Turn on the TV or read any comments section of an online newspaper — even the New York Times — and you will quickly feel the need to take a shower and to physically distance yourself from common citizens of dubious intellect.

You’ll notice people complaining about their taxes, while never cutting their own spending, earning more, or optimize their spending (like the CEO Model I describe in the Save $1,000 in 30 Days Challenge).

The problem is multi-faceted:

First, once something incurs spending, it’s incredibly difficult to stop spending on it. Why? On a national level, because there’s momentum, jobs, and opposition to change. On an individual level, we’re more motivated by loss than by gain, so it’s easier to do nothing than to take away something we’ve grown accustomed to.

Second, people get emotional. You see this with jobs and taxes (and rightfully so), but also with areas as prosaic as design changes on Facebook. In many/most circumstances, we don’t like change, and we over-emphasize our own interests (”I CAN’T UNDERSTAND WHY THEY DON’T MAKE A MAC PRODUCT!!! GRRR!!), while never seeing the big picture (Macs have a ridiculously small market share).

Third, the natural progression is to do more: more staff, more funding, more spending. Without a conscious spending plan, you’ll find that executing a Think, Want, Do analysis will reveal some huge disparities in where you think your money is going vs. where it’s actually going.

Let’s take a look at some numbers.

Now, you can take a couple routes after seeing these:

1. Complain about Obama, Democrats, Republicans, the war in Iraq, etc. The funny thing is, people love to debate minutiae but fail to realize that energy is a valuable resource — and it’d be much more productive to focus on things we can control (like our asset allocation, automation, negotiation, etc). If you do this, you are just like everybody else who loves to complain but does nothing to improve their own finances.

2. Realize that the real message of this post is to focus on the BIG WINS — the things that let us save significant amounts of money. While it might be fun and emotionally liberating to debate over some local issue, the way to move the federal budget forward is to fix the 800-lb gorilla: healthcare costs. The same is true of your spending: The very first tip in my Scrooge Strategy is called the Two-Headed Savings Approach, where I show you how to focus on dramatically cutting the costs on your two biggest discretionary expenses, rather than trying to save 5% on 50 things (as most people do), and ending up feeling guilty and achieving no behavioral change.

Stop complaining about things you can’t control. Realize that the correlation between macro-economic and political decisions has very little to do with our money on a day-to-day basis. Most importantly, we’re cognitive misers, and only have a limited amount of attention. Focus on your own finances first, and let the fools (or politicians) debate the macro-level.

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.

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

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.)

I’m delighted to announce the winners of the giveaways here:

Winners:

1. 9:00 AM Beth Mathiason of Cottage Grove, MN – Kindle
2. 10:00 AM Paul Colvin of Happy Valley, OR – Kindle
3. 10:00 AM Jan Small of Chicago, Il – $1,000 from Mint
4. 11:00 AM Elizabeth Cummings of Iowa City, IA – $30 Pearbudget Account
5. 11:00 AM Gail Kenney of Ponte Vedra, FL – Kindle
6. 12:00 PM Jeremy Wheeler of Vancouver, WA – Kindle
7. 1:00 PM Zuzka Bodik of San Francisco, CA – $30 Pearbudget Account
8. 1:00 PM Edgar Mendez of El Paso, TX – $1,000 from Mint
9. 1:00 PM Therese Mascardo of Newport Beach, CA – Kindle
10. 2:00 PM Boyd Wold of Herriman, UT – 20 Min. Coaching Session
11. 2:00 PM Andy Needler of Austin, TX – $1,000 from Mint
12. 2:00 PM Natalie Bradley of Harrisburg, PA – Kindle
13. 3:00 PM Kane Louis of Townsend, DE – Kindle
14. 4:00 PM Mario Sanchez Carrion of Mirmar, FL – Kindle
15. 4:00 PM Joel Weinberg of Chicago, Il – $1,000 from Mint
16. [Edit]: In all the chaos, I forgot to give away the last $1,000. The winner is Robby Hipp.

