How many of us choose to focus on the most pointless areas of personal finance? Should I open this credit card? I feel guilty paying for name-brand cheese. Do you think I should buy one of those coupon books?
People waste time on minor decisions and debate minutiae for several reasons:
- It’s all they know, since they’ve repeatedly had the “latte” example shoved down their throats for 20 years (even though it hasn’t worked)
- They don’t have an overarching money system, so they grasp at whatever decisions are in front of them
- Small decisions make us feel productive, while Big Wins take systematic work
Think about it for a second. You can work for 2 years to really optimize one area of your finances (e.g., honing your discipline to stop buying chocolate). But what if you’ve picked the WRONG THING to work on? What if chocolate purchases are only 0.00001% of your total spending? No matter how hard you work at disciplining yourself, it’s ultimately useless. It’s like being CEO of the wrong company.
I’d like to talk about some of the most common areas we focus on and highlight some effective/ineffective ways to think about them. Why? Because being rich isn’t about which credit card you use or which bank you choose. If you want to live a rich life, learn to focus on the bigger picture: mindset, execution, and timing are more important than sitting around and debating minutiae. Let’s go through some examples to help apply this to your life.
The point is to work on the right things, not to simply try harder.
Mistakes: Paying off Debt
- Goal: Get out of debt
- What people obsess about: negotiating APR, credit score, transferring balances between cards
- What they should REALLY care about: cutting costs and automating payments
People in credit card debt spend time debating which credit card they should get, how they can quickly up their credit score, or whether or not they should negotiate a lower APR. Those things will only take you so far. The number one thing they need to do is AUTOMATE THEIR PAYMENTS AND CUT COSTS TO PAY OFF THE DEBT.
The problem is that thinking about how to use my script to get a lower APR and calculating how much 5% lower APR will save them is more fun, sexier, and seems more tactical. I don’t care how many blog posts or books you’ve read about the intricacies of credit. If you haven’t actually done the #1 thing you need to do, it’s worthless. And again, that thing is: Cutting costs and automating payments.
Mistakes: Earning More
- Goal: Increase your income
- What people obsess about: business cards, how much to charge, what their “idea” is
- What they should REALLY care about: how to EARN money
When trying to earn more money, the #1 barrier is “finding an idea.” Instead of systematically testing different ideas, most people simply wait for the idea to fall down from heaven — and they do this for their entire lives.
Worse, some people delusionally waste time on business cards, setting up an LLC, and obsessing over pricing. I’ve seen this in literally thousands of examples of students I’ve worked with.
And yet most of these activities are pointless. The best example of this is Nicole, a freelancer working toward the goal of earning $1,000 more per month. I showed her how 90% of her activities were a complete waste of time — and I showed her how to earn more money rapidly.
Mistakes: Saving Money
- Goal: Save money
- What people obsess about: bank interest rates, budgeting, making spreadsheets
- What they should REALLY care about: cutting costs, earning more, setting up automatic savings contributions
Most people never even think of this, but for the few that do, they often approach it in a curious way.
How many friends do you know who take out a piece of paper and sketch out grandiose notions of how much they can earn/save to live a great lifestyle? Sound familiar?
Yet those pieces of paper are soon discarded, and we get our next set of bills at the end of the month, shrugging. “I guess I spent that much,” we say.
When we try to save, we end up trying to save on everything — 50 cents on this, $4 on that. As a result, we give up in a couple weeks. A better approach would be to use the Two-Headed Savings Approach, which lets us focus on limited attention and willpower on the biggest wins.
After that, focus on the CEO Model — Cut Costs (above), Earn More, and Optimize Spending. Optimize existing spending by making a few phone calls to negotiate lower rates for cable, your gym membership, even credit cards. And automate the entire process.
Mistakes: Bank Accounts
- Goal: Open an account
- What people obsess about: account interest rates, rewards
- What they should REALLY care about: opening an account and automating payments
I get dozens of emails every week with people freaking out about opening a bank account. “Ramit,” they say, “your book says ING gives 3%. But it’s only 0.75%! What am I gonna dooooo?”
First, I want to ignore them. Then I want to kill them. Finally, I decide to shame them.
Attention morons: The difference between 1% and 2% on even a $10,000 balance is about $8/month. You do not get rich from rate chasing. Instead, pick a bank you trust, fold it into your automation system, and get on with your life.
The Key Takeaway: Work on the RIGHT things, not everything
Americans love to try to do it all. They use phrases like “it couldn’t hurt, right?” when in reality, it very much could hurt to focus on the wrong things.
That’s because we’re cognitive misers with limited attention and willpower. If you’re wasting these limited resources worrying about a $3 latte, you will almost certainly be ignoring the Big Wins — like negotiating a higher salary, finding your Dream Job, earning more, and cutting costs on the biggest areas of spending.
Making these big changes is hard, so we try to distract ourselves with peripheral decisions like APR, interest rates, credit-card companies, and other irrelevant data.
Choose your battles wisely. We can only focus on so many things (something that flies in the face of our “do it all” culture), so it’s important to (1) pick the right areas to focus on, and (2) ruthlessly hone and optimize our approach within each area.
For example, we all know people who have been talking about some “great idea” they have…for 20 years. Compare them with someone else who decides to simply get started — who takes a testing approach — and after 4 weeks, has made more progress than the “dreamer” made in 40 years?
I’ve covered every single one of these topics on this site over the last 8 years.
To get started, check out the links above. But before you open up 20 tabs, commit to do just ONE thing today. Maybe it’s “Cutting $100/month from my spending” or “Earning $250/month by May.”
Just remember — most people will focus on the tactics because they’re shiny and immediately rewarding. But losers love tactics. Winners ignore shiny things and focus on what matters most.