Ramit Sethi | Talks at Google
>>I myself have read Ramit’s book, and I’ll
tell you, as a finance major in college, I have not learned more about bank accounts
and credit cards than I can in four years. I learned it from Ramit more than college.
His book focuses on personal finance for people in their 20’s and 30’s, by weaving in together
threads from health and fitness, social psychology, and personal finance.
His blog, IWillTeachYouToBeRich.com, frequently crashes because so many people access it.
It hosts over 300,000 readers per month, and Ramit just told me he’s getting new servers
to back up more readers. He’s no stranger to Silicon Valley.
Previously, he cofounded a company called PBwiki, where he helped develop user acquisition
of millions of users. Ramit graduated from Stanford where he studied
technology and psychology. Please welcome Ramit Sethi.>>[applause] Ramit: Thank you very much. Testing one, two,
three. Ramit: Is this okay? Can you guys hear me?
Okay. Thank you very much for having me.
When I was doing my first start-up, we used to meet here about four times a week.
So thank you very much for that. Just a quick question.
Who here has read my blog or my book already? Okay.
Who here thinks it sounds like a big, fat scam?
“I will teach you to be rich” yeah. What I want to talk about today is a system
that I’ve been working on building for the last ten years.
And it comes down to, “Personal finance is not about willpower.”
People think, “If I just try harder, I can save more money.
I can earn more money.” Very similar to, “If I just try harder, I
can lose ten pounds.” And clearly, it’s more complex than trying
harder. It’s clearly more complex than throwing tactic
after tactic out at people. What we’re going to do today — I want to
spend about a half an hour talking about the psychology of automation — the psychology
of personal finance. And then, I’m going to talk to you a little
bit about the system — how you can implement it today.
It takes about six weeks. People are pretty smart here, so you can probably
do it a little faster. And then, we’ll just do a lot of Q and A.
I’d love to take questions. Personal finance is intensely psychological.
And, first of all, when I talk about, “I will teach you to be rich,” I want to emphasize
that ‘rich’ is not just about money. For some people, ‘rich’ could mean buying
a Louis Vuitton bag or expensive shoes or traveling all the time.
That’s perfectly fine. That could be a rich life to you.
For other people, it might be about charity or, you know, more traveling or whatever it
may be. That’s fine too.
But ‘rich’ is only partly about money. The reason that I started this was, I got
sick and tired of personal finance experts telling us things like, “Don’t spend money
on lattes,” and “Keep a budget” — which no one ever does, and is the most useless advice,
but continues to be expressed for the last 50 years, even though no one keeps a budget.
It just doesn’t work. So today, these are things we’re not going
to talk about. We’re not going to tell you to keep a budget.
I’m not going to lecture you about lattes. And for some reason, kooky people start talking
about Ron Paul and commodities when it comes to investing.
We’re not going to talk about that either. What we are going to talk about is building
an automated system so that, by default, without trying, your money is doing the right thing,
okay? And that will let you lead a rich life and
spend your money guilt-free. Because ‘I will teach you to be rich’ is about
spending extravagantly on the things you love if you’re cutting costs mercilessly on the
things you don’t. So let’s get to it.
In the next hour, we are going to go through a bullet-proof system.
This is a system that you can use for your own money.
And most people, if I ask you, “Where’s your money going?” most people look at their bills
at the end of the month and go, “I don’t know. I guess I spent that much.”
I don’t know why they talk like that, but they do.
Instead, what I’ll propose is a bullet-proof system where, if I were to say to you, “Hey,
you need to start saving 500 bucks for this trip to Thailand you want to take.”
You’re going to say, “No problem. I know exactly where to take the money out
from here to here and have it flow over here. And it will be a couple clicks, and it will
be done — automatically. We’re also going to examine the psychology
of it. And I want to ask you guys to first take a
couple minutes with me to go deep into the psychology, because it’s not just about tactics.
It’s not about me telling you, “You need to spend less on this and earn more and do.”
We know that. We know what we need to do. Why aren’t we
doing it? I took a survey of about 1600 users and asked
them, “What are the things you wish you saved for 10 years ago?” And it was almost a uniform
curve. People in their 20’s wished that they had
saved more for travel. People in their 30’s wished that they had
saved more for their down payment on their house.
And people in their 40’s were often really screwed if they haven’t started — wished
that they had saved more for their retirement. So we know what’s going to happen to us ten
years from now, yet we delude ourselves into thinking, “We’ll do it later.”
I met a girl on my book tour. She’s about 25, 26.
And she told me a really interesting story. She said, “Ramit, I read your book, and I
started saving for my wedding. Already, I have a little sub-savings account.”
I said, “Great, can I get this on flip cam? This would be awesome.”
And she got very uncomfortable. She said, “No, no, no.
I don’t want to talk about it on camera.” I said, “Why?”
And she told me, “I’m not engaged yet.” [laughter] Isn’t it interesting that we know the average
age where a woman gets married, where a man gets married.
We know the average cost of a wedding. Put the numbers together, and it means that
if you’re 20 years old, you need to be saving over $300 a month for your wedding.
If you’re 25, over a thousand dollars a month. But who does this? It’s so weird.
And it struck me, “Isn’t it interesting that it’s weird for this young woman in Portland
to be saving where it’s actually normative for us to say, “Oh, I’ll just figure that
out later.” Or even more delusional, I’m just going to
have a small, simple wedding with a few friends. No, you’re not. You’re going to have a big-ass
wedding, because that’s what we want. It’s our day. So let’s get real.
Let’s be honest and acknowledge what the costs are going to be, okay?
