Motley Fool Hidden Gems Investing - Ramit Sethi on Spending, Renting, and Financial Misconceptions

Episode Date: April 16, 2023

Money is often thought of on a transactional or restrictive basis. But, what if it could be a source of joy? Ramit Sethi is a best-selling author and the host of the Netflix series “How to Get Rich.” Alex Friedman caught up with him to discuss: - The source of most financial conflicts in couples - Renting vs. Buying - Building the skill of spending money Host: Alex Friedman Guest: Ramit Sethi Producer: Ricky Mulvey Engineers: Dan Boyd, Kyle Carruthers Learn more about your ad choices. Visit megaphone.fm/adchoices

I'll ask people sometimes on social media, if you got $10 million tomorrow, what would you do? You know what one of the most common answers is? They go, I wouldn't change a thing. I love my life. And they kind of expect me to applaud, you know, applaud me, Mr. Finance Guy. And I actually find that to be extremely lazy, intellectually lazy. You're telling me with $10 million, you would not change, you'd wear the same shirt, you'd

eat at the same Chipotle, you wouldn't even get guac? I'm Chris Hill, and that's Ramit Sethi, best-selling author and host of the Netflix series, How to Get Rich. Alex Friedman caught up with Sethi to talk about why budgeting doesn't work for most people, the case for renting instead of buying, and how to spend money without feeling guilty. I know over the last year or so, you have been running a podcast speaking with couples talking about their personal struggles with finances and the disagreements they have. And I'm curious, what do you think are some of the roots of these conflicts? And what are some of the signs that financial disagreements can be resolved or not be resolved?

well imagine being in a room and listening to a couple with 12 million dollars in the bank and they are arguing over potentially getting divorced because one of the partners is too cheap we've never heard this the only way we hear this kind of stuff is through the movies and i wanted to actually talk to real couples with real numbers from behind closed doors and I've spoken to tons and tons of them. Some people have $800,000 of debt. Some have millions of dollars of net worth and different ages, different sexual orientations, every type of couple you can imagine. You start to see some patterns after a while. The way that people describe the problem is different often than the actual problem. The most common way people will come to me is they

say we're not on the same page okay that sounds reasonable but what does that actually mean you know my partner's an overspender and they never put put the blame at themselves but one of them might be an underspender the biggest most common problem that i see with couples talking about money is that they lack a rich life vision together think about it when most of us think about money well people listening here i know you're sitting here looking at investments okay fine but remember you're not normal okay normal ordinary people who don't listen to this podcast the way that they think about money is purely on a transactional or restrictive basis transactional means should we go to target should we get that dessert we got to get the tires fixed it's just

a series of transactions one after another no joy no vision and restrictive is the entire world constantly looks down their nose at us and tells us no lattes no jeans no vacation no no no how do you think that makes people feel about money it makes most people hate money while at the same time being paradoxically infatuated with it you know looking at their friends at bora bora on a tuesday and so when couples come to me they're arguing over something purely transactional like he or she spends too much at target but really they don't have a vision of what they want to use their money for. So when you're working with these couples, how do you work to resolve some of those challenges to really create a shared vision around money? I always start by asking

them, tell me something in the last 30 days where you were not on the same financial page. I want a specific example. And I do this because it's very easy to talk in platitudes about money. Well, I like to travel and my partner likes freedom. I don't care about any of that. I want a specific example. For example, one couple said, um, we, our car broke down and we have kids and we needed to get it repaired. And my partner did not want to spend the money to get the car repaired. And frankly, why should you have to check with your partner for something that involves kids safety? Shouldn't that be agreed upon already? And so we start there with a very specific example. I let both partners explain their perspective. And then I will often ask them, um, how did you

grow up with money what do you remember your family saying about money and you'll hear very classic things a lot of people say we never talked about money ever it was never talked about so for every parent listening uh if you don't talk about money your kids end up defenseless in the world they end up talking to somebody like me because they had to make up their own meaning of money and their own habits with money because their parents didn't want to talk about it and there's all kinds of class structures involved and stuff like that. You'll often hear people say, my family said things like, we can't afford that. And if you hear that repeated a thousand times, then let's say you end up going to college, you end up making a good income, you end up with

$200,000 in your portfolio or $500,000. Those very same people often feel they cannot afford something even when they have millions of dollars in the bank. So what you learn in that segment is that our past follows us and the way that we look at money is not rational. You're not going to the grocery store and making a pivot table to compare crackers. It's often what your mom or dad or family said 40 years ago that you unknowingly carry with you. So those are a couple of the first ways that I get into the conversation with these couples. What do you think are some of the most damaging things children can hear growing up around money? We can't afford it. We don't talk about money in this family, that's for rich people. Notice the sneer on my face. That's for

rich people, not people like us. As if rich people are evil. And so imagine what that does to somebody who then excels in their career, starts to make money, but the more they win, deep down, the more they feel they are losing because they're becoming an a-hole. So that's very destructive as well. Probably the most destructive thing of all is to simply not talk about money. I remember a couple I spoke to, the husband had grown up in a community where there was a clear divide. He was on the poor side of the tracks, and then on the other side were the lawyers and the doctors with the big houses.

