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7 lies we tell ourselves about money

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See the 7 lies below — plus a holiday gift at the bottom.

1. “I want to make passive income”

I love when people say this because you can tell they have no idea what they’re talking about. It’s kind of like trying to identify people with bad taste: Just go to the local Hometown Buffett. They’re all there.

I hate to say it but most of us don’t need to focus on passive income, we need to focus on improving our active income — our jobs. How? By becoming more skilled, solving more problems for our bosses, and basically out-hustling co-workers.

A lot of people don’t like to hear this because it means that instead of reaching for some dream of $500/day in passive income, they actually have to do some work right now at their jobs. But your job is the most likely place you can significantly increase your income.

Solution: Get better at your job and negotiate your salary. Here’s how:

2. “If I just try harder, I can save more.”

This is like a fat man swearing off sugar and delicious Taco Bell. Not even swearing it off, just saying he can swear it off “some day.” The truth is, we all know we need to save money, exercise more, call our family regularly…but there are serious barriers to doing all of these.

There is significant research indicating that simply trying harder will not help you get started investing.

Solution: Automate your finances so you’re not dependent on your willpower.

3. “I’m going to start keeping a budget”

Do you guys remember when I made fun of stupid frat-boy business ideas, the worst one being when a bunch of dudes get together and decide to start a t-shirt company?

This is like that, only for grownups. At some point in our lives, each one of us will get motivated and decide, “Yes! I’m going to track my spending.” This will last about 10 minutes until we realize it’s (1) really hard, (2) we don’t like ourselves when we objectively analyze our spending, and (3) it’s much easier to do nothing than to subject ourselves to the pain of budgeting.

In fact, I am going to quote a very wise man on this one: myself. Here, directly from my book, are my thoughts on budgeting:

“Create a budget!” is the sort of worthless advice that personal-finance pundits feel good prescribing…Who wants to track their spending? The few people who actually try it find that their budgets completely fail after two days because tracking every penny is overwhelming. Amusingly, in a 2007 survey by bankrate.com, 75 percent of Americans said they have a budget—which is complete nonsense. “There’s probably a lot of wishful thinking in this response,” says Jared Bernstein, director of the Living Standards Program of the Economic Policy Institute. “It’s probably more accurate to say that three-quarters think they should work on a monthly budget.” My kind of man: exposing the delusions of people everywhere!”

Solution: Create a Conscious Spending Plan that will let you spend extravagantly on the things you love, as long as you cut costs mercilessly on the things you don’t.

4. “My friend goes on vacation 4x a year and he makes less than me!”

Your friend is either a highly skilled practitioner of Conscious Spending, or an idiot. What’s funny is this becomes more true as you get older, yet we get even more jealous. Think about it: How many times have you heard one of your parents ask the other one, “Why can’t we go on vacation like they do?” without understanding how their spending breaks down?

Odds are, they’re not conscious spenders, but rather overspenders.

The single-best book on this is the Millionaire Next Door, where we learn surprising facts about the average millionaire: 80% are first-generation affluent, invest 15%-20% of household income, buy used cars, and rarely buy expensive watches or suits. They’re the ordinary neighbors who are saving money instead of spending it on a new Mercedes.

Solution: Would you look at a bunch of blue whales for advice on losing weight? Then why would you look at your ordinary friends, who are making ordinary money decisions, and will end up with ordinary results — not having enough money — as role models? Refocus your financial aspirations to people you value and their conscious decisions, not showy displays of wealth from people who are poor role models. If you suspect they can’t afford it, they probably can’t.

5. “I’m different than everyone else…I don’t need to save up for a wedding/kids/car/life insurance”

This is also known as, “Ugh, Ramit, I’ve already done all the stuff you’ve told me…now what?”

People are delusional about what will happen in the next 10 years. For example, if you’re in your 20s, the next 10 years will bring kids, a new car, a mortgage, taxes, insurance, maintenance, travel, life insurance, medical insurance….etc.