Congratulations! If you’re a winner, keep an eye out for an email on the weekend of 3/28 with further instructions.

Book excerpts

See why this book isn’t yet another boring personal-finance book.

Forward your receipt to iboughtthebook@iwillteachyoutoberich.com for bonuses, spreadsheets, and more. No purchase necessary.

1. How much money do you spend each month?
2. Where does it go?
3. Where do you want it to go?
4. Are you rich?
5. What does rich mean to you?
6. Hey, how’d you pay for that iPhone?
7. How much do you automatically save each month?
8. Why’d you pull your money out of the stock market?
9. You’re always thinking about cutting down on spending. Ever thought about earning more money?
10. OMFG, are you REALLY planning to buy a house for the tax deduction?
11. If your employer has a 401(k) match, do you max it out?
12. Then pay off debt, invest in your Roth IRA, and — if you still have money left over — max out your 401(k)?
13. Once your money is in those different accounts, have you invested it according to some simple rules of asset allocation?
14. In the next ten years, you’ll have to pay for a wedding, new car, have kids, take vacations, etc. How much are you saving each month for those things? (In last week’s Scrooge Strategy tip, I showed how to do this tactically, along with a pre-built spreadsheet.)
15. 6 months ago, if I had told you the stock market would be on sale for 50% off, would you have invested more, less, or pulled all your money out?
16. You’re always complaining about money, but have you read even one book on personal finance?
17. When was the last time you said “no” when someone asked you to do something that involved spending money?
18. How do your friends handle their money, and how do you think it affects you?
19. What’s the one thing you could do today to start getting rich?
20. Why haven’t you already done it?

[Update]: Download a PDF version of these questions for easier sharing.

• Learn how to automate your money — one of the most important parts of making sure you hit your money goals consistently

• Have crystal-clear answers for the most common personal-finance questions: “Should I buy or rent?” “Should I pay off my debt or invest?” “How do I invest?” “How do I save more money each month?” — and be able to explain them to others.
• Learn how to avoid crackpot prognosticators that try to predict which way oil, stocks, and real estate prices will go…and nearly always get it wrong.
• Learn more frugality tips that really work, as well as tactical tips for easier investing, negotiating, and tracking your money

I’ll do this through more detailed blog posts, videos, Money Diaries, interviews, and my new book (coming out in April 2009).

I know first posts of the year are supposed to cover resolutions, but I think these three posts do a better job than I could:

Jared Goralnick points out that one of the best things you can do is know what you want.

K notes how New Year’s resolutions must fit into your lifestyle

And the New York Times illustrates how almost all New Year’s resolutions fail

The truth is, I don’t believe in New Year’s resolutions. If you have to be really honest with yourself, did you actually achieve last year’s resolutions? Do we even remember what they were?

It’s time to get brutally honest
Few of us are honest with ourselves. I wrote about in The $28,000 Question: Why Are We All Hypocrites About Our Wedding?, where I pointed out how we all love to say “My wedding will be simple, but it never really is. If we acknowledged that our wedding would be over $20,000, we could start saving for it. And when I pointed out how much you need to save for a wedding, people’s jaws dropped.

Let’s get real.

When 90%+ of people consistently get the same result (failure for New Year’s resolutions), I start to believe that the real answer is, “forget it and acknowledge the truth.”

For example, when I constantly tell myself I’m going to take work home when I go to visit my parents — yet I’ve never actually done any work there — it’s time to be honest and acknowledge that I’m never going to work while hanging out with my parents. Now, I leave my work at home and enjoy my vacation.

When you constantly berate yourself for not keeping a budget, even though everyone says you should, it’s time to forget it and find something that works. (I’ll show you how in a future post.)

Consistency, not magical moments
Success is not about some special moment in time, like the first of the year. If you haven’t been able to do something all year, there’s very little chance that a New Year’s resolution is going to change that.

