The author and financial expert discusses retirement and income security, debt, and the framework behind having a rich life.
Our guest on the podcast today is personal finance expert and author Ramit Sethi. Ramit's first book I Will Teach You To Be Rich, published in 2009, was a best-seller. A new edition of the book came out last year. Ramit is the founder of Iwillteachyoutoberich.com and Earnable, an online course created to help entrepreneurs start and accelerate their businesses. He received his bachelor's and master's degrees from Stanford.
Ramit Sethi's Background
Ramit Sethi’s books
Financial Decision-Making and Wellness
“Self-Made Millionaire Ramit Sethi: This Is the Mindset you Need to Be Rich,” by Ali Montag, cnbc.com, Sept. 18, 2018.
“Money Dials: Why you Spend the Way you Do,” by Ramit Sethi, iwillteachyoutoberich.com, June 10, 2019.
“How to Get out of Debt Fast (…Even if You’re Dead Broke),” by Ramit Sethi, iwillteachyoutoberich.com, Oct. 8, 2019.
“I’ve Been Writing About Money for 15 Years, and I Can Tell you too Many Couples Talk About Money all Wrong,” by Ramit Sethi, businessinsider.com, Feb. 27, 2019.
“Emergency Fund: How a few Thousand Dollars Can Save Your Life,” by Ramit Sethi, iwillteachyoutoberich.com.
“How Much Do I Need to Retire?” by Ramit Sethi, iwillteachyoutoberich.com.
“The World’s Easiest Guide to Understanding Retirement,” by Ramit Sethi, iwillteachyoutoberich.com, June 10, 2019.
“Self-Made Millionaire Ramit Sethi Shares his No. 1 Piece of Advice to Invest for Retirement,” by Tom Huddleston, Jr., cnbc.com, Oct. 31, 2018.
“I Always Thought People who Flew First Class Were Suckers, Until I Realized They Knew Something About Spending Money it Took me Years to Figure Out,” by Ramit Sethi, businessinsider.com, Feb. 19, 2019.
“Economic Class in America: A new Framework,” by Ramit Sethi, iwillteachyoutoberich.
“Ramit Sethi: Here’s What to Do if You’re Short on Cash Right Now,” by Megan Leonhardt, cnbc.com, June 24, 2020.
“Coronavirus: Panic Is bad, but Overreaction is Good,” by Ramit Sethi, iwillteachyoutoberich.com, March 11, 2020.
“Money & Coronavirus: How to Save for a Recession,” by Ramit Sethi, iwillteachyoutoberich.com.
“The 3 Most Important Money Rules for a Recession,” by Ramit Sethi, iwillteachyoutoberich.com.
Advice and Investing
“Why Personal Finance ‘Experts’ Continue Giving Worthless Advice,” by Ramit Sethi, iwillteachyoutoberich.com.
“Betterment Versus Wealthfront: Which Is the Better Robo-advisor?” by Marquette Carney, iwillteachyoutoberich.com.
“A Financial Expert and Best-Selling Author Says for Building Wealth in the Long Term, ‘Average’ Is More Than Enough,” by Tanza Loudenback, businessinsider.com, May 21, 2019.
“Money Expert Ramit Sethi Shares his 3-Step Strategy to Save Money While Eliminating Debt,” by Anna Hecht, cnbc.com, March 26, 2020.
“Investing for Beginners: How to Save Millions for the Future,” by Ramit Sethi, iwillteachyoutoberich.com, March 2, 2020.
“How to Help Clients Choose Between Funding Retirement and a Child’s College Education,” by Samantha Lamas, Morningstar.com, Oct. 11, 2019.
“Don’t Buy a House (+ How to Ignore Dumb Propaganda),” by Ramit Sethi, iwillteachyoutoberich.
“Buying Vs. Renting: Which Is the Best Option for You?” by Marquette Carney, iwillteachyoutoberich.com.
Christine Benz: Hi, I'm Christine Benz, director of personal finance for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.
Benz: Our guest on the podcast today is personal finance expert and author Ramit Sethi. Ramit's first book " I Will Teach You to Be Rich" published in 2009 was a best-seller. The new edition of the book came out last year. Ramit is the founder of IWillTeachYouToBeRich.com and Earnable, an online course created to help entrepreneurs start and accelerate their businesses. He received his bachelor's and master's degrees from Stanford.
Ramit, welcome to The Long View.
Ramit Sethi: Thanks for having me.
Benz: We're really excited to have you here. Your book is called " I Will Teach You to Be Rich." You also are in charge of IWillTeachYouToBeRich.com. In the book rich doesn't simply mean amassing a lot of assets. How do you define it?
Sethi: Well, one of the key insights of my work over the last 16 years has been that rich is quite different for each of us. And interestingly, rich might be your ability to go out and buy $1,000 cashmere sweater. Great. No problem with that at all. Go for it. For others, it might be being able to pick up your son or daughter from school at 3 pm. That's also a rich life. But one of the things that I like to do when I start off talking about money with people, I don't talk about compound interest, I don't talk about asset allocation. I start off by asking people what their rich life is. And it is absolutely fascinating how people respond to that question.
