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>> 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-*** 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-***, 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 *** 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]