This year, like every year, is about sensible changes. They may not be as sexy as announcing to your friends that you have a new resolution to lose 50lbs or you’re going to cut your spending by 50% in 1 month, but systematic changes work. Make your money flow automatic. Understand where your money should be going (debt vs. investing?). Figure out how to run the numbers so you can see if one decision is better than another.

It’s not as sexy as “15 stocks you must buy!” or “18 banks with better interest rates than yours,” but it actually works. I’ve written about why sensible goals impress your friends, get you girls, and help you lose weight. As I always say, would you rather be sexy or rich?

I need your help, though. You need to decide what you want to accomplish this year. If you’re looking for quick tips that will be silver bullets, this isn’t the right blog for you. If you want someone to help you save money using extreme frugality tips to save an extra few bucks here and there, I’m not your guy (there are better frugality bloggers out there). And if you have no idea why you’re earning, spending, saving, investing, and automating your money — or if it’s just to keep up with your friends — this is definitely not the site for you. I need you to decide why you want to be rich — and what rich means to you. Do you want to pay off your debt this year? Or be investing $500/month by June? Or save up for a vacation to China?

Once you know where you want to get, you can take my tips and apply them to your life. Everything falls into place once you’re saving and spending towards something.

I’ll help with the best tips I can write for you. For an example of some of my favorite tips, please check out my Save $1,000 in 30 Days Challenge (scroll down for the tips). I spent over 150 hours writing those tips, and they saved people hundreds of thousands of dollars. Expect more highly tactical tips like that, but directed towards topics like investing, negotiating, and more.

Later this week, I’ll post my 30th tip of the 30 Day Challenge.

Then we’ll get on to the new stuff.

It’s going to be a great year.

1. Ignore the Sensationalist Media
Gawker pulls off one of the finest pieces of reporting on the bailout. When I wrote The Media is Atrociously Bad at Prediction and I’m Sick of It, I highlighted how various business media point make bold predictions, get it completely wrong, and are never held accountable.

In this case, Fortune highlighted AIG as one of “10 Stocks to Buy Now.” When they later apologized, they posted “The Best Stocks for 2008,” which, as Gawker points out, included…Merrill Lynch.

2. Hedge Fund Surprise?
This is like a tuna surprise, only worse: Hedge Funds Are Bracing for Investors to Cash Out. Many people haven’t heard about hedge funds’ redemption clauses, which basically means that fancy investors (e.g., universities, pension funds, and really wealthy people) will be able to withdraw their money today (Tuesday, 9/29/08). If that happens, nobody really knows what the repercussions could be…but they would probably be Very Bad. I’ve previously written about why hedge funds are overrated for investors.

3. We Have Short-Term Memories.
If you think history doesn’t repeat itself, you’re nuts. In fact, 10 years ago this month, Long Term Capital Management, a huge hedge fund, nearly caused a global financial collapse. Yet here we are — with the same words being thrown around. Does anyone really think investment bankers won’t make their same salaries at some point in the future? Or that we won’t gradually move back to huge executive compensation? Still, as I pointed out last week, none of that really matters to the individual investor. What matters is picking the right strategy and sticking to it.

4. What We Can Learn From Warren Buffett
Huge, long Warren Buffett interview. He is the man. Read this. It teaches you so much about long-term investing and admitting what you know — and don’t know. Note: I just ordered this new book on Warren Buffett.

5. Should You Buy More? Sell More? Something???!
“Should I withdraw money from my 401(k)?” After 10 people sent me this link, I knew I had to check it out. In the article, 24-year old Bodie Partsch worries about the economy and contemplates withdrawing money from his retirement account, saying, “I could have the money sitting in a jar on my kitchen counter. It’d be safer than in my 401(k),” he said. BAD MOVE! Here’s a quote from my upcoming book:

Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

Now, if only we could know the best investing days ahead of time.

But, of course, you can’t. Trying to time the market is for fools. So you keep investing carefully and methodically, while spending as consciously as possible.

