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?

What I Didn't Learn at School But Wish I Had

I am reading Jamie McIntyre's book What I Didn't Learn at School But Which I Had. The man claims to have become a multi-millionaire in a few years. Of course I am highly skeptical of all his claims now that I have realized that he has received a slap on the wrist by ASIC. Nevertheless, his writing so far is fairly entertaining. He claims that when he was young he started his own business and got killed (not literally) doing so. He was $150,000 in debt. Then a rich mentor taught him how to become rich again. What surprises me is how similar this story is to Robert Kiyosaki's stories. What I can find in common are two things: (1) a disaster and (2) a mentor. Kiyosaki was a failure at school and when he started his own business he also failed. He had a rich dad and a poor dad and his rich dad acted like a mentor and taught him all he needed to know to be rich.

That being said, I would like to point out a strange inconsistency in McIntyre's book. On page 1 he says the following:

Unfortunately, now the standard of living for many Australians is dropping rapidly, despite our politicians trying to convince us otherwise. With all the wealth that still exists, why is it that so few Australians get to share in it? What is going on that limits us to sharing in only a fraction of this country’s wealth, and what can we do about it?

This suggests that it is all doom and gloom for most Australians, and we need to listen to wealth experts like him to save ourselves. However, on page 8 he claims the following:

In this country we are all incredibly wealthy. Do you think anyone in Australia in their right mind would want to trade places with someone in Bangladesh or Ethiopia? We have a tremendous amount of wealth already and I had to start to recognise that. In fact we already have everything we need to be successful. And that is a lot to be grateful for.

My Thoughts on Dave Ramsey

I've been reading about Dave Ramsey, who is a financial guru. His financial advice is apparently based on the Bible and has a strong dislike for debt.

Many say that by borrowing money to invest, one can make more money because investing more money earns more than investing little money, and the only way to get more money if you don't have that money is to borrow it. Dave claims that although this is true, the added risk or leveraging to invest makes debt investing worthless. He even quotes the book of Proverbs in the Bible that claims that "the borrower is slave to the lender."

Ultimately I think risk versus return is a matter of personal preference. Each of us have different risk tolerance. Since using debt to invest is a way to increasing both potential return and risk then whether it is good for you depends on you and how much you can stomach risk. If you are a fearful, risk-averse individual who is worried about losing money and would rather settle with little money instead, debt is not for you.

Dave is against credit cards because he claims that it gives people the impression that they have infinite money. I think credit cards can indeed do that. However, credit cards have many benefits. For example, you need a credit card to buy many things over the Internet. Buying stuff online saves petrol. (Using Paypal, you can choose to debit your bank account rather than use credit card.) The credit card I use, the Coles Group Source Mastercard, has a 2-month interest free period. This means you can leave money in investments for those two periods to accumulate interest. Because I spend so little, doing this doesn't earn me much money. The main reason why I use credit card is because I don't have much money in my bank account. If I used debit card all the time, as Dave recommends, then I may spend more money than I have and be charged an overdraft fee. Dave claims that I shouldn't spend money I don't have, but what if I have no money and I need to buy necessities like petrol or food? Dave claims that you should have savings in your bank account. The problem with this is that money in currency form in your bank account does not earn interest, so money in cash form is wasted. Dave claims that personal finance is 80% behavioral and that the problem with credit cards is that users think they have infinite cash. This may be true, but having heaps of cash in your bank account also gives you the impression that you have lots of money. Many people use savings accounts from their bank accounts to save up money for a deposit on a house, and what I often see is people hesitant to buy a house because of all the risks attached to it. They then have heaps of money in their bank account, and the temptation to just withdraw cash from an ATM or spend using debt card is huge.

Apart from my credit card, I am quite anti-debt. Dave recommends that you should attack your home loan as fast as possible. I would even go so far as to say that you don't need a home. If my parents kick me out of their house then I am prepared to live in a van. What you need is a roof over your head. A van provides that. Hopefully I will never be that desperate!

Dave talks often about teaching children good financial habits. I happen to believe that by having children you are putting yourself into debt. Why is this? First we must define debt. Debt is the obligation to pay or do something. By having a child, you automatically create an obligation to pay for the child's food, clothes, and so forth. You are obliged to do this by law. Thus having a child is no different to taking out a home loan. This therefore means that because each of us has to provide for himself then all of us have a debt. Because I need to eat, pay for rent/board, etc, then it follow that I have personal necessity debt. However, this debt can be eliminated. If I save enough money and invest it all, the returns on this investment could pay for necessities and then I would truly be debt free. There is the problem is inflation, that is a change in prices of necessities, however this can be fixed with hedging.