Ptak: One concept you discuss is called the money dial. What does that mean? And what are some examples?
Sethi: Well, this was the exercise that I created when I wanted to help people understand what they actually want to do with their money. Interestingly, when you ask people, what is your rich life, they almost always give you the same three answers. The first one is freedom. I want to do what I want, when I want. Then sometimes they will say, I want to be able to pay off my debt. That's sort of a dim dream, I think. If your only goal is to get to zero, that's not very motivational for people. And then, finally, you have people who talk about their third point with money and what their rich life is, is very vague when you ask that question.
So, when I push them on what their rich life is, what do you want, suddenly, things change. And the way that I did this was I asked them, what do you love spending money on, love, not like love? And everybody's eyes light up. They start smiling. Everybody's got one thing. The most common answers here are eating out. That's number one. Second is health and wellness. And the third travel, okay. After that there's a steep decline. But there are a variety of different categories. Mine happens to be convenience.
And then, I asked them a question like this, I say, what if you could quadruple your spending? What would it look like and what would it feel like? And this is really a pivotal moment for people. Because most people have never thought about spending more on the things they love. They've actually only been berated to spend less on everything. When you ask them what it would look and feel like to spend more on eating out, they typically have the same response. Well, I'd probably have to go on a diet because I eat out four times a week. But I push them gently. And I remember speaking to a young man in DC while I was on a book tour. And he said the same thing about going on a diet. And I said, really? What would you do if you could quadruple the amount you spend? And he started looking off into space. And he finally said, I have a list of every Michelin starred restaurant in town, I would go there. And I leaned in, I said, who would you take with you? And he said, my family because they've never been able to afford to go to those places. That is a money dial. That is what turning up that dial can look like. And once you know what you want to spend money extravagantly on, then you can cut costs mercilessly on the things you don't care about.
Benz: Well, that's what I wanted to ask about. How do the boring old financial jobs fit into this framework like, you know, saving for retirement or building an emergency fund? Retirement security is probably never going to be anyone's money dial, but it has to be done, right? So, how do you fit the two things together, the sort of more aspirational vision for your life alongside the things that you know you have to do?
Sethi: Well, I've worked with millions of people through my website, through my newsletters, social media, books and tours. My conclusion also based on my work in psychology and behavioral change, is that we want to start and meet people where they are. And I find that the minute anyone starts talking about money, whether it's in a financial advisor's office or reading a 401(k) brochure, they're already on defense, because most people don't know about personal finance, but they know enough to know that they're doing something wrong. And that's not a good sign to help them absorb and learn and make moves.
So, if it were up to me and I were advising financial advisors on their primary first conversation, there would be no math allowed, there would be no compound interest, there would be no words like estate allowed. Not at all. The questions are human questions that you might ask your children or your friends or parents. What's important to you, what do you want to do with your life? What does your rich life look like? What if you could spend more on that? These are questions that any person can answer, and they actually want to answer it. People desperately want to talk about their dreams. But until we get that down and set some foundational context for what their vision is of their future, then no amount of interest rates and returns and expense ratios are going to matter.
And I can tell you that many of us have experienced with people who end up in their 60s, let's say, they have some money, but they have no idea what to do. No idea what to do with it. They saved and they did all the right things, but they forgot the most important thing, which is to have a reason why. I remember I was having dinner with somebody in their 60s. And I asked him, if you could go back and give yourself advice in your 20s, what would you tell yourself? Any thought about it for a second? And he said, save more. I would have saved more. And I happen to know his financial situation. He's done fine. He has money. I said, if you'd save more, what would you have done with the extra money? You've got money now. What would you have done with some extra? And he looked at me stumped. It is reflexive. It's almost religious in our culture to save money. Now, that doesn't mean we do it. There's just words around and there's all these commercials out there telling people save and invest in 401(k) and this and that. Doesn't mean we do it. But what we lack is asking people why, what do they want to do and pushing them on it, not accepting the first typically lazy answer, I want to do what I want, when I want. Well, what is that? When you get into that, then suddenly people are much more receptive to these foundational concerns of retirement and tax-advantaged investing, et cetera.
Ptak: I had a couple practical follow-ups. One is defining a rich life that can vary from member to member of a household. And so, the question is how to reconcile between those definitions? And then, also, I would imagine that the definition of rich life is not static. It does change over time. And so, how should one navigate that as well?
Sethi: There absolutely are seasons in life that change. I want to start with that question because I love that one. And one of the things that I observe is the financial-services industry focusing primarily on getting people ready for the rich life in people's 60s and beyond. That's the reason I started I Will Teach You to Be Rich. Nobody was speaking to people of my age at the time I was in college and nobody was talking about the things we wanted to do. We wanted to go out. I wanted to be able to buy around and drinks for my friends. That was a rich life to me. Certainly, it was not thinking about estate planning at age 20. And also, getting advice from people who look and sound like you is profoundly important, that representation really matters.
