The $28,000 question: Why are we all hypocrites about weddings?

August 14 152 Comments latest by Beth

On Saturday night, I was out with some friends, including one who’s planning her wedding for next August. I’ve had a bunch of family weddings in the last few months, so I suggested she check out a nearby stationery store for her invitations. “It’s really expensive, like $14 per invitation. But at least you can get some ideas for design.”

She looked at me and, without a hint of arrogance, said, “Oh, I’ll check it out. I actually talked to my family and we have an unlimited budget for the wedding.” With one sentence, I was rendered speechless. She didn’t brag. She just said it matter-of-factly: Her wedding could cost anything and it was ok.

She comes from a very wealthy family, so this isn’t such an unusual thing. What is unusual, however, is that so many people will scoff at the above story — and then proceed to spend ungodly amounts on large purchases like a new home or a wedding while steadfastly insisting how absurd “most” people are. Today, I want to write about how to plan for these large life events. But be prepared — you’re going to have to confront the hypocrisy that we all have when it comes to these purchases.

Of course your wedding will be simple
When my first sister called me to tell me that she’d gotten engaged earlier this year, I was out with my friends. I ordered champagne for everyone. When my other sister told me she was getting married a few months later, I told all my friends again. Then I found out they were having an East coast wedding and a West coast wedding — each — for a total of four weddings in a few months. I ordered a round of cyanide and made mine a double.

That’s what got me started thinking about weddings recently. The average American wedding costs almost $28,000, which, the Wall Street Journal notes, is “well over half the median annual income in U.S. households.” Hold on: just wait a second before you start rolling your eyes. It’s easy to say, “These people should just realize a wedding is about having a special day, not about putting yourselves in crippling debt.”

But guess what? When it’s your wedding, you’re going to want everything to be perfect. Yes, you. So will I. It’ll be your special day, so why not spend some extra money to get the extra-long roses or the filet mignon?

My point isn’t to judge people for having expensive weddings. Quite the opposite: The very same people who spend $28,000 on their weddings are the ones who, a few years earlier, said the same thing you’re saying right now: “I just want a simple wedding. It’s ridiculous to go into debt for just one day.” And yet, little by little, they spend more than they had planned — more than they can afford — on their special day. Why is that?

The spending for weddings increases year after year. Yet we insist that we will be different: Of course we won’t spend that much. Of course we’ll have a budget. Of course we’ll have a small simple wedding. Sure we will.

So what should we do?
So knowing the astonishingly high costs of weddings, what can we do?

I see three choices:

Cut costs and have a simpler wedding. Most people, frankly, are not discplined enough to do this. I don’t say this pejoratively, but statistically: Most people will have a wedding that costs tens of thousands of dollars. (If you want to debate the difference between the average or median amount, see here or below for a simulated wedding budget.)

Do nothing and figure it out later. Most people do this. I spoke to a recently married person I know who spent the last 8 months planning her wedding, which became a very expensive day. Now, months later, he and his wife don’t know how to deal with the debt resulting from the wedding. If you do this, you are a moron. But you are in good company since almost everybody else does it, too.

Budget and plan for the wedding. Ask 10 people which of these choices they’ll do, and every single one of them will pick this one. Then ask them how much money they’re saving every month for their wedding (whether they’re engaged or not). I guarantee the sputtering and silence will be worth it. (Leave a comment describing what happens!) This is a great idea in theory, but is almost never followed in practice.

We actually have all the information we need: The average age at marriage is about 27 for men and 26 for women. We know that the average amount of a wedding is about $28,000. So, if you agree with this choice — and you don’t want to go into debt for your wedding — here’s how much you should be saving (RSS readers, click here):

Most of us haven’t even thought about saving this amount for our weddings. Why not? What do we do instead?

We say things like,

• “Wow, that’s a lot. There’s no way I can save that. Maybe my parents will help…”
• “My wedding won’t be like that. It’ll be simple and elegant”
• “I’ll think about it when I get engaged”
• “Luckily, I won’t have to pay for it.” (Who will? Is your future spouse thinking like this?)
• “I have to marry a rich guy” (I’ve heard people say this and and they were only half-joking)

More commonly, though, we don’t think about this at all: one of the most major expenditures of our lifetimes, which will almost certainly arrive in the next few years, and we don’t even sit down for 10 minutes to think about it. Something’s broken here.

