The Ultimate Guide to Making Money

Set smaller goals: impress friends, get girls, lose weight

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New readers: welcome! This is a blog on personal finance and personal entrepreneurship for college students, recent college grads, and everyone else. I’ve been writing for over 2 years and I have over 400 articles in my archive. After you read the post below, here’s a list of popular iwillteachyoutoberich posts and my RSS feed.

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If you had a life-threatening illness, would you take your medication? “Of course,” you might say. Not the average patient, though: Even when facing death, a surprisingly high percentage of patients don’t take the medication prescribed to save their lives. This is called patient compliance and last night, I was thinking about it in terms of behavioral change.

When I was studying social influence and persuasion in college, I learned about social psychologists’ and medical practitioners’ attempts to effect behavioral change for good things like washing hands, eating healthier, staying in touch with family, etc–and how hard it really is. “But Ramit,” you might say, “if someone’s going to die, you just give someone their medication and they’ll take it! If they don’t, they’re stupid!” Ah, I might reply, I see we have brought the wit and grace of Shakespeare to the debate today. Jackass. But in truth, getting people to change their behavior–whether it’s going to vote, clicking a button to buy something, or taking life-saving medication–is far more complicated than just giving someone the appropriate information and trusting them to do it (“information influence is the least effective form of influence,” we learned over and over). So I’m interested when I hear of people attempting to change their own behaviors.

Last year, a friend of mine who was entering college started getting really into fitness. I think was due to his laudable goal of “getting some girls.” Kudos, sir. Anyway, he started working out more than I would have expected: in the morning, running during the day, then working out again at night. I told him how ridiculous I found that. Do you know people who get so into their idea du jour that they go completely overboard and burn out? For me, I would rather do less, but make it sustainable. The problem is, that’s rarely sexy. Instead, if you’re working out for 5 hours a day, you can point at your effort (often just to yourself) and say, ‘Look, I’m doing it!’ But would you rather feel satisfied at your efforts, or would you rather get results through a methodical process?

This idea of sustainble change is core to personal finance. Sometimes I get emails from people who say things like, “Ramit! I read your entire site and I started managing my money! Before, I was spending $500 a week! Now I’m saving $495 of it and putting it into a bank account!”

I read this and just sigh. While you might expect me to get really excited about someone contributing $495/month to their savings, I’ve come to realize that when someone goes from one extreme to another, the behavioral change rarely lasts.

In my experience, this is true in personal finance, fitness, studying, and a bunch of other areas. When I make a change, I almost always make the most incremental change of all and work iteratively from there. This is why I just shake my head when I see personal-finance pundits giving families advice to go from a 0% savings rate to a 25% savings rate (“you can do it!!!”). Giving that kind of advice to someone is not useful if their habits have been set for years. That’s why you find articles like 8 lottery winners who lost their millions. Habits don’t change overnight, and if they do, chances are it won’t be sustainable.

For example, if I started keeping a budget and discovered I was spending $6,000/month, I’d do two things: First, make a plan for getting my budget down to something reasonable. Second, I’d immediately cut 10%. 10% isn’t too high or too low, but is does add up to something concrete. Then, a month later, I’d say ‘Hey, this isn’t so bad’ and cut another 10% off. And so on, according to my own plan.

The other way to do it is to look at your $6,000/month, freak out, and cut half your spending. Then, you’re suddenly in a completely different spending behavior without the means to cope. How long do you think your ambitious budget will last?

How many friends do you hear saying, “I’m not going to drink for a month” or “I’m going to study for 4 hours a day”? For me, the next month isn’t really important, and I don’t understand the point of short-term things like that. A month from now, okay, you only spent 50% of what you normally do.

And…now what? If you can reasonably expect that you’ll bounce right back to your normal spending, what did you really learn? “I can do it!” you might say. Well, I’m glad, but I’d rather have people cut their spending by 10% for 30 years instead of 50% for one month.

Sustainable personal finance

A ghetto graph I drew this morning

Did you know that 95% of diets fail? As Randi Cardonick, a nutritionist at the Penn Health for Women, notes, “If 95 percent of all diets fail, we have to assume it’s the diet that’s failing, not the dieter.”