There’s also people who are even more delusional. Twenty percent of people actually believe
they’ll get rich by winning the lottery. [laughter] I hate these people.
Ten percent think that they’ll get rich through an inheritance.
I hate them as well. And perhaps, the most delusional of all.
Three percent via an insurance settlement. Yes, I’m sure — smart three percent.
Not going to happen. Why don’t we do this?
If I were to ask someone in their 40’s, “What’s the number one thing that you are worried
about or concerned about?” They would say, almost all of them, “Money.”
We know it. We know we need to exercise more. We know we need to work out more, eat less,
and manage our money. Why don’t we do it?
It’s not about trying harder. That’s something I want to emphasize today.
Let’s take a look at some comparisons. When it comes to personal finance and food,
there’s a lot of similarities. So the health and fitness world directly inform
your money behaviors. We spend more than we think.
We also eat more than we think. If you were to actually look and measure what
you ate, what you spent, you wouldn’t like it.
You wouldn’t tell people what you did. In fact, there’s great research showing that
there were people who were more comfortable talking about their sex lives than their credit
card bills, making me ask, “Where do I find these people?” [laughter] Okay?
We value anecdotal stories over actual research. How many times have you heard your friends
say, “Oh, you really should invest in real estate — it’s the best investment.” No, it’s
not. Or you know, friends telling you, “the baby
minutiae.” How many of you have heard friends saying,
“Don’t eat fiber after 11 p.m., because it doesn’t metabolize.
You need to eat fruit. But make sure you get your carbs in the morning”
— these weird theories that are not backed up with literature.
How many people do you know that complain about money but have never spent one weekend
actually optimizing their finances? You can do it once, and you can have the residual
benefits forever. So there are profound, psychological reasons
why we don’t do what we know we need to do. We also have the media shoving down our throats
these ridiculous covers and ridiculous messages like, “Top ten stocks you must own in 2010.”
Actually, analyze those media messages, and they are almost always wrong.
They don’t even match the market. What they are doing is selling advertisements
and selling magazines, not selling good financial advice.
The answer is far more prosaic, and it’s something I like to talk about which is, “Would you
rather be sexy or would you rather be rich?” Would you rather go to a party — I’m a nerd.
I don’t know if you guys do this, but when I go to parties, we talk investment strategy.
This is what we do. And people say, “What are you investing in?”
And it’s sexy to say, “Well, I got this stock, and I’m looking at some early-stage angel
funding. Whereas the real individual investors are
simply saying, “Well, I picked an index fund, I got my asset allocation right.
It took me a weekend. And all I do is just automatically send money
every month. It’s not as sexy, but it’ll make you rich.
Other reasons — and this is perhaps the most important of all.
There’s just too much information. And everywhere we go, we’ve got our parents
who don’t know anything about money, generally, telling us stuff.
We’ve got the media. We’ve got friends, who think they know, but
they don’t really know. And we’ve got information all over the place.
What’s the result of all this? It makes us actually want to do less.
It makes us — when we see — let’s look at 401k’s, for example, great study in the the
book, The Paradox of Choice. When there are more options in your 401k,
people actually participate less. It’s very counterintuitive, but it’s true.
How many of you have ever opened up your 401k and just gotten overwhelmed with the choices?
Anyone here? Interesting. And we’re all — in this room, we’ve got a
lot of very, very smart people. It’s not that you’re not smart, it’s that
it’s a human tendency to be overwhelmed by too much.
The results of all this information, all this media messages is predictable.
It’s, we do nothing. We say, “We’ll do it later.”
So, if we know it’s important, why don’t we do it?
One of the biggest things that I talk about with ‘I will teach you to be rich’ is that,
every day we wake up and we’re confronted with 50 choices we could make about our money.
We can pay off debt. We can earn more. We can try to do better at our job.
We can not go out and spend that money on lattes.
Whatever it may be. Instead, I prefer to focus on the big ones.
Pick the one or two things that actually matter. And do those, and let your friends worry about
saving money on diet cokes. Let me give you a couple of examples.
This is a simple one. You may have seen these numbers before.
Smart Sally starts investing a hundred dollars a month at age 25.
She stops at age 35. She just lets the money grow.
Dumb Dan doesn’t start until he’s 35. He says, “Oh, I better keep investing till
I retire.” Both of them at the end — remember, one person
invested for ten years, another for 30 years. Smart Sally has $50,000 more.
So let your friends worry about ordering lattes. You could focus on the one or two things that
actually matter. Another example.
The difference in having good credit when you go to buy a house.
Typical house, let’s say, $300,000. The difference between having good credit
and poor credit is over $100,000. It’s not sexy, but it’ll make you rich.
So what I want to do now is, get into the six weeks.
And I want to talk to you about what you can do in six weeks to automate and optimize your
finances. Because the No. 1 goal is that no one here
needs to be a financial expert. You don’t need to be an expert to do this.
You get it set, you get it automated, and you get on with your lives.
All right. So here’s what we’re going to do. First, Week One.
I picked Week One as ‘credit,’ because we all have credit cards.
We all hate our credit card companies. So, I want to show you how to screw them a
little bit like they screwed some of us. There are six commandments.
I’m going to skip the first four, because a lot of us know that, but I’m going to talk
to you about the last two. They’re a little bit counterintuitive.
Who here knows that, when you buy something, and let’s say, it’s got a one-year warrantee.
And your new phone breaks on day 366. That’s no problem.
Your credit card automatically gives you an extra — it doubles your warrantee up to a
year. So if something breaks on day 366, no problem.
