7 lies we tell ourselves about money
December 21st, 2009 - 71 Comments
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.
- Personal finance is not about more willpower, including specific details on my automation system for your finances & a 12-minute tactical video
- The psychology of passive barriers (why we can’t seem to do things we “know” we need to do)
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.
- Conscious Spending: How my friend spends $21,000/year going out
- Full Conscious Spending Plan (with specific recommendations on percentages for each category) is available in my book
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.
- The Ten Year Savings Strategy: Saving money after you’ve already handled the basics
- Why do delusional people think their spending will be different than other people’s?
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.
- Behavioral psychology/economics on why you are not a good stock-picker
- Full chapter on why investment “experts” are overrated and hilariously wrong in my book, along with another chapter on specific ways to automate your investments with sensible, long-term investments
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.
- Automate your money
- Some of my favorite books on money
- My Scrooge Strategy premium tips, which will save you hundreds of dollars per year
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