Right on. So when you’re deciding what to change about your personal finances, eating habits, exercise plan, or whatever…try making the smallest change today. Something you won’t even notice. And follow your own plan for gradually increasing it. In this way, time is your friend because each month gets better than the one before it, instead of the other way around.

 

Update: My old title (“How to make a sustainable change by being less ambitious”) sucked, so I changed it.

Update: Also see a related article, The Best Decision vs. The Financially Smart One

Update: If you’re a new reader, here’s a list of popular iwillteachyoutoberich posts and my RSS feed.

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52 Comments

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  1. excellent post! I was just talking with my finanical advisor the other day and I told him I wanted to contribute an extra $150 to my IRA each month. He asked why and I said, I finished paying off my car over a year ago, and those payments were $250/mo, so I have this “extra” money I should probably move over to my IRA.

    Then he asked me if I’d become used to the extra $250/mo and I said of course. He advised that instead of going for $150/mo, why don’t I ease into it at $75/mo at first. His reasoning was that since I was used to the extra cash, the $150/mo would seem like too much at first and that I might not stick to it.

    long story long, I took his advice.

  2. This is an excellent piece!

    Like much of your writing, this piece focuses on empowering people to take control of their lives, instead of living forever as fearful mindless drones. I think that if people reading it can take this one piece of advice to heart it will do more for them than all the financial acumen in the world.

    On a personal note, last year, I became eligible for my company’s 401k and immediately started contributing the maximum that they would match. At first, this cut to my disposable income was noticeable, but not for long. Now I’ve just added about the same amount (dollars) of monthly savings in post-tax money, and it doesn’t even hurt as much as the original start to my savings.

    In short, baby steps work!

    Thanks for the site and all, enjoyed your recent e-book.

  3. Right on, Ramit.

    I dropped 30 lbs. about 2 years ago and have kept it off largely due to one thing that I do that you won’t see in many diets: I give my self one day a week where I can eat anything I want. Having that one day where you can backslide just a bit (don’t over do it!) makes the next 6 a lot easier.

    Same with personal finance. No, you don’t need the shiny new car. But go ahead and get that cool little mp3 player it if makes you happy.

    Moderation in all things…Slow and steady wins the race…And lots of other cliches. :)

  4. Nice article! I have a list of goals for this year including personal & financial goals. I am going to go through my goals just to check if I am not setting unreasonable goals & to take it “Slow and steady”

  5. A Kathy Sierra you’re not (in regards to your graph) :), but I really liked the article.

    So, if “information influence is the least effective form of influence”, what’s the next best step? Maybe a possible next article?

  6. This is fantastic advice. The changes that I have been successful with both in life and financially have been those that have been gradual. I have an auto-direct debit from my paycheck to a savings account and my Roth IRA. I adjusted my lifestyle and dont notice this money missing. When I tried to move an additional $380 a paycheck to another savings account, I found that it was too drastic a change and I had to take it back out immediately to settle my credit card bill for that month. Had I started doing $50 or $100 a check and slowly increased it, I probably would have been OK.

  7. Habits! Habits! Habits! Habits!

    Ramit, over at I Will Teach You to Be Rich has written a fantastic post on how setting smaller goals and creating habits helps you become more financially independent. His article is right on target with regards to what the One Year Exit Plan is all about. Check it out!

  8. I love your graph.

  9. It’s funny how human psychology is–I’m glad you’re offering some of it.

  10. I’m just looking around your site for the first time and it looks like you are generally offering some pretty sound advice. But tell me: are you actually rich yourself? Because if you haven’t actually managed this then I must take some of your advice with a grain of salt.

    I can recall all sorts of things that I read on the Motley Fool years ago that made sense at the time but since then I have found are not really great rules. And in fact the very nice people who wrote those articles were not rich themselves and turned out to be terrible at picking stocks. Otherwise I expect that they wouldn’t have had the day job writing for the Motley Fool. So could you perhaps consider adding something to your collection of introductory posts which establishes your bonafides?