Call your credit card; they’ll write you a check.
It’s no problem. The other thing that’s pretty interesting
that I learned recently was, if you buy something, in the first 90 days, it gets stolen, you
break it, or you even lose it, they’ll write you a check $500 or $1000.
It actually happened to this laptop. I bought my first Mac. It was my little baby.
I bought it a few months ago. First week, I spilled a huge glass of coffee
on it. I was almost weeping. And couldn’t repair.
It was destroyed. And so, I called up the credit card company.
They wrote me a check for 600 bucks. I sold it for parts on E-bay and broke even
on my $1400 mistake. You can do this with anything — a sweater
— anything. Anything you buy with your credit card, okay?
So the point is, you want to use all the benefits you get with credit, or with anything for
that matter. I was actually going to work at Google as
an APMM. And I remember, when they made the offer,
I built my own super-anal, wierdo spreadsheet about the benefits that I would get here.
And I think, for me, it was something like 22 to 26k a year in benefits — if you use
them. You guys know this. Your car insurance.
It’s huge discounts. Movie tickets, flowers, all kinds of stuff.
Did you know that? These are things you can use.
The other thing about credit is to negotiate like an Indian, okay?
I have been bred to negotiate like an Indian, so I want to share some of this with you.
You can negotiate your car insurance. You can negotiate your credit card late fees,
overdraft fees, your gym, cable. You can — even if you carry debt — you can
negotiate your credit card APR, which if you’re carrying a lot of debt is a huge win for you,
okay? Do you guys want me to do a mock negotiation
right now? Would that help? A Yes. Q All right. So it’s easy to say ‘just negotiate’
but, for some reason in America, we’re scared of using the phone.
I don’t know why, but people are really afraid of using the phone.
Which allows me to No. 1, mock them, but No. 2, in the book, I actually wrote the e-mail
scripts, or the scripts you can use on the phone.
People literally call these companies and read them the scripts.
So the companies don’t like me very much. Let me give you an example of an overdraft
negotiation, okay? So, I am — I have $500 in my checking account.
I just used my debit card — which by the way, you shouldn’t — I just used my debit
card to buy a $700 purchase, so I’m overdrafted. And what they do is, they just hit me with
a $37 overdraft fee. So I call them up, and I say this, “Hi, there.
I just wanted to confirm that you’ve received my extra transfer that I sent in after that
overdraft. Can you confirm that you’ve received that
money now? There should be about a thousand dollars in
my account.” “Well, yes sir, as a matter of fact, we did
receive that transfer yesterday. Thank you very much.”
“Okay, now, I wanted to talk to you about that overdraft fee.
I see that an overdraft fee was incurred, and I’d like to ask you to waive that please.”
“Why?” “Well, I made a mistake.
I was moving some accounts around, and it’s not going to happen again.
I’d like you to waive that overdraft fee, please.”
Now, two things right here. Just stop right here for a minute.
First of all, you have a 50 percent chance right there of getting that fee waived —
right there. For two reasons, one because you asked, and
most people don’t. And second, you didn’t say, “Can you remove
that overdraft fee?” Because the natural response of a customer service rep is to say, “No.”
You said, “I’d like you to waive that overdraft fee, please.” Okay.
So let’s say they do it, 50 percent. If not, you’re going to have to go a little
tougher. Say, “Sorry, sir, I’m not able to waive that
overdraft fee, but we have blah, blah, blah — marketing pitch — blah, blah, blah.”
“Well, you know, I’m looking at my account here, and I’ve been a customer for four-and-a-half
years, and I’d hate to have to switch just because of one, minor, overdraft fee.
Can you take another look and see what you can do for me?”
Right there, your chances go up to about 65, 70 percent. [laughter] It works.
And then, if it still doesn’t work, you can escalate, or you can call back later.
But the point is, you can do this. And actually, I’m going to teach you three
words you can use right after this call. And you can say.
A lot of people save a lot of money using this.
And it’s true, by the way. The phrase is this, you call up your cable
company. Do this with your — they hate me — call
your cable company, and say this, “Hi, Mr. Comcast, I noticed this $80 a month fee that
I’m paying. You know what? Times are tough. Times are
tough. I just can’t afford that anymore.
What can you do for me?” “Well, sir, as a matter of fact, we have a
special $50 offer that we can offer you for the next 12 months.”
“Oh, thank you very much.” You just saved $400 a year, okay?
That’s the money that you could use to start investing and use on things you love, whether
it’s going out or traveling. These things work.
So I would really urge you to call up all your companies and take them for all they’re
worth, because you’re paying them. These companies pay $300 to $1,500 in customer
acquisition costs. They don’t want to lose you for a $37 fee.
So take advantage of it. They expect it. They build it into their models. All right.
We’ve now covered credit. Let’s get to bank accounts. This is pretty
easy. I just want to share the actual accounts I
use and how I set it up. Rather than having all your money sitting
in a big pool in a savings account, don’t do that, because it’s easy to just say, “Oh,
I’ve got 5k or 10k — or whatever the number is — yeah, I’ll just take some of it out.
And then, you just stay stagnant for a year to five years.
Instead, use sub-savings accounts. So, I’ll actually show you a screenshot of
my own savings account. I’m saving for certain sub-goals like a wedding,
even though I’m not engaged, car repairs, because those are unexpected, and a trip to
China. What happens is, if I want to take some money
out to do something, it’s not that I can’t take it out, of course I can.
But it’s just that minor, psychological barrier. I have to think for a second, “Do I really
want to take $1,000 out of my down payment fund? Do I really?”
