in life. Freedom from working on projects that make us feel sick. Most of all, freedom from working with people we hate.

More on the Things I Hate.

Thanks to Ian for the link!

My friend works in a fancy New York consulting company and wrote me this the other day. She was asking about employer-sponsored stock-purchase plans, which are basically when your employer lets you buy their stock for a discount. It was a calm morning until I read this email and started throwing things around my room in disgust.

Almost as often as "What stock should I buy?" is the question "When do I sell it?" Let's take a journey into the wonderful world of selling a stock. Christ, I can't believe I actually wrote that. Ok anyway, here we go...

When it comes to mutual funds--and index funds to some extent--there are thousands and thousands of options. A wise man once wrote this:

...you can pick a mutual fund of almost any imaginable type, based on many factors (e.g., risk, return, sector, geographic area of investment, etc). For example, you could invest in a value fund, an emerging-markets fund, or a medical-device fund.

Check this out: I'm going to add a little skepticism to the many, many articles that are floating around the Internet right now, bemoaning the condition of stocks and the market in general.

Background: Lots of companies are reporting their earnings and, combined with inflationary worries and a possibly slowing market, everyone is throwing their hands up in worry. Everyone in the press, at least.

Fortunately, people who read this site are a little smarter. Let's look at a recent report from CNN Money and actually dig a little bit:

Remember when I wrote about how foolish actively managed mutual funds are in most cases? (Link: Don't some active mutual funds beat index funds?) I've also written broadly about mutual funds: All about mutual funds

Sometimes, teaching people how to get rich gets me a bad rap. "You just want to make money," I've been told. Or "money isn't everything." These gems, while not particularly eloquent, do have a point. Actually, I'd prefer that these people ask me why I teach people to be rich. It's important to ask yourself, too: Why do you want to be rich?

As we get older, we naturally get more conservative with our money. That's why, when we're young, it pays to be aggressive with our investments.

I like to drive fast. A few days ago, I drove on a long trip and realized something: It's probably not worth it to drive so fast. I ran a quick calculation and discovered that, if 2 drivers drove in a 40mph zone, the sensible driver (40mph) would take 30 minutes to drive 20 miles. The fast driver (60mph) would indeed get there faster--but it would take him 27.5 minutes for a grand savings of 2.5 minutes.* I was disgusted with my findings.

I was also disgusted with myself for thinking like an old man. This kind of thinking, I realized, is why grad students start wearing bike helmets and why Americans don't eat street food in third world countries. They think the risk just isn't worth it.

We naturally get more conservative as we get older. When it comes to finances, you are (or should be) in hyper-growth mode in your 20s. You can afford great volatility of stocks, and your timeline is long enough to mitigate most reasonable risk. More importantly, we don't have kids, mortgages, and huge car payments to support. Let me draw out 3 scenarios to show you why investing as much as you can (and as aggressively as you can) is important when you're young:

Apparently so in some cases. Usually I hate art (that's because it all looks like garbage to me), but this article was pretty stunning:

"In 1998, NYU business school professors Michael Moses and Jianping Mei began an unusual experiment. They would track every transaction involving objects that had sold more than once at auction at the major New York houses since 1875..."

There are some things so entrenched in our culture that we never stop to think what they really mean. Let me direct you to one of the most striking examples in the last 10 years: The Backstreet Boys' hit, I Want It That Way. This god damn song is so catchy that, while we were all singing along and bopping our heads, we never stopped to think about what the lyrics actually meant. Consider:

Tell me why
Ain't nothin' but a heartache
Tell me why
Ain't nothin' but a mistake
Tell me why
I never wanna hear you say
I want it that way

Now I am an educated man, but I can't find any deep meaning in those (admittedly soulful) lyrics. To be honest, I don't understand what the hell they mean. But I keep repeating the words because the beat is so good.

A pretty similar thing has happened with the phrase "diversify your portfolio." We all say it, but why is it really important? And how do you actually do it?

They are really good. He writes like a grandpa who happens to be really smart and fun. If you're new to investing, Warren Buffet is America's greatest investor (I once called him the Snoop Dogg of investing). He still eats at the same restaurant and drives an old truck. He runs a fund call Berkshire Hathaway and writes a great letter detailing his successes and failures every year.

Read them. They're a great way to learn why he makes his choices and how to evaluate investments.

• Warren Buffet's letter about 2004 (PDF)
• All the rest of his letters

Sometimes I use the phrase "asset allocation" at cocktail parties to sound smart. The host, whose party I am crashing, usually looks at me, surprised, and asks me one question: "How did you get in here?" Then I leave, usually.

Anyway, asset allocation is a fancy way of describing where you put your money (e.g., 50% in stocks, 20% in index funds, etc). It's like outlining a paper: You want to know where you're going with your investments. Otherwise, you just get a hodgepodge of random investments with no central goal.

I got an email from an investment advisor named Ryan last week. He pointed out that some loaded funds (mutual funds that charge commissions) actually beat index funds. When I wrote All About Mutual Funds, I railed against loaded funds. Here's how the conversation went.

Most adults in America invest in some kind of mutual fund. They’re an easy, hands-off way to buy and diversify part of your portfolio. But there are costs to handing off your investment decisions to someone else. Here I’ll cover the basics of mutual funds, the secret most investors don’t know, and what fund I invest in. I will also make fun of stupid things people do with mutual funds.

I just saw a segment on CNN about how the iPod is selling like crazy this Christmas season. 4 hours later (!), after seeing the same segment, one of my friends asked me if he should buy Apple stock.

Straight from the Wall Street Journal...

"Nearly half of Americans say their biggest investment mistake was to wait too long to start investing, according to a new survey.

Straight from the Wall Street Journal...

"Nearly half of Americans say their biggest investment mistake was to wait too long to start investing, according to a new survey.

I showed this site to my friend George Northup, the CFO now-CEO of AuctionDrop. He had a few more suggestions for things young investors should learn.

Want to learn everything on this site in 1 hour? I teach a 1-hour class called I Will Teach You To Be Rich.

Now that you've learned about budgeting and banking, it's on to the fun stuff. Investing is the best way to earn substantial amounts of money. Here's how you can earn money with your existing money.

Stocks
When you own a company's stock, you own part of that company. If it does well, your stock will do well. You can buy and sell whenever you want through your broker or self-serve sites like ETrade or Datek.