Here’s a sample expense sheet of a wedding. Try playing around with it (RSS readers, click here):

(Figures taken from my dad, recent wedding-planning expert, and partially combined with these figures and these figures.)

Note how changing the amount of guests doesn’t really change the cost very much: Reducing the headcount 50% only reduces the cost 15%. Creating a simple, affordable wedding, it turns out, is surprisingly hard.

It’s not just weddings
Weddings are just one example. We don’t plan out our largest expenses, like houses, cars, and even kids. This is what I call conscious spending but, honestly, it’s much easier to simply ignore these looming purchases and think about them later.

The problem is, if you don’t plan ahead, it becomes much, much more expensive. From the example above, a 25-year old who starts saving for his wedding will have to save 3.5 times the monthly amount a 20-year old will. The alternative is to simply finance it, which makes it even more expensive because of interest. This is especially true of long-term loans for houses.

Some recommendations
1. Be realistic. Even though you’re reading personal-finance blogs like iwillteachyoutoberich and are probably better at your finances than 99% of other people, you’re still human. Your wedding (and mine) will be more expensive than we plan. The head-in-the-sand approach, however, is the worst thing we can do. Sit down and make a realistic budget of how much your big purchases will cost you in the next ten years. Do it on a napkin — it doesn’t have to be perfect! Just spend 20 minutes and see what you come up with.

2. Set up an automatic savings plan. Since the last recommendation to make a budget was completely unrealistic and almost nobody will do it, I suggest just taking a shortcut and setting up an automatic savings plan. Assume you’ll spend $25,000 on your wedding, $20,000 on a car, and (however much) on a down payment for a house. “But Ramit,” you might say in an annoying perfectionist voice, “that’s almost $3,000 per month. I can’t afford that!” Can you afford $300? If so, that’s $300 better than you were doing yesterday. Now that you’ve read this, your preparation — or debt — is a choice.

3. You can’t have the best of everything, so use the P word. Prioritization is such an important concept. Like I said, it’s human nature to want the best for our wedding day or first house, and we need to be realistic about acknowledging that. With that said, we simply can’t have the best of everything. Do you want the better food or an open bar at your wedding? If you have the costs on paper, you’ll know exactly which tradeoffs you can make to keep within your budget. If you haven’t written anything down, there will appear to be no tradeoffs necessary. And that’s how people get into staggering amounts of debt. For the things you de-prioritize, beg, borrow, and steal to save money: Use a public park instead of a ballroom, ask your baker friend to make the cake, and ask relatives to help with cleanup. This is where, if you plan ahead, time can take the place of money.

Ideally, you do #1 (simplify) and #3 (plan). But even if you can’t simplify, at least you can plan.

The result — and what to do today
Today, sit down and plan out the major purchases you’ll have in the next ten years — whether or not you’re engaged or have any plans to buy a house soon. This is really important: Planning before you need to separates rich people from everyone else. Plan out how much you’ll reasonably need. Plan out how much you can save. Then go into your savings account and set up an automatic deposit plan. (If you want a $25 ING referral, send me an email.) Starting tomorrow, your savings account should have virtual buckets of money for upcoming items (e.g., 30% for your down payment, 25% for your wedding…).

The result: A wedding where you know all the costs and prioritize for what’s important for you. A wedding where, the day after, you’re debt-free and can start your lives together. And the ability to control your spending, instead of having it control you. Sort of like the point of this entire site.

I’ll write more about the logistics setting up automatic savings plan in my upcoming book, I Will Teach You To Be Rich. To get early excerpts and the chance to be featured in the book, sign up for my free newsletter (sample newsletter here):

If this is your first time to iwillteachyoutoberich.com, the blog on personal finance and entrepreneurship, here’s a quick guide to get started.

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152 Comments latest by Beth

Chicken Little and Kooks Who Don’t Know What They’re Talking About

February 28 49 Comments latest by Vijay Bhatter

This post is long, but there are emails and comments from a bunch of nuts that I pasted, so don’t be intimidated. Today I threw all pedagogical goals out the window. My goal is instead to have you shaking your head saying “what the hell?” by the end of this.

See, every single day I write on here, I try my hardest to communicate the idea that personal finance is not very hard to get started with. There are a few strategies that time and research have proven work for making money. Yes, there are endless strategies to optimize, but for most of us, they’re irrelevant: The largest, most important problems are that we don’t get started early enough and we’re not disciplined enough. Unfortunately, that message isn’t sexy enough to sell magazines or satisfy kooks who want to wring their hands about the current state of affairs. As a result, we see people confusing global geopolitics with personal finance. They worry about how the oil shortage in Chechnya (or whatever) will affect the currency crisis that will affect their country’s immigration policy that will affect the unemployment numbers that, somehow, will affect the amount of money they’re able to save.

