Sunday, 27 December 2009

Excerps from I Will Teach You to Be Rich

As I have already mentioned in earlier posts, I really do like reading the I Will Teach You to Be Rich blog, but there are sone things written there that I think are puzzling.

1. Do I give in to emotion?

According to Top excuses and tactics: Why haven’t you started your own business?, Ramit is a robot who has no emotion. He acts according to reason and rationality: "I hate emotions. I tell my friends to call me an Emotional Robot because I care about the tactics, not how you feel."

However, according to Irrational but good things to buy, he claims that he loves to buy stuff that makes him feel good. What kind of robot is he?
2 things that (I think) are worth spending money on: the irrational things that make no financial sense, but you love, and anything that gives you the potential to make more money.

These are the things that you love, the ones you can’t resist. Your friends might wonder why you spend so much on them, but they make you feel good.

Maybe it’s a massage once a month, or eating out with your friends every Friday. My weakness is hot salsa and good pens. Yeah, I know.

But they make me so happy.

2. Should I buy a new car?

In Cost vs. Value: Why I Bought a New Car, Ramit goes against the mainstream personal finance rule that you should always buy a used car and uses the following rationalisation: "Sure, a new car costs more. But over the long-term, not that much more."

A new car lasts longer than an old car. A used car can be less reliable and buying one old car after another can have significant transaction costs. However, if you buy a new car and hold it for a long time, you will have to hold the car even when it is old and out-of-fashion. If you buy a 2009 car now and hold it for 30 years, by 2039 you will be driving an old bomb that's 30 years old while everyone else is driving flashy cars.

To summarize, Ramit says you should buy a new car and expect to hold it for a long time. However, he also claims in Why do delusional people think their spending will be different than other people’s? that most people underestimate the power of social influence and that you should give yourself the freedom to change your mind in the future. If you want to give yourself more options in the future, why lock yourself in by buying a new car and expecting yourself to hold it for the long run?
We like to believe we’re individual and different, but the entire field of social psychology illustrates how we mistakenly believe we’re in control of our own lives while systematically underestimating situational and social influence.
Ramit also quotes someone named Sara to back up his arguments:
To pretend you know exactly what you want now (at say, 25) for when you are 50 is the equivalent of adamantly stating when you are 5 that you hate all boys/girls and will never like them. It’s utterly ridiculous. All you can do is acknowledge that your current self cannot predict everything that will happen in your life, or everything that you will want...
If your "current self cannot predict everything that will happen in your life," how can you expect to buy a new car and hold it for the long run?

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