I wrote this post a few months ago and never got around to posting it, so here it is today with some edits.
Writing about personal finance is a curse in many ways. It’s like being a cardiothoracic surgeon standing in line and watching someone buying a KFC bucket of 14 thighs and legs right in front of you. You could say something, but that would be uncouth. Still, sometimes I can’t resist.
First, the situation: I was at a holiday potluck and man, people brought the best foods. There was the typical pasta, cheesecake, and salad. But then like a glorious peacock preening in the sun, someone walked in with a gigantic bag of McDonald’s chicken nuggets–with all the sauces. Shortly afterwards, another person brought in KFC. I was stunned that someone would have the audacity to bring McDonald’s to a potluck. And I loved it.
Anyway, I met this girl who found out I do personal-finance stuff and she started asking me about her 401(k). “But Ramit,” she said, “I don’t make enough to max out my 401(k).” (She works at Google, which has a very generous plan.)
Well, I told her, she could either make more money, cut costs, or do nothing. She replied that she couldn’t really cut her costs. “I’m not like all those other girls who go shopping,” she told me. “I really don’t spend a lot.”
This is when I got a gleam in my eye. Really?
So I asked her how much she spends on rent and a few other things, and did a quick calculation. I told her she probably spends about $30,000/year on expenses, and she looked at me like Gumby had just walked in the room doing backflips and jumping jacks. “Huh?” she said. It adds up: $1,200/month on rent, $1,000/month recreation (going out, vacation, Christmas gifts–yes, you have to factor those in), $500 month misc (gas, unexpected medical, travel). As you can see, this is a really really rough estimate that adds up to $32,400/year.
The number stunned her.
I continued eating my chicken nuggets.
(First of all, if you do nothing else today, just do a back-of-the-napkin calculation like I did to get a ballpark of what you spend. Then, if you’re working, compare your annual spending with your annual income (after taxes) and see if you’re spending more than you make. For example, if the potluck person had a $40,000 income and $32,400 expenses, after taxes she’d actually be spending more than she made. PLEASE DO THIS TO SEE IF YOU ARE SPENDING MORE THAN YOU EARN!!! If you’re too lazy to do this, I hate you.)
Back to the girl. I suggested she read my 2006 financial makeover, table of contents, or any book, and I made the same points I always make — “You can’t get rich if you don’t know where your money is going” — but I think there’s a larger point that I’m starting to realize.
Frugality would only get her so far. Sure, now that she realizes how much she’s spending, she might cut 10% off her budget and start investing it. That’s great. But to the people I’ve talked to, they want more: We all want to save more, spend more, and make more, which comes back to making more money. That’s why I’m sort of torn between writing about the mechanics of saving, banking, budgeting, and investing — or working with what you have — and personal entrepreneurship to make more.
What do you think?