  11. Good idea. And you’ll note that I absolutely don’t recommend specific stocks, nor do I recommend you listen to anyone who does. Most people are horrible at specific stock/fund recommendations, anyway. (I’ve written about Cramer, The Motley Fool, and others in my archives.) I try to use actual data to back up my points.

    I appreciate your suggestion. And as a further point, I’d suggest you take everyone’s advice with a grain of salt, no matter how much you trust them. The minute you start following exactly what someone says is the minute you have become a fool. Nobody’s suggestions are 100% right for you. But the best writers/speakers can hopefully give you some insight so you can figure out what is right for you from the many, many options.

  12. Good post Ramit! Congrats!

    But I have to admit that it disturb me a bit (not this post in particular but the whole personal financing advising). It made me really anxious to share these thoughts that you and everyone else is about to read!!!

    Reality check people!!!

    If you need genuine personal fincancing advice then I suggest that you should try to get it from a hausfrau with five mouths to feed!!!

    She will be more than happy to have someone asking for her advice, and she will offer it to you freely immediately!

    You will be amazed to learn how exactly these decent housewifes manage to distribute the ‘family money’ by improvising every now and then and by trying to get the best deal on a variety of products and services on a daily basis, by simultaneously aiming towards the general good for all involved parties (all family members, etc)! The things that they do are unbelievable! They just gradually cultivate an instinct I guess!!

    Personal time management and Personal Financing to its best!!!

  13. Good post. In sum: Think bite size, and think day-by-day.

  14. Jackson Landers, what does having money have to do with making good choices? Ramit’s post is as much about personal fulfillment as it does about having more money than the person next to him. Those born with money will have money, but if they are an idiot (or criminal, abuser, etc.), would you follow their advice? Having money is a heavy symbol in America, but no help in learning how to make lasting changes, which is the real point.

  15. The 95% all diets fail is wrong it was on old study with 50 people.

    20% of all dieters succseed in keeping the weight of
    Weight watchers is 28% still low numbers but not 5%

  16. 2 (or more) Points.

    Ok. Your incrementally decreasing plan is impressive.

    but consider the situation where someone is trying to quit smoking a pack of cigarettes a day.

    its proven, you will have a bad time with your plan; and income has a similar reaction. once you have so much money coming in, you “adjust” to that level of income (aptly named the “income affect” http://en.wikipedia.org/wiki/Income_effect ) where a lower level of earnings hurts more than if you were poor then just got bumped up to that same level of income. In my experience trying to make small changes leads to a cop out. “oh, i am only going to miss 15 minutes (since i’m trying to go to the gym more, i started out small, like you said, with 15 min sessions, which , of course will 1. get me jacked and 2. relieve my unnecessary comma addiction.) at the gym today, so why even bother going?”

    IMO, small changes dont do shit. and (in my quitting cigs example) cold turkey tends to me just as bad, I think an equilibrium exists around 50% (wow, a middle road!!! in the middle too!!! damn, i’m original!!) where you increase that percent exponentially every period following, till you achieve your goal (quitting smoking, losing 9 lbs., playing wii, making a million dollars…)

    anyways, im not nay-saying (maybe i am, i don’t know) but people who accomplish the monumental change seem better off than the one who are smoking 10% less a day….

  17. Everything in moderation – my personal motto in all aspects of life.

  18. I’m a big fan of baby steps. Trying to do too much at once doesn’t work.

    Hhhmmm…if 20% of all dieters succeed in keeping the weight off and losing weight is the number one new year’s resolution, then why are most Americans still overweight?

  19. This post sucks. Only kidding, I just wanted to be different. It is good to point out the importance of setting moderate and realistic goal setting. Staying motivated is hard enough already, without unrealistic expectations. I still think it is a good thing to set very high long term goals and balance them with lower short term ones. This way we can improve continuously in a manageable increments.

  20. What Ramit is describing is a variation on the “foot in the door” technique: changing behavior gradually with increasing levels of commitment. Nice application, Ramit.