I hear these kooky tales and they infuriate me. Today made me rise out of my PBwiki cave and write this because we have half the financial pundits on TV freaking out about yesterday’s drop in the stock market.

Minor stock-market drops like this amuse me because we see these crazies come out in full force. On the Reddit page describing yesterday’s stock-market decline, for example, we see some very good comments (towards the top) and then many idiotic ones like these:

• “The 10% return myth is nothing but Wall Street propaganda”
• “500 points on teh dow in one day is a big deal. If that continutes for 1-3 more days it will melt down”
• “Equities only got really good returns when most people were scared of them”
• “The real history of US equities is just that there were three really big bull markets: in the 20s, in the 60s, and in the 80s/90s. Outside of those periods broadly investing in stocks has been a lousy plan, and for most of the 19th century it got you soaked.”

Here’s a tip: If someone starts using words that sound really big combined with accusing somebody of a Very Large Conspiracy, chances are they don’t know what they’re talking about. Also, you’ll notice that kooks use qualifying words like “broadly” and “in general” and “melt down” (what does that mean, exactly?). It’s hard to be wrong when you can’t be pinned down.

I have a serious problem with people using wide-eyed, handwavy geopolitical logic to explain what’s going to happen with their money. But one thing these short-sighted pundits forget to remember is that a market goes up and it goes down. YESTERDAY IT WENT DOWN. ALL DATA WE HAVE INDICATES IT WILL GO UP SOMETIME SOON.

* * *

A couple months ago, a friend of mine called me and started telling me about her personal finances. This girl goes to a Very Good Law School, so don’t dismiss her for being unintelligent. But I couldn’t help but feel rage as she started telling me the following things:

• ”I’m not going to invest in the stock market because it’s not safe. The current crisis means our money will be worth less and less every day. When you factor in the immigration crisis, it’s virtually untenable.” I have to give her credit, though: It was a good use of the word “untenable.”
• ”I really want to start my own company doing something I love. I think entrepreneurship is safer than investing.”
• ”I want to stop working in 5 years and support my family financially (even though I’ll stay at home to raise the kids). So I have to start something successful.”
• ”I don’t think 401(k)s are the way to go because there is a lot of risk and you can’t control your choices.”

We see someone here who doesn’t really know what she’s talking about. She’s not stupid, just misinformed. I told her that, too. These are not the reasonable conclusions of someone who’s informed about personal finance, but someone who’s cobbled together a shaky theoretical framework that ties personal finance, global politics, and entrepreneurship together. I wanted to die.

I probed a little bit. “Where did you learn this stuff?” I asked. She hemmed and hawed and finally said that she’d read “part of” Donald Trump and Robert Kiyosaki’s book (read some thoughts on the book here).

This made me so mad. Here we have someone who’s getting bad information—and then, only reading part of the book—and not comparing it to any information. While she was misinformed, she needs to take some responsibility for actually learning this stuff. Think how much time we spend on things like our email, our problem sets, or even reading US Weekly. Then think how much time we spend seriously learning about personal finances. Which affects us more? Which one will you complain about more for the rest of your life?

I was doubly frustrated that she was using one book as her gospel. Listen, if you use one place as your only source of information, you are a moron. I don’t care if it’s iwillteachyoutoberich or the Wall Street Journal. One source is not enough. You need to be reading multiple, research-based sources so you can compare what is actually happening, not just discussion groups on the Internet where people share their opinions about what’s going on.

If you do read sources that only confirm each other, you get something like this. Here’s an email I got recently that just blew my mind. This iwillteachyoutoberich reader uses the shakiest logic I have ever seen to paint the most dire picture of personal finances in America. Take a look:

“The blogs on personal finance have exploded since then. Good way to tell we’re at the cusp of a serious recession now, not that half-asssed one when the stock market dot-bombed.

Of course, that mini-recession hurt me badly, because there was a state budget crisis nationwide and I work in government. I couldn’t find a job. I’m working now so I guess I’m better off now than I was then. So, we’ll see.”

This is all I asked:

“Why do you think we’re coming up on a recession?”