Every day I get frustrated people who tell me they’ve implemented all my strategies, yet when I tell them the next step is to implement the Ten Year Savings Strategy — where they save for the most likely things they’ll encounter within ten years — they become oddly dismissive.

Why? Because it’s not sexy. They want advanced “tips” and “tactics” to do something cool…even though saving money for the things they will almost certainly need is the most pragmatic thing to do. They actually say things like this (a real comment):

“First of all, I’m not getting married. No, this isn’t just the talk of someone who can’t see far enough into the future. We all know the only benefit of getting married is in avoiding divorce.”

Solution: If you think you’ve already optimized your finances 100%, use my Ten Year Savings Strategy and ask a few people 10 years older than you what they wish they’d saved for. Then do it. Oh yeah, and if you’re “sure” you’re not going to have kids or get married because it always ends in divorce, just go hang out with your 14-year-old friends and come back here in 10 years.

6. “I’m going to invest in stocks”

I am getting so mad typing this that I don’t even know where to start. First of all, let me acknowledge that fewer than 5% of people will probably ever say this, since most people don’t invest at all, then turn 40 and get scared, call their HR rep, set up some kind of mis-allocated 401(k) plan, and then go on their merry way whistling and eating walnuts.

 

So if you’re thinking about this, it’s actually a good thing — it means you’re probably thinking about investing far sooner than others.

Unfortunately, “investing” does not mean picking stocks. It also does not mean buying a house, but that’s another story.

Even the fanciest portfolio managers fail to beat the market most of the time, which is why I argue for target-date funds, where you simply pick a fund determined by your age, set up automated payments, and get on with your life.

It’s also critically important to note that your asset allocation is more important than the individual investments you make. Think about it like this: If you write a book, your Table of Contents is more important than any individual word you write. Yet people obsess about the words instead of spending the bulk of their time on the TOC.

Solution: Stop trying to pick stocks. Instead, automate your investments with target-date funds or, if you really want to control your investments, a group of low-cost index funds.

7. “Money is just for greedy people…I don’t need to worry about this stuff”

No it’s not. This is the excuse of lazy people who don’t want to spend a weekend learning about money, but instead worry and complain about it for the rest of their lives. I’ve said it since this site came out: “Rich” isn’t just about money, it’s living a rich life, whether it’s buying nice clothes, traveling around the world, spending extravagantly on your hobbies, or spending as much time with your friends/family as possible.

But part of that is money. If you haven’t optimized your money — whether you earn $35,000 or $350,000 per year — it doesn’t mean you’ve taken a principled stand against consumerism. It means you’re lazy.

Solution: Take one weekend to learn about your personal finances. Once you automate your money, you’ll never worry about it again.

 

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73 Comments

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  1. But I really do want to make passive income 🙂

  2. I definitly can related to the traveling comment. My friends go on cruises a lot and them come home and drive BMW’s and watch TV on their new plasmas… Meanwhile I watch tv on my laptop via hulu, bike to work, and find free activities to do!

    Although when I am 40 I’ll probably be financially free and buy as many of those walnuts you spoke of in your post.

    Good info, thanks for the share.

  3. Houston, we have a typo (a funny one, at that).

    – “Get the 1st chapter of my New York Times best-selling book for free.” I am getting so mad typing this that I don’t even know where to start.

    – “Get the 1st chapter of my New York Times best-selling book for free.” No it’s not. This is the excuse of lazy people who don’t want to spend a weekend learning about money.

  4. Wait, wait, wait. It seems like all titles on your blog are screwed up. I tried 2 browsers.

  5. Awesome post again!

    It seems everyone wants to make lots of money doing little work these days.

    What ever happened to work ethic and basic finance like spend less than you make?

  6. I hate being told what to think. Let me count the ways I disagree with these points:

    1. “I want to make passive income”

    Not a lie since, uh, yes, I do want to make passive income. As well as increase my active income. These things aren’t mutually exclusive.

    2. “If I just try harder, I can save more.”