    Good peripheral technique. I’m so sick of hearing how central methods are the only way to go.

  21. Great Post Ramit. As always you have made me rethink all of my goals for this year and even write them down in a more reasonable manner. I always knew that if you want to start on something you should start little by little but when someone else tells you, it seems like you really have to do it. Great Thanks again

  22. You’re absolutely right of course. The “right here and now” and “All or nothing” mentality is to blame, lack of patience too. Most people want direct instant rewards. Some try to get them but fail to see dangers and the cycle in it.

    I’m a good follower of another (more optimal, supercharged) methodology, used in jogging:

    Start small, gradual and slow, just get the feel of things. You can then try to pump things up a bit if you feel really motivated. At least now, you know how much effort moving from 0 to 20% takes and how you relate to that; you can move it to 80%. If it dosnt work out, moving back to 40% and sticking to it wont seem so hard and unsustainable.

    Coming back to what you said, “Kaizen” philosophy (small increments of change regularly) is the best for any personnal change and developement in any aspect/field: goals can be attained quite effortlessly and smoothly.

    Ah, and please, get a plotting program :D

  23. Hey Ramit,

    I really enjoyed this bit about influence and psychology-I’d love to see more. And great “ghetto graph” too!

  24. I will offer one addition to your post (and you may have covered this before) – if you have a big upswing in income (a raise, a new job) ease into that as well, don’t just start spending with abandon. When I graduated college, I allowed myself a small bit of that extra money to increase my standard of living (about 10%) and put the rest into savings. Since I’ve been putting about $900 a month in savings, I’ve been able to pay off my undergrad loans and save for my Master’s.

  25. Hey Ramit,

    We just talked about this concept at work–as it pertains to software development. The idea is that it takes you several releases to go from non-existent -> perfection. The first step is to move the action from impossible to possible, even if “possible” also means annoying, buggy, or ugly. As you learn more about how users want to interact with the feature and what other ideas might come from this feature, you build those into the next release where you move “possible” to “almost awesome”, etc. Overall, it seems that the baby step approach is applicable in all sorts of situations.

  26. Hi,

    First time on your blog, lot of common sense in what you write…I’ll be coming more often.

    LP.

  27. I tend to over analyze things so I fail to set goals. This is how it starts:

    I see a need or am unsatisfied with a particular frame of mind or behavior pattern I am keeping.

    I intend to set out and change it.

    I immediately become distracted by all the factors I try to take into account and then fail to implement any plan because I’m overwhelmed with the idea that I’m missing a key component to the plan, which will ultimately result in a failed strategy.

    How do I take action? How do I priorities and find all the facts?

    Lost.

  28. small point: the preferred term these days is ‘patient adherence’ rather than ‘patient compliance’

  29. Nice post Ramit, I just stumbled here and i’m really enjoying your posts.

    It took me nearly 2 years to make something significant out of my online projects, but now that I’ve based them really well – they are pretty much robust.

    Allen.H

  30. My goal before reading this post was to sell the Indian equivalent of Ask.com ‘poocho.com’ for $1m. Now, I’ll settle for $250k.

    Ask.com was bought by Barry Diller’s IAC for $2.3 Billion in 2005. The indian translation ‘Poocho.com’ is on Ebay for no reserve and a Buy It Now price of $1m. Barry Diller, Yahoo and Google have been invited to bid.

  31. While I’m sure starting small doesn’t work for everything, I hope it’ll work for me. Considering I’ve watched things I’ve tried to do end up sitting around gathering dust, perhaps I just need to start small.

    I’ve noticed something about myself. I write fiction as a hobby, and my ideas balloon. I can’t write a ten page short story. It just gets bigger, and bigger, and bigger, and then it’s so big I can’t see it anymore for what it is and give up.

    I think the same mechanic is at work with financial goals but in a different way: my problem is too big to fix, so I’ll just not fix it.

    Of course…. both are wrong.

  32. Ramit,

    Great post. I have never posted on your Blog before, but have followed it for the last year. I found it when I was looking for info about Stanford University for my girlfriend.