And the handwaviness began:

“The housing bubble peaked in mid-2005, and construction jobs are dropping. The government picked up some of the slack in the 2000-2005 period by hiring people in defense, and of course many of the construction workers were illegals who are now leaving in droves. So unemployment isn’t bad right now. What’s on the horizon now is weaker consumer spending because the HELOC ATM is closed for business. Also, as the subprime lenders fail, a lot of money in the system is starting to vanish.

Loans are on the books for much more than the house (asset) is worth, especially in today’s dead housing market (huge inventories from overbuilding, houses spend months on the market). Debt was sold and resold, leading to a chain of insolvency that could bring us back to an S&L crisis type disaster. Check out the Mortgage Lender
Implode-o-Meter:

http://ml-implode.com/

Also, we have an inverted yield curve and the dollar has lost a lot of value in the last two years. This by itself doesn’t mean much but it could lead to government actions with a recessionary outcome–or (as many fear) stagflation.

With any recession, not all sectors are affected, and, from my reading about the Great Depression, even in a deflationary era those who were accustomed to hustling for their living–artists, musicians, insurance salesmen–continued to make a living, while those who expected a job to just be there for them ended up destitute.

Right now the warning signs are all in place, and the housing bust is beginning its drunken walk to the bottom. Vast amounts of wealth, as held in RE, are vanishing. Prices of certain commodities are dropping (=weak building/production/jobs outlook), while the price of food, which everyone needs to buy, is looking to go up, which will squeeze out the market for everything else.

Look at Ford. Look at SoCal real estate. Interesting times are ahead…”

I asked this:

“Out of curiosity, do you have any specific, measurable factors that you predict? Something you could be held to in 3 months, 6 months, etc?”

The response:

“Wow, put my money where my mouth is? Well, I’m not an economist, and I’m relying on other people’s analysis. I expect that this coming spring real estate season is going to be very painful for a lot of people, with the median sale price finally dropping as the cash-back lending scam is exposed to the light of day. (It’s already being exposed in AZ, which had one of the worst bubbles in the country in Phoenix.) But this is all old news–my mother tells me that home valuations in Massachusetts are already at 1997 levels.

In six months? Seriously, that is so short term. A lot could happen depending on whether Bernanke raises or lowers the Fed rate in the short term. Also, many major players are continuing to prop up the dollar. Japan wants a strong dollar so they can sell Sony and Toyota products, China wants a pegged dollars so they can sell cheap crap, and even Germany has a vested interest in a strongish dollar (look at where their trade surplus is coming from). Central banks won’t be able to keep this house of cards up forever, but they should be able to manage the next 6 months. So far (last year), there were some times went the dollar softened a lot, and certain central banks rushed in to prop it up. Hence the dollar see-saw.

Here is a pretty hard-and-fast prediction: food prices are going up. Wheat production has dropped in favor of corn for ethanol, there was a freeze in California and a freeze is coming Florida, ravaging vegetable crops. In the mean time, with the savings rate flat instead of negative, as HELOCs go away, there are going to be a lot of Americans who look at the high price of eating out and just say no (or seek bargains). Some restaurant chains (eg Don Pablo’s) are already in trouble; I expect more to be in trouble in 6 months as higher food costs (traditionally the cheapest part of the equation), and increasing wage demands run smack into lighter wallets. Middle class, keep-up-with-the-Joneses America is being squeezed here. Just look at the woes of Target last year. Look at 2006 holiday shopping (flat, YOY). Multiple middle/upper middle chains are in trouble; discount chains are also in trouble. High end had a great year, with all the huge profits from hedge funds and private capital lbo’s (legal thievery) and huge bonuses on Wall Street.

Some expect Toyota, Honda and other Japanese car makers to do well this year because foreigners do not like the new Japanese gov’t and are discounting the yen as a result. I don’t really know much about this, though.

Wall street: insiders say that everyone is in lalala denial mode, trying to get another quarter or year of profit before the shit hits the fan. For example, Bernanke right now has the power to unleash a bloodbath in the bond market (which is in bubble mode), but so far has hung back… However, that may be out of his hands by the time 2007 is over if Congress becomes deeply involved in credit tightening due to failed banks and Joe Sixpack anger over liar loans, suicide loans, rising ARMs, etc.

The stock market is a sleeping Cthulhu right now. Everyone is hoping that nothing will wake it. Many pin their hopes on high inflation, which will keep nominal values high even if true values plummet. Since there are contrary indicators out there (both inflationary and deflationary), but a strong gov’t bias towards inflation (helps the taxman and reduces the debt), betting on high inflation is probably the most rational course of action.”