I’ll also add this link from JLP: It looks like Market Turmoil is Scaring Off Young Investors, where he notes:

Isn’t it crazy how we do the exact opposite of what we should be doing? If the stock market was going up, up, UP, people would be jumping in left and right—essentially buying over-priced stocks. Now that the market is on a downswing, people are sitting on the sidelines.

6. Cool Data Visualizations of The Economy
The New York Times does extraordinary data visualizations to give you a fresh perspective on the news. Check out What Your Global Neighbors Are Buying and A Year of Heavy Losses. From the first one:

How people spend their discretionary income – the cash that goes to clothing, electronics, recreation, household goods, alcohol – depends a lot on where they live. People in Greece spend almost 13 times more money on clothing as they do on electronics. People living in Japan spend more on recreation than they do on clothing, electronics and household goods combined. Americans spend a lot of money on everything.

7. Q&A: What’s Actually Going On With the Bailout?
If you don’t understand exactly what’s going on, that’s because nobody does. But there are some excellent overviews of the financial situation floating around. I like this one by Suze Orman, where she tells people the following:

• What to do with $100,000 in debt and a $39k/year job.
• The huge mistake first-time homebuyers make. (Hint: A $1,500 rent is not the same as a $1,500 mortgage.)
• What to do when your mutual fund’s account value drops from $120,000 to $88,000.
• Should you stick with stock funds in this tumultuous environment?
• How to buy a car (I disagree with her on this one).

I also like this overview by NY Times Columnist David Leonhardt. If you like audio, check out this excellent program from This American Life. Finally, last week I linked to this excellent explanation of the market crisis on the Freakonomics blog.

8. What Gmail Has To Do With Your Money
I’ve been thinking about this post on a tech blog recently. It shows the early sketches/designs of Gmail, and what you realize from looking at them is that we only see the finished result — not the sausage-making in the back room. The same is true of rich people: We hear about people going on $50,000 honeymoons or driving brand-new Mercedes, but we don’t see the hard work behind it. This is an important concept that’s being more revealed with today’s economy: Many of the people who drove the expensive cars and bought the expensive houses couldn’t afford it. The people who were quietly accumulating wealth will do much better. Read more about this in one of my favorite personal-finance books, The Millionaire Next Door. (Btw, if you haven’t bought a couple good finance books recently — or anything that will help you turn your income into more money so you can hit your goals — please read this.)

9. Don’t Let Your Friends Be Morons
Don’t let your friends be idiots. If you read this site, chances are you understand that having 20, 30, or 40 years before you need your money gives you plenty of flexibility to invest for the long term, even with major or minor dips in the market. Yet with these terrifying headlines every day, it’s like people have become blind, yet highly literate zombies who wander aimlessly from one newspaper to another. Being dumb is not just focusing on the wrong things, it’s making poor financial decisions and then throwing up your hands and wondering why you don’t have enough money a few years later. If you own only one stock — especially if it’s your employer’s stock — then you are a fool. If you are going to buy a $1 million house with no research because you think it’s a good investment, you are a fool. If you don’t realize that your expensive, worthless mutual fund is costing you tens of thousands of dollars over your lifetime, you are a fool. Worry about the things you can control, not the headlines.

10. Get More Reading Material
Want more links? I keep my delicious bookmarks up to date every day, especially the section on finance.

I hope this helped. I’m thinking of doing a live video/webchat next week. What do you think? Would you attend?

0:00 — Why I started I Will Teach You To Be Rich (skip this if you’ve already heard it)

0:35 — Do young people really care about money?

1:10 — We feel guilty about our money

1:33 — What people do when they read iwillteachyoutoberich

2:00 — My favorite result when people read this blog

2:15 — What is rich?

2:20 — Can’t people just find this information by going to a bank? (This is where I crack up.)

2:45 — People who just read my site vs. people who take action

3:00 — How I scale iwillteachyoutoberich, monetization, and a little about PBwiki

3:55 — “The voice of 10,000″ to scale beyond just one person

4:50 — Why it’s more important to spread the word about personal finance than to make money right now

The “…American Journal of Psychiatry analysis of 21 studies showed that behavioral treatment helped people fall asleep nearly nine minutes sooner than sleep drugs. In other measures, sleep therapy worked just as well as drugs, but without any side effects.