Of course, over time, those change. We know that there are pivotal moments when people have a family, when they get a new job, potentially if they get divorced, of course, retirement. Those change over time. What is interesting is encouraging people, I think, to seize those seasons and really push it to the limit in whatever season you're in. For example, if you are in--let's just use your 20s for example. Of course, you should save for retirement. And of course, compounding matters more than ever in your 20s. You have a massive opportunity. But there's also opportunities to do things that you cannot do in your 40s, things like take a very long, extended trip. And so, that is part of a financial plan, too. It might not show up in a spreadsheet, but it's part of a rich life. And I find that people are much more receptive when you talk to them and acknowledge the season of life that they are in. You're in your 20s, you want to take a month-and-a-half to go to Europe? Awesome. Let's talk about how to make that happen. Yeah, okay, there'll be some trade-offs. But if you look at this and you decide looking back 20 years from now, would you regret not going? Sounds like it's the right call for you. Okay?
Of course, now, as for the spouse question, or partner question, oh, that's a tricky one. And I really, really love this. I have some first-hand experience being married. And we started off with different money lenses. And that was extremely challenging. And over time, I've been very thankful and grateful that I've been able to go through it on a personal level as well. One thing that I recommend in Chapter 9 of my book, when two people sit down to talk about money, usually it devolves into how could you spend so much on coffee and these sort of $3 questions, when in reality, most people should be asking $30,000 questions.
My advice is, if you are sitting down for the first time to really have a series of money conversations, again, we're not talking math in the first, second, maybe even third meeting, we're talking about how were you raised around money, what'd your parents say at the dinner table? What's your first memory? What's something you've changed your mind about with money since you were a kid? Just really getting into it. And of course, being vulnerable yourself. The other more tactical advice that I give is, when you set your first savings goal together, make it fun. What's a trip we want to go on together? What's an experience we want to create? Let's save for that. Because money then becomes a source of pleasure, not simply a source of beratement or feeling bad about yourself.
Benz: You reference that people spend too much time on the $3 questions and they should be thinking about the $30,000 questions. So, what are those $30,000 questions?
Sethi: Negotiating your salary, making sure you're working at the right job. That's a skill. It's not purely luck. You can learn how to navigate the career space. And you can learn how to negotiate salaries. We routinely teach people how to negotiate $10,000 or $20,000, salary increases. Asset allocation, that's a big win. That matters far more than any amount of lattes you could ever buy. Your fees, the fees that you were paying. Of course, we know the importance of fees as investors and yet, think about how much time we spend, whether it'd be cutting coupons or rate-chasing as opposed to really evaluating once a year, are we paying the proper fees for the advice we're getting, not just financially, but in all different parts of our life.
Your relationship, that's a big win. That's a big financial win as well, making sure that you have the right relationship, and that you are aligned on your spending. And also, another big win, your earning. So, this is something that I think is typical more of my millennial readers, people in their 20s and 30s. They are increasingly looking at additional ways to make income beyond their job. Many of them have jobs, but many of them are using, whether it's our programs, or they're doing it on their own, to start a business, started on the side, eventually, maybe even go full time. And we have many multiple six-figure earners, we also have folks who are making an extra $5,000 a month, or even $500, and that's quite meaningful. So, there are approximately 5 to 10 big wins in life and a big win, if you get that right, you never have to worry about appetizers or lattes again.
Ptak: How do you apply this ethos to people that are dealing with issues of income security and also uncertainty around healthcare security? I know that they would have their own definition of rich life, but I would tend to think that it's going to be a very, very pragmatic definition. And so, can you take what you've been describing and apply it to those types of situations as well?
Sethi: Yeah, and I'm so glad you asked about that, because I do believe in personal responsibility and I do believe in educating ourselves and making what we can with the situation that we are given. But I also believe that there needs to be systemic reform, and there are some serious structural issues that go on. So, it's one thing to say, Hey, you know, make a debt payoff plan and try to earn more. That's great, and you should do that. But if you are one step away from going bankrupt because of healthcare laws, that's not acceptable, especially in the United States of America. Now, as for practical and more tactical advice, I find that 95% of the people I talk to who are in debt do not know how much debt they actually hold. Why would they? It's a painful number to reckon with. So, it's easier to simply not open up that envelope.
The second thing is that 99% of them do not have a debt payoff plan. They don't even know how much they owe; how could they know when it's going to be paid off? The simplest and really most effective thing that you can do if you're in debt is to get all your payments together. If you don't even know how much you owe and who you owe it to, call them up and make those companies do the work for you. How much do I owe? What's my balance? What's my interest rate? And what is my current debt payoff date, if I go, as I've currently been going. Then you can work with these companies, whether it's a credit card company, student loan company, car loan. And there are many people--I remember speaking to somebody who is in $350,000 of student loan debt. That's crushing. That's crushing. And thanks to some recent laws, that's also nondischargeable. He found that with tweaking his payments a little bit paying an extra 50 to $100, which he could manage, he could shave off years of that debt payoff plan.