By this point I was mentally exhausted.

“Ok–thanks for clarifying. I completely disagree but I was/am very curious to hear your reasoning, so I appreciate your thoughts.”

Her final response:

“They say that optimists do better in the end (in investing and in life), and your real asset is your entrepreneurial skills, not whatever stocks you own. For you, dumping money in a cheap index and forgetting about it will probably be fine because your earning power will only grow with time.

As for myself, I have lousy networking/leadership skills and I work in local gov’t which doesn’t pay so well (but the bennies are okay). I have inherited money which I need to preserve and grow to ensure I have a decent retirement (as traditional pension plans are in big trouble these days). I have a more pessimistic outlook anyway, hence
the extreme risk aversion.

Worries about the US stock market were keeping me up at night, so I had to do something. You have to do what works for you.

PS–I know I sound like a granny but I’m only 27.”

Ok…take a deep breath.

Can you imagine me saying something like that at work? “Hey guys,” I might say, “I really think the color blue makes people upgrade more often. No, seriously. You look at the sky and note the reflections of the moon off the ocean and the thousands of years of the Egyptian pyramid-makers causing sand to be blown hundreds of feet in the air, and you can understand that the long-term consequences make us cognitively wired to respond to the color blue. So I think we should make our upgrade text blue.” If I ever said that, David and Nathan, the other two PBwiki co-founders, would just put their hands in their pockets, stare at me, and blink. Then I would immediately commit seppuku in front of them.

PLEASE STOP MAKING STUPID GRAND GEOPOLITICAL ANALYSES THAT YOU THINK WILL AFFECT YOUR MONEY. PLEASE!!!

There are more important things to worry about. Are you saving enough? I’m willing to bet $100 right now that the people who make these handwavy arguments haven’t maxed out their retirement accounts, properly allocated their portfolio, and diversified. In fact, I bet these arguments are simply a misguided excuse to do nothing.

There is a simple way to point this out: ask them what they’re doing instead. This is where two things will happen: First, they will start talking about grandiose “alternative investments” like hedge funds, commercial real estate, and venture capital. Second, when you point out that most people can’t invest in hedge funds and venture capital, and that the stock market generally returns better than some of their other asset classes (“municipal bonds!!!”), they will start stuttering. Oh, there’s a third thing. You will want to kill yourself.

The people who make these kind of broad, sweeping statements (”The looming currency crisis will render retirement accounts worthless!!!”) are so far off base that I don’t even try to educate them. But they’re dangerous because they know enough buzzwords to convince novices that they might possibly be right–so, of course, they better hoard their money and do nothing because it’s too unsafe to invest!!!

If there’s one thing I really hate, it’s people taking advantage of others financially. (As a sidenote, there are over 30,000 words of Things I Hate on my other blog.) In any case, this post today is a plea to you: If you hear this kind of stupid, kooky reasoning from someone, call them out on it. If they think investing is so risky, what are they doing instead? What evidence do they have that their strategy will work? How do they explain away the last 70+ years of success in the stock market? What about the benefits of tax-free and tax-deferred growth (i.e., through Roth IRAs and 401(k)s?). How about the thousands of peer-reviewed research articles and hard data supporting sensible, long-term investing? Press them hard and watch their arguments fall apart. And remember: You can worry about the world’s political situation and the commodity price of salt in Hong Kong, or you can be constructively concerned with how to maximize your savings rate, how to live below your means, and how to invest for long-term growth to achieve your goals. Which one is more manageable?

Related:

• Oh my god! A “global correction” is underway!
• The worst financial advice from around the web

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49 Comments latest by Vijay Bhatter

Conscious spending: How my friend spends $21,000/year on going out

January 24 99 Comments latest by brooklynchick

A few weeks ago, a couple of friends and I were talking about where we want to travel this year, and one of them said something that surprised me. “You probably wouldn’t approve, but I want to go to the Caribbean this year.”

Huh? Why wouldn’t I approve?

I thought about this in a pensive stare for many moments, taking the form of Rodin’s Thinking Man and wishing that I had a pipe and perhaps a tweed jacket. Then I figured it out. Apparently, I’m the personal-finance guy to some people. And, I realized with a sinking feeling, to many people, “the personal-finance guy” means “the guy who tells me I can’t do stuff because it costs too much money.”

