Here, let me just tell you how much you spend

Ramit Sethi

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. ChristianPF

    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. Adam Ferguson

    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. Chris

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

  4. Phil

    I would enjoy more entrepreneurial topics, personally.

  5. Ola

    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. eric

    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. Amy

    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. Adesanya

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

  9. K

    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. Ryan

    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.

  11. trip

    Generally, all great wealth is created through earned income. It is like the difference between savers and investors. Good savers follow the mechanics as you describe, but true investors can accurately value businesses.

  12. Rita Bradley

    I vote for you to cover both please. Defense and offense. Comment #10 is interesting. Not everyone will be able to get their act together and retire comfortably. Some have waited too long and are not even in good enough health to make the neccesary changes. Maybe someone (I would but I’m to tired) could do some research on what happens to people who haven’t adequately prepared for retirement. Do their adult children take care of them? Does some “luck” fall on them and they manage to survive. I’d like to read some real life experiences. Could end up being cautionary or even encouraging…..

  13. Brooke

    Your posts just crack me up.
    I’m with you, now that I’m freakishly saving my money, it’s hard to keep mum when I see others wasting theirs. My classmates bring Starbucks drinkie drinks to class every day – I wistfully wish I had one too until I mentally tally what it would cost me (not even including the calories). I wish someone would have clued me in to how much I was spending like 10 years ago.
    Both personal finance and business ideas are great. Thanks for your posts.

  14. Jessica

    Maybe you can differentiate yourself from other bloggers by trying to define a happy medium?
    There are two limits to that cash flow margin and I am interested in widening it from both directions. Usually I read advice toward one extreme at the expense of the other, and I don’t think that is the best approach. A more applicable approach would be a nice change.

  15. wen-wen

    ramit, this is a great article. I think people have no idea how much they spend until they sit down to think about it… its kind of scary.

  16. Terry

    re: #10

    I earn my state minimum wage and have no credit. (I cannot spend more than I earn, as I cannot even get financial aid or student loans.) Frugality will indeed get me only so far; it’s not possible to save and invest my way to a million dollars on my oathetic income.

  17. brint

    I don’t like evolutionary finance theory. You know, the theory that says small costs redirected into small investments become big change over time. You should have a giant sticker on their blog saying, “this is only a theory – read with skepticism.”

    Evolutionary finance is a boring way to live. Give me big sacrifices and big risks on the road to big gains. I’m not going to sacrifice my life for a few decades of measly savings.

  18. Garcia

    Folks – your just going to have to learn save . It can be done just do it .

  19. Susan

    I’d like to see you do both evenly. Offense and defense. I’ve lived both with a decent income. The offensive approach is stunningly simple. The offensive approach is much trickier in thsee very challenging times. If people haven’t figured out how to invest properly in good times, the challenge to do so now will be climbing Mt. Everest with a backpack and chewingi gum. We have a society that has given up on working towards funding their futures because we have gotten so far away from only ‘eating what we kill.” You have to learn the defensive techniques first before you can be effective on the offensive. But people have to be willing to make changes and forget the Jones’.

  20. Sandeep

    lol @ the way gumpy comes in

    I’ve been following your blog for quiet some time and I think you have an interesting balance of both. Your blog has never bored me.

    Am currently in the process of negotiating some extra fee I have to pay. Let’s see how good your tricks work in India.


  21. KS

    Great post Ramit!

    I would like to see more articles on how to make money.

  22. Ryan

    @Terry: I’m sorry. I really didn’t mean to sound like I have it all together and getting along in this world is cake. I don’t and it isn’t. I’m glad you’re checking out this site.

    You (and Ramit) are right in that frugality will only get you so far. But some people (like me) with a modest wage and good habits (and young age) can be frugal and invest wisely and probably retire ok. I, personally, am not that interested in entrepreneurship, though that may change.

    Ramit: I think I second the others that you could find a happy medium. Excellent post, by the way.

  23. Jongasm

    “Give me big sacrifices and big risks on the road to big gains. I’m not going to sacrifice my life for a few decades of measly savings.”