So, there certainly are things you can do. There are no silver bullets. There is no magic script that you can use. You can negotiate down APRs on your credit card. A lot of people don't know that. And some of these debtors actually do want to help you out. But the larger key is making a plan and then automating the execution of that so that it is not dependent on any motivation or inspiration every day. That is the way that you can slowly, methodically and healthily pay off that debt.
Benz: You've called traditional budgeting pointless. Why is that? And what's a better way to get in touch with how you're spending?
Sethi: Well, most people don't do it. And they don't want to do it. So, it's pointless and ineffective. Because if we simply look at the efficacy, it just doesn't work. Who wants to look at how much they spent last month, knowing that they probably overspent and then having to reckon with that? It's like people don't like to get a cavity taken out. It's like, do you want to do that every month? And then also correlate that with how poorly you ate and why you're causing yourself to get cavities? No, we don't want to do that. So, we don't, and guess what, life goes on. That's how most Americans live. They don't have a budget, and life goes on. It's fine until one day, it's not. And I wanted to change that for a long time.
When I started writing my blog in 2004 and eventually went on to write a book, I purchased many of the other personal finance books out there. And what I discovered was in Chapter 1, many I would say most of the other money books start off by saying, let's find out how much you spent last month. And that's a great way for people to politely close the book and say, No, thank you, I'm going to put that right back on the bookshelf. Nobody wants to do it. So, instead, I wanted to create a more forward-looking plan.
Yeah, let's look at the past. Let's analyze what we spent for the last roughly four weeks. It's not going to be perfect, but it's 85% of the way there. More importantly, let's plan out where we want our money to go. So, blank slate. If you could have your money go anywhere, where would it go? Now, it's really fascinating. If you ask the average person who's not educated in personal finances at all, they actually have no idea about some of these basic rules. They don't know 28-36. They don't know 10% for savings or investments. They don't know these numbers. And that's okay. So, they start off with this idea that's not particularly sophisticated. But what I did was with the help of my community and the millions of people who've been reading, I figured out how much people typically are spending on fixed expenses, et cetera. And when you give people a benchmark and you explain why, suddenly they realize, okay, I can make that work. And sometimes when they can't, I can't really afford to put 10% in savings. Okay, what am I going to do? Well, you know what, I can do 7% this year, and then I'm going to focus on increasing my salary and my car payment is going to end. So, I'll be able to do that next year. Okay, great.
People are very, very comfortable once they have a benchmark of saying, look, I may not be able to hit it perfectly, but I'm generally on track and that makes me feel good. That is so profoundly different from look at a spreadsheet full of things you spent on last month and then figure out what to do about it. That's like it's empty. You're throwing people into a national park and saying, make your way out of here. It's impossible, it's very difficult. So, instead, what I want to do a conscious spending plan, look forward, decide where you want your money to go. Here are some benchmarks that are very helpful. And if you can hit these, you are good. You don't have to worry about anything else. Just hit these basic numbers of savings and investment and the rest is guilt-free spending. You could spend it on whatever you want.
Ptak: So, how do you think that the pandemic has affected the way some of those you work with have set their conscious spending plans? I would have to think that they would be revisiting some aspects of those plans, just given the way circumstances have intervened. And so, can you talk a little bit about maybe what sort of changes you've been making in consultation with clients and whether you've revisited any aspects of your framework in light of what we've experienced?
Sethi: Yes, it's a great question. I have. As soon as the pandemic happened, I decided to make some very rapid changes. And first, my wife and I left the city. We left it pretty early on, and even so early that our friends were like, what are you doing, and maybe it's I've watched too many Batman movies and I've seen bad things happening in cities. I said, we should get out of here. So that was first thing was taking care of my family. Second thing was taking care of my team. So, we initiated a COVID stipend for anyone who needed additional funding for whatever reason, groceries, for their parents, or their family or themselves. And then, we also initiated a debt freeze, or a payment freeze, I should say, for any of our customers. So, we have tens of thousands of customers. Anyone who needed to put their payments on hold, we initiated that proactively, no problem. And then, we raised a bunch of money for Feeding America and other organizations.
Finally, when I spoke to my readers, looking at the economy, as it got worse and worse, I did make one change. I recommended that they increase their emergency fund savings from six months to 12 months. Now, that is quite aggressive. And the reflexive response for some was, that's crazy, you're telling me that I should stop investing, so I can put money in a savings account that's basically losing money. I find that interestingly a lot of people who really should be the beneficiaries of being financially conservative take unnecessary risks. In truth, the extra return you might get for a few months of savings in the grand scheme of your life, it's not really that big. But having the safety and security of a six- to 12-month emergency fund can truly be a lifesaver if your job or entire industry goes away. So, I did advise them on that.
