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How to automate money to get rich
Within days of publication last month, Ramit Sethi's book I will Teach You to be Rich became a bestseller. That is a feat, given that books on personal finance are a dime a dozen.
But the 26-year-old Stanford alumnus is not your standard issue 'how to' book writer. He has been called, among other things, 'a rising star in the world of personal finance writing' by the San Francisco Chronicle. Excerpts from an interview:
Your book has a daring title -- given the current economic situation. Was it deliberate?
That is true. It is deliberate. I actually started writing on this almost five years ago when I started a blog by the same name. I have been writing this for five years and I have spent the last two years on this book that is all new and has all new content.
The reason I started it was when I was a student at Stanford, I wanted to teach people about what I have learnt about money. And if I had called it something like Financial Prosperity and Conscious Spending, every one in the world would be completely bored and no one would read it.
So when I started writing it, I wanted my friends in college to pay attention to it. The point was not for me to be yet another boring personal finance person, nagging you and telling you not to spend money on things. I wanted it to be as if you and I are sitting across the table, having coffee and talking about money.
We make fun of each other, we make fun of our friends, and in the process we figure out how money works.
How to automate money to get rich
So the idea was to engage people and get their attention?
Yes. The funny thing about the title is that people may think that 'he is a get-rich-quick guy,' but actually when you read the book within a few minutes you understand that this is about long-term investing, about sensible conscious spending and not advice for anybody to make quick money.
Despite the title, my focus is long term.
At this time of downturn, do you think people will take a serious look at the book on how to get rich when their main concern is one of survival?
When the book came out, it instantly became number one on Amazon and it sold out within hours. It was number three on Barnes and Nobles and on the first day my published had to order an immediate reprint.
So certainly there are people out there who want to know how to be rich. The question is what does rich mean? You have to understand that being rich is not just about money. Money is just a small part of it.
I think a rich life is other things -- like being able to be with your family or being able to travel or being able to work on a flexible schedule. Different people have different definitions of rich. I certainly focus on how to use money to lead a rich life, but money it is not the only thing.
Coming back to your question, do I think Americans are looking at how to be rich in this economy, I think yes. Because the principles that I talk about in this book are not about buying something, but about automating your money.
It is about being sensible over the long term so that you can basically optimize your credit cards, savings account investment so you do not end up having to worry every day with things like 'did I pay that bill or missed the deadline?'
When you follow the principles everything runs smoothly so you can focus on things that are important to you.
How to automate money to get rich
What do you mean by automating?
Every day you can do hundreds of things with your money. The truth is most of us get overwhelmed with that and we simply just do nothing with the money. It just sits there in the checking account and it does nothing for us. I show people how to automate that money.
It is something I call the 'next $100 principle'. If I were to ask you where the next $100 that you earn will be going, most people would say they have no idea. At the end of the month they look at their bills and they shrug and say 'I guess that I spend that much.'
What I show is that the next $100 that you earn -- imagine it is the top of the funnel -- $10 will go automatically to your investment, $5 to your savings account, include $2 for your next visit to India, and from the rest of it you will pay your checking, your credit cards and some of it will also be used also for guilt-free spending.
That is a concept that goes hand in hand with automation because a lot of the times my young readers of the blog, who are typically 20 to 35 years old, feel guilty that they are going out buying a $200 jeans. What I show them is that if you want to buy a $200 (pair of) jeans, that is fine as long as you are meeting all of your other goals first.
How to automate money to get rich
So, basically, you are talking about prioritizing things and sub-accounting your money?
That is right of everything you said, except that it happens by default. In other words, once you set it up it happens automatically. You do not have to do anything on a day-to day basis. And that is extremely powerful.
You say that your target readership is 20- to 35-year-old people; how are these people dealing with personal finance issues at this time?
The thing when it comes to young people and money is that most of them are ignoring it entirely. And there are a few reasons for that.
One is that it seems very complicated. Two, there is no immediate need to pay attention. Third, there are a lot of people who are trying to sell you different things and you do not know who to trust.
As I tell in my book, anyone who tells you about 10 best stocks to buy this year, or whatever year, is a complete fool. When it comes to young people, the first thing they are doing is that they are simply ignoring their money.