Just think about it for one extra second. That, often enough, is the default to help
you make the right decision. The accounts that I use, I’d recommend too.
So one is for ING Direct, for Orange, I like them a lot.
They’re simple, they don’t spam you with a bunch of mail and stuff.
It just works. The second is Schwab for checking.
The reason I like Schwab is two reasons. One, they pay you interest on your checking
account. Two, I don’t know if I’m the only one who
finds myself at like, a liquor store at 3:30 in the morning withdrawing $380.
Am I the only one? Well, you know, you get hit with these huge,
like $5, $10 withdrawal fees that make me boil and rage.
Schwab actually refunds all your ATM fees. So I really like them for that, especially
if you live in like a New York area. You’re getting hit with these fees all the
time. So these are the two accounts that I use and
I like personally, okay? Let’s now talk about Three, which is investment
accounts. Now, people get really confused where they
tend to conflate investing with opening your investment accounts.
That’s not the case. You can break it down, and in this week, you
just opened up your investment accounts. And I know here, you’ve already got investment
accounts opened by default. So you’re already a step ahead.
People often wonder, “Which account should I open up when it comes to investing?” Here’s
a typical ladder of investing. First, your 401k.
Then, you want to pay off debt. Then, you’ve got your Roth IRA.
If you have all these three steps, by the way, you’re investing roughly about 5 to 10k
a year, which is great. If you still have more money, you can go back
to your 401k. And then, if you have more — you’re investing
over $20,000 a year — open up a taxable account. A little bit different for Googlers.
So I want to cover that for you for a second. I know you’ve got a Roth 401k, which is great,
and the match is very generous. So, if you simply do the first one or two
things, you are ahead of the game, you’re ahead of 99 percent of your peers.
I’ll take questions at the end. So just doing a Roth 401k as much as you can
and paying off debt is wonderful. That’s what I call the 85 percent solution.
It gets you 85 percent of the way there. Now, get on with your life, okay?
If you really want to get fancy, you could do the rest of that stuff.
Especially in 2010, there’s a bunch of cool tax stuff, especially if you’re a highly-compensated
employee, but that’s more complex, and that is the 85 to 100 percent of the process, okay?
Quick numbers on 401ks. I just want to show you how these numbers
work. Many of you have seen these.
These are the kind of things that you’ll see in these magazines all the time.
They’re just numbers. They don’t really persuade you to take action.
So, when you — some of this stuff that I’ve have done with ‘I will teach you to be rich.com’
in the book is all about behavioral change. Just quickly notice these numbers here in
terms of ages on the left. You’ll see that, with an employer match, your
money actually just grows. This is without. This is with a match.
And your money just grows tremendously. And notice that, by the way, the Google match
is actually more generous than these calculations. So, your money really, really grows quickly,
all right? I won’t say more about that.
Oh, except one more thing. Psychologically, it’s very important.
They did some great research where they went into companies and they — people had to opt
in — they had to fill out a form to get into the 401k.
Remember, there are big, tax benefits. You save a lot of money using a 401k.
About 35 percent of people opted in. Then they made it ‘opt out.’ In other words,
you’re automatically enrolled. Compliance — or contributions — skyrocketed
to over 90 percent. That’s why it’s really important to automate
this. Because, you might be motivated right after
you leave this talk, but six months from now, you’re like, “Let’s drink.”
You’re not thinking about personal finances. So just automate it, and you don’t have to
worry about it again. Quickly — investment accounts — I like Vanguard.
I know you’ve got Vanguard here. They’re great. They don’t try to gouge you with fat commissions
like some of the other guys. T Rowe Price and Schwab are also great.
So any of these companies are wonderful, and they have great funds that you can do for
low cost. We’ve now covered credit, your bank accounts,
your investment accounts. This is the tough one. Conscious spending.
So, like I said, I don’t want to tell you “You shouldn’t spend on x, y, z,” because
the first thing you’re going to do is say, “Screw this guy.
He’s telling me what to do.” And, in psychology, that’s the term reactives.
We don’t like someone to tell us what to do. We actually rebel against that.
Not the case. I think you should spend extravagantly on
the things you love, as long as you’re handling the other stuff.
So I want to talk about how you do that. Again, if I asked you, “Where does your money
go?” Most people don’t know.
Or if they think they know, they don’t. We’re not cognitively wired to amortize our
spending. So if I were to ask you, “How much did you
spend?” Did you really count in the $700 in Christmas
gifts you spend at the end of the year, adding about 60 bucks a month? No.
You didn’t count vacation. You didn’t count all these one-time events.
Here’s a nice baseline for what your spending could look like in your 20’s and 30’s.
Okay, I say that specifically, because 20 to 35 percent of guilt-free spending, like
drinking, is almost a criminal amount for some parents.
That’s okay. When you’re in your 20’s and 30’s, this is what we spend money on.
It’s fine. As you get older, your spending numbers are
naturally going to change. What I want to emphasize here is that, if
you cover your 50 to 60 percent of fixed costs, your investments and your savings, the rest
of the money is guilt-free spending. You don’t have to feel bad about buying $300
jeans, because you know you’re already hitting these numbers. Okay.
So what’s going to happen after this? You might take a look at this, and you might
analyze your own spending. And you might say, “Wow, I’m like, wildly
off. I’m not even contributing close to what I
want to put into my retirement or savings or whatever.
How do I tweak this, so I can get the numbers in order or in line?” I think ‘saving’ is
a bad word. We don’t like to think of saving, because
it means “giving up on the things we love,” right?