The other thing that I recommended was a three-part framework. And that framework is first play defense. So, get your 12-month emergency fund in order. If you've got that, next, continue your investing plan as usual. We know that it's not about timing the market, it's time in the market. And then, finally, go on offense. If you have done defense, and you've continued that you still have money, which a lot of people do, although it's not really palatable to talk about it publicly, go on offense, look for opportunities, whether it's starting a business, many of my Earnable students have done that, whether it's looking for investment opportunities, whether it's simply writing a big check to a charity or a family member that needs it. Go on offense and use your money in a meaningful way. That's a three-part framework that I have adapted based on COVID. And it's really helped people understand what to do in a time like this.
Benz: You referenced the importance of having an emergency fund and enlarging it potentially at this time. Do you like the idea of automating that for people like maybe embedding that in terms of workplace retirement savings, where they have an option to save short term in some fashion as well? Seems like people really struggle with getting their emergency funds together.
Sethi: Yes, I mean, I'm a huge fan of automation, in any and all regard. So, when I was back in college, studying human behavior and psychology and technology, and just looking at what happens, for example, when firms introduced automated 401(k) contributions, right? You could spend the next 50 years educating people about tax advantages, or you can simply make 401(k) opt out. Make it automatic, boom, compliance jumps above 90%. And so, the more we can automate these things, the better. And I think this is a really important point for anyone in the financial-services industries.
Let's remember this. nobody really cares about being a financial expert. I want to say it again, because it's so important. Nobody cares about being a financial expert. They don't want to. This is really important. All they want is for their money to go to the right places and for them to be safe and okay. That's it. And so, we make a profound mistake when we give people a 300-page document and a Monte Carlo analysis. We say, here you go, there you go, that's your life. Nobody cares. You would think they would care because they claim that money is the most important, but they care in the way that they can approach it. And that is why when I talk about money, whether it's on Instagram--like yesterday when I talked about some myths about raising taxes on the rich, I used examples that resonate with them. If they want to read the math, I can talk about the math. But most people want to be approached with their money in a way that resonates with them.
So, for automation, most people do not want to manually go and transfer things. They may want the outcome of that. Of course, they want a nice savings account that's growing. But every month, they're motivated month one, month two, okay, they'll do it, month three, they got something else going on. It's, I think, a sign of humility and understanding when we acknowledge we are imperfect as human beings. And that doesn't mean we're bad. It simply means that we should use systems to make up for our flaws. If you tried to get me to manually invest every single month, I'd probably do it three, four, five, six months in a row, maybe month seven, I would forget. I know that. I acknowledge that. That's a human weakness. So, I set up automation. And the more we can do that for ordinary and frankly, sophisticated people, the better, because people are more than happy to tweak the system once or twice if they know that it's going to provide ongoing benefits. It's when you demand people pay attention for the rest of their lives to something that becomes very difficult for people to actually adhere to it.
Ptak: I wanted to go back to one of the three elements that you mentioned in your framework, which is this notion of going on offense, which I think is very intriguing, and I think actually will hold an appeal to a lot of people. But at the same time, the pandemic can be a difficult environment in which to make big life choices. And so, how have you worked with those that you work with, to help them navigate that making sure that if they are going to make a big life choice, they're doing so in the correct state of mind, knowing how much pressure, I suppose, we're all under right now, given the environment.
Sethi: In order to make these big life choices, I intentionally made that the last step in the framework. I don't want somebody who has no emergency fund, who has one month of investments, suddenly deciding that they want to pack up, move, try some crazy investment, change jobs. I don't want that. It's risk upon risk upon risk, it's too much. So, therefore, I intentionally advise people first play defense. I want that emergency fund up. Second, I want you to continue your investing plan. If you don't have an investing plan, now is the time. Go read my book or read any other book. And then, third, and only if you've done those other two things, then you have earned the right to play at this level. This is a methodical approach. But when I share why, people intuitively get it.
We all know that when we were kids, we earned the right to watch TV after we finished our homework. We've known this principle since we were children. It's only though as adults that we want everything all at once. And there's really nobody to tell us no. Because of the trust I build up with my readers over the last 16 years, I tell them what I believe, I tell them exactly what I'm doing. I tell them the accounts that I use, the banks that I love, the banks that I hate. I'm very, very transparent with them. And I even tell them that people like me, I should be taxed more. And they've never heard somebody talk like that. Wow, somebody who's actually advocating for himself to be taxed more. What? So, they know that they're here and it's straight, whatever I tell them. And thanks to my business model, I create products, they buy it, if they find value, they keep them. So, it's a very straightforward aligned business model. We don't do commissions or anything like that.
And so, when somebody like me says, look, you got to earn the right to be able to play at that level, they understand that. And so, although it might be a little unpalatable, Oh, I have to focus on savings for the next six months, that's so boring, it's earning nothing in my bank account. They understand there's a bigger picture. And they remember, we always start with what is your rich life. So, whether it's traveling five-star resorts, or whether it's going to taking six months off to go build houses in a different country or even here in America, they understand that we are working toward each of our rich lives. That's why they are willing to take it step-by-step as opposed to trying to jump to the more advanced stuff right off the bat.