What I urge them to do is say, 'Look, you can read a book or a blog whatever it is, and then within 10 hours you can be better than 90 percent of the people at managing your own money.' And I am not saying 'do not spend your money,' because nobody listens to that advice.
What I say is that being rich means you spend money extravagantly on things that you love and you cut costs mercilessly on the things that you don't. That is conscious spending.
How to automate money to get rich
You are talking about long-term investments, I presume in bonds and shares and stocks, etc. How do you think young people would react to investing long term in the economy where stocks are going down?
Most people, I would say, do not know how the stock market works. If I had told them six months ago that the stock market is going to be on sale for 50 per cent off, does it interest you, and 100 per cent would have said, 'Oh, that is great! I can't wait to invest.' Now that it is falling, people see that as bad.
The point there is that people who do not understand how the market works, all they do is stop doing any personal finance behaviour. They look at the newspaper headlines and the headlines are scary. But people who have been reading my blog for years know it is a long-term game.
They know that what has happened now is unprecedented and that certainly makes certain people nervous. But the point is not to shift anything and to focus on the long-term and to continue investing and make sure that one has a savings account.
One has to make sure that one is focussing on earning more money, not in the next two years, but in the next 20 or 30 years.
How to automate money to get rich
How personal finance-savvy are Americans?
In general, we Americans are not very savvy about personal finance at all. There are reasons for that. The first thing we can blame is our education system. We are not taught about personal finance in schools, and even if we are, these are old boring classes with boring topics.
Second problem is our parents -- who do not know much about personal finance either -- what they would teach us is what they had learnt in different generations. For example, there is this treasured notion that buying a house is the best investment that you can make. And that is not simply always true.
Thirdly, the government is not taking its role in educating people nor the private industry.
The fourth, and that is really important, is us. We are not taking responsibility because the truth is there are plenty of resources all for free, from which one can learn in three hours -- whether it be my book or blog or somebody else's -- more than anybody else.
How to automate money to get rich
It seems you are trying to drive home the same point about personal finance -- focus on the long term.
Yes, true, but there are a couple of some more things that I am saying. The message is somewhat the same and somewhat different. A lot of personal finance experts focus on the long term and I do the same thing.
But a lot of them also say don't spend money and all that. My thing is if you love it I will show you how to spend tons of money. But I also show you how to cut costs mercilessly on things that you don't like. That is one thing that I learnt from my parents.
I teach people how to negotiate like an Indian and this has been hugely popular. I show them literally what you can save when you call up your bank to negotiate fees. But a lot of the Americans are not used to negotiation at all.
I show them videos how to negotiate. That really gets people interested in personal finance.
How to automate money to get rich
You studied technology and psychology at Stanford. How did you become interested in personal finance?
The way I got interested was due to my parents. There are four kids in my family. My parents said that if we wanted to go to go to college we would have to get scholarships. I applied for some 70 scholarships and the first scholarship that I got was for $2,000.
And they wrote the check directly to me, although that is unusual. What I did was to invest that money in stock market -- and I lost half my money. That was when I realized that I must learn something as to how it works.
So the next few years I started reading books, watching television shows and I learnt that there are a few simple principles that work in personal finance. There is lot of hype and people are trying to sell you different things. But what I also learnt was that if you manage your money, it also lets you to have a rich life.
As I said, being rich is not just about money.
How to automate money to get rich
What is your advice to people about managing personal finance in these times of crisis?
The first thing is to focus on the long term. Secondly, instead of worrying about what the newspaper says, scary headlines and all, look at your own finances. Have you optimized your credit cards?
Have you set up an automated system where each dollar that you earn is allocated for different things? Do you have savings for the short term and the long term? Those are more important than reading news on a day-to-day basis.
How important you think it is for people to take a personal finance adviser's help?
I do not think most people a need a personal finance advisor. I think you can get 85 per cent of the way there on your own, and that would involve picking up a good book -- whether it is mine or anybody else's. It is less about technical knowledge.
Personal finance is very similar to dieting. You know a lot of people who go on diets talk endlessly about calories, carbohydrates and workouts, while the two basic things that one needs to know are how to eat less and work out more.
Like with dieting, the important thing in management of personal finance is to know if you have committed yourself. If you did, chances are that you will succeed.