    It’s not about that. It’s about spending money wisely. Why spend $5 every day on coffee? If you stop doing this, are you “sacrificing” your life? If so, I’d say you have a pathetic life to begin with.

    $10/day, or $300/month, will turn into a nice return over many years, and it does not require a change of lifestyle; only a couple of small changes to poor buying habits many of us have.

  24. Mike


    If the comments above are representative of your blog’s population of readers, I’d say that we’re quite diverse and we want it all.

    Personally, I think that the topics tie together quite well anyway. For the youngin’s who are likely fresh in their careers (or still in school), money is tight, so budgeting, saving and banking are great topics on the road to financial freedom.

    For guys (and gals) like me, with a few working years under our belts, we may be in a better position to put away some above and beyond the standard 401k/403b/TSP options. So investing and entrepreneurial advice may be our cup of tea.

    For the older guys and gals who are getting towards retirement or are already there, they may be looking for tips on how to make their savings/investments/etc last through their non-working years.

    Personally, entrepreneurship isn’t a current interest of mine. For now, investing in a diverse portfolio for the long haul and in CDs for short term savings (3-years or less) is working for me.

    As always, I enjoy your blog as is… keep up the good work!

  25. rvb1977

    Nothing worse than being at Sears to buy a new car battery and watching a middle-class dad take his 16 year old kid to buy rims. What a waste of money!

  26. communicatrix

    If you’re too lazy to do this, I hate you.

    Damn, Ramit. You’re the funniest financial blogger out there.

    Keep ’em coming. You speak the truth!

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  28. Scarfish

    Well, clearly we want it all in all possible ways–we want to save, invest AND spend, AND we want you to write about personal finance, frugality, investing, and entrepreneur topics. And we are nt demanding at all!

    In all seriousness, personal finance is by necessity a well-rounded discipline. If you save, but do not invest, you are not benefitting as much as you could. If you match your job’s retirement plan or do a Roth every year, but don’t save for short-term purchases and buy on credit, you’re moving in too directions at once. If you scrimp and save, but are being underpaid and acting as a martyr, you’re doing yourself no favors. We need to combine investing smarts, learning to live below our means, long and short-term planning, and finding a career path (company or self directed) that gives us at least the hope of earning more money over time. I think in all of those areas, anyone who’s reading financial blogs can still use help–so why not cover them all?

  29. mariobox

    Good question Ramit…The approach I find most useful is to learn some basics on personal finance and creating a system that can be put on autopilot, with the idea of dedicating most of our energy and creativity to find ways to make more money (through personal entrepreneurship). Saving is pretty easy and it can be summarized by developing good habits and learning how to do a budget. The basics of nvesting is also easy: max out your 401K, open and fund a Roth IRA and put the rest in an index fund (and don’t forget to build a short term (5 year) cash fund for planned expenses and emergencies). Then, put as many bills on auto payment so you don’t have to think about them. After that, you may just need to spend a couple of hours a month on keeping an eye on your money and see how are you doing, while using the rest of your time to figure out how to make more money, hopefully doing something you enjoy.

  30. Nikhil Bhat

    Ramit, the question is this: did you get her number?

  31. Her Every Cent Counts

    It’s so easy to end up spending more than you make. I just wrapped up my first year of a full-time employee and I was under the impression that I was making ‘x’ amount per month when at the end of the tax year I realized I owed hundreds of dollars to the IRS. So much for breaking even.

    Life in the Valley is painfully expensive for an entry-level employee. I’m fascinated by entrepreneurship but I’ve only managed to fit in a few freelance web design and writing projects outside of my full-time job. The extra cash is great, but I wonder how much “extra” I should do per month. I’m starting a new job that pays much better than my current job soon, so that’s exciting (I think I will start breaking even if I spend as I do now with my new salary) but that still leaves little to put away. I look forward to more budgeting advice on your site as I really need help in that area of my life.

  32. Josh

    I think if you have the basic system of saving and money management down in practice, then you’re positioned to be more successful (at least on a management side) of business opportunities that may come along. So a little of both would be nice, with emphasis on the first.

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