The behavioral strategies for better sleep are deceptively simple, and that’s one reason why many people don’t believe they can make a difference [emphasis mine]. One of the most effective methods is stimulus control. This means not watching television, eating or reading in bed. Don’t go to bed until you are sleepy. Get up at the same time every day, and don’t nap during the day. If you are unable to sleep, get out of bed after 15 minutes and do something relaxing, but avoid stimulating activity and thoughts.

It may be hard to believe, but studies show these simple steps really do make a meaningful difference for people with sleep problems.”

Hmm, could managing your money be the same? If you have a friend who is paralyzed by inaction, maybe sending this to them will wake them up. (Note to new friend: Here’s the table of contents of all my past articles.)

This is nothing personal against you, because every personal finance author I’ve read says the same thing, but your advice is not for real people like me. The “spend less, save more” theory is great for singles or young married couples with no kids (and therefore, fewer attachments, expenses, etc.) I’m 30 years old, married, with two children. I make a very good wage for a 30-year old, but after a mortgage, two car payments, a wife who is a full-time student herself, daycare, and (many) other various utilities, activities, etc. there’s not much left for saving.

Granted, things will be better in a couple years when my wife is done with school and we’re back to being a dual income household. But all you personal finance gurus are people who have graduated from Stanford (or some other 1st tier school) and worked your way into a high paying, high end job. You represent about 0.01% of the population. Not that I hold that against you–I wish I had been that successful. But I need some other strategies to help me get my finances in order.

My response:

So what’s the alternative? Throw your hands up and say, ‘I give up — there’s nothing I can do’? Or are there small, systematic ways you can save more, invest more, earn more, and spend money in a conscious way?

I also pointed him to The Shrug Effect. He wrote back:

I think you miss my point. At no time did I resent your success and doubt that I ever could have done that. Had I had differing priorities in my younger days, I’m sure I would be in a much different position than I’m in now. But I chose to get married, have children, and support a wife’s dream of medical school, among other things.

[...]

My whole point, which you missed, was that most of the the personal finance articles available are not geared towards people in my situation.

Huh? I’m not the only personal-finance writer online — there are lots of other people who write about getting out of debt, frugality, etc. My response:

This is an interesting discussion so I’d like to continue on it for a minute, if it’s ok with you.

I understand your point, but I’ve seen thousands of articles about people in your situation. Few, very few articles, are geared towards young people who have everything together. Most of the articles are about how to get out of debt, how to spend less, etc.

I’m curious: Exactly what kind of advice are you looking for?

He didn’t respond, so I re-pinged him a couple days later. His final response:

After sitting on this a while, I realize that there isn’t really any advice I can be given. I want to–and do, for the most part–give my wife and kids whatever they want. Until I stop doing that, the whole saving more, spending less thing won’t work for me.

I think that’s very perceptive of him to realize that there isn’t really any advice he would listen to. Notice how at first he didn’t think any personal-finance advice was relevant for him (even though there are millions of articles online for every conceivable situation). Could the problem have been him, not the advice? Answer: Yes. So here are my thoughts.

1. If you don’t say no to things, your life is guided by external priorities, not your own.

• If you don’t say no at work, you’re going to be resentful of your workload
• If you don’t say no to going out all the time, it’s going to be tough to save money
• If you don’t say no to your family sometimes, you’re not going to be able to save, much less grow your money

2. Ordinary actions get ordinary results. Look around. Do you see many rich people around you? No, because they are behaving in predictably ordinary ways: Not knowing how much they spend, not being conscious about where their money goes, and not setting investing goals. Want an easy way to see this? Go ask your friends who just went on vacation (or bought a new handbag or iPhone or whatever) this: “Wow, that’s awesome. How long did you save to be able to buy that?” Their reaction will be priceless, as if the antagonist from Saw II is holding their head in a vise and ordering them to look at the moon while opening their mouth. Try it.

