How Young Adults Can Overcome Financial Challenges
June 30, 2010
This week, I’m exploring the unique financial challenges of young people just starting out. What better way to do this than by interviewing Ramit Sethi, the author of the New York Times best seller, "I Will Teach You to Be Rich." I hope you enjoy.
We keep hearing that young adults are becoming financially independent at a later and later age. As a member of this generation, what’s your take on that? Besides the obvious things like student loans, a recession and high unemployment (which are obviously compounding the problems), what do you see as the biggest obstacles for young people?
Too much information. We love to think that more and more information will help us make better decisions, but that's just not true for finances. In "The Paradox of Choice," Barry Schwartz explains how more mutual fund choices cause our eyes to glaze over and say, "Hmm...I'll do this later." Which we never do.
Here's the funny thing: We don't want information, we want solutions. We don't want to be "financially literate," we want to be rich. We don't want a "Roth IRA," we want freedom. Unfortunately, nearly every financial company misses this when they try to reach young people.
Just one more thing: We can blame everyone else, but the truth is that we—young people—need to get off our backs and handle our money. We complain about money for our entire lives. Yet have we ever read one good book on personal finance? It's time to stop blaming others and get proactive about our finances.
You've written a great book to help members of your generation establish a firm financial footing. If you could condense your advice into the top three or four things, what would they be?
Personal finance has traditionally been about old people lecturing us about all the things we can't do: "No, you can't spend money on lattes. No, you can't afford those jeans. No, you can't go on vacation." Nobody—especially young people—wants to hear someone telling them "no." But personal finance is really about saying YES. Yes, you can spend extravagantly on the things you love ... if you cut costs mercilessly on the things you don't. You want those $300 shoes? Get them, guilt-free ... as long as you're handling your other goals. Again, every financial company misses this.
We tend to think, "If I just try harder, I can save $200/month"—just like we think, "If I just try harder, I can lose those 10lbs." But if we're honest, we realize willpower alone doesn't work. I encourage everyone to set up automated systems so your money goes to the right places without your ever seeing it.
Don't ignore psychology. Did you know the most common feeling around young people and money is guilt? Yet "experts" continue to trot out the same old tactics ("Keep a budget!") instead of understanding why we're stuck. When you can understand our behavior—without judging—you can cause huge, measurable changes in young people.
Finally, avoid chasing hot stocks and alternative investments, which are designed to make others money. Focus on long-term, sensible investments like target-date funds.
In your book you also talk about the lessons you learned from your family. Given this, what is your advice for the parents of those young people who are struggling to get out on their own? How can they help their son or daughter become financially independent—without simply cutting them off?
Well, I'm thankful to my immigrant Indian parents, who basically bred me to be a negotiator. In my book, I show people how to Negotiate Like an Indian using pre-written scripts to beat their cable company, credit card, bank, and gym.
For parents, I'd encourage them to recognize that our motivations at 20 or 30 are completely different than someone in their 40s or 50s. Don't point out all the bad things that can happen if we don't save. Try using the carrot approach: Show us how money can be empowering for fun things like travel. Once we see that, we realize the power of saving and investing.
And finally, are there any words of encouragement you can offer young people as they look into the future? Is there a reason to be optimistic?
Absolutely. It's easy to get scared of the economy today, but it's critical to focus on the long term. Today, there are more tools and techniques to automate money than ever before. We have the opportunity to earn more than ever before. All of this allows us to live a richer life than virtually anyone in history. But we have to get started.
Ramit’s blog, , hosts over 300,000 readers per month. He can be reached at firstname.lastname@example.org.
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