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5 myths of personal finance (plus: stupid advice)

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What are the most common mistakes in personal finance — especially among blog readers?

I recorded a 30-minute interview with Flexo and Tom over at the Consumerism Commentary podcast with extensive notes below. It’s called Stupid Financial Advice + The 5 Myths of Personal Finance.


Stream the interview or download my melodious voice here.

Notes:
[00:00] Introduction from Flexo
[00:50] Interview with Ramit Sethi about stupid financial advice
[01:50] — The Reddit community
[03:27] — Frugality
[05:09] — Big wins
[08:03] — Knee-jerk behavioral change
[09:41] — The “buy and hold” strategy
[13:10] — Financial magazines leading up to the recession
[16:48] — Finding decent financial advice
[19:01] Ramit’s five myths of personal finance
[20:01] — Myth #1: Personal finance advice is only about spending less than you earn

– Sort of meaningless pablum that lets people feel better about themselves but get nothing done
– And you can just see that’s true by asking a few questions: Are you happy with your finances? How much do you spend on eating out and loans? What’s your system for getting ahead? What are your goals?
– Just knowing a fact doesn’t make it implementable. As we say in persuasion, “informational influence is one of the least persuasive methods available”
– Make it tactical: How do you get the right accounts? Dominate your credit card? Automate your money? Pick the right investments? Handle money and relationships?

[21:33] — Myth #2: Personal finance is about more will power

– If I just try harder…
– Reminds me of weight: If I just try harder to diet…
– Every choice has a cost. Trying to save on 50 things vs. 5 things…
– How has that worked for you over the last 1-2 years? 10 years? Most of us are fat and in debt
– It’s about building systems that handle your weaknesses so you can exploit your strengths. Automate, earn more, cut costs

[22:55] — Myth #3: You can’t save any more money

– Yes you can
– We under-report how much we eat, just as we under-report how much we spend
– You can’t out-frugal your way to rich
– Saving: CEO
– Tracking is #1
– Setting goals is #2
– Automation is #3
– Earning more is #4

[25:18] — Myth #4: Everyone is like you

– MSN readers criticizing my frugality tips, saying frugality is about a lifestyle choice
– “Ridiculous to spend $28k on weddings”
– Silo effect: Sites like Reddit make you surround yourself with people who (1) don’t know anything, (2) act like they do, and (3) they ALL have the similarly kooky opinions!
– Solution is to read multiple CREDIBLE sources

[27:43] — Myth #5: Frugality will make you rich

Myth: “I can save $10 by not buying that book! Ha Ha!”
– Pay for value
– Not just sticker price, but value
– Why it’s crazy for people to try to find these extreme deals on books. If you implement even 1 tip, you’ll save/earn 1000x the money
– Same people who don’t pay end up spinning their wheels
– Would it be worth it to buy a $10 book that has saved people thousands? Scrooge for a few bucks/month if it helps you earn $300/month? Or to buy a course at a community college for $500?
– Focus on value, not cost

[30:26] End

Random notes

BUY AND HOLD

– Unprecedented what’s happened, lot of people to blame (including ourselves)
– But there’s a knee-jerk reaction: BUY AND HOLD DOESN’T WORK!
1. Ok, so what does?
2. The people who pull out of the market now are going to face another, more serious phantom risk: Running out of $. (SEE BELOW)

AVAILABILITY HEURISTIC

– We tend to overvalue what’s easily remembered — so you might say, “VWs are terrible cars” when in fact Consumers’ Reports prove otherwise (I do this)
– People are freaking out and removing their money from the market — driven by fear, not educated moves
– Change asset allocation. Change regular contribution amounts. Diversify. Earn more. But PULLING YOUR $ OUT? Worst thing you could do
– And people will face another fear they don’t know today: Running out of money. Not as obvious as losing 40%, but you can’t do much when you’re 82 and out of $
– Focus on the most important things and work, step-by-step, to hit them

BUY AND HOLD 2

– Compare equity returns to any other measure and you’ll see over the last 70 years have shown equities to return the best. PAST PERFORMANCE IS NO GUARANTEE…
– But I prefer to use data unlike the other handwavy arguments that involve the gold standard, doom and gloom, and tin cans

Listen to the interview here:

Download MP3 here.

Stop reading and start doing. Thousands of people have already bought my book and dominated their personal finances. If you haven’t already bought my book for about $10 (Amazon), take 10 seconds to do it and learn how to turn all this information into a 6-week plan to dominate your personal finances. If not now, when?

(Make sure you forward your receipt to iboughtthebook@iwillteachyoutoberich.com for a bunch of bonuses, including something new coming up soon.)