Nothing could be further from the truth. Now, I will call your ass out when you’re being stupid about money. But I’m not the finger-wagging parent who tells you not to spend money on lattes. Instead of taking a simplistic “don’t spend money on expensive things!!!” view, I believe there’s a nuanced approach to spending. Today, I’m going to tell you about 3 friends who are spending lots and lots of money on things you might consider frivolous–like shoes and going out–but I’m going to tell you exactly why I think they’re perfectly justified.

But first, let’s talk about a couple of things.

Frugality. There are plenty of blogs on frugality. This is not one of them. I think you can have lots of fun debating the minutiae about which grain of rice is cheaper, but it doesn’t really get you much further towards your goals. Also, most Americans are not brought up with the idea of frugality. I’ve been in a car with friends who were so hungry that they had to pull over and get food even though we were only 5 minutes from home.

For me, writing a blog on frugality would be like trying to convince an ankylosaurus to dance a god damn jig. As a result, I don’t believe that frugality is very sustainable for a lot of people. Yes, maybe we’ll stop buying those lattes (or whatever), but something else will take its place. In my opinion, unless there’s a fundamental mindset from a young age, it’s hard to change the I-want-it-now habits. Whether you agree with me or not, that’s why I don’t write a blog based on where to find the cheapest laundry detergent.

Finally, and this is the most important, frugality alone doesn’t get you to your goals. It’s a helpful but not sufficient condition. So I take another approach of trying to write about money holistically, while urging you to make your own decisions about what’s important enough to spend a lot on, and what’s not.

2007 is the year of conscious spending. THE PROBLEM IS HARDLY ANYONE IS DECIDING WHAT’S IMPORTANT AND WHAT’S NOT! DAMNIT! That’s why 2007 is the year of conscious spending, in which I want you to consciously decide what you’re going to spend on. No more “I guess I spent that much” when you see your credit card statements.

No. Conscious spending means you decide exactly where you’re going to spend your money–for going out, for saving, for investing, for rent–and you free yourself from feeling guilty about your spending. Along with making you feel comfortable with your spending, a plan lets you continue growing towards your goals instead of just treading water.

The simple fact is that as young people, most of us are not spending consciously. We’re spending on whatever, then reactively feeling good or bad about it. Every time I meet someone who has a prescriptive budget (aka, “Here’s how much I want to spend on X this month), I’m so enchanted that my love rivals Shah Jahan’s for his wife Mumtaz Mahal (look it up).

Today I’m going to write about people who spend a lot on things that most people consider absurd. This article is not a rationalization for absurd spending habits. PLEASE. If you walk away from this article with your hands triumphantly over your head saying “I’M PERFECT!!!” then you are a moron and your parents are probably very sad. But if you look at the idea of conscious spending–of people who have paid themselves first, then used the money they have left over to do what they want with it–then your parents will be very happy and probably live longer. Man, I can’t believe I just used your parents’ longevity to convince you to read.

Ok, let’s get to it.

My three friends

The shoe lover. My first friend is a girl who spends about $5,000/year on shoes. Since expensive shoes cost about $300-$500 each, this is around 10 or 15 shoes annually. “THAT’S RIDICULOUS!!!” you might be saying. And on the surface, that number is indeed large. But I think iwillteachyoutoberich readers can look a little deeper. This girl makes a very healthy six-figure salary. She has a roommate, eats for free at work, and doesn’t spend much on fancy electronics, gym, etc. In fact, her job provides many of the amenities other people pay for.

She loves shoes. A lot. And so, after funding her 401(k) and a taxable investment account (she makes too much for a Roth), she has money left over. Now here’s where it’s interesting. “But Ramit,” you might say, “it doesn’t matter. $500 shoes are ridiculous. Nobody needs to spend that much on shoes! You’re just saying it’s ok because…well, I don’t know. But it’s too much!!!”

I see eloquence does not reign rule today. But I want to take that statement apart. First, I bet most people who are astounded at the price of her shoes haven’t even done what she’s done. To the people who would criticize someone for spending $5,000/year on shoes: Have you funded your 401(k) and started outside investment accounts? Do you keep a strict budget of how much you spend? Second, when you have extra money lying around (extra = after reasonably maxing out your investment options), what’s better: Making a strategic decision to spend on what you love? Or just spending it on random things here or there and eventually watching your money trickle out?

