Last week, I recorded an interview about credit unions, money, and the economic crisis with George Hofheimer at the Filene Research Institute, which studies consumer finance and credit unions. George and I met when I spoke to credit union executives a couple of years ago.

Here’s the interview in streaming MP3 form, plus a transcript below.

George Hofheimer: Hello, this is George Hofheimer, Chief Research Officer at the Filene Research Institute and welcome to our podcast series entitled ‘Ideas Grow Here’. Today, we will be having a conversation with Ramit Sethi, Founder of the Personal advice site, iwillteachyoutoberich.com. He is also the author of an upcoming book by the same name. Ramit, a 26-year-old Stanford graduate will furnish a young adult’s perspective on what role credit unions can play for today’s stressed out consumers. We hope you enjoy today’s show.

Today, I want to welcome our guest. His name is Ramit Sethi and he is the founder of the website iwillteachyoutoberich.com, and Ramit, I was wondering if you could tell our audience, today, a little bit about yourself, your background, and a little bit about your business. It’s kind of unique.

Ramit Sethi: Sure, I am 26-years-old. I started, ‘I Will Teach You to Be Rich’ when I was a student at Stanford and I actually started it for reasons before that because when I was applying to colleges, I had to get a bunch of scholarships to be able to afford it. The first scholarship I got was $2,000. I turned around and invested that in the stock market and I lost half my money. So when I got to Stanford I decided that I probably should learn about money. I then started teaching it to my friends and, of course, they never attended my classes, they said it sounded great, but they never came.

So finally I started a blog and that blog iwillteachyoutoberich.com really took off; the blog posts about 180,000 readers per month and it’s been featured in the New York Times, The Wall Street Journal, on TV, etcetera. What I try to do with this site is talk about personal finance and personal entrepreneurship as if you and I are sitting around the table just chatting about money. So it’s not the same old browbeating about stopping your spending on lattes because frankly, that hasn’t worked. It’s more punchy points about things that we care about and how to try and achieve those goals, whether it’s negotiating with your bank, negotiating with your credit union, saving up for a vacation, or even getting a second job or doing some kind of entrepreneurial thing on the site.

George Hofheimer: So how can you teach me to be rich?

Ramit Sethi: Well I think the first thing is that rich is not just about money. A lot of people say, “Well, do you have a million dollars?” and the question is, “Well doesn’t it depend, if you have a million dollars, is that rich? What about if you live in Manhattan, or what about if you are 26 versus 65?” Rich is not just about money, so it’s really important to understand what rich means to you. And for many people it means being able to take an international trip once-a-year or being able to help your parents out with their retirement. The first thing you do is understand what it means to you.

The second thing to set some modest goals. And I think most people have pretty modest dreams that are actually very achievable. If you do want to go to China next June, no problem. I can help you plan for that and help you save up the money to do that. If you want to invest your money so that at a certain point in the future you are earning more from your investments than from your savings I can help you do that. The key is, it’s not about being the fanciest, smartest person in the room and knowing P/E Ratios. The hardest part is really just getting started.

George Hofheimer: Well that’s good news for me, because I am never the smartest person in the room, but, kind of, considering the advice that you are giving consumers and some of the ideas that you are throwing out there what could credit unions be doing more effectively?

Ramit Sethi: Well, I think it’s a great time to reach out to consumers. I read a report yesterday that said 8 out of 10 Americans are stressed out about their personal financing. I found that astonishing and I think there are a couple things that credit unions can be doing and I know this has been well debated among your organization. I have read your blog and some of your reports CUNA, CUES, etcetera; but I think first is reassurance.

Right now, as a typical consumer, I hear nothing but bad news and I think the financial companies like banks have really fallen short in reassuring customers. The second thing is guidance. How to save, how do you preserve your money. What should you be doing? They should be saying “Hey! Here’s what’s going on. Here’s why we’re going to be around.” Instead, they are just leaving a vacuum of information.

I think credit unions really do well at this on the community level because they have got such great and deep roots with the communities. They’re going out there and helping to not only educate their own base but also giving their base the tools to spread the word and I can talk about that a little bit later too.

(00:04:52)

George Hofheimer: So delving into that a little bit further, and I am a reader of your blog. A lot of the advice that you do give to consumers is really common sensical stuff. So why do you think people, number one, are so stressed out about it. Number two, why do they have such a hard time dealing with their finances?