Benz: So, it seems like the financial-services industry is really warming up to this idea of helping clients align their finances with their aspirations and their life goals. But I guess some of it strikes me as kind of marketing spin. So, if I'm a consumer and I'm attempting to discern, like who's good at this and who is just trying to get money so that they can manage it, how do I figure that out?
Sethi: Well, Christine, I'm absolutely shocked that you would accuse the financial-services industry of pure marketing. I am shocked that you would say that. How could you? Yes, it's true. I think, overall, it's a good thing that the financial-services industry is realigning to focus on what people want, what they actually need. I think there are some really interesting business model challenges. I've spoken to several advisors who I really like and respect. And they point out, I think, quite accurately that what's more valuable to the client is behavioral advice. However, most people are not really willing to pay for that. And so, that's certainly a challenge going forward.
I will say that, in my opinion, the financial-services industry should be advocating first and foremost for their clients to be put first. I think the reflexive arguments against the fiduciary rule are nonsensical. I mean, it's actually unbelievable some of the stuff that I saw in the press. Some firms and companies claiming that if they have to be fiduciaries and put their clients first, fewer Americans will get good financial advice, because they can't afford to give it to them. They actually put that in writing. I can't believe it. What type of industry or firm would actually say that publicly? With that said, the advisors who stand out are the ones, in my opinion, who are of course, putting their client first. But that's really just table stakes. They're connecting with them in interesting and engaging ways. They're writing content, they're also creating their own methodologies of how to reach people, and how to connect with them. In other words, they're not starting off by talking about what is your retirement goal? That's not their first question in the first meeting or the first day at all. They're talking about what's your life like, tell me about it. What would you do differently?
So, yeah, there is some element of marketing. I agree. Again, financial services is known for that. But in general, I do want ordinary Americans to have access to great information about money. And personally, I just wish things were a little easier. I've spent 20 years studying money, understanding it, doing it on my own, helping millions of people. You shouldn't have to do that to get good at money, you really shouldn't. Things should largely go well if you do a few basic things. You should automatically be contributing to your 401(k). You should automatically have a savings account. You should automatically understand, do I have enough, is getting a house actually a good decision for me, et cetera. And that, of course, involves a combination of financial services and products; it involves systemic change, government role, and of course, individual responsibility as well.
Ptak: That all sounds like sensible advice. My question would be do those who are trying to achieve some of the goals that you described need a financial advisor, and if they determine they do, should they be paying them 1% of the assets under advisement to get the help that they need?
Sethi: Well, I'm going to tell you what I tell my readers. I tell them that the majority of people do not need a financial advisor, you can do this on your own. And I show them exactly what to do. I show them funds, I show them asset allocation, I show them automation, even down to the level of this is the date on which your transfer should happen from this account to that. Once they set it up, I found over the course of millions of people using my material, they're quite good and quite confident at it. That's fantastic.
Now, there are certain reasons to hire an advisor. And I've been very explicit about what those reasons are and how to hire a good advisor. Also, I've hired an advisor myself, okay? I fit one of those rules, which was I wanted a second set of eyes, a temporary second set of eyes on my investment plan. And I think that depending on how large your portfolio is, or how complex your situation is, for example, you might be in a second marriage, you might have multiple children going to college, you might be starting to think about downshifting retirement. Those are all pivotal moments where you may say, you know what, I'd like to get a second set of eyes, just make sure I haven't missed anything big.
So, there are reasons that you may want to hire an advisor. The average American, I advise them, you can do this yourself, you can certainly get started yourself. And I have to emphasize why I say that. I don't think we should delegate one of the most important things in our life. And this is not the same as delegating your oil being changed or your lawn being mowed or even going out to a restaurant having somebody cook for you. This is profoundly deep. It cuts across everything you and potentially your spouse do.
So, when you ask people in their 40s, what are you worried about? And the primary answer is always the same, money, this tells you, it's got to be something that you yourself are tackling. You're getting in there, rolling up your sleeves and doing it, and you can. As for the people who do hire an advisor for a temporary second set of eyes, or they want a plan, that's fine. I show them how they should interview five different advisors, they should, of course, get along with them, ask them if they're a fiduciary. They should pay an hourly rate. I'm happy if people pay a high hourly rate. Premium service, premium prices, I'm all good with that. They should not pay a 1% fee. I do not support that at all. And I've been very clear about why that is. There's no reason that an ordinary investor should be paying an assets under management fee. As we know from the research, those fees do not produce better returns in investing or in behavioral response either. And so, pay an hourly rate. Even if the hourly rate is high, great, pay it. In the short term, it might seem expensive; in the long term, anything is cheaper than 1% AUM.
Benz: You've recommended robo-advisors for people who need help with their investments. Would target-date funds be a worthy solution as well, especially for people who are just kind of getting their financial footing?
