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Money Myth #3: Cut Back on Everything!

The third in a SLTV Original series of three money myth-busting tips from personal finance author, Ramit Sethi: Cut Back on Everything! (Do you really have to?)

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Money Myth #3: Cut Back on Everything!
Frugality is the most important thing when it comes to personal finance, right? Just cut back on everything! (No, Don't!)... This is the third video of a SpendLessTV.com Original series of three money myth-busting tips from personal finance author, Ramit Sethi: Cut Back on Everything!

You can catch the first of the money myth-busters, "Money Myth #1: Willpower" here. And the second of Ramit's money myth-busters, "Money Myth #2: Just Spend Less Than You Earn" here.

Ramit Sethi is the author of the New York Times bestseller, "I Will Teach You To Be Rich," which focuses on personal finance for people in their 20s
and 30s by weaving together threads from health & fitness, social psychology, and personal finance. He's been writing his blog, iwillteachyoutoberich.com, since 2004 and hosts over 300,000 readers per month. He also runs an online course on how to turn your skills into side income at earn1k.com. Previously, he co-founded a Silicon Valley collaboration company called PBwiki, where he helped drive user acquisition
of millions of users. Ramit, 28, graduated from Stanford, where he studied technology and psychology.

Ramit's written hundreds of free articles for millions of readers and helped people save, invest, automate, and earn more money. His book, I Will Teach You To Be Rich, was an instant New York Times best-seller and became the #1 overall book on Amazon the day it was released (knocking Twilight off the top spot). His material on earning more money on the side has been featured in the Wall Street Journal and ABC News, and he's regularly featured in the New York Times, and on the ABC show "Good Money".

To learn more from Ramit about personal finance and entrepreneurship, including in-depth techniques on earning more money and automating your finances, check out these links:

The Blog
NYT Bestselling book, I Will Teach You To Be Rich
The Psycology of Money
Automating Your Finances
Earning More Money
Twitter @ramit

MORE ORIGINAL VIDEOS FROM RAMIT SETHI:
Busting Money Myths: Spend Less Thank You Earn
Busting Money Myths: Willpower
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Video Transcript: "Money Myth #3 Cut Back on Everything" an Original SpendLessTV.com video from Ramit Sethi.

Hey guys Ramit here from I Will Teach You To Be Rich. This video's for my friends at SpendLessTV, and this is myth number three of personal finance. That's three of three.

Today's myth is one of my favorites, and that is: That frugality is the most important thing when it comes to personal finance; that we should simply look at what we can cut and cut as much and as deeply as possible. And I just don't believe this. I think that frugality is important. I think that a lot of people in America ummm... spend a lot, spend more than they need to, but I also think that the vast majority of experts who simply write about frugality over and over and over miss a very important part of the equation, and that is: earning more. In fact I'm going to give you some examples of why earning more is so important, and I'm going to give you some examples of how to do that, okay?

So when it comes to thinking about frugality what we hear from people is basically that personal finance is about no, no, no. No, you can't spend money on lattes, no you can't go on those vacations, no you can't afford those jeans, no! And what's the first thing that we do when we hear that? We say, "Screw you! Who are you to tell me what I can't do with my money?" And then we go out and over-spend.

My approach has always been: spend extravagantly on the things you love. So I don't think it's ridiculous to buy $500 jeans, or $500 shoes, or take a weekend trip to Vegas - as long as you're handling all the rest of your money in a nice conscious spending plan. Alright? I don't have a value judgment that you're a bad person that you've spent $700 on a handbag, I don't care. If you value it and you can pay for it - do it. That's very different from many people who will tell you, "Don't don't, don't, don't spend it on anything." And I just don't think that's sustainable.

At the end of the day it's also more fun to say "Yes!" Most of my readers want to know how they can live a rich life. Now, yes, they have to cut back on some things, but they also want to know how they can go out more, eat out more, visit friends more and I want to show them how to do that. So let me give you some examples comparing cutting back verses earning more because it is profoundly different, and then I'm going to show you how you can earn more, both at your job and outside of your job, and we'll go from there.

Alright, so let's pretend that Jill decides that she's gonna cut back a little, but she's really going to focus on earning more. Here's what she does to earn $400 more a month, right we all could use $400 more a month, all she does is she finds something she likes, she figures out how to turn that into paying her - now get this - only five hours a week - that's basically couple days, couple weekdays she spends 2 hours, and then on the weekend she spends only one hour; okay and she's only charging $20 an hour. Okay, we're talking about doing a little painting, a dog walker, could be whatever, $20 an hour a very modest amount to make. $400 a month, not bad. Not much time, respectable amount of money.

Let's compare that to Jack who has to cut back in order to save $400 a month. Here's what he has to do: he has to drink one less latte per week, which means he has to think about it.at the top of his head. Okay? He has to buy groceries in bulk, he's gonna save about $30 doing that. He's gonna go out 4 fewer nights per month, okay? That's assuming he's spending $50 each night going out, okay? He's gonna cancel his cable bill. He's gonna eat out 5 times a month instead of 8, and after all of that, he's saving $400.

Who do you think feels better at the end of the month? That's question 1. Who do you think has a more sustainable behavior pattern? That's question 2. And number 3, who do you think can go further than where they are now? I think that's the most important question of all, because at a certain point you can't really cut anything more, but for Jill the one who's earning $400 more a month, she can apply what I call the "tuner strategy" and simply tune that number up. She can get more clients, she can work more hours, or she can raise her rates; $20 an hour is relatively low. A lot of my students have gone from $20 to over $100 an hour. Okay? So, there are a lot of things you can do with earning money.

The other thing you can do when you're earning money is pay off your debt very very rapidly; and it can be paying debt, mortgage, whatever. Here's an example: $10,000 credit card at 15-percent interest - if you're paying at the minimum, you're paying bout $12,000 in interest and that's going to take roughly 35 years, so we're talking the minimum. If you put the minimum plus $500 a month - pretty much what Jill was earning - you're going to go from $12,000 interest to paying about $1,000 in interest, and you're going to pay it off in 16-months.

So - it's a profound difference what can happen when you not only focus on cutting back on a few things, but really start expanding the pie and think about earning more. Now, I cover this, and I think the easiest way to start earning more, is to freelance. That doesn't mean you start a product, it doesn't mean you do all this crazy stuff, you simply take your existing skills and turn it into income. So I've helped thousands of people do this. You can check out a bunch of free materials on my site, iwillteachyoutoberich.com. Go, at the top and it says: Earn More Money. There's a whole bunch of articles there. If you're interested, I have a course, and you can sign up for more free stuff at: earn1k.com.

Alright So the major point I want to make today is it's important to think about what you can cut back on, but it's equally if not more important to think about how to expand your pie and earn more. Alright? I'm Ramit from I Will Teach You To Be Rich, thanks to my friends at SpendLessTV, and I will talk to you soon.

The third in a SLTV Original series of three money myth-busting tips from personal finance author, Ramit Sethi: Cut Back on Everything! (Do you really have to?) Do More... For Less with the Money-Saving Tips & Videos on SpendLessTV.com - Get More for Your Money, and Your Life!