Ramit Sethi: Well, why do you think people can’t lose weight? There are no secrets to losing weight just as there are no secrets to getting rich. If you want to lose weight, you eat less and exercise more. It’s very simple, but instead we get caught up in these ideas of, “Well I better eat carbs before I go to sleep, and then I should eat fiber right after I go running, and I should buy this pedometer.” You know what, if you do those two big things, exercise more and eat less, chances are you are going to lose weight, and the same is true with personal finance.

I think it’s very sensible, but there’s a lot of blame. We love to assign blame to everybody. There’s a lot of blame to go around as to why we are not succeeding as consumers at managing our money.

First of all, we are not trained. We didn’t learn this stuff in school. Most of my friends, even those who graduated and made great amounts of money, still don’t know how to manage their money.

We have bad examples. Our parents taught us about money. Chances are they didn’t know what they were doing. We see what’s on TV; you see these shows where people are changing their stock picks everyday, that’s crazy. Wall Street, they have a profit motive and our friends, they are not actually encouraging us to have a life of frugality; instead we try to see who can one up each other. Finally though, I think most importantly it comes back to us.

Personal finance is shrouded in a sense of mystery and I mentioned that 8 out of 10 people are stressed about their personal financing. How many of those people do you think have ever read one book on personal finance? There can be all the tools in the world, but if we are stepping up to learn them and the rest of it is disappointment.

George Hofheimer: So it’s kind of getting to the old-fashioned notion of thrift. Is that going to be hip again? Do you truly think we are entering a new era of how people consider their finances and know that the era we are leaving is one where asset prices go up? You can trade stocks on a daily basis and you will become rich easily. Is thrift an old-fashioned term that is going to be hip again?

Ramit Sethi: I think in some ways, yes. When I add things on my blog I write things like how to negotiate like an Indian. I have taught people how to call up their banks, their credit card companies, or any financial institution or and negotiate fees. I literally write the script of words they can use to negotiate specifically and people love that. So that is something that is really, really effective. I don’t think savings are sexy yet. It’s not quite so attractive to say, “How do you get that amazing quote.”

“I calmly put aside $25-a-week in an automatic withdrawal and after six months, I was able to afford it.” That doesn’t sound great, but when people asked, “How did you buy that new car?” I said, “I used the service called Fighting Chance and I was able to get about $5,000 off the asking price of the car, $2,000 under invoice because I had some information that other people didn’t, people’s ears will perk up.

So I think the take-away there is that thrift can be hip, it can be cool, if the vision is big enough. Saving $5 here and there is not a big vision, but being able to say, “Hey, I saved $50,000 on my mortgage because I knew something that you didn’t,” that is really, really alluring.

George Hofheimer: Yes, absolutely. Now, we operate in the credit union space and anytime people from the same industry get together, there is a lot of navel-gazing and conventional wisdom. And the conventional wisdom in credit unions, one of them is that we offer a better deal for the consumer and we are the best-kept secret. As I have become accustomed to your website, I notice that you talk about the types of accounts that you have and I notice that you don’t have a credit union account, I’m curious as to why?

Ramit Sethi: Yes. George, I am on thin ice because I spoke at CUES, the Credit Union Executive Society last year in Hawaii and I got in big trouble because I didn’t have a Credit Union Account. So, I am going to go into this knowing full well that I am treading water here. This is what I would say. You are right, I don’t have a Credit Union Account. I think credit unions are fundamentally about change and I think it’s very similar to a political issue we have got going on right now.

Because most Americans have bank accounts, not credit union accounts, credit unions require consumers to make a change. And to be frank, I am lazy and so are most people. We are cognitive misers; we have enough going on in our life and we don’t want to worry or even pay attention to our financing. Even me, and I have read about personal finances every day.

(00:09:52)

To be a little less glib, I have evaluated a lot of credit union accounts and bank accounts and I guess the question is, is there enough activation energy for me to change to a credit union or even for me to go to a website and open up an account. I think, “Why would I?” And, I think, fundamentally, it’s certainly not because credit unions are member-owned. To be completely honest, none of my friends care about that or even know about that. “Do I get extra services?” I paid, I think, $50 for a Costco account because I could clearly measure my ROI. I am not so sure that it’s easy to do that with a credit union. Even though I love the services and when I go to buy a house, I will absolutely go and see if there are competitive rates there. I have heard about credit unions from a trusted source.

I want to give you an example. You read my blog and know that I talk about my ING Savings Account a great deal. I love it and the reason is two-part. One is that they have a really beautiful simple service that pays me a decent rate and they do not send me a bunch of stuff in the mail. They just leave me alone and I can do what I need to do. The second thing and this is the key, they have given me the tools to spread the word to other people and I have referred thousands of customers to ING.

