Three Questions: Insights From Wesabe Advisors Ramit, JD and Trent

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Wesabe’s advisory board includes three of the biggest names in personal finance.  To help you get to know them better and to tap into their considerable smarts, we posed three questions to each of them:

1.    A family member is graduating from college and you’ve decided to give him a book on money management as a gift.  What would that book be?
2.    Has the economic downturn changed your relationship with money?
3.    What is the single best piece of financial advice you have ever been given?

A big thanks to our advisors:
–   JD Roth of Get Rich Slowly;
–   Ramit Sethi of I Will Teach You To Be Rich; and
–   Trent Hamm of The Simple Dollar
for taking the time to send over such insightful answers.

A family member is graduating from college and you’ve decided to give a book on money management as a gift.  What would that book be?

JD:  When I speak to college students, I hand out a one-page guide to personal finance on which I recommend four books:

– The Money Book for the Young, Fabulous, and Broke by Suze Orman
– Debt is Slavery by Michael Mihalik
– Brazen Careerist by Penelope Trunk
– The Random Walk Guide to Investing by Burton Malkiel

Each of these books serves a different purpose, but contains great information. Many people have told me that Your Money or Your Life by Joe Dominguez and Vicki Robin helped them after college, and I know that it helped me later in life. Finally, my colleague Ramit Sethi just published a new book called I Will Teach You to Be Rich, and it’s perfect for young adults.

Trent:  There are several good choices here depending on the person’s situation.

My default choice for a female college graduate would probably be “You’re So Money” by Farnoosh Torabi (my review).  It’s written with the strong voice of a young female professional and deals with the social pressures that many young professional women face in terms of spending money on material goods.  Along the way, it dishes out a lot of useful and relevant personal finance advice.

My default choice for a male college graduate would be Automatic Wealth for Grads by Michael Masterson (my review).  This book does a great job of painting personal finance in a positive and exciting light by making it clear to the graduate that life really is full of possibilities as long as you put the foundation pieces in place.

However, there is one book that trumps either of these choices.  If you know the student well and he/she strikes you as a person that’s particularly thoughtful and introspective, the best choice for that student is “Your Money or Your Life” by Joe Dominguez and Vicki Robin (my review).  This is the single most powerful personal finance book I’ve ever read, but it requires a lot of introspection to really get a lot of value out of it.  Instead of focusing on typical personal finance issues, the book is more of a guide to reflecting on money’s role in the larger life choices you make.  A thoughtful college graduate can get a ton of valuable ideas from this book.

Wesabe for Ramit
:  Rather than let Ramit answer this question, we wanted to take the opportunity to mention his awesome new book, I Will Teach You To Be Rich.  Targeting 20-to-35-year-olds, this New York Times bestseller (congrats, Ramit!) would make a great gift for a college grad.

Has the economic downturn changed your relationship with money?

Trent:  I tend to behave like we’re constantly in an economic downturn, so the current economy really hasn’t affected me too much.  I always strive to spend less than I earn, regardless of whether or not the economy is roaring or it’s tanking.

One thing I have done differently, however, is that I’ve been buying more stocks (in the form of index funds) than usual.  That’s right, in an environment where the Dow is dropping below 7,000, I’m buying stocks.  I look at it this way: I can buy the exact same stocks that I could buy a year and a half ago, except now they’re 55% off.  Many people might shout about how we don’t know where the bottom of the market is, but I argue that you’re better off buying most of the way down and right through the bottom of the market until a recovery is clearly and strongly in place.  That way, you’re sure to hit the bottom as well as a lot of “near bottoms” both before and after the real bottom.

Ramit
: First of all, I’ve been saddened at how many friends are instinctively pulling their money out of the market without thinking twice — they’re reacting out of fear, not logic. The other thing I’ve noticed is a manic sense to “cut costs anywhere,” which is driving people crazy. You can’t save money on 50 things at once! It just makes people nuts. I’ve re-doubled my efforts to save money on two problem areas (eating out and going out). If I can save 20% on those over a period of six months by setting smaller goals, that saves me hundreds of dollars each month.

JD:  All around me, my friends and family members are struggling during this economic crisis. They’re having to cut back on their way of life. My wife and I are fortunate that we haven’t had to make any sacrifices yet. Why not? Because we’ve spent the last three years trimming our budget; we’ve already cut back. One benefit of routinely practicing smart financial habits — in good times and in bad — is that when things get rough, you’re prepared. You have a buffer to protect yourself from economic storms. I haven’t always been this prepared, but I’m glad to feel safe in 2009.

What is the single best piece of financial advice you have ever been given?

Ramit: You don’t have to be the smartest person in the room — you just have to get started. Even in this economy, if you get started saving and investing, that makes far more of a difference in your overall returns than having a PhD in finance or being a fancy investment banker. Consistent, long-term saving and investing is the key, not reacting to news of the day.

JD: The best piece of financial advice I ever received is simply this: “Nobody cares more about your finances than you do. If you don’t take care of them, nobody’s going to take care of them for you.” It was only when I realized this that I was able to turn things around, get out of debt, and begin building wealth. I wish I could remember where I first heard this — Dave Ramsey? Warren Buffett? — because this principle helped me to take control of my finances.

Trent: Spend less than you earn.  I first picked up on the idea from “Your Money or Your Life,” but it was most succinctly stated in the excellent unheralded personal finance book “Debt is Slavery” by Michael Mihalik (my review).

It seems so simple, but it’s actually much more complicated than it sounds.  Each month, I make it a goal to spend less than I earn that month.  I usually make it more specific than that – for example, I intend to spend only 70% of what I earn most months – but even an 80% or a 90% goal is fine.

This serves dual purposes.  First, it pushes me to actually spend less.  If I find a clever way to save money, then it becomes easier for me to reach that 70% goal – or even beat it.  Second, it pushes me to earn more.  If I can put more cash in my pocket by working harder or more effectively, then I have more money to save (in that 30% bucket) and more to spend (in that 70% bucket).

Over time, actually, I’ve been lowering my monthly target.  Lately, I’ve been shooting to spend only 55% of what I bring in per month.  Doing that over the long haul will put me in GREAT financial shape.


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