What are the most common mistakes in personal finance — especially among blog readers?
I recorded a 30-minute interview with Flexo and Tom over at the Consumerism Commentary podcast with extensive notes below. It’s called Stupid Financial Advice + The 5 Myths of Personal Finance.
Stream the interview or download my melodious voice here.
[00:00] Introduction from Flexo
[00:50] Interview with Ramit Sethi about stupid financial advice
[01:50] — The Reddit community
[03:27] — Frugality
[05:09] — Big wins
[08:03] — Knee-jerk behavioral change
[09:41] — The “buy and hold” strategy
[13:10] — Financial magazines leading up to the recession
[16:48] — Finding decent financial advice
[19:01] Ramit’s five myths of personal finance
[20:01] — Myth #1: Personal finance advice is only about spending less than you earn
[21:33] — Myth #2: Personal finance is about more will power
– Sort of meaningless pablum that lets people feel better about themselves but get nothing done
– And you can just see that’s true by asking a few questions: Are you happy with your finances? How much do you spend on eating out and loans? What’s your system for getting ahead? What are your goals?
– Just knowing a fact doesn’t make it implementable. As we say in persuasion, “informational influence is one of the least persuasive methods available”
– Make it tactical: How do you get the right accounts? Dominate your credit card? Automate your money? Pick the right investments? Handle money and relationships?
[22:55] — Myth #3: You can’t save any more money
– If I just try harder…
– Reminds me of weight: If I just try harder to diet…
– Every choice has a cost. Trying to save on 50 things vs. 5 things…
– How has that worked for you over the last 1-2 years? 10 years? Most of us are fat and in debt
– It’s about building systems that handle your weaknesses so you can exploit your strengths. Automate, earn more, cut costs
[25:18] — Myth #4: Everyone is like you
– Yes you can
– We under-report how much we eat, just as we under-report how much we spend
– You can’t out-frugal your way to rich
– Saving: CEO
– Tracking is #1
– Setting goals is #2
– Automation is #3
– Earning more is #4
[27:43] — Myth #5: Frugality will make you rich
– MSN readers criticizing my frugality tips, saying frugality is about a lifestyle choice
– “Ridiculous to spend $28k on weddings”
– Silo effect: Sites like Reddit make you surround yourself with people who (1) don’t know anything, (2) act like they do, and (3) they ALL have the similarly kooky opinions!
– Solution is to read multiple CREDIBLE sources
Myth: “I can save $10 by not buying that book! Ha Ha!”
– Pay for value
– Not just sticker price, but value
– Why it’s crazy for people to try to find these extreme deals on books. If you implement even 1 tip, you’ll save/earn 1000x the money
– Same people who don’t pay end up spinning their wheels
– Would it be worth it to buy a $10 book that has saved people thousands? Scrooge for a few bucks/month if it helps you earn $300/month? Or to buy a course at a community college for $500?
– Focus on value, not cost
BUY AND HOLD
– Unprecedented what’s happened, lot of people to blame (including ourselves)
– But there’s a knee-jerk reaction: BUY AND HOLD DOESN’T WORK!
1. Ok, so what does?
2. The people who pull out of the market now are going to face another, more serious phantom risk: Running out of $. (SEE BELOW)
– We tend to overvalue what’s easily remembered — so you might say, “VWs are terrible cars” when in fact Consumers’ Reports prove otherwise (I do this)
– People are freaking out and removing their money from the market — driven by fear, not educated moves
– Change asset allocation. Change regular contribution amounts. Diversify. Earn more. But PULLING YOUR $ OUT? Worst thing you could do
– And people will face another fear they don’t know today: Running out of money. Not as obvious as losing 40%, but you can’t do much when you’re 82 and out of $
– Focus on the most important things and work, step-by-step, to hit them
BUY AND HOLD 2
– Compare equity returns to any other measure and you’ll see over the last 70 years have shown equities to return the best. PAST PERFORMANCE IS NO GUARANTEE…
– But I prefer to use data unlike the other handwavy arguments that involve the gold standard, doom and gloom, and tin cans
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