Sethi: I love target-date funds. They're my favorite investment. And I highly recommend them. They're great, because they're simple. They are one investment. They're automatically diversified and automatically rebalanced. I can't recommend them enough to people. And it's funny--when you speak to beginning investors, they've been taught through media, movies that you have to pick stocks and you've got to have big multiple screens with green letters running across. They're almost skeptical when you tell them. No, it's actually just one fund. That's it. And all you need to do is set it up to automatically invest, and you're done. And when you tell them that you should actually be spending less than 60 minutes a month on your finances, they almost don't believe you. The irony is, they're drawn to the more complex, because it seems mysterious. But in actuality, once you get really good at something, you learn that really the crux of success in that field is typically very, very simple. Same with investing, right? Automatic investing consistently, low fees and focus on the long term. It's really simple, almost too simple.
Ptak: Maybe we can talk about what seems like the antithesis of that, which is brokerage accounts like Robinhood, which had become popular among young investors just starting out. The question is, is this a good way for young people to get started investing, in your opinion?
Sethi: No, nobody should be using Robinhood. It makes zero sense. It's toxic for young people in particular, who are now being trained from day one to believe that investing is about randomly picking individual stocks. And I would be willing to bet--in fact, I would be willing to bet a large amount of money that early Robinhood investors will have lower lifetime earnings and lower lifetime investment returns than the average Vanguard investor.
Benz: I want to talk about homeownership. You have argued that many people overemphasize homeownership as a component of a successful financial life. And it's definitely hard to argue that homes are always great investments, but they are the largest source of wealth for many households. And they're also I guess, as an illiquid asset, something that people can stick with, and not tap for short-term needs and so forth. So, I guess, how does homeownership fit in? How do you suggest that people approach that?
Sethi: Yeah, this has been a really interesting conversation that I've had with my readers over the years. My big advice for people when it comes to buying a house is that I want them to run the numbers. It seems so simple and innocent. Of course, Ramit, we'll run the numbers. But as I've dug deeper into it, I've discovered so many things about buying a house. In this country, real estate is religion. And we grow up being taught these phrases like you're throwing money away on rent, don't pay your landlord's mortgage, or they're not building more land. And so, people grow up without really thinking about it. But eventually "knowing" that they should buy a house, and this is so funny. You hear people talking about this. One of the favorite things on the Internet is to complain about how expensive weddings are. No matter what if you write about weddings, somebody's coming out, popping out of the comments section and saying, oh my god, you spent that much? Well, I spent $52 and we sort of hot tamales at our wedding and we're still married 30 years later. That's such a waste of money. And people will then say, yeah, we could have taken that money and bought a house with it. Notice that the wedding and the house are always tied together.
Now, where do you think that came from? You have people who are largely financially unsophisticated. You never hear folks talking about investing, target-date funds, dollar-cost averaging. But suddenly, when it comes to a wedding, they're talking about, oh, we would just prefer to just put that down for a down payment. Where'd that come from? And the answer is that there's been a systematic marketing campaign from The National Association of Realtors. The government and of course, our parents, who bought houses, telling us that you need to buy a house. That's the best investment there is.
When I started to dig into this, I became extremely fascinated because if you actually truly run the total cost, you include what I call the Phantom costs of buying a house and you compare it to investing in an S&P 500 fund, you will often find that housing is not a great investment. Not always, but a lot of times. I have lived in San Francisco, New York and Los Angeles. I've rented in all of those by choice. It would have made no financial sense for me to buy. I want to say that again because it is so counterintuitive. It still makes no financial sense for me to buy. And I could buy right now. So, I'm a renter by choice. I'm sure one day I will buy. I'm also sure that when I do, I'm sure the house is going to be great. I'm also sure it's probably going to be a terrible financial decision.
What happens is you have somebody saying, you know, my grandma bought a house in Texas in 1970 for $200,000 and she just sold it for $600,000. She made $400,000 of pure profit. But of course, if we dig into the numbers and we look at how much she spent on maintenance and taxes and interest and then we compare all that plus your down payment to what you could have made by just simply investing in a S&P 500 fund for 0.1%, you often find that people could have made much more by renting, key being they need to invest the difference. That's a big, big key.
My point with this is not to tell people that buying a house is a bad decision. That's not my point. Like I said, I will buy a house someday. My point is that a rich life involves deep thinking about your big decisions and buying a house is perhaps the biggest financial decision for most people. I don't want people going into it unknowingly. I don't want them getting charged crazy fees on their investments. I don't want them investing in things that are not properly diversified and I don't want them buying something that for a lot of people ends up making them house poor and because of the way that all the fees are levied and obscured, they don't actually realize, wow, this house is costing me a lot more than I thought.
So, I'm giving people permission, run the numbers, question what you've been told about buying a house. It may be right for you, or it may not. But you should never feel pushed into a large financial decision. You should get clear on the difference between what is a luxury purchase and what is an investment. And you should get educated about all of your different options because you have lots of options to grow your money. And if you want to use housing, that's fine. Understand the trade-offs. If you want to do a target-date fund, great. If you want to do all the above, great. But I don't want somebody using phrases that they were taught when they were seven years old--don't throw money away on rent. That's not what I want. I want my I Will Teach You to Be Rich readers and everybody listening, take the unconventional choice, run the numbers, decide what is right for you and your rich life. I have found that to be very, very rewarding.