    Not a lie. Over the last few years I have managed to save money by trying harder, in addition to automation. Again, not mutually exclusive. I automate enough to take advantage of employer matching in a pension, and fill up an ISA (rough UK equivalent of a Roth IRA), but I still ‘try harder’ each month to see how much I can have left over at the end of the month, then save it. Next year, I’m going to try harder still. I’ve cut down on my alcohol consumption recently – that should be a good $30 or $40 a month I can save by ‘trying harder’.

    3. “I’m going to start keeping a budget”

    Not a lie. Budgeting isn’t hard – just let software take care of categorisation (e.g. mint or yodlee), and after a couple of months to get an idea of where your money is going, set some monthly budgets based on whether you want to increase or decrease spending in any given area. The software will track it all for you, and notify you when you are getting near a limit. This is trivially easy. It’s not about counting pennies.

    4. “My friend goes on vacation 4x a year and he makes less than me!”

    Not a lie. I *do* have friends that take multiple vacations a year and earn less than me. a) I’m not jealous, I prefer to vacation in my garden with a pile of books. b) Yes, they probably are in debt because of it. That doesn’t mean I’m lying to myself though.

    5. “I’m different than everyone else…I don’t need to save up for a wedding/kids/car/life insurance…just go hang out with your 14-year-old friends and come back here in 10 years”

    Not a lie. This is utterly condescending. I didn’t want kids when I was 14, I didn’t want kids when I was 24, and I still don’t want kids now I’m 33. And I paid off my car 4 years ago; it still only has 50K miles on the clock and I expect it to last another 10 years. Believe it or not, Ramit, some people really don’t follow the only path that you personally can see.

    6. “I’m going to invest in stocks”

    Not a lie. I already have enough money going into index funds (maxing out my employer match and my tax-sheltered ISA allowance). Now I intend to start buying a small portfolio of individual dividend-yielding stocks, and I already have an options plan with my employer.

    7. “Money is just for greedy people…I don’t need to worry about this stuff”

    OK, this one I agree would be a lie – though I’ve never, ever met anyone that seriously believes this.

  7. Great post! I think #7 is very important. It allows people to live their lives without even trying to improve their financial situation. It is insidious because people are not aware of how destructive it is.

    Also, it is easy to think that people who have money are evil. When they see someone driving a nice Porsche or Ferrari they say, “Oh that guy is bad because he is greedy and takes other people’s money.” I think it is much healthier to say, “Oh, look at the nice man in the Ferrari. He must have helped a lot of people and made money.”

  8. Russ, I think the problem with “passive income” is that it is largely a myth. The term persists because it sounds extremely attractive. Who WOULDN’T want “passive income?” You invest it once, then sit back and do nothing as the cash just flows in, “passively,” forever.

    The truth, unfortunately, is that there’s no such thing, in my opinion. Many of the investments that are often described as “passive” aren’t, really. They require ongoing attention and work. Rental properties effort to maintain and repair, as well as chasing tenants for rent, and finding new ones when they move out. Dividends are unpredictable, and have been shrinking a lot lately. The interest from CDs and T-bills are too low to be a practical source of income replacement, unless you’re able to save up several million. Patents, royalties, real estate – they all require periodic work on your part.

    Thus, in my opinion, it’s best to simply let go of the fairy-tale notion of “passive income” and simply accept that if you’re planning to live off an investment portfolio, it’s going to take at least a little effort and attention on your part.

  9. @Kevin

    I agree completely, but I think it’s semantic squabbling to define ‘passive’ as “absolutely 100% effort free income forever”, which is what you appear to be doing. If you could put up a website that generated $20K of income and required 1 minute of maintenance per year, would you consider that active or passive? What about if it took 10 minutes a year? An hour a year? Where do you draw the line?

    I agree that real estate is not passive income. I have a small amount of money in a REIT, but that’s just part of a diversification strategy (I have a little gold for the same reason, and obviously that generates no income either). However, I *do* classify dividend and bond income as passive, even if I have to spend a couple of hours a year rebalancing the capital. It may or may not be true that they will never completely replace my active income, but then my whole point was that active and passive incomes are not mutually exclusive. If dividends never replace my salary, that’s not a reason to ignore them.

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