As always, there are no secrets to personal finance. Fundamentally, you can either cut costs or make more money. When I say that, people roll their eyes, but they fail to dig into each part. Cut costs? That means saying no. That means being merciless with budgeting and negotiating and making smart purchases for the long term. Make more money? That means entrepreneurship, working two jobs, or asking for a raise.

The whole point of this site is that getting rich doesn’t happen to you. You make it happen. Until you step up, nothing will change.

Don’t miss my next post

• Get notified of new posts by email
• RSS feed
• My newsletter:
  

Now for the most part all of that money will be used to do things like pay rent, and buy groceries, but when I’ve calculated it out, there’s around $1000 left per semester minimum, and more if I can be frugal about how I spend it.

My questions was, do you think it would be smart to turn around and pay off part of my loans with the extra cash, or could you recommend me a direction to maybe take this extra money that I have, and invest it to make a return? I know right now that I could either drop it in my ING savings account which is at 4.5% or put it into a money market account at my bank which is about 4.5% also. Other than that I wouldn’t know where to begin.

The problem with investing money in the short term is that it’s dumb. Sure, you could make a few percentage points — or you could lose most of it. Short-term volatility is very high, while time (and good investing choices with low fees) smooth out short-term volatility. As I’ve written before, time pressure=bad decisions. For example, I remember when I was a sophomore, we hosted this prospective freshman in our room for Admit Weekend. This guy left our room with a single decree: “Guys,” he said, “I’m not coming back until I hook up with a hot girl tonight.” My roommate and I looked at each other and laughed and laughed. Then we told him to just pack his stuff and take it with him — he wouldn’t be coming back, and it was nice to meet him. When he sheepishly came back around 3am, alone, I believe that moment of happiness will rival even the birth of my children. Setting a rapid timetable for getting ass, it turns out, is difficult.

Back to student loans. Do you want to invest your student-loan money for the possibility of making just $7.50/month (9% returns) but possibly losing some/most/all of it in the short-term? “But Ramit,” you might say, “I’ll just invest it in something safe so I can’t lose it.” Lower risk = lower rewards, so if you invest it in a safe government bond, you’ll earn about 5% — basically your savings rate. You need time and more capital to grow your money, not $1,000 and a few months. That’s the domain of get-rich-quick quacks, something I hate. Remember, the first thing I ask when someone wants to know about investing is, “When do you need this money?”

Ultimately, it comes down to risk and reward. This is why I find those 0% credit-card games so moronic. These are the ones where people get 0% interest money from their credit cards and transfer it around to earn interest on relatively large sums of money. Sure, you can make a hundred bucks a year, or maybe even a few hundred, but the risks of time, mismanaging the process, and screwing up your credit score just aren’t worth it to me. Plus, I’d rather do something useful and sustainable instead of spending a year getting $200 band-aid.

If it were a college student and I had some money left over from my student-loan account, I’d put it in a high-yield savings account like ING or HSBC and let it get about 4.5%. (Note that this would earn you about $4/month in interest, just about enough to buy Sisqo’s greatest hits on iTunes.) Separately, the most profitable thing I could do would be to learn about investing, asset allocation, and building an infrastructure to manage my personal finances.

The basic messages here are:
Risk and reward. Before you get overly excited about something, ask yourself if it’s worth it. You might make $200 in a year, with the possibility of messing up your credit for doing those stupid balance-transfer games? Not worth it.
Sexy vs. rich: Making it sustaintable. Are you building a long-term infrastructure or are you doing something short-term and dumb to distract yourself from the hard work of learning about real banking, budgeting, saving, and investing? Do you have a savings account? A Roth IRA? An investment account with proper asset allocation? Have you bought even one personal-finance book? (Here are 50 books I recommend.)

Learning and building a system may not seem as sexy as INVESTING IN DERIVATIVES AND SHORT-TERM SECURITIES!!!!11*#! but it’ll damn sure make you richer over the long term.