    The idea that radical behavior changes don’t last is right on — unless there is a forcing function that serves as an artificial motivational factor. I would say this dates back to the Epicuran philosophy of “Everything in Moderation. Nothing to excess.” Epicurus’s “personal hedonism taught that only through self-restraint, moderation, and detachment can one achieve the kind of tranquillity that is true happiness.”

    Preach On Brother Ramit!!!

  33. Ramit,

    I would like to thank you for the investment advice I have received from your website in the past few weeks. I am trying to get something started as well to follow my journey into becoming financially fit. Thanks!

  34. “How many friends do you hear saying, “I’m not going to drink for a month””

    Umm, lots? Many of my friends give up alcohol for January. Every year. It works the way ‘going easy’ doesn’t. It’s far too tempting to just have another once you’ve started.

    I agree that generally change should be gradual and easy to sustain, but sometimes a short sharp shock is the only thing that will work.

  35. I’ve found that having a way to see results (and not just looking at a bank statement or scale) is a great way to keep behavioral changes going.

    For years I’d been complaining about my own bad habits and saying I was going to change them. Never happened. So I created a long list of everything I wanted to change and picked out a few key starter items in various areas. They’re really just baby steps.

    After that a checklist that I carry with me keeps me following through. I look at it and am ashamed of a day where I only had 4 glasses of water instead of all 8 or skipped my 5 minute meditation. Most of the habits can easily be incorporated into my daily routine (calf raises at the microwave). As the good habit becomes permanent I can remove it from the and begin work on something else.

    Starting with babysteps and key items allows me to ease into the changes bit by bit rather than going all out and failing miserably (starting with one veggie serving a day and working up to 5) sometimes I naturally go over the goal and that makes me feel good.

    Being able to look at the list and see how well or poorly I’ve been doing motivates me to keep getting better.

  36. Personal finance, like eating/dieting, is more personal than it is financial, I have come to learn.

  37. Wow, great post! I got this link from 37signals and you can bet I’ll keep reading now.

    In fact, I’m going to check this blog 12 times a day!

    But really, great post.

  38. So… where should I start? I’m 23 and pretty much living paycheck to paycheck. I have a 401k through my job and they match 90% of what I put in. I only started that about a year ago though. I opened up an account with ING and have so far ended up taking out just as much as I put in because I couldn’t pay my bills…

  39. i have no girl friends so please give any idea for get more girl friends

  40. Hey,
    I love what you’e doing!
    Don’t ever change and best of luck.

    Raymon W.

  41. don’t just gear these articles to men.

  42. Awesome ! and i rightly fit into this category, truly i do :-)

  43. Nice post. I’ll add a personnel example. When each of my children was born I decided to put some money away for a college fund. I started with twenty dollars a paycheck into a savings account and a commitment to try to bump it up by a few dollars every year or so, or if I got a promotion, etc. My eldest is now a junior in high school and I’m saving $80 a paycheck for her, and there’s 25K in her funds for college. Will this pay for four years? Maybe (depends on what she does and where). Will it help? Damn straight it will. The point is the $20 dollars I started with wasn’t even missed. The additions over the years were small percentages of raises and also not missed.
    I’ve done much that same with retirement. Putting enough in to get the matching at first and then if I got a three percent raise, bumped up the retirement a percent. Not every raise, but enough to make a real difference over time. The small steady drops into the bucket, given enough time, will fill it.

  44. Anonymous analyst Link to this comment

    Great advice. Looking at this from a basic behavioral aspect for most people savign for retirment is to effimeral a concept. Stashing away that $100, $200, or more a month is a constant reminder of the opportunity cost of enjoying that money now. As an analyst I have participated in more seminars than I can count where a financial advisor tries to wring out every cent of extra spending from a client’s life just so he can invest it and the advisor makes more money. If we return to the adage of pay yourself first, every time we find new bits of money from paying off a car, credit card, raise, etc., we should set aside a portion of that ro reward ourselves. The remainder we can save or invest or pay off more debts. But rewarding ourselves is a tangible reinformcement to the positive behavioral changes we’ve made. However, if I do pay off my car a save the $400 a month and then just turn around and send it off to some investment account in the sky, even though I am doing the financially smart thing, I am still out the $400 a month. By dividing that and leaving $200 in checking for me to enjoy, I now have a tangible reward for my efforts and I am still contributing an additional $200 to savings.

