Is Your Financial Clock Ticking?

Ramit Sethi, a personal finance expert, joined The Long View to discuss his new Netflix series How to Get Rich, budgeting, investing strategies, and more.

Here are a few excerpts from Sethi’s conversation with Morningstar’s Christine Benz and Jeff Ptak.

Budgeting and Conscious Spending

Jeff Ptak: I wanted to talk a bit about budgeting and conscious spending. You often talk about a conscious spending plan, and you have a free spreadsheet that people can download. Can you talk about what that consists of?

Ramit Sethi: I’m not a fan of budgets. I don’t know anyone who effectively maintains a budget long term. And also, my worst hell on this planet is sitting and being 58 years old and tracking the price of asparagus at Safeway. I don’t want to live that life, ever. Furthermore, I actually find it very uninteresting. I spent this much last month—what does that tell me about going forward? And when you apply psychology to budgets, you recognize quickly why it does not stick. Here’s the basic message of budgets: “OK, everyday person on the street who doesn’t really pay attention to their money, I want you to open up a spreadsheet—again most people don’t even use Excel—I want you to open up a spreadsheet, I want you to find all that you spent in the last 12 months. The spending that you don’t track at all and that you feel really guilty about. Go ahead and spend the next two months trying to gather all that information and type it in or integrate it somehow. And then you see a bunch of numbers, and I want you to magically make sense of it and then use that to decide what to do next. By the way, you have to do this for the rest of your life.” Is it any surprise that no one actually keeps a budget for the long term?

The fact that this has not been discovered in the financial industry absolutely blows my mind, and I credit a lot of this to my studying psychology at Stanford when I realized certain things about how we are cognitive misers, how we carefully ration out our attention on the things that matter. And so, for me, I want to simplify, and I want to focus on the high-leverage items in personal finance. I call them “the big wins.” And with a conscious spending plan—I think I have one on my website. There are four numbers that I track—I track these myself personally as well. The first one is fixed costs. And I give people an actual percentage. I find that specificity is really helpful. Fixed costs, 50% to 60% of take-home pay—that includes your rent or mortgage, utilities, any debt payments, cable, groceries—all the fixed stuff. The next category I track is savings, 5% to 10% of take-home, although, of course, I’d love to see more. Next is investments, 5% to 10% of take-home—I’d love to see more because that’s where real wealth is generated.

And then my last category is my favorite one: guilt-free spending, that’s 20% to 35% of take-home pay. So, you have those four numbers, you can sit down solo or with a partner. And you can say, “OK, let’s map it out—this takes us 15 minutes to get 85% of the way there. Let’s decide what we want to do this year. Do we want to go to this great restaurant? Do we want to take a trip with our family? Do we care about a nice hotel? Oops, that doesn’t fit into our numbers. All right, let’s save a little bit more this year and we can do it next year.”

Time and Money

Christine Benz: One thing that you talk a lot about is the role of time. How time relates to money and how people sometimes go through these steps to save money that ends up costing them a lot of time. Can you talk about how you approach that and how you want people to factor their own time into the financial decisions they make?

Sethi: I would love it if people stayed awake on a Saturday night researching different savings accounts like I do, but most people actually have a life, so they’re not going to do that. That’s life. That’s why they turn to people like me. And that’s why they come to you for advice as well. The fact of the matter is that I want people to spend less than an hour a month on their personal finances, not just because they’re ignoring it, that would be ineffective. But rather because they have systems set up that are automatically handling their savings, automatically handling their investments, and they even built in a little buffer in case their tire goes flat on their car.

When it comes to making big financial decisions, we are super irrational. I kind of love it honestly. It’s just the human condition. We’ll spend more time looking up what cool restaurant opened up to go out on a Saturday night than we will researching the actual cost of buying a house. It’s absolutely bonkers. You have people who literally keep a massive Yelp page, or wherever they’re tracking their restaurants, and then you ask them what percentage of gross income is going toward housing. They’re like, what does gross mean? I go, OK, cool. Let’s start at the beginning.

The fact is, I can’t berate people for that because there’s a lot of stuff I don’t know. If you ask me how my car works, I have no idea, I just put the key in and it turns, great, let’s go. So, what I often do is say, let’s get the big things right. Let’s make sure that by default your money is being saved, it’s being invested, and also you feel guilt-free when you go out to eat at a restaurant, you can order dessert. You don’t have to spend a ton of time, but you do have to get the high-leverage items right. Those would be things like buying a house, buying a car, or any type of debt that you might be taking out. Get those right and then the price of coffee does not really matter.