It means saying ‘no’ to the things we love. So instead, I like to use something I call
the ‘CEO model’ — cut costs, which is one, we know that. Earn more.
We always forget that. I’m actually in the middle of launching something
on my site right now to help people take their skills and turn it into income on the side.
I think it’s a very easy thing to do, especially for highly-skilled people.
And you can earn a nice $500,000 dollars on the side.
And then, optimize spending, which is like the thing like negotiating.
If you do these three things, you can make huge wins.
I’ve got people who read my site who previously said, “Oh, there’s no way I could cut down
any more. There’s no way.” And then, they automate and they go through
this and they’re now saving a thousand dollars a month into their savings and retirement
accounts. Very normal salaries.
So it’s not like they’re making a huge amount of money.
Instead of trying to save on 50 things and not succeeding at any of them, forget that.
Use the 80/20 principle. Or what I call the ‘two-headed savings approach,’
and just focus on your two biggest, discretionary expenses.
Who here knows what their first or second biggest, discretionary expense is?
Yeah, just shout it out. A Travel. Q Travel. What else?
Eating out. Okay. Drinking. I know you guys don’t want to admit it. What
else? So there are these big, discretionary expenses.
I don’t want to say, “Cut down your travel all the way.”
Because maybe you really value that. Or eating out. That’s what it is for me.
Instead, what I say is, “I’m going to pick these two discretionary expenses that I want
to cut down on, and over a period of six months — not tomorrow — but over six months, I’m
going to cut down by roughly 30 to 50 percent.” Just slowly. Look at the numbers. They’re
really slow. By the end of these six months, if you do
this with two, you’ve got $500, $600, $700 in extra, discretionary income.
Extra cash where you can do whatever you want with that.
And it’s not like you went from eating $500 a month out to $200.
That would never work. Take it slow, take it gradual, but make it
sustainable, okay? And don’t worry about saving money on $3 here
and there. If you focus on the biggest two expenses,
that’s all you really need to worry about for cutting costs.
That’s the 80/20 rule. Now quickly, I’m just going to power through
these power techniques. How do you track your spending?
I use mint. I use this in conjunction with my two-headed
savings approach. So I’ll say, “Hey, if I’m spending too much
on eating out, which is my thing, text me.” You can compare it to people near you.
I’m like a little bit of a wierdo — as you can tell — when it comes to this financial
stuff. So one thing I do is, any time there’s a human
involved, I don’t trust them. Actually, you guys at Google should know what
I’m talking about. What I’ll do is, I’ll save these receipts
any time I write something human, like there’s a tip involved.
And once a week, I’ll take two minutes and just check and make sure they didn’t add an
extra zero to that tip. You don’t have to do that. That’s a little
bit extreme. I use Google Calendar as well.
On the 15th of the month, I just check it. “Hey, am I spending too much on eating out
or not?” And if I am, I’ll just maybe say ‘no’ to one of my friends asking me out, or
I’ll cook at home. I’m not going to cook at home.
But if I’m doing fine, then I won’t have to worry about it.
Shut it down, and I’m done. Get on with my life, okay?
That’s conscious spending. And that lets you spend on the stuff you love,
instead of worrying about spending here and there.
Okay, automated. This is my favorite. This is my favorite part of the whole system.
I want to take you step-by-step through that system now and show you how it works.
You get — let’s pretend that you make a hundred percent of your income from your salary —
which is the case for most people. How does it work?
You get paid, let’s pretend, for ease of use, you get paid on the first of the month.
Some of that money is going to automatically be taken out and sent to your 401k.
You then send the remainder — 95 percent ballpark — to your checking account.
This is your e-mail inbox. This is where everything happens.
You filter money, you disburse money right from here.
It all happens from your e-mail inbox or your checking account.
You’re going to set up an automatic transfer to your Roth IRA, or maybe your debt, whatever
it may be. You’re going to set up an automatic transfer
to your savings account where it’s split into sub-savings goals. Okay?
Now, if you do simply these things, you are handling your money better than 99 percent
of people. You’re good to go. So now, it comes down to spending money.
I tend to spend most of my money on credit cards, because I get, you know, a bunch of
consumer rewards and points and stuff. This is guilt-free money, because you’ve already
handled the stuff you need to handle. And if you’ve got — some people don’t accept
credit cards — like, the landlord? You don’t need to write those checks.
I hate writing checks. So every 26th of the month, my bank automatically
sends a check to my landlord, and I never have to touch that again.
You can automate that as well. Now, look at the power of this.
If I were to tell you now, “Hey, I want you to start saving $200 a month for our trip
that we’re going to take to China.” You can easily say, “Oh, perfect, I know exactly
how to do that. I can use a two-headed approach here to generate
a couple extra hundred bucks, or I can tweak my savings goals to generate that extra hundred
bucks. And I would create another savings goal here.”
You can do all these different things with your automation system instead of just having
this, you know, nebulous sense of money that’s coming in and going out.
It’s very powerful to be able to control it. There is a missing piece and that is ‘timing’.
You can’t have all these transfers going around all the time, because you’ll be hit with tons
and tons of fees. So, let’s pretend — for just a moment, for
simplicity — that you’re paid on the first of the month, okay?
What you would do is, on the second of the month, you would initiate a transfer to your
401k — just like we saw — the rest would go to your checking.
Then on the fifth of the month, you would go to savings and your Roth.
Then on the seventh etc. And after the seventh, the rest is guilt-free
money. Timing is important.
I know you get paid twice a month. So you can tweak it a little bit.