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63 Comments

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  1. These are interesting thoughts but mostly lacking in substance. Spend less than you earn isn’t some personal finance lesson, it’s the basis for all of personal finance. To knock it is to knock even your own book where you help people reduce their monthly expenses through your somewhat innovative tactics. Regardless of how you do it, even you are helping people to spend less than they earn.

    Additionally, if you help people to make more money you’re helping to widen the margin for earning more making the spending less relative to earning power easier.

    Spend less than you earn is above and beyond THE personal finance lesson. No it won’t get you out of debt and it won’t introduce compounding interest into your world, but if you aren’t doing myth #1 from the start you’re doing PF all wrong.

  2. One of the biggest issues I have with PF is how the lesson of “spending less than we earn” is internalized and applied by many. I would agree it’s a part of the foundation but not “the foundation”.

    I believe another part of the foundation is make more money than you need. Awww…what a concept! This philosophy forces one to ask a fundamental question: how do I continue to create/add value for others so that it may increase my cash flow.

    After we master this foundation, we should then move to the tactics that were suggested in your notes: “How do you get the right accounts? Dominate your credit card? Automate your money? Pick the right investments? Handle money and relationships?”

    Spending less is a great lesson to master but in todays economic world we need to add some other lessons to the curriculum of PF

  3. “Spend less than you earn” isn’t simply a call to frugality – that’s what people with blinders on think. It’s a call to a lot of things:

    + increasing your income – get a better job, earn more, and spending less than you earn becomes substantially easier.

    + stabilizing your income – diversifying your income streams and investments stabilizes and grows your income.

    + reducing debts – debts are a required payment that make it more difficult to spend less than you earn, since you’re spending on debt repayments.

    — just for starters. “Spend less than you earn” is a call simply to focus on your gap – the difference between what you bring in and what you spend. There are countless moves you can make to increase that gap, psychological, mechanical, and otherwise.

    “Pablum”? If those concepts are pablum, most of your site is pablum.

  4. Ramit,
    Great interview. It was very beneficial to hear you re-enforcing many of the same things that I’ve been hearing over the past few months. It’s amazing how many of my friends still don’t get it. One of my friends recently turned down the opportunity for investing in a duplex (way, way below market with solid long term tenants and in a great area) but then turned around and spent the same amount remodeling his basement. Somehow a flatscreen and a kegorator was a better investment than a property with a 20 year record of generating positive cashflow. Now if he would have put the money in some other investments because I realize real estate is not for everyone then maybe I wouldn’t be so disappointed. Another friend only does 3 year car leases for him and his wife because he doesn’t want to worry about car maintenance. Seriously, is it that hard to hit up Jiffy Lube every 5,000 miles?

  5. Many people think that cutting expense is the only way to build savings and reduce debt. That’s not true. One of the basic principles of personal finance is to spend less than you earn. Most people focus on the former because it can be easier to look at ways to reduce your bills.The great thing about that principle is that there’s another part: earning more money.

    If you’re a new college graduate and you don’t have a job lined up or your job is basically to pay for your bills, then seriously consider freelancing. It can build your skills, network, and your income.

  6. […] If you have 30 minutes Ramit has 5 myths of personal finance.  Link […]

  7. […] the original here: 5 myths of personal finance (plus: stupid advice) | I Will Teach … Related […]

  8. I think you’re completely misusing and inappropriately maligning the term frugality.

    Tight-wad, cheap-ass, penny-pincher.

    Those would all be appropriate terms for people who don’t make informed purchasing decisions – they make sticker-price decisions.

    Wikipedia defines frugality as a practice of acquiring goods and services in a restrained manner, and lists the following:

    “Common strategies of frugality include the reduction of waste, curbing costly habits, suppressing instant gratification by means of fiscal self-restraint, seeking efficiency, avoiding traps, defying expensive social norms, embracing cost-free options, using barter, and staying well-informed about local circumstances and both market and product/service realities.”

    So get it right. Whatever you want to call it, seeking to maximize how far your dollar goes and to restrain your spending to a level within your means are all the habits of a frugal person. Ignoring value, quality, and durability in favor of a low cost option are the habits of price-sensitive hyper-consumers, not the frugal

  9. Ramit,
    I’d like to see a real defense of buy-and-hold on your website. If such a huge part of your advice to people is to be believers in the stock market, then show them WHY.

  10. To clarify my point…
    It may be true that equities have outperformed over a 70 year period, but that is not a good enough reason – owning stocks has been an inferior strategy for the last 40 years.

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