Ramit Sethi: Are you Building the Habits to Live a Rich Life? – The Jame Altucher Show (Part II)

Check out the James Altucher Show Podcast Page

Check out the Podcast Notes for Part I

Key Takeaways

  • Being average sucks… except when it comes to investing
    • An average annual return of 8% will get you rich over a long enough time scale
  • You should be taking advantage of an employer-sponsored 401k
    • There are tax benefits for one
    • To add – It’s all about compound interest: contributing a few hundred bucks a month at an 8% annual return adds up to HUGE savings by the time you’re 60-70
  • If you have a financial advisor you’re paying a 1% fee to, you’re potentially losing up to 28% of your annual return
    • This could add up to millions over the course of your lifetime
  • Whether it’s going to college or buying a house, always be skeptical when someone says – “You NEED to do X”
  • Ramit’s take on Bitcoin/crypto:
    • “If you have a beautiful portfolio, have your asset allocation dialed in, and you have a little extra money and want to put 5-10% of it in crypto… be my guest
    • “But to go around saying crypto is the best investment and you’re a Luddite if you don’t invest in it… is ridiculous”
    • “I think very few people in America should own Bitcoin unless it’s part of a diversified portfolio or any other speculative asset”

Intro

Being Average SUCKS (except in investing)

  • “In America, being average sucks. You never want to have average grades, especially if you’re Indian like me. You never want to have an average relationship. But in investing, average is awesome.”
    • If you achieve the average return of 8% a year in the stock market, you can easily become a millionaire over a long enough time scale
      • All you have to focus on is:
        • 1) Not taking your money out during a crash
        • 2) Putting as much money as you can into the market every month

James and Ramit Disagree About 401ks

  • James has written about how 401ks are a scam and that you shouldn’t utilize them
    • Check out this Business Insider debate where he discusses it a bit more
    • He also wrote about his stance here
    • Why does he think this?
      • “I’m very much in favor of having cash NOW… I don’t like to give cash to some other entity that I’ve worked hard for and maybe I’ll live to see it come back to me 30 years later.”
  • Ramit disagrees:
    • “I understand how it can make you and other people uncomfortable to have your money ‘locked away'”
    • Why can’t you withdraw money from your 401k as you freely choose without paying a penalty fee? – there are a few reasons:
      • The average person would take it out right away, they can’t resist a lump sum of cash
      • To add – if people didn’t throw money in a 401k, they’d probably just spend it 
      • Most people aren’t savvy when it comes to money and are susceptible to shady financial advice (they’d be apt to take the money out once they read one newspaper article about how the markets taking a turn for the worse)
    • But realize the tax benefits for 401ks are large (you don’t want to miss out on this)
    • And as a bonus – if your company matches your 401k contribution, it’s free money
  • James
    • The 401k fees really bother James
  • Ramit 
    • It’s all about compound interest – contributing a few hundred bucks a month, at an 8% annual return, adds up to HUGE savings by the time you’re 60-70
      • The earlier you start saving the better
  • What would James personally do with money he held onto rather than investing in a 401k?
    • Take an online course to build skills which he could then translate into more income
    • But Ramit has a counter:
      • The average American just simply wouldn’t do that – they’d spend the money

What would Ramit recommend someone do if they worked for a company that didn’t provide a 401k match?

  • 1) Skip the 401k
  • 2) Open a Roth IRA and max it out
  • 3) If you have debt, pay it off aggressively
  • 4) Go back to the 401k and max out your contribution (due to the tax advantages)
  • 5) If you still have money leftover, invest in an HSA account
  • 6) If you still have money, invest in a non-taxable, non-retirement investment account

Avoid Financial Advisors

  • If you have a financial advisor you’re paying a 1% fee to, you’re potentially losing up to 28% of your annual return
    • This could add up to millions over the course of your lifetime
    • (When ditching your advisor, stick to email – they’ll try to guilt you out of it)

Investing is Not Gambling (misjudging risk)

  • Many people think of investing in the market as gambling, so they just keep their money in a savings account
    • But these people don’t realize that doing so is like floating on a boat with tiny holes (they’re losing money every day by not investing and keeping the money in a savings account)
      • How are they losing money? – Inflation

Credit Card Debt

  • James actually advises people to just stop paying their credit card debt
    • “You don’t have credit card debt if you simply stop paying it”
    • He wrote about his stance here
    • Even if you stop your payments, you’re technically still staying within the credit card agreement/contract (you’re not breaking any rules)
      • In reality, the banks plan for a certain % of people defaulting on their credit card debt every year – you’re just falling within that %
  • But if you do the above, realize:
    • The bank/credit card company will send a debt agency against you – and they’ll be AGGRESSIVE
    • You’ll probably never get a loan again or your interest rates will sky rocket 
    • Your credit score will be wrecked
    • You probably won’t be approved for a credit card anytime soon
    • AND – It won’t fix the bad habits that got you into debt in the first place

Getting Real

  • Whether it’s going to college or buying a house, always be skeptical when someone says – “You NEED to do X”
    • To add – It makes sense to know who you’re taking advice from
      • If your uncle is telling you you need to buy a house and you don’t want to be in the same position he is 20 years down the line, maybe you should take advice from someone else
  • “Society has carved out a specific grave for each of us. Most of us end up very predictably in that grave – 2.5 kids, a mortgage we can’t afford, and 5 days of vacation we don’t even enjoy. We don’t save enough and suddenly we wake up at 42 thinking, ‘Oh my God, what am I supposed to do.?'”

Ramit’s Stance on Crypto

  • Ramit has found that people who are into crypto don’t have much of a financial portfolio elsewhere
    • “They’re f*cking lunatics! They are speculators and are like, ‘Diversification .. HAHAHA HODL'”
  • Ramit actually caught some backlash last year after sending an email bashing crypto, which he ended up writing a public apology for – read about it here
  • Here’s Ramit’s opinion:
    • “If you have a beautiful portfolio, have your asset allocation dialed in, and you have a little extra money and you want to put 5-10% of it in crypto… be my guest
    • “But to go around saying crypto is the best investment and you’re a Luddite if you don’t invest in it… is ridiculous”
  • Ramit – “I think very few people in America should own Bitcoin unless it’s part of a diversified portfolio or any other speculative asset”
    • “I’m willing to bet on this – people who invested in Bitcoin will have sub par returns for the rest of their lives. Not because of their Bitcoin investment, that could go up or down, it’s because the kind of person who invested in Bitcoin is going to be a terrible f*cking investor.”
      • “The person who got into credit card debt is going to get into it again. The person who bought this speculative investment thinking it’s going to solve all their problems is going to keep doing it for the rest of their lives.”

Additional Notes

  • James will never make a follow on investment after making an initial angel investment
    • His reason – “Either the company is going to do awesome and my additional investment will do great or they’re going to fail and I’ll have just lost more money”
  • James keeps most of his money in cash (not a savings account)
    • The majority of Ramit’s net worth is in index funds
  • More and more people are using LinkedIn to search for side hustles rather than full-time work
  • Many people would rather dream about exercising 3-4 times a week than actually exercising once a week
    • Do what you can!
  • James has never had a credit card 
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