One is, you can just pay yourself in the first 15 days.
Do your 401k and your retirement accounts. And then, the second half, you can pay your
fixed income. The other thing is, if you have enough money
just sitting there, you can just treat it as a buffer and go back to this once-a-month
system, which is, in my opinion, simpler if you’ve got the money.
So that’s how automation works, okay? Now, we’ll go on to the last part, and we’re
now on to investments. How many people here have not invested at
all? Okay. Not that many.
I know it’s automatic for you, which is great. You’ve already got a leg up.
Let me just quickly walk you through the important stuff to know about investments, and then,
we’re going to do questions. Okay. Ignore these stupid magazines. Okay?
They — like I said — are selling ads and magazines.
They’re not selling good, financial advice. Repeat — please listen to me when I say this;
this is very important. Investing is not about picking stocks, okay?
Investing is not about picking stocks. People think it is.
All of our friends think it is. It is not. Even the fanciest portfolio managers in New
York could do this for a living can not even equal the market, okay?
And they’re paid millions of dollars. So it’s not about picking stocks.
It’s much different than that. Okay. Thinking that investing is like picking
stocks is like thinking that any individual word in a book is the most important thing
you do when writing it. No, the most important thing when writing
a book is your table of contents — your organization. The way that you structure it, right?
Same as writing code; same as writing a book. So asset allocation is basically your investment
plan. When you’re 25, you want to be pretty aggressive,
because you can afford the volatility, and you want to go for rapid growth.
When you’re 35, you don’t necessarily want to be — you want to tone it down a little
bit. When you’re 65, you know, you can’t afford
to lose that money. You’ve got medical bills.
You’ve got bingo bills. [laughter] What are you going to do? It’s life or death.
So, what happens? How do you actually turn this into investing?
What do you do? And just quickly — at the bottom of this
pyramid of investing is where you have the most control — stocks, bonds, cash — you
can pick individual stocks. Most people think this is what investing is,
and they get overwhelmed because, How are you supposed to know what stock to pick?
So, they came up with mutual funds and index funds.
And instead of having some smart guy in New York pick it for you, they have a computer
mirror it and cut your fees by a tremendous amount.
Great, the problem with index funds is that you still have to create an asset allocation.
You can’t just buy one index fund. You have to buy like an international fund,
a domestic fund, large cap fund. And people don’t do that.
They’re horrible at it. So then, they recently came up with something
called “life cycle funds” or “target date funds”.
How many of you guys have heard of that phrase? Life cycle or target? Excellent.
And I know that that’s an option that they offer here, which is perfect, because people
think — they say, “Oh, yeah, asset allocation is really important.”
But psychologically, they don’t want to get in there and rebalance, because rebalancing
is really hard. So people don’t do it.
That’s why Granny, in 2008, sometimes lost 65 percent of her money — which she never
should have — because she was improperly allocated.
So you pick the target date fund, a low-cost, target date fund where you have access to.
And basically, you don’t have to worry about rebalancing over time.
All you have to worry about is funneling as much money as possible into it.
That’s it. I will teach you to be rich. Reduce your choices.
Focus on the stuff that matters, and then, get on with your life. Okay?
That’s investing in a nutshell. So what do you do now?
First, you want to get your credit cards straight. Make sure you’ve got the right credit cards.
Make sure you’re taking advantage of every benefit they offer.
Call them up and ask for something called their Booklet of Benefits, so you’ll know
all about the purchase protection and warrantees and all that stuff. Use it.
It saves you hundred dollars of dollars a year if you do.
Go through, set up the right accounts — investing, savings, checking accounts.
Look at your conscious spending. I’m not telling you to keep a budget.
You can actually do it in one day. Just plug your info into something like Mint
and or, you know, you can do it in Quicken and look at your last month and just start
from there, okay? It doesn’t have to be difficult.
After that, you basically automate it. That will take about a week or two to get
set up straight. And make sure your investments are right.
And then, that’s it. It’s really about just getting on with your
life. It’s not about becoming a financial expert.
So with that, I want to leave plenty of time for questions.
And I want to emphasize before we get to those that this is all about living a rich life,
right? It’s not about the money itself.
As you can tell, the most intellectually exciting part for me is the automation, because you
figure out how to make all these models work and everything go.
It’s not about the money. The money is nice, but it’s about being able
to live a rich life — whether it’s shoes or jeans or travel or charity — or whatever
it may be. So, with that said, let’s open it up for questions.
Yes. Q So, I really appreciate you being here,
first of all. Second of all, it seems like it’s pretty easy
to get your retirement and asset allocation put away and have that secure.
So, once you feel comfortable with your long-term retirement savings, how do you focus on short-term
investments, like I have a down payment — figure in a few years, I’ve got that going
on. And maybe I have a Master’s degree going forth.
How do you make sure investments for that? A That’s a great question.
The question is, How do you — you’ve already got your retirement handled — how do you
think about short-term investments? And I would actually flip it and say, “Think
about it as short-term savings.” Anything above five years roughly, you can
go ahead and invest that, depending how long it is out.
But for something that I’m planning to do in the next five, seven years, I would just
put it in a sub-savings account. And this is something I call the ten-year
strategy. A lot of people say, “Well, I already got
my retirement handled. What am I supposed to do now?
I have a little bit extra money.” Simple. Go ask someone ten years older than
you what they wish they had saved for. And they will say things that we don’t think
about — diapers, insurance — all these weird things that we don’t think about.