This girl loves shoes. And after planning for her long-term and short-term goals, she has money left over. This is why it’s so surprising that people pass judgment when they see others buying things like expensive shoes. This girl has her shit together. And I think she’s right on.

The partier. My second friend spends over $21,000/year going out. “OH MY GOD, THAT’S SO MUCH*#%(#%(#%!” a couple people said yesterday. Let’s break it down, though. Let’s say you go out 4x/week–to dinners and bars–and spend an average of $100/night. I’m being conservative with the numbers here, since a dinner can run $60/person and drinks could be $12 each. I’m not including bottle service, which might cost $800 or $1,000. (He lives in a big city.) That’s easily $400/week.

Now, this guy also makes a healthy six-figure salary, and he’s similarly invested quite a bit in his 401(k) and outside investments (including real estate). The key here is that he works such long hours that he’s only really free Friday and Saturday nights. And so he goes out. Hard.

In just a couple years, this guy has saved more than almost any of my friends. He’s also spent more on going out than anybody I know. And although $21,000 sounds outrageous on the surface, you have to take context into consideration. For example, look at his spending by percentage: Just for easy calculations, if we assume that this guy makes $210,000/year net, his going-out budget is roughly 10% of his income. For my friends who make $35,000/year, you can be damn sure that they’re spending more than $3,500/year ($67/week) on going out.

The subscription nut. The third friend is a tech guy who has a Tivo subscription, Rhapsody subscription, cable/Internet connection, gym membership, Netflix account, magazine subscriptions, and a couple of monthly online accounts. Now, when I wrote Guess How Much Your Subscriptions Cost?, the point was to highlight how we systematically discount the cumulative effect of our subscriptions. In other words, we forget to add them all up to see the total amount–which is usually a LOT. That’s why companies love, love, love subscriptions.

Anyway, I showed my friend my article, and he just shrugged. I started to get angry and use a line I’ve always wanted to use–”Do you know who I am?”–but he then explained that his subscriptions came out of his entertainment budget, which he’d carefully thought about and revised every few months. And, not surprisingly, he has a savings plan that is automatically deducted from his paycheck.

The point here is that, whether or not I agree with his subscriptions, he’d thought about it. He’d sat down, considered what he wanted to spend on, and was executing on a plan. That’s doing more than 99% of the young people I’ve talked to. Shit, if he had decided he wanted to spend $8,000/year on furry donkey costumes and Faberge eggs, that would have been great. At least he has a plan.

* * *

An analysis
I know a lot of people are going to start screaming at me for things they disagree with, so I want to try to take it step by step. Then you can send your criticisms to youarestupid!!!@iwillteachyoutoberich.com.

Most of us are not consciously thinking about our spending. By that, I mean we’re not being proactive about planning where our money should go. We’re going through our 20s doing whatever, and inferring our spending patterns from the bills we get at the end of the month. We not only lack a prescriptive budget (”I want to spend 20% on my retirement account, 10% on savings, 20% on going out…”), we even lack a descriptive budget (”where the hell is my money going?”). (More about budgets and asset allocation.) And so I completely understand the sickening feeling we get when we see our bills, or the guilty feeling we have when going out to a dinner with friends.

We’re also looking at surface characteristics and making stupid judgments. ‘You spent $300 on jeans!’ ‘Why do you shop at Whole Foods?’ ‘Why did you decide to live in that expensive area?’ I know we all wonder these things about our friends because I do, too. And, in fact, most of our judgments are right: Because young people are not carefully considering their financial choices in the context of their long-term goals–e.g., we’re not paying ourselves first and we’re not developing an investment/savings plan–when you think your friend can’t afford those $300 jeans, you’re probably right. I’ve tried to be less judgmental about this. I’m not always successful, but I’m trying to work on the fact that the sticker price doesn’t matter–it’s the context around it. You want to buy a $1,000 bottle of wine? And you already saved $50,000 this year at age 25? Great! But if your friends are going out four times a week on a $25,000 salary, I bet they’re not consciously spending.

The friends I wrote about above are an exception to most people our age.

They have a plan. Instead of frivolously spending money without a holistic goal, they took a few hours, wrote down where each % of every $ should go, and then built an infrastructure to do it automatically. They spend less time worrying about money than most people! These are people who already know about ING and their credit cards and basic asset allocation. They’re not experts, but they got started a while ago.

