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Start Here: “The Ultimate Guide to Personal Finance”

Here, let me just tell you how much you spend

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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?

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  1. yea, Ramit you are right – it is a tricky balance. Its the difference between Robert Kyosaki and David Bach. Kyosaki doesn’t want to waste his time with the “small change” whereas Bach focuses on the “small change” until it is “big change”. Personally, I think you need a little bit of both in order to reach your full potential.

  2. Write about it all. Saving and earning more both apply to personal finance, and it shows people that they have choices.

    If you can’t live without a new pair of shoes each month, find a way to earn that extra $100 each month. This is one thing that I’ve noticed a lot of the people around me don’t understand, so I think it’s important for you to write from both sides of the line.

  3. As said in one of the last lines from one of my favorite movies: “Can’t we have both?”

  4. I would enjoy more entrepreneurial topics, personally.

  5. I think it’s important for you to focus on both and each person have a foundation in saving, investing, banking, etc. because if there’s no foundation everything will crumble.

    If I know how to make more money but don’t know to rein in the costs, my standard of living goes up with my income and I am back to square one where I started.

    On the other hand, if I know the basics of personal finance and I am doing the right thing, making more money might increase my standard of living but it should not increase it proportionally to the increase in income. This way, one will be able to get ahead in life and have it all as almost everyone seems to want.

  6. I’d stick to the personal finance … my own experience is that no matter how much I make (from when my wife and I lived on 35K together to when we now have an income of 160K), it is quite easy to spend it all, or even more than all of it. In other words, the issue is the same whatever your income: you need to take stock of what you earn and make informed decisions about allocating that money between spending and saving. That is as true of entrepreneurs as it is of anyone else.

    If you find a way to earn $100/month more for shoes, you’ll discover you also want new socks. You still have to figure out how much you have and what you are going to do with it.

  7. I would feel a little left out if you exclusively wrote about entrepreneurship. I don’t want to start up a business. I want to be a struggling musician and learn how to manage what little earnings I do make.

  8. I like to eat my cake and have it.Please continue to write about saving, banking, budgeting, and investing as well as entreprenuership.

  9. Easier to win the game if you play both defense and offense.

    Personally, I have the defense under control so I’m being generous here. I’d rather see more business building stories, especially as you are on of the rare few to actually be living the lifestyle.

    I LOVE your Friday Entrepreneurs series.

  10. I think one issue is, what does it mean to say “frugality would only get her so far”? Far towards what? A happy retirement? That doesn’t take much money.

    It’s tough. How do you have more money? Save more or make more. How do you make more? Well, there’s a thousand ways to talk about this and there’s probably a blog for each of those. Personal development, changing careers, entrepreneurship, investing…junk bond trading, kidnapping celebrity offspring?

    I read this blog because there’s straight forward, well-researching information here, with a touch of sarcastic humor I happen to enjoy.

    Another thought: Do you want something scalable that everyone can relate to, like frugality, low-risk investing (like for retirement), and basically just making your money work for you? Or do you want something more specialized for the inspired few like entrepreneurship? Really helpful to some or somewhat helpful to a lot.