He grew up with a pretty destructive view of money, that they didn't have it, they didn't talk about it, and any time he heard anything about money, it was a negative, it was a fight. so he grew up thinking money's negative well guess what he grew up he and his wife did pretty well they were making good money and one day his daughter comes home from school with a lunch that the school had provided they had given her a basket of food and he said what is this and his daughter had at school said we don't have enough food we can't afford it and so the school had helpfully given her you know some some food to take home he was furious his wife thought it was funny but he was furious why would you tell people that we're poor that we can't afford it we have

money and i asked him you ever talk to your daughter about money he said no i said why and this was the most fascinating answer he said because i want to protect her from it now think about that his entire life experience money is bad it's negative it's a source of pain and so with that belief in mind he wants to protect his daughter by not talking about it shielding her from it because he thinks money's so negative and therefore his daughter thinks she's poor you see how these are now carried from generation to generation and one of the gifts that i want to be able to give these couples and the listeners is to recognize the stories that you've been told and to design your own story going forward to me that is the genesis of a rich life you've clearly

had a great deal of success from the book and from your podcast yet you and your wife choose to rent instead of own i know this comes as being counterintuitive to a lot of folks it does what so i'm hoping you can tell us a little bit more about your thinking there why you choose to rent instead of own i love this topic i love it so much and people get so mad and i also love that because in america real estate is religion we are fed a short series of little phrases and they're repeated to us 20 million times in our childhood and we start to believe them everybody listening see if any of these sound familiar you're throwing money away on rent funny no one ever says that you're throwing money away when you go eat at a restaurant you're paying

your landlord's mortgage funny nobody ever says that about paying the restaurant owner's mortgage uh what about the equity funny nobody ever says what about the phantom costs and so what i want to do and what i encourage people to do is to run the numbers on the biggest purchase of their lives that shouldn't be controversial but because in america we so deeply believe that real estate is religion, we have simply closed our minds off to actually analyzing the biggest purchase of our lives. And instead we take it on faith. Let's be very clear. Sometimes owning a house can be a great financial decision. Sometimes renting can be a better financial decision. In my case, I've rented for over 15 years in San Francisco, New York, and LA, and I've made more money renting

than I would have owning. How? I'll give you a very specific example. This is true in high cost of living areas, and it can be true in different areas. That's why you need to run the numbers. When I lived in Manhattan, I was renting. Let's just pretend for easy math that my rent was $3,000 a month. There was a place basically next door, same size, same square of footage, same number of bedrooms, same view. To own that place would have cost over $6,200 per month. Let me say it again. I was renting for $3,000. It would have cost over $6,200. Once you factor in taxes, interest, opportunity cost of a down payment, and maintenance. And so I said, why? I don't need that. I'll take the $3,200, I'll invest it, and I'll go to a nice luxury hotel

because i love hotels i made more renting than i did owning so for everybody listening here's the key message never feel guilty about renting especially now when things are quite unaffordable especially if you're young always run the numbers because you want to understand tco total cost of ownership when it comes to owning not simply the sticker price so ramit i know your new show how to get rich comes out on netflix april 18th what have you learned from the people you've helped on your new shell? You know, I think the number one thing I learned is compassion because most of us think of money as just a series of numbers. But when I got the chance to go around the country, go into their homes, meet their families and their friends and work with them for a long period of

time, longer than on my podcast, that gives me a chance to really understand why they behave the way they do with money. You know, you learn, not everybody grows up with two parents who teach them about custodial Roth IRA at the age of 14. That's not everybody's circumstance. And so when you meet people who, let's say, have credit card debt, or you meet people who view money differently, easy come, easy go. A lot of the work that I do on the show is like a detective. Why do you think this way? And I think it would be really tempting to come in and throw 50 spreadsheets at them and say, just do the numbers. The numbers are a small part of a rich life. Small. Sure, we should be cognizant of compound interest and expense ratios. Of course, we've got to learn the basic language

of money. But everybody listening, I know you've got something irrational in your life. You know it and I know it. It might be that you spend extra on peanut butter. It might be that you splurge for nice diapers for your son or daughter. It could be that you drive a car that's more than functional. it's just really nice and that's okay on this show compassion was definitely the number one thing i learned by getting to go deeper with each of the people i worked with when you're teaching people about improving their finances do you see times where you're knowingly going against the economic textbooks because most people are not economists oh yeah yes absolutely you know there's simple examples like the snowball technique for paying off debt you know sometimes people just

