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

Save hundreds and get a last-minute holiday gift. I’ve recently added new premium tips to The Scrooge Strategy to help you save money, including:

• How to save $940 on domestic flights
• Using cognitive dissonance to force yourself to save money,
• Specific phone calls to make once/year to save hundreds

…and lots more. Sign up for a 1-month free trial at The Scrooge Strategy.

Once-a-year gift: Sign up by December 24th, 2009, and you’ll get a free gift Scrooge Strategy subscription to give to a friend, including proven tips to save, earn more, and optimize spending on day-to-day purchases.

1. Sign up for Scrooge Strategy
2. You’ll receive an email with instructions on adding a complimentary subscription for a friend. As long as you’re a member, they’ll stay a complimentary member. They’ll receive their subscription on Christmas day.

“Making decisions is energy-consuming. Subjects who use their willpower to eat healthy radishes instead of the available and sumptuous chocolates are less likely to persist in solving unsolvable puzzles. Subjects who are told to suppress emotional reactions to a movie are less able to solve solvable anagrams. We have a limited amount of decision-making power to allocate on a moment to moment basis. That is why developing small but healthy habits that over time will become automatic is so money.”

From Iterating Towards Thinking Less (thx Ben)

Jared Goralnick: 20 questions your overwhelmed friends are afraid of, a spinoff of my 20 questions your financially unprepared friends are afraid of. Jared’s blog is a hidden gem on productivity and conscious action.

You make $50,000/year? That’s actually about $2,900 per month after taxes. This is one of the simplest, best articles I’ve found on the hidden costs of living that most people never consider (then wonder why they can never get ahead).
From Things I wish I’d been told

“She told me to write a letter. I did, and the supervisor agreed to shave $300 off our rent — saving us $3,600 this year. Here’s the letter I wrote.”

WSJ Wallet Blog: How to reduce your rent

“You see Ramit likes to focus on saving money where it really counts. He focuses on the big things in life that we waste money on rather than toiling away for three hours to save $4. I spent less than 30 minutes on the phone and saved $175.89. Much better than the money I saved at CVS yesterday.”

From My No Debt Plan

How I’m saving $25,000 in 2009. What to do when you make major purchases, keeping account information in one place, negotiating down service providers (cable, cellphone) once per year, working on side projects, setting up sub-savings accounts.

Use gas prices to become your own hedge fund. One of my favorite tips of all: setting up sub-savings accounts to save money for specific things (down payment, vacation, etc). I show you how with screenshots.

Stop being a loser and spend money to make money. You can’t out-frugal your way to being rich, and life isn’t just about cutting costs. Think of your personal finances like a business, where it’s sometimes ok to spend $10 to make $20. I’ll show you examples in this post.

Sometimes, you just need to make more money. The importance of side projects, second jobs, and other ways to make money. You can’t out-frugal your way to rich! Here’s how to become a freelancer/consultant.

Money Diaries: The spoiled 20-something used to living beyond his means. Part of The Money Diaries series, where real people write about their actual spending over 7 days. Oddly voyeuristic.

How to negotiate your car insurance (highly tactical tips). Includes phone numbers, websites, and an actual call script to use once you reach your insurance company. People saved hundreds with this tip alone.

Save thousands by pre-paying your debt. By paying an extra $100/month towards your debt now, you can save thousands over the long term. We tend to ignore this, since the “long term” represents phantom costs, but thousands of dollars later for a small change now is often well worth it. Includes charts and illustrations.

Optimize your cellphone bill. Simple, fast, and it works.

See more tips on the Save $1,000 in 30 Days Challenge page (scroll down for the tips).

Btw, for premium savings tips, check out something I launched: The Scrooge Strategy.

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?

• Sam Stovall: “Since 1950 we have had 48 pullbacks – meaning declines of 5 – 10%. We’ve had 18 corrections – meaning 10- 20%, and 8 bear markets. At the worst on average we end up getting back to normal in about 3 1/2 years. But people just don’t want to wait that long and they let fear overtake their emotions.”
• How much does a beer cost in Zimbabwe?
• “I cannot believe how a family of seven with children ages 10 through 21 are able to pull off living on an annual budget of $35,000.” Read more at 8 Lessons I Learned from the Cheapest Family in the Nation. Hands-down, the best book on this is The Millionaire Next Door.
• The sky is falling! Predictions for 2008 that are alarmist and have no specifics. Note the last paragraphs where he refuses to give specific predictions. Also (I call this a Kooky Alert), notice how Chicken Little people who predict doom and gloom always argue for the gold standard.
• What to do if you receive a large windfall (and what others did). Here’s what I do.

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