To me, this is an enviable position to be in, and it’s exactly what iwillteachyoutoberich is about: cutting costs on what you don’t care about, and spending extravagantly on the things you do. The problem is, we all want to have it now, so we make short-term decisions. We also use simplistic goals like “Oh, fine, no more lattes!” I hate when people say that, because (1) it’s usually thought of as a panacea, and (2) for the people who have to make that pledge, it’s usually such a part of their routine that hoping for long-term behavioral change is hopeless. What if I suggested that you could be doing what one of these friends are–spending whatever you planned without thinking twice–and it would make perfect financial sense? And you wouldn’t feel guilty about it?

I know that sounds good. But the catch is, there are no stupid, simple secrets like “no Starbucks.” You need to work to change your spending habits for a year, or maybe 2 or 3. Would you be prepared to work that long to get to a place where you knew exactly what you’re spending, and you could spend extravagantly on the things you value?

You can. It takes a plan. And it’s really as simple as that.

“But Ramit…”

“These people probably spend hours every day managing their money”
Nope. I asked them how much time they spent, and not surprisingly, it’s just a few hours a month. Two of them set up an automatic infrastructure so that money is automatically moved from one accout to another as paychecks come in. Once you set your infrastructure up, you’ll spend less time managing your money than most people do. And you’ll have more of it, too. The simplest way to do this is to set up a high-interest savings account (let me know if you want a $25 referral to ING — more about ING/setting up your accounts) and automatically deduct money from each paycheck.

“I’ll never make six figures in my early 20s”
THAT’S NOT THE POINT!! PLEASE DO ME A FAVOR AND DON’T GET CAUGHT IN THE DETAILS. That’s exactly what I wrote about in The Shrug Effect. Here are some better suggestions:

• Think about it by percentage (”what percentage of my income am I spending going out?”).
• Think about it in terms of goals (”how much do I need to save for a down payment on a house in 5 years?”).
• Just look at yourself and say, what am I already spending a huge amount on? And what would I really like to be spending on? A good way to do this is to say, If I had all the money in the world, what would I like to do? Then figure out how to do it. But remember, pay yourself first instead of just spending on things you want.

Still, there is some truth to what you said. If you’re making $40,000, your lifestyle is just going to be different than someone making $190,000. That’s just a fact. But whatever your income is, I guarantee you can live better on it by having a spending plan.

“Yesterday, you wrote that you just moved to San Francisco and you’re paying 2x the rent. Why would you do that? Shouldn’t you live beneath your means?”
Good question. I still am. In my 2007 resolutions post, I wrote that in 2007, I’ll make more, save more, and spend more than ever before this year. I created an asset allocation to save and invest more money (both in the stock market and in my own businesses), and then I looked at what I had left over. And I consciously decided that the higher rent, parking, eating costs, etc, was worth it.

One additional point is that money isn’t just here to be saved and scrimped and pinched. It’s here for us to enjoy. And I love living in SF. When you consciously spend, you can say “it’s worth it” after having actually considered the alternatives using numbers, not foofy emotions.

“I have identified a fatal flaw in your reasoning. Yes, your friends may have maxed out their 401(k)s, but they could still invest more. And since every dollar we save now is worth a lot later, your dumb friends are actually losing tons of money!! HAHA!!”
Touche. Yes, technically you could always save more. But when your money becomes oppressive to you, that’s when you stop respecting it. If I were saving 95% of everything I was earning and not enjoying any of it, would I really have an incentive to respect my own self-set goals? As someone commented earlier today, personal finance has a lot more to do with “personal” than with “finance.”

And so, as a personal example of my finances and decision-making for moving to SF, I definitely could have taken the extra money and put it towards more investments. But after making my asset allocation, I’m happy with how much money I’m putting away. I don’t want to blindly just save more and more with no good reason. Conscious spending is about putting your money in the best places that make the most sense for you.

* * *

I think the comments on this post are going to be very interesting. I want my major takeaway points to be very clear:

1. Conscious spending is about making a plan on how you want to spend your money.
2. Most of us are not spending consciously–we’re just spending whatever and then getting the bills at the end of the month.
3. Why should we spend consciously? If your plan is forward-thinking, you’ll be able to pay yourself first by automatically saving/investing part of each dollar that comes in. You also won’t feel guilty when you go out, or buy shoes, or whatever, because it will be an explicit part of your goals. And if you structure your system to pay yourself first, in a few months, you’ll start to see it add up. Imagine where you’ll be one year from now.

Thanks for reading. And please tell your friends.

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