hate debt. And so it might make sense to pay off the smaller balance versus what would be economically rational with a higher interest rate. Sometimes I have people, again, they just hate debt. And they're like, I want to put an extra $1,000 a month towards my 3.1% interest rate. And I'm like, are you sure you want to do that? And they go, I hate debt. I go, okay, fine. In the grand scheme, if you want to pay off your debt a little sooner, fine. Sometimes there are people who go remit. I ran the numbers. It's actually more expensive for me to buy a house and I still want to do it because I want my kids to be in this area or I love to decorate. Whatever. I go, fine. If you've run the numbers and you understand the ramifications, fantastic. That

can be part of your rich life. So there are times where I can stretch the rules, where I can bend the rules, but I want everybody to know the rules. You've got to know how much you should spend on your fixed costs, 50 to 60%. That's part of my conscious spending plan. You've got to know how much you can expect to make in compound interest returns over the long term. That's also part of my conscious spending plan and everything I talk about. Most of us don't know these basic numbers, so we don't really know the rules of the game. And once you know the rules, then we can talk about which ones you want to break. If you're listening right now, you might be very secure in your finances, but still have trouble spending guilt-free. Ramit, why do you think guilt-free

spending is so important and what advice do you have for these types of people i love this topic very few people are talking about it most of the world is focused on getting people to save any money at all and i get that but if you're a financial nerd listening here and you run monte carlo analyses for fun then you might be a little obsessive about money and i'm willing to bet, because I've spoken to tons of people like this, you're really good at saving money, right? And everybody teaches how to save money, but nobody teaches how to spend it. And so here's what happens. Somebody starts off, they start investing in their 20s, and they're really good. They keep increasing their savings rate. They max out their 401k,

all that stuff. And they're being prudent. There's nothing wrong with that. I think it's fantastic. and a lot of them tell themselves when one day i'm gonna start tapping this portfolio the deaccumulation phase all these fancy words we use but by the time they do it by the time they're retired they get scared they're not used to not seeing money come in and also as they get older not only physically may you know they may not be able to climb everest etc they may be taking care of an ill parent, but also they have never built the skill of spending money. And that's really the point. Spending money is a skill. And you cannot simply flip the switch when you're 55, 65, 75 years old. Just like making friends, it's a skill that has to be nurtured throughout life.

And so you'll hear people saying these peculiar phrases. I don't need to eat at fancy restaurants. i'm perfectly fine with a domino's pizza i go first of all domino's are you sure that's the one you want to choose all right fine all right but what they're really saying is i have not built the skill of understanding why somebody would enjoy that i'm not saying you have to go to a five-star restaurant that's not my point maybe it's not your thing but could you go once and at least go with an open mind and try to understand why other people would enjoy it could you take a friend and treat them. Maybe you go, I don't need business class flights. Fine. But what do you need? And maybe it's not even about need. Maybe it's about want. A lot of people, they often, I'll ask

people sometimes on social media, if you got $10 million tomorrow, what would you do? You know what one of the most common answers is? They go, I wouldn't change a thing. I love my life. And they kind of expect me to applaud, you know, applaud me, Mr. Finance guy. And I actually find that to be extremely lazy intellectually lazy you're telling me with 10 million dollars you would not change you'd wear the same shirt you'd eat at the same chipotle you wouldn't even get guac you'd fly the same seat on an air and and they go yeah i don't care about guacamole i don't care about business class i don't care i don't care they see it as a virtue because if you're frugal for too long it becomes your identity and then i say to them you wouldn't take anybody with you you wouldn't treat

a friend. You wouldn't fly in an old college buddy. You wouldn't donate a huge amount to the local YMCA or ACLU. They never thought that way because their identity is so overwhelming to them that they are focused on what they don't need, that they never stopped to think about what they do want and how they could serve other people as well. So frugality is great, but taken too far, it can become an affliction. And that's why you need to not only save, but need to learn the skills of spending money meaningfully as well so for people that haven't built up the skill set what are the first steps you usually recommend they take i i go through an exercise with them so i ask them in fact let's do it right now so i want to ask you alex what do you love to spend

money on not like but love obviously travel i'm a millennial so that doesn't make me too unique tell me okay so where do you like to travel anywhere i can go all over the world i just had a trip with my girlfriend to the Dominican Republic. We went to the Samana Peninsula, saw migrating humpback whales, beautiful area. Before that, we went to Croatia. So yeah, we're very lucky. I love to travel. First of all, look at that smile. This is what I love to see. This is where I start. I'm not sitting here talking about budgets. I hate budgets. I want to understand what you love to spend on. Okay. That's the first question for everybody listening. What do you love to spend money on? The most common answers are in order, eating out, travel,