Ptak: I wanted to go back to an earlier question on Robinhood specifically, but maybe we will widen it out to the concept of learning by doing and specifically, learning by making mistakes. And I guess, it's sort of tied in with the you only live once sort of ethos, right, YOLO. And I know that one of the defenses that some have mounted for things like Robinhood is that you kind of get it out of your system and you learn from some of those mistakes. And so, maybe to broaden out in your experience, is that important or really should we focus more on precisely defining what is truly important to us in leading a rich life and try to minimize mistakes like those?
Sethi: Everyone's going to make mistakes. I made them myself. When I started off investing as a teenager, my dad helped me open up a custodial IRA and I thought that investing meant picking stocks. So, I picked three random stocks. Two of them went bankrupt. And I quickly learned I didn't know what I was talking about and I spent the next few years really learning about money and testing my approaches on myself and then slowly with my readers. I never hold it against anyone if they make mistakes, particularly when they're starting off. Hey, you know you're going to get an overdraft fee. Okay, great. Use the script in Chapter 1, get that reversed. Hey, you might pick the wrong account. No big deal. Let's fix it while it's small because soon your numbers are going to get quite large and those mistakes can be costly.
If people were to join a service like Robinhood with the mindset of, you know what, I'm going to experiment with this for three months. I'm going to allocate $1,000 and that's what I'm using to invest. And then, at the end, that's it. That's my cap. Great. That's not what's happening. If you look at people in forums and subreddits discussing this, that is not what's happening at all. We have people leveraging. We have people borrowing. We have people who are surrounding themselves in an echo chamber of others who are encouraging day-trading. And long-term sophisticated investors know that net-net these folks are going to lose money. What's even worse, they're going to create bad financial habits that I argue will last the rest of their lives.
So, it's no problem to make mistakes. We're all going to make mistakes at any age, at any level of sophistication, but there are certain things that are so dangerous that we should be extremely careful about trying without clear rules and guidelines for ourselves and this is one of them.
Benz: We've had a couple of guests from the FIRE movement on the podcast, and sometimes I see your perspective being cast as sort of the opposite of FIRE. Is that your view? Are you anti-FIRE?
Sethi: No, I'm not anti-FIRE. I know a lot of the FIRE folks and I think the FIRE community is especially interesting. First off, anything that gets Americans to increase their savings rate in general I think is a good thing, okay? Personally, I do not encourage extreme frugality. And one of the principles that I share with I Will Teach You to Be Rich is live life outside the spreadsheet. Meaning, at a certain point you've won the game. You already know your early retirement date, or you've already accumulated enough to retire at whatever age you want. Fine, great. Congratulations. At that stage, get out of the spreadsheet. Running another analysis and tweaking your portfolio by 0.01% is not going to change anything.
With the FIRE community, one thing that I've encouraged when I did another podcast with Mad Fientist was what are you going to use the money for. And if your answer is, I want to do what I want when I want, that's not an answer for someone that has spent years optimizing for the next step of life. My encouragement with I Will Teach You to Be Rich and my approach is, let's start living that life now. There are things that many of us have experienced, friends or parents, who get to a certain age, they have big plans and then something happens. They get struck by an illness. Something unexpected happens and they simply can't do it. That's the last thing I want for my readers. There are also certain things that you can't simply start older in life. It's more difficult. Folks often on some of these subreddits are talking about, you know, when I retire, I want to learn a different language and I want to travel and this and that. Awesome. I love it. But all we need to do is look at the last two years of anyone's life to have a fairly good predictor of what they're going to do in the next two years of life. If you've been traveling now, you're probably going to travel more later. If you haven't, I would say it's unlikely that you're going to dramatically change your life in retirement.
I heard a very fascinating principle related to early retirement, et cetera, which was a relative of mine said, we really have 20 years of peak spending--not talking about saving, talking about spending--40 to 60. Now, we can disagree on what those numbers might be. But he said, look, early on, you don't have any money, fine. But at a certain point, whether it be health reasons or interest reasons or family reasons, you're not going to go on a backpacking trip around Europe when you're 78. So, you have these peak 20 years to spend. Now, let's make sure, of course, we don't run out of money, of course. Let's also be as intentional about spending. What are the seasons of life that I'm in right now? What's important to me? Is it children? Is it my spouse? Is it my family? Is it charity? Is it a venture? Let's really dial in on those. Knowing we have a finite amount of time and we should spend as much time on that as we do tweaking our investments and tracking our spending and running a Monte Carlo analysis.
So, I have no problem with the FIRE community. I love anybody that encourages us to think deeply about what our rich life is and increase our savings rates. I do think that money alone is not a rich life. You can have $1 million; you can have $10 million. That's just a number in a spreadsheet. What you do with it, that is when you truly craft and create your rich life.
Benz: Well, Ramit, this has been such a fun and insightful conversation. Thank you so much for being with us today.
Sethi: Thank you for having me.
Ptak: Thanks again.
Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.
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Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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