5 Unconventional Truths?

April 24, 2014

A coworker of mine recently forwarded me a mass email from Ramit Sethi, author of I Will Teach You to Be Rich, about what he claims are five “unconventional truths” that go against conventional personal finance advice. Since one of the themes of my blog is being a bit unconventional, I was curious about how much I agreed with these “truths.” Here they are with my thoughts:

1) “Tax refunds are a good thing.” Sethi’s basic arguments are that people may not have enough to pay a tax bill if they don’t have a refund, they won’t earn much interest on their money throughout the year even if they did save or invest the extra amount in their paycheck (which they probably won’t), and people tend to save their refunds or use them to pay down debt. However, all of this can easily be rectified by simply having those extra savings in your paycheck automatically transferred to a separate savings account. (Setting up automatic savings is something Sethi is usually a huge fan of.) Yes, interest rates are low but I’m less concerned about earning interest on that money and more with what would happen if that person who doesn’t have enough savings to pay their taxes had some other financial emergency. At least they would have the savings available to them rather than have to wait for their tax refund and run up credit card debt or possibly miss mortgage or car payments.

2) “Budgets don’t work.” Sethi’s point here is that tracking your spending is just too difficult to expect people to do and you should just automate your finances instead. To some extent, I agree with that since I automate as much of my finances as possible, including giving myself a monthly allowance for discretionary expenses rather than tracking every nickel and dime. However, budgeting is more than about tracking expenses. It’s about taking a step back to review your spending and make sure it’s in line with your goals and priorities. For example, is it worth postponing a new car if it means you can take a more expensive vacation this year? Only budgeting allows you to compare these tradeoffs and make conscious choices about your money. Once you’ve done that, automating it can be a great way to make sure you stick to it but you still need something to stick to.

3) “Big Wins beat frugality.” Sethi says instead of cutting back the $3 lattes, it makes more sense to focus on the things that can make a big difference like negotiating a raise and other ways of increasing your income. I’m confused here because he also says that the key is ‘spending extravagantly on the things you love, and cutting mercilessly on the things you don’t.” For some people, the $3 latte can fall into that latter category but they spend the money anyway because it’s a habit and they don’t feel like it makes much of a difference. But it does. Small expenses add up. That $3 latte is $90 a month that could be used to pay down credit card debt, save for any number of goals, or be spent on something they really do love. Even if you do love your lattes, there may be a way of getting them or something similar at a lower cost. So yes, big wins matter but so do little ones, especially for people who may not be able to get those big wins yet. I say go for the big wins but also make sure your spending, both big and small, matches your priorities.

4)  “Unexpected” expenses are actually pretty expected. Rather than having one large emergency fund, Sethi advocates having saving “sub-accounts” for each type of expense. This seems unnecessarily complicated to me, especially when the amount of those “unexpected” expenses do end up being pretty unexpected and you have to start transferring money from one sub-account to cover an unexpectedly large expense in another. I actually do like the sub-account idea for expenses you can truly plan for like a vacation or a holiday but in my experience, unexpected expenses are just that.

5) “Ignore the news. Your personal finances have very little to do with the macro economy.” I generally agree with this since people do tend to over-react to the news, especially when it comes to their investments. That being said, you’ll want to be aware of developments like changes in the tax code or new investment opportunities that could have an effect on your planning. You don’t have to rely on the news media for that information though. That’s what a good advisor is for.

Wow! Ramit Sethi is actually making me feel a bit conventional. Who do you agree with? Leave your thoughts in the comments section below.