I think that goes back to a huge part of the community outreach that credit unions do but can do better. It is like you have members that are passionate about credit unions. In fact, I would take a guess that the average credit union member is much more of an evangelist than say a Wells Fargo Bank Account holder. But, as a credit union member, are you giving your members the tools to spread the word?

I would argue, George, that referral should be a strategic metric that’s held up at the executive level every month. How many referrals did we get and programs should be put into place to help members refer other people. I think that is the way that young people hear about financial services. And when I am having conversations with friends about different tools, credit unions just aren’t in those conversations.

George Hofheimer: Interesting. And actually those thoughts that you just had were confirmed by a study that we did. We went into credit union member’s homes several years ago and asked them why they chose the credit union. One of the questions we asked them is “what are you a member of?”, and remember that they knew that they were part of a study examining why they joined a credit union, and the majority of folks did not mention that they were members of credit unions. So it’s the whole notion of having a tangible benefit and something to talk about, I think is a pretty compelling argument as well?

Ramit Sethi: That’s very interesting.

George Hofheimer: And so not to be tone-deaf to what’s going on outside the four walls of everyone’s lives and that’s the economy. The general consensus is that we are entering a pretty deep recession and it’s going to impact consumers tremendously. What can credit unions do, in your opinion, to help consumers through this recessionary time?

Ramit Sethi: That’s a good question. That’s a tough one. I am sure there are much smarter people in the credit union field that are thinking about this, but I will give it a shot as a consumer. I think the first thing is reach out to consumers. We are looking for leaders and we are looking for leadership to be honest with us. Just last night, after watching a presidential debate, I was furious and I wrote up a post on my blog saying, “Here is what Obama and McCain didn’t tell you about your money. They didn’t tell you x, y, z because it’s political suicide to do so.”

We are looking for leadership and it’s not coming from Washington as to what’s going on with the economy. Are we really expecting things to get better by the end of the year? I don’t think so, but nobody is going to tell you that. You can take a top-down and bottom-up approach. Top-down, you have got CUNA, you have got CUES, you have got other national organizations evangelizing credit union as a whole. Then from the bottom-up, at the community level you reach out to the local community and evangelize credit union, again, as change. It’s different than the same old banks you have had.

Locally, credit unions have resources that banks can’t beat. I have seen credit unions come and speak at high schools and universities that banks are too busy minting money to go to. This is a tactical piece of advice. When you go out to the community I would strongly recommend you attend events where people are forced to attend. That sounds somewhat counterintuitive. We always like to think if people care they will come. But I bet anybody listening to this knows that if you are hosting an event where you talk about credit unions or financial planning, your attendance rate is going to dismal.

(00:14:49)

So I prefer to go to places where people are forced to attend. If you are going to go speak at a classroom, make sure the professor require students to attend. If you are going to speak at a company, make sure the manager forces his or her direct reports to attend. And when you are there speaking to people, give them tools right there on the spot to sign up. Coming back to what credit unions can do in this economy, I think it’s time to think of revolution, and not evolution.

I have spoken to a lot of credit unions over the last couple of years and I still hear conversations about which paperweight should we offer to get people to sign up for our service or should we increase our yield rate 1%. You know that doesn’t fly anymore, increasing it 1% doesn’t make me pay attention to the computer screen and go sign up for an account.

We are talking about huge different ways of getting people to change. Offer us a system that will take us through our 20s and 30s. Don’t just say, “The services are available if you want it;” say, “We are going to make you a deal. We will give you better rates. We are going to work with you in a detailed basis and build a system for finances that will come through in your 20s and 30s.”

And finally, finally, finally and most importantly use your existing base of members to spread the word. If you don’t do that you just can’t compete with the deep pockets of banks but I will tell you this, having 10 people come to me and say, “Ramit, I got this amazing deal at this credit union, you should check it out,” that is more influential than any amount of advertising I could see on TV.

George Hofheimer: Well that’s great, Ramit. I think all of these are great points and coming from a generation where credit unions are struggling to effectively serve in the young adult market. I think the advice is sages and hopefully folks will take action in these tough times to help consumers out.

So once again, Ramit Sethi from iwillteachyoutoberich.com. If you haven’t checked out that website, I think it’s a great resource and a very keen consumer perspective on financial services and what you can do to help better serve today’s consumers. So Ramit, really, I appreciate your help today and your thoughts. So have a great day.

Ramit Sethi: Thank you.

Total Duration: 17 Minutes.