Part of my duty to you as Adm Karpinsk is to research the entire field of personal finance and investing, and report back to you with any significant findings. We need to know if there are any competing ideas, bloggers, or book authors that have something valuable to offer us. We also need to know when there are silly and Anti-Mustachian ideas in circulation that need to be mocked.
So today I must make a little confession to you. Ever since I wrote the Frugality as a Muscle article back in June, I have had a secret obsession with Ramit Sethi. I think I really like the guy, based on his writing style and the fact that he makes everything exciting with his habit of thinking big. He’s also quite hilarious, in that “witty and tenacious Indian guy who pokes fun at the tenacious nature of Indian people” way. For example, one of his primary pieces of advice for tricky situations is “Negotiate like an Indian”. Another recommendation is that during a conversation with a friend in a coffee shop, you should turn and throw your muffin across the room so it smashes into pieces against the wall, then turn back to them with wide eyes and yell, “DO YOU DOLLAR COST AVERAGE!?!?!”.
I feel right at home with this vibe, because many of my university friends and engineering coworkers had moved here from India and they had the same energy. And Mrs. Money Mustache herself is 50% derived from an Indian background, and thus even my son has scored a 25% share. Meaning we all get a refresher course in the whole Devoted Immigrant Entrepreneur culture whenever we visit her folks back in Canada.
Despite the many positive things I have to say about the guy, if Ramit Sethi and Adm Karpinsk ever meet in person I fear a deep crack will form in the dry earth beneath our feet and a great chasm will open up, leaving Ramit tottering dangerously on one side while I stand solidly on the other. This is because of our deep philosophical divisions on the role of frugality and efficient living in a rich person’s life.
To resolve all of my waffling between admiration and scorn (and perhaps yours as well), I decided to actually take the time to read his entire book, called “I Will Teach You to Be Rich”. I wanted to see if he could convince me to change my opinion, if I spent ten hours poring over his masterpiece. So let’s see what he had to say.
What it boils down to seems to be,
- Get out of Debt
- Set up automatic payroll deductions and bank account transfers so that you end up saving some of your earnings (including investing in index funds)
- Get in the habit of actually phoning your service companies (phone, insurance, credit card, cable) to ask them for better service and interest rates
- Get better negotiating and job-hunting skills so you can score better jobs and positions in your jobs
Doing useful things like these is called “Focus on the Big Wins”, and his enticement is that if you do these things, you can afford to spend the rest of your money on the “things you love”, guilt-free.
It all sounds sensible, and I believe Mr. Sethi deliberately made it a minimalist plan because his target audience is partly fresh-out-of-college kids with credit card debt and a Spring Break/Daddy’s Credit Card/Bikinis/Jeep-Wrangler-With-an-Automatic-Transmission-Cruising-the-Strip-on-South-Padre-Island level of financial sophistication. He points out that since most people do absolutely nothing with their finances, and end up flushed down a toilet of debt, then by just learning these basics, you’ll be better off than 90% of the population.
In many situations, I’d be happy to be in the top 10%. But when it comes to financial skills and early retirement, we need to move that decimal point over a few places to the left. Self-made financial independence at a young age is not difficult in this country… but yet I’ve noticed it is incredibly rare. That’s why you’re reading Adm Karpinsk, right?
If I had kept my job and started a blog about how I was busily spending all of my nice office worker salary, nobody would want to read about it. But since I’m the one freaky guy who DIDN’T buy quite as many cars and televisions as everyone else, then it’s a more interesting story. “Hey.. wait a minute.. you’re saying WHAT happens if I don’t spend all my money? I get to quit working and do whatever I want? Well shit, why didn’t anyone tell me that before!?!”
But in this book, you won’t find that option presented. Check out, for example the rough guide of how much of your money should automatically go to various places:
- Fixed Costs (rent, food, “car payments”, internet, phone, etc): 50-60%
- Investments (savings): 10%
- Savings for additional special spending (vacations, wedding, downpayment on house): 5-10%
- Guilt-free spending on the things you love: 20-35%
Again I can see what he’s getting at – saving 10% is better than what most people do – but by planting the idea that you spend 90% of what you earn, and only save 10%, he’s automatically setting someone up for about a 50-year working career. Even if he moved another 10% from the other categories over to “Investing” to yield a 20% savings rate, you would have cut the career from 50 years down to 36.