which you hit health and wellness is number three and convenience is number four. These are called money dials. Okay. I call them dials because like a radio dial, you can turn them up, which brings me to my second question. If you could quadruple the amount you spend on travel, what would it look and feel like for you? The white Lotus. Tell me fancier hotels, you know first class flights excursions every day local food tours oh my man all right i like it and would you be going solo or would you be bringing i'd be bringing my partner maybe my friends nice how long would you travel for two to three weeks how much how long was your dominican republic trip that was about a week i feel like after two weeks i usually get a little antsy want to get

back it might be a little different if you're traveling like white lotus you might feel comfortable all right yeah okay cool i like it so um what i'm hearing from you is quite a dynamic vision uh it's actually amazing for everybody listening notice that first you you you just had it off the bat you were ready to tell me white lotus and i said well that's just a word what does that mean and you knew hotels excursions even food tours you've clearly thought about that that's amazing that's rare second you did it uh longer okay that's cool longer and third you talked about who you would bring with you. These are called money dials because you can turn them up. And so when I ask people to create a vision for themselves, I start with what do you love to

spend money on? And the answers are actually usually less sophisticated than yours, Alex. So the most common answer is I like to eat out. And then I go, cool, what would you do if you could quadruple your spend? And they go, well, I'd probably have to go on a diet because I'd be eating out four times a week. Ha ha ha ha ha. And I go, oh God, not this again. But what they are really doing with that answer is they're thinking linearly. I eat at Chipotle once a week. If I'm going to quadruple my spend, I would eat four times a week. But what you did was really cool. You changed not only the quantity, how long you would go, but you changed the quality. You would be going to a nicer hotel. You'd be doing more adventures, experiences. You can do

that with food. You can do that with cars. You can do that with clothes. One of my favorite examples was a young woman who loves clothes and she was stuck. You know, she shopped at someplace like Macy's or H&M, something like that. And she was stuck on linear. I'm only going to buy four times the amount of clothes. And I said, what if you turn that dial way up? 2X, 3X, 4X, 10X, just for the vision part. And what if you took your mom and you flew to Italy and you both went shopping and got something made for the two of you, the two of you would always remember together. What would that be like? And that is an example of how you can start to create a vision for where you want to spend extravagantly on the things you love as long as you cut costs mercilessly on the things

you don't. I know you've talked a lot about not creating budgets for people that you're working with. And I know for a lot of our listeners, they may be used a budget in the past. So I'm curious, why don't you start with creating a budget? Well, everyone used the budget in the past. they use it for a day and then they give up because they hate it. It's like somebody saying, oh, okay, Ramit, you hate flossing. So therefore you're going to have to floss. Well, actually, they do say this. You have to floss every single day of your life and then you have to track how long you floss for. And because we know that you're not actually going to floss, every time you open up that spreadsheet to track it, you're going to feel bad about yourselves. Anyway, good

luck doing this for the rest of your life. Bye. Does that sound like it would ever work? No. And not surprisingly, nobody actually maintains their budget. Even the very people who recommend you keep a budget because I know them. So let's reframe the way that we treat money. I don't actually want you to be spending 30 minutes a day tracking money. Neither do you. Okay. This comes from my background in psychology and understanding human behavior and persuasion. Most people do not want to track money. I know you nerds listening. You love it, but you're not normal. Most people do not want to track money. All they want is for their money to do what it's supposed to do and make sure they can go out and eat at a nice restaurant and not worry. It's really quite

simple. So how do you do that? I recommend using my conscious spending plan. You could download it from my website. Four numbers. That's all you need to track. The first is fixed costs. That is your car, your mortgage or rent, utilities, the things that are fixed. And I recommend 50 to 60% of take home be spent for that. Next, your savings. That 5 to 10%, again, we can adjust depending but it's a ballpark investments five to ten percent i like low cost index funds etc and finally my favorite one guilt free spending 20 to 35 percent now imagine the relief where you plug in your numbers it's one page okay it takes 20 minutes you can do with a partner you can do it solo and suddenly you can benchmark and be like oh my god we're spending way too much

on housing. That actually happens to be the number one expense problem. Number two is auto. People buy these things and they have no idea how much total cost of ownership is, which is why I insist on running the numbers. But a lot of people actually discover that they're not saving because they try to save at the end of the month. That's a failing strategy. And also, a lot of people have no concept of how much they can spend on guilt-free spending. Once you know your numbers, just the basic ratios. If you want to buy a $200 bottle of wine and you can afford it, God bless. You want to buy a thousand dollar cashmere coat, be my guest. You want to use the money so you can travel for two to three weeks and stay at a beautiful hotel, or you want to tip every time you go out

30%, that's how you do it. But you got to understand the rules of the game. And that is how I use my conscious spending plan. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.