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Money Myth #2: Spend Less Than You Earn

This is part of an SLTV Original series of three money myth-busting tips from personal finance author, Ramit Sethi. Is it essential to Spend Less Than You Earn to grow your savings? Maybe not...

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Money Myth #2: Spend Less Than You Earn
Personal finance is simple, to get ahead, "Just Spend Less Than You Earn"... Well, maybe it's not that simple. This is the second video in a SpendLessTV.com Original series of three money myth-busting tips from personal finance author, Ramit Sethi: Just Spend Less Than You Earn.

You can catch the first of Ramit's money myth-busters, "Money Myth #1: Willpower" 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: Cut Back on Everything!
Busting Money Myths: Willpower
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Video Transcript: "Money Myth #2 Spend Less Than You Earn" an Original SpendLessTV.com video from Ramit Sethi.

Hey guys Ramit Sethi here from I Will Teach You To Be Rich. I'm doing this video for my friends at SpendLessTV, and this is myth number two of our three money myths.

Myth number 2 is that personal finance is only about spending less than you earn... oh yes! Every internet commenter in the world loves to point out, "Oh, who needs to sell a book? Just spend less than you earn, duh!" Well, it's not actually that simple. If it were, nobody would be overweight, nobody would be in debt, okay? The fact of the matter is knowing a fact alone doesn't actually make you take action on it. So I find it somewhat disingenuous when people say, "Oh he's just trying to sell a copy of a book." Give me a break, please.

Here's the deal... um... let's talk about how you can actually take this abstract knowledge that we should be spending less than we earn, yes we should, and how do we actually operationalize that, how do we put that into action? There's a few things we can do today that 99-percent of other people don't, and as a result they spend the next 40 years of their lives complaining about their financial situation. What can we do?

First of all, [in the video, Busted Myth #1: Takes More & More willpower] we talked about automation, we can do that.

Second of all , we can focus on conscious spending instead of trying to keep a budget which invariably fails. Here's how it works: Conscious spending says that you should spend extravagantly on the things you love as long as you cut costs mercilessly on the things you don't. Now think about that. It's actually profoundly different than a budget. A budget is about looking backwards and it's generally about making you feel guilty about what you spent on. A conscious spending plan says: Hey, I like $400 jeans, I'm going to spend on that. Or you know what? Worrying about a $3.00 late really makes no sense because it doesn't add up that much anyway, so I'm just going to focus on maybe improving my credit score by doing X, Y, and Z and my conscious spending plan is going to help me do that because I'm going to automate my spending. The point is you focus on you can spend and what you do want to spend on and as long as you're taking care of all your other savings and investment goals, you can spend guilt-free.

Which brings us to the second thing you can do, and that is to develop savings goals. So, may of us kind of go day-by-day without thinking about what we're going to need in the next 5, 10 or 30 years. Now we all know about retirement plans, yes we should be putting away money; I recommend you put away at least 10-percent of your take-home pay. But there's actually something else you could do. You can be looking at what do you need in the next 10 years. Most of us have some pivotal decisions: We're going to need to maybe get married, buy a house, buy a car, have kids, etc. For those things there are very predictable amounts of money that you need. For example if you know that in your neighborhood a down payment for a house is $50,000, okay that means you need to be saving x-amount of dollars per month.

I did an interesting study where I found that people who are age 20 need to be saving 330-dollars a month for their wedding. People 25 need to be saving over $1,100 a month for their wedding. How do we know that? We know that because we know the average age of a wedding and we know the average cost of a wedding. So the point is let's think about what's coming down the pike in 5 to 10 years and start putting away money for that instead of simply saying "Oh, who knows? There's nothing I can do with my money" Actually, in one Saturday afternoon you could automate many of these things and never have to worry about it again.

So, personal finance is not just about saying "Oh, you should spend less than you earn." It's actually about putting that into tactical action and sitting down and saying, "You know what? I'm going to get specific about this. Even if it's on the back of a napkin I'm going to write down how much these things are going to cost me, roughly and then I'm going to automate my way so I don't have to think about it on a day-to-day basis."

And that is the end of myth number two. Thanks to SpendLessTV. If you're curious about how to set up this system you could check out my book, "I Will Teach You To Be Rich" or a lot of free stuff I have at IWillTeachYouToBeRich.com. Thanks very much.

This is part of an SLTV Original series of three money myth-busting tips from personal finance author, Ramit Sethi. Is it essential to Spend Less Than You Earn to grow your savings? Maybe not... Do More... For Less with the Money-Saving Tips & Videos on SpendLessTV.com - Get More for Your Money, and Your Life!