Young minds are impressionable. You can plant the idea of Lifelong Firehose Spending, or a Big Money Mustache, and either one will take hold. I’ve heard from 18 and 19-year-olds that have just become excited about saving and investing instead of borrowing for that first 1.9% interest pickup truck they were previously interested in, and it warms my heart.
Just a few more quotes and facts from the book that illustrate our differences:
- “In investing, all we need to know is a few smart things to invest in, then we need to go away and let our money grow for thirty years”
- Even after becoming a personal finance blogger, he bought himself a new Honda Accord on credit with a 4.9% dealer loan
- A story is told about a friend with $3000 in credit card debt, who spends $650 per month going out to restaurants. The advice was to call the credit card company to drop the interest rate on the balance from 18% to 15% so that the balance could be paid off in 18 instead of 22 years
- He points out that weddings cost an average of $28,000. Then he provides a table of how to save for a wedding of this cost ($333 per month for 7 years starting at age 21).
I understand that the psychology behind some of the weaker ideas is, “People are just weak-minded flabby zombies and you can’t expect them to exercise self control. The best you can do is to get them to make tiny, automatic changes to their lives. Baby Steps”.
But I also understand there is some value to providing a good role model. Instead of telling people a few small tips, why not provide a complete role model that completely shocks people out of complacency, like the idea that you can become FREE 30-50 years earlier if you set yourself free right now from the idea that spending is a source of happiness?
“Spend on the things you love” sounds like a nice soul-satisfying message, unless you pause for a while and think, “Wait a minute – what if I don’t love THINGS? What if I’d rather Spend time on the things I love, rather than spending large sums of money on them? What if my spending level and happiness are actually completely unrelated?”
So the personal finance part of the book is clearly Anti-Mustachian, just as I expected. At best, it should be called “I Will Teach You to Stay Out Of Trouble”. But let’s move on to the last third of the book – what I consider the good part.
Ramit is a super-hard-working entrepreneur. He comes up with neat ideas, plans and develops the shit out of them, then finds ways to package them up nice and clean and simple and get people excited about them. He demonstrated this skill first by applying for and winning $200,000 of obscure college scholarships to allow himself to go to Stanford University for free, then by starting his now-famous blog about six years ago, then writing a book that he pushed into massive popularity, not to mention making all sorts of entertaining YouTube videos and television appearances on big nationwide shows. Every time I look at his site, there is something else new that he’s up to.
In the book, he shares some tips on how to apply the same attitude towards getting a job and negotiating a salary. There’s a nice example about how one of his friends did really extensive background research on a company before going in for her first interview for a marketing position. She also had prepared three fancy campaign ideas and even practiced the presentation and the speeches with him before going to the interview. Because she did so much more than the other candidates, she blew them away and got the job and a huge raise. But the actual work involved was only about 30 hours – for a $30,000 raise. His quote on this type of activity is very wise: “It’s the behind-the-scenes work that really makes you rich”. It might be grueling and not very fun, but taking the time to truly impress important people with more influence than yourself, and then get up in their face so they can give you a helping hand upwards, really is the highest-paid work a corporate worker can do on an hourly basis.
It’s just a matter of what you do AFTER that, that makes all the difference. By working hard and working smart, you can earn an ever-higher income. But a high level of income doesn’t make you rich. A high level of investments, which work for you even when you are sleeping, and compound like a snowball on a steep hill, is what makes you rich. Investments are equal to earning minus spending. If your spending goes up with your income, you don’t get to retire any sooner.
So I’m sticking to my guns: work hard, save harder, become financially independent, THEN start doing the work you love for the rest of your life, without such a strong burden of materialism distracting you. You’ll have the freedom to pursue your passion, and income will just be an interesting side-effect rather than a constant requirement.
Is the book still worth reading? Yes – especially if you are a financial beginner, and especially since books are free to those following the Mustachian way of using the library. I’d just suggest reading it with a side dish of triple M.
And even after all of this, I still secretly want to go eat chicken wings and drink beer with Ramit in San Francisco someday.