  45. Excellent post! I love your graph!

  46. It’s worth remembering too that several small goals can add up to one big goal.

    Say you want to save $5,000 a year. If most of us set that aside out of our pay checks, we’re probably going to struggle. Instead we might:

    1) Initiate savings of $250 a month ($3,000 a year)
    2) Swap all utility bills for cheaper suppliers (say $300 a year)
    3) Refinance a mortgage (saving say $1000 a year)
    4) Grow a second income stream from a hobby (say $500 a year)
    5) Collect loose coins in a jar ($200 a year)

    Like this, all the smaller goals add up into the bigger goal, but it’s a lot more achievable.

  47. An interesting article (long but interesting) on behavioral change. Part of the article speaks to how large changes elicited greater adoption than small.

  48. I think in terms of personal finance this article is right on point. With working out for example, I work out 30-45 minutes every day… It is much easier than the 2 hours 3 days a week that i used to do. However, the person who compared quitting smoking to reducing spending – i don’t think that is accurate. Here is why.

    Smoking is not necessary but spending is. You don’t HAVE to smoke one cigarette to be a successful person, but you do have to spend money. What level of success you decide upon is up to you, but there will be spending involved. I quit smoking cold turkey in December and I personally feel it, like many other things in life, is mind over matter. You simply have to convince yourself that smoking is horrible and is not for you. Once you have that, you will truly hate smoking and will not want to smoke. From there you follow the simple rule of “I will not smoke a cigarette.”… No matter what the circumstance, a cigarette is not for you.

    Spending does not work the same way. Spending is something you must do in moderation. Gaining control over spending is hard because you can’t convince yourself it is “bad,” because then you wont pay what bills you do have on time. Or then you wont get the maintenance you need done on your car. But then again, you can’t tell yourself there is nothing wrong with it, because then you will not control it. Personally I have not mastered my spending. That is one of the very reasons I read this site, and many others – I like to keep my mind aware of the subject and get whatever advice I deem useful. But I do feel that this theory in regards to spending will work.

    I think with things that you need to continue but that you are trying to moderate, this is a good theory. I will surely test it out. As for drinking/smoking – (things you do not need at all) just go cold turkey and set your mind against it.

  49. Great wisdom in this article! This concept of adding or subtracting to obtain the results you want in your life is the foundation that most successful people live by. Congrats again and I will continue to read your post through my google reader!

    Sterlzs

  50. Wow, what an excellent post – it’s so rare to see something truly original, as well as unorthodox, in the PF blogosphere. Major kudos. :)

    And even major-er kudos for making me LOL at your Shakespeare comment (I’m going to steal that haha) and your “ghetto graph.” ^__^

  51. Hey, great advice!!
    In terms of losing weight, I’ve been using the same idea, and it does work!! Here’s a great article geared towards just that:
    The 10% solution
    It hadn’t occurred to me to put my spending on this kind of diet! ha.

  52. i agree sustainable change is best, but there is another thing at play which might have gone unnoticed. the motivation factor might be higher when you do a big change as you see your progress more clearly. i have experienced this firsthand (started dieting about a year aho and lost a very big amount of weight. the change was quite big – writing every calorie down, spending lots of time on diet forums etc.) and it was contrary to the “10 or whatever%” rule), but i have to say that seeing quite big results was what kept me going (and keeps me going futher as i am not at my goal yet). but i did bounce back i autumn so it might not be perfect. back o track now:) i am not sure i would have kept going if i was doing it slowly (lsot of dier advice recommends cutting like 10% of cals, or just giving up soda and go from there), as the hassle would be similar (having to check everything). i am not saying you are wrong, just wanted to add that motivation sometimes might be based on bigger results than the ones gained from a slow approach