Financial Tips for 20-Somethings

Ramit Sethi, creator of the popular I Will Teach You to Be Rich blog and author of a forthcoming book by the same name, wants to show young people how to manage their money. While there's no dearth of books on personal finance, he thinks most of them repeat the same old—and unhelpful—story. U.S. News spoke with the 25-year-old recent Stanford graduate.

Do young people today face different money issues than their parents did at their age?
Yes and no. We still need to save, invest, and plan. But on many objective measures, things are not going well for gen Y. The facts just keep coming: Average tuition is up over 250 percent since 1976, revolving debt is up 24 percent in the last five years, and 2004 male graduates earned less after inflation than they did 30 years ago. Half of recent college grads have failed to pay some of their debt. And there is a staggering array of places to spend our money, including online and on luxury goods that simply didn't exist 20 years ago.

But I'm less interested in knowing the sociological trends than helping individuals start to manage their own money. Hopefully, by getting the discussion started in a refreshing way, we can all get our friends to pay attention to this stuff and start organically. As an example, the most common way people hear about my blog is through word of mouth. That tells me young people do care about their finances.

There are so many books out there on young people and money—Suze Orman's The Money Book for the Young, Fabulous and Broke, for example. What's different about your advice?
I always say that personal finance has been taught by old white men for old white men for way too long. If I see another newspaper column about saving money on lattes, I might just have to jump off a bridge with 68 iron weights in my hand.

There aren't any secrets to personal finance. People have been saying similar things for 50 years: Know where your money is going, save more, invest your money, and grow it. But instead of seeming like lectures, personal finance can actually be relevant and engaging to young people. How do you make money as personal as talking to a friend? I try to tell stories about dumb things I've done with money, simple steps to save and invest, and how to think about money (like the difference between being cheap and frugal). And I think I have the best readers on the planet, who offer really smart comments on every post.

What kind of stories do you hear from your readers who are frustrated with their financial experiences?

The problem is not that we're making bad personal-finance decisions. It's that we're not making personal-finance decisions at all. A lot of my friends don't know how much their 401(k) match is or why a Roth IRA is a great choice. These are recent Stanford grads [like Sethi]. Part of it is our educational system, part of it is the complicated paperwork and messages that financial companies give us, and part of it is our own lack of personal responsibility. But no matter how you slice it, we need to step up and take control of our finances.

The second-most-common story I hear is not knowing where to get started. Should I pay off debt? How do I pick stocks? What savings account should I open? There's so much noise that even the basics, like opening a high-interest savings account, have become complicated. Last year, I spoke to the Credit Union National Association about simplifying their offerings for young people. I wish more financial companies would pay attention to the needs of gen Y.

In your blog, you say that personal-finance experts have long lectured young people "not to buy lattes, fancy electronics, and expensive clothes. To which I always reply: How has that been working, grandpa?" So what kind of advice is more useful?

We don't want to know about term life insurance or estate planning. Those words make our eyes glaze over, and more of the same personal-finance topics will produce similarly poor results. But we do care about money if it's presented on our terms.

There's a funny idea in our culture that more information is always good. But as Barry Schwartz noted in The Paradox of Choice, the more choices we have, the less likely we are to do anything. In a study about 401(k) participation, he wrote, "For every 10 funds added to the array of [401(k)] options, the rate of participation drops 2 percent."

So if the average 20-something sees 20 fund choices at work for his 401(k), TV commercials about annuities, blog posts about Roth IRAs, and newspaper columns about not spending so much on lattes every day, what do you think he'll do? Chances are: nothing. Over half of 20-somethings don't contribute to retirement accounts. Forty percent don't even deposit money regularly in a savings account.

We want to know two major things: how to figure out where our money is going and how to make it go where we want. Make it simple, make it interesting, and get other young people to join in on the conversation.

Name three things young people can do to improve their financial situation.

1) Getting started is more important than being the smartest person in the room. If I had a choice between being 100 IQ points smarter or starting to invest earlier, I'd choose starting earlier. I encourage young people to read enough to get started but not to worry about knowing every investing instrument under the sun. There are plenty of easy ways to get started, like a simple low-cost index fund. If you haven't gotten started yet, try to systematically understand your personal barriers. Are you afraid of losing money? Are you not sure about how much money you actually spend each month? Then tackle them one by one.

2) Be strategic about spending. Instead of saying, "I guess that's how much I spent last month," be strategic about your spending. One of my most popular posts was about a friend who spends $21,000 per year going out. It seems outrageous, but he consciously spends that much after maxing out his investment options and giving to charity. By knowing what you value and where you're spending, you can consciously decide if that's how you want your money to go.

3) There's a difference between being sexy and being rich. Lots of us get sucked up into the hype of fancy alternative investments and day-trading and the "Hot Stock of the Month!" I hate this so much. Those investment tips are designed to sell magazines, not good advice. The investment literature—and people like Warren Buffett—show that long-term, buy-and-hold investing wins. It's not as exciting as buying and trading every day, but what would you rather be: sexy or rich?