And then, create a sub-savings account and simply put it in there, and that’s it. Q You’re barely making inflation. Ramit: You’re barely making inflation, but
if you have a goal in the next, roughly, three to five years, you don’t want to undertake
the volatility, and you’re not going to make that much in three years anyway.
So it’s better to just go for security in that case and save.
Things that we typically need to save for are, down payment on a house, kids, car, wedding.
Those are some of the things that are life events for many of us.
Yeah, Ben. Q How do you negotiate if you don’t have mutual
funds? Ramit: Question is, How do you negotiate with
something like cable when they know they have a monopoly and you don’t have another choice?
Well, first of all, you’re not talking to like, the head strategist at Comcast.
You’re talking to a customer service rep. So I just decide to crush them.
I don’t tell them that. Remember, these companies pay hundreds of
dollars to acquire you as a customer. So they don’t want to lose you.
So, you can say, “Well, I’m going to cancel.” Or what would I say these days?
I’m going to use Hulu, all right? They are petrified of this.
So use whatever tactics you have. And by the way, remember, if it doesn’t work
the first time, say, ‘Thank you very much’ — you’re always polite; you’re always respectful.
Hang up. Call back in a week and try another test.
I love testing these guys, because you can figure out what actually works.
Other questions. Yes. Q So explain why do the Roth 401k is better
than the traditional? because I have [indecipherable] Ramit: Okay, question is, Why is Roth 401k
better than a traditional 401k? And it’s actually a pretty complex question.
I don’t want to go too in-depth. But in general, for people in their 20’s and
30’s, a Roth 401k for tax purposes can be better. It can be better.
As you get older, it becomes a little more dicey, because the taxes are different on
a Roth or a traditional 401k. So as you get older and you have a different
set of outcomes and income levels, then it varies.
We could talk offline, but for most people in their 20’s and 30’s, Roth, whether it’s
IRA or 401k, is a pretty good choice. Yes. Q You mentioned in one of your blogs that
you’re better off with maxing out your 401K before taxes? Ramit: Question is, in one of my slides I
mentioned that ‘you should max out your 401k before going to pay off debt’ but since interest
rates are so high on these credit cards, what should you do?
So actually, what I said in the slide was ‘max out up to your match’.
So if you — I know here, you get something like a three percent match, a hundred percent.
Etc.. Whatever the numbers are. Maxing out your match is free money.
And then, going and paying off your debt is good.
And then, if you still have money, you can go back to your 401k and pick up the rest
of that. So the match is important, but you’re right.
Debt levels — debt interest rates are extremely high.
So you have to carefully weigh that. Yep. Q [inaudible] Ramit: Better to buy or lease a car? Easy
answer. For most people, it’s better to buy.
The only people who should lease cars are companies — because you get some tax benefits
— and really rich people who are like, “You know what?
I’m just going to buy a new Mercedes next year, so screw it.”
Those are the only two types of people who should lease.
It almost never makes sense for individuals to lease.
Buying a car whether it’s used or new — I bought a new car.
Of course, I’m Indian, so I bought a Honda Accord.
It was either that or a Camry. I mean, I don’t have any choices. [laughter]
So that’s what I got. Other questions? Yes. Q [inaudible] Ramit: Oh, God. Okay. Great question.
Question is, I get a lot of advice from my parents about buying a house.
What do you think we should do, particularly living in the Bay Area?
So, okay, let me say it very clearly. Real estate is not the best investment that
all Americans have thought it is. If you run the numbers, you need to remember
a couple things. First of all, people say, “Well, you get the
tax benefit for buying a house.” The answer to that is, you don’t spend a dollar
to save thirty cents, okay? It makes sense in some areas, particularly
in the Midwest, it can make a lot of sense. That’s Part 1. Part 2 — when people look
— so, let’s say my rent is $2,000, okay? Let’s say that I find a mortgage that’s $2,000.
So you’re like, “Oh, might as well build equity.” Hold on a minute.
Your mortgage — you have to add — listen closely — you have to add 40 to 50 percent
for maintenance, taxes, insurance, to actually cover your out-of-pocket costs.
And remember, you have to amortize your roof or your dishwasher, which is going to cost
$500 or $25,000 into those costs. So people forget that. And there’s a third
part. They forget that when you buy a house, you
all of a sudden increase your spending. You all of a sudden start getting magazines
like Better Homes and Living Gardens or whatever it’s called.
And you buy, you know, these nice vases. So you have to factor these things in.
For some people, it makes sense. But when you run the actual numbers, it becomes
a lot less attractive on the coasts to buy it as an investment.
Also remember that all your money will be going into this one fixed investment, which
is very, very risky, okay? So, I’m not trying to say it’s bad all the
time. I am trying to say that, Americans — especially
our parents who don’t know anything about money, because no one knows anything about
money — have just blindly repeated this thing. “Oh, real estate, real estate, build equity,
tax ben–.” What? Ask them to actually run the numbers
with you, and they will quickly — like, they’ll say, “Oh, I got to go watch something on TV.”
[laughter] Yes, question in the back. Q [inaudible] Ramit: Good question. The question is, where
should I learn about building up a good credit score? Okay.
So, the single best place is to actually go to the source.
Go to myFICO.com. And they have a nice pie chart right there
that will show you what your credit score is made up of.
Like 35 percent of it — the largest portion — is made up of just paying your bills on
time. Which is one reason why, if you automate,
you’ll never miss a payment. So, it’s not complicated, but it does take
some consistent work. That’s why, if you just give it time and automation,
it’s kind of like nurturing your credit plant. That’s my new analogy. Other questions? Yes. Q Back to the house question.
Pulling money from a Roth 401 or IRA, is it okay for a first time home buyer? Ramit: Sure. If you have a Roth IRA or, indeed,
many different types of retirement accounts, you can actually pull the money out penalty-free
— and there are exceptions in some of these, like buying a house — you won’t pay a penalty.
If you’re going to buy a house, absolutely. That’s a fine place to pull it out. I prefer
not. I prefer you have a separate sub-savings account.
But, you know, if you’ve got your money in there, and you want to pull some of it out
for a down payment, sure. Yeah. Q [inaudible] Ramit: Yeah. Question is, How do you handle
sub-savings accounts if you don’t have something like ING?
So there’s two answers to that. One is, Excel. If you’re like, you know, a big Excel nerd,
that’s fine. The other thing is, just get an account that
does. Because, like I said, you might be motivated
now, but I am not motivated six months from now.
I want it to be all automatic. And I think we all know like, we don’t want
to be focusing on this stuff. So, either do it in Excel and commit to that,
or just get an account that does that. Other questions? Yes. Q What do you think about [inaudible] Ramit: What do I think about credit watch
sites like Equifax? They’re okay.
These sites basically will alert you if something’s going on with your credit — if it’s gone
up or down. I think there’s a new site called CreditKarma.com
which lets you do this for free. I personally don’t understand how it works,
so I don’t want to recommend it or not, but you can check it out.
A lot of people are using it. These sites are okay.
They charge about 9.95 a month. Basically, you can get your free credit score
and credit report, and I put the details in the book. These are fine.
I mean, if you really are anal about it, that’s fine.
Personally, you can just check it once a year. You’ll probably be fine.
Yeah, I mean, this is like — that’s a question of someone who’s already done 85 percent of
the work, and they really want to get down to the nitty-gritty.
And if that’s you, then absolutely, you should do it if it makes you comfortable. Q You showed an example — your personal example
— like Charles Schwab checking and ING savings. You mentioned like, you made a comparison
to inboxes that your inbox that you are — are you just using that to make your money
sort of movable and then putting all the rest in your savings at ING or do you have a savings
at Charles Schwab? Ramit: Okay, so the question was, Do I use
labels and archiving and, you know, all these shortcuts for my bank accounts?
Do I have just a savings account and a checking account?
Mine has gotten a little bit more complicated than when I initially started, because I have
a business account and things like that. But you can get a hundred percent of your
needs as an individual met with one good checking account and one good savings account, and
then, your investment accounts. You don’t need to get any fancier than that.
Okay? Yes, Tolu. Q [inaudible] Ramit: Yeah. Ad words consulting. [laughter]
All right. Okay, so question is, How do I earn more on
the side without being in conflict with Google or my employer?
I would urge you to think broadly about your skill set.
People here, especially — you guys are supertalented. And it’s not just that you know how to optimize
ad words. It’s that you know how to build all my funnels
or you are even really good at writing copy for — not even for ads — just for something
else. Or you’re a good project manager, right?
So I’ve got a friend who — this is a true story by the way — it’s happened in the last
two weeks. So I was giving a webcast. I do live webcasts
on my site. And I was just talking about earning more
and telling people, “Here are some ways you can think about it.”
And I was saying, “Look, there are people like me who are horrible at cooking, don’t
know how to cook, and don’t want to cook, and I’m busy.
I want someone to just do it for me.” So he writes me an e-mail afterwards.
I think he’s like an engineer, but he loves cooking.
And he spends a thousand dollars a month on groceries just because he loves it.
He said, “Hey, Ramit. Come to my house this weekend, and I’ll teach
you how to cook. You’ll know five good dishes by the end.”
I wrote back — I’m like, “No, no, no. You misunderstand me.
I don’t want to learn. I want someone to do it for me.”
He’s now bringing food over to me Sunday nights in Tupperware, clearly labeled.
The guy now has two clients, and he makes over $1,500 a month — just with two clients
in the last two weeks. That was his hobby. He turned it into his
skill. So I’m actually launching something on my
own site right now to help people identify the niche of people who want what you guys
have to offer. And then, earning that money on the side
— something you can do with a few hours of work.
The results are actually pretty powerful — we’ve got people who are earning, you know,
thousands of dollars with a few hours of work every month.
So that’s how you do it on the side. Other questions. Q I have a question from San Francisco. Ramit: Sure. Q So, I actually — I own your book — and
I was trying to put together the conscious spending plan.
And with regard to the fifty to sixty percent on fixed costs, I know that — the way that
you built it out — that comes after tax. And so, how would you recommend that we factor
that out at a company like Google where we’re getting a lot of fixed costs factored in pretax?
For example, you know, I pay something like 60 bucks pretax a month on my bus pass and
my gym membership. And so, that definitely kind of changes the
balance a little bit. And I was just — kind of wanted to ask you
how to kind of factor that in for people like us who want to do the conscious spending plan
as well? Ramit: That is a tough question.
What I would try to do is just look at the simplest case first.
Just forget about taxes and look at what you are paying — like I did in my diagram.
And then, after that, you can take the certain areas where you’re getting pretax benefits
and you can factor those in too. There’s really not a great, simple answer
for this one, because it’s so different depending on, you know, are you using an HSA or your
bus pass or whatever it might be. Basic bottom line I would say is, “Start off
with the simplest example you can, and then just deduct the taxes out of there.
In the grand scheme of things, it shouldn’t be too big of a deal, since those expenses
are fairly small anyway. Hope that helps.
Okay, any last questions? Okay. Well, I think we will wrap it up there.
Thank you guys very much.>>[Applause]