Financial Disasters Don’t Start the Way You Think

A lot of financial disasters do not start with one huge mistake. Often it's something small. They just delay investing for another year. They stop checking their credit card balance carefully because they know it's bad. And then one day they wake up and money is this constant cloud hanging over their shoulder. Today I'm reacting to financial horror stories from all around the internet. And the scary part is how many of these stories sound completely normal at the beginning. As we go through these stories, I want to break down how people are slowly getting trapped and the warning signs that they're missing so that you don't miss the same warning signs yourself. Let's dive in.

What's your 401 balance? Just while we're on that, because I don't have the document.

So it's like $5,000.

Okay.

And is that your only retirement account? Because I don't have any others.

Yeah.

Okay. So your previous job, you didn't— you rolled over into this or you didn't have things?

So— I have taken out my 401.

Why?

Multiple times.

Multiple times?

Why?

Why possibly?

Because, like, I don't know, I just— people have told me, like, you can just take it out, so...

Well, yes, of course you can! With penalties and taxes, but yeah, I mean, there's a lot of things you can do. You can go murder someone right now, there'll still be consequences.

Yeah, I regret it now, but...

Would you do this multiple times?

Um, like 2020 and 2019. Like, I think it was like 2 years, 2 years back to back I did it.

That's insane. What did you take it out for?

Um, what even contribute—

I— well, no, actually I did use some of it when I purchased a house.

Okay, so You used that towards the down payment on a first home?

Yeah.

Okay, that's okay. So you were able to use that penalty-free?

Um, well, I didn't know what I was doing, so I think it was a penalty.

Well, I know you can take out of IRAs. Let me see, 401 should be the same. I just want to extra confirm. Okay, so this is— this was just my ignorance on this. No, you still likely succumbed to penalty.

Yeah, there was still a penalty.

Why?

Because what you did essentially with this, with the penalty, you paid a 10% interest rate at minimum.

Yeah.

On the money to put it out.

If—

did you know you wanted to get a house?

Yeah.

Then why the fuck was it in a 401?

I don't know.

Well, to be very clear, with the money that's left in there, which I don't even know if it's gonna stay in there because you've withdrawn twice, but either way, the money that's in there You're desperately behind on retirement.

Yeah.

For the second half of your 20s.

And you've lost— I feel like I'm watching a bullying session happen in front of my eyes. I meet a lot of people who come on my show and they don't know technicalities of hardship withdrawals and things like that. I find it very difficult to judge somebody for being ignorant. If you don't know something, okay. I didn't know about progressive overload until I was like 30 years old. Nobody taught me. I just didn't even think to ask. I think that with money, it's become popular to judge people for not knowing. I don't love it. Like, okay, she didn't know. If somebody goes like, oh, I didn't know about the difference between a 401 and an IRA, I'm like, okay, let's talk about it. Let me show you why somebody might choose this versus that. Do I think that she was irresponsible with money? Yeah. She didn't know any better, but she's an adult and she should take responsibility to learn. This decision will likely cost her hundreds of thousands of dollars in lost gains. But I have a philosophical disagreement with bullying people and just relentlessly bullying them because they don't know something or they made a bad decision. I think to myself, if somebody walks away after talking to me, how are they going to feel? Because the way they feel is actually very likely to determine what they do. And if they feel ashamed, they're very likely to do what so many Americans do, which is avoid their money. I would much rather have somebody feel understood, maybe even me admitting to a dumb mistake I've made. And here's how I got out of it, because ultimately I want you to feel empowered. I want you to know that even if you've made a couple of mistakes, we all do, you have a very good chance of living a rich life. Let me show you how. There's a subscription service that I personally pay for and I love it. It keeps my identity safe. And if you Google your name and the city you live in, you will see that your identity is everywhere. This is why I personally use DeleteMe, today's sponsor. DeleteMe is a hands-free subscription service that removes your personal information from hundreds of data broker and people search sites, which reduces the risk of your data ending up in the wrong hands. And it's easy because you sign up once and their team continuously scans for and removes your information using their own in-house technology. Which keeps your data safe. I actually bought DeleteMe for my parents as well because I know that parents tend to be even more vulnerable to scams. I like that DeleteMe has been doing this for over 15 years. This is their specialty, and they were recently named by Wirecutter as the number one data removal service. When I log into my dashboard, I can literally see which sites had my information and then confirmation that it's been removed. And that is one less thing to worry about. If you wanna reduce your digital footprint, and lower your risk of scams and identity theft, go to joindeleteme.com/ramit and use code RAMIT at checkout for 20% off a plan for you or your family. This is one of my favorite subscriptions that I personally pay for. You can also click the link in the description below. All right, let's look at the next story.

So as it turns out, the student loans that I've been paying $1,500 a month for, for 2 years, have a 17% interest rate. So what I thought I've been paying off for all this time, I'm actually like, I owe more than what I started off with. What the fuck?

This is super frustrating already. It's frustrating because in my opinion, I do not think that people who went to college should have 17% loans. Just think of the type of civilization we want to create in the US. We want people who are educated, We want people who build skills. I don't even mind that college costs money. I don't even mind having a little bit of student loan or student— I don't mind that. 17% is insanely high. I can't get that return in the stock market. You can't either. So essentially that money is just going up and up and up, even if you are paying off more than the minimum. And this is the type of situation we are putting our young graduates in. Also, that loan is not dischargeable in bankruptcy. That is a policy decision that we made that locks people in student loan debt forever. Should this young woman have known it? Yeah, she probably should have read the documents. I agree. Should I have known how to work out correctly and the importance of doing deadlifts when I was 18 years old? Yeah, but I didn't, and nobody told me, and there was nobody around me who was in that Type of environment. The difference is that I did not get locked into a financial trap that would probably cost me tens of thousands of dollars for years and years and years. That's probably the situation she's in here. Documentation matters. I think it's important, but I also think realistically the average student does not understand what they are signing up for, and they are entering a Byzantine system of confusing numbers. Go talk to an 18-year-old and ask them to explain interest. You explain interest to me. You're watching this video right now. Explain it to me. Can you? Do you know what an amortization chart is? Do you know that for the first 20 years of your 30-year mortgage, you're paying more towards interest than principal? No, you don't even know what I'm saying right now. This is English, but you can't understand it because the average person does not understand it. Now, here's my philosophy. I think that we should take responsibility for our decisions. Yes, but I also wish it was just a little bit easier. There was a couple I spoke to when I was in New York, and the woman had come from Germany, I believe, and she mentioned that there in Germany, their student loans are basically at 0% interest and they're capped at a certain number. Now, can you imagine this? In America, a lot of people who are older just go, fuck it, I went through it, you should go through it too. But why? What if we actually reimagine the way that our entire education system worked? What if we chose to have limits on these companies in the same way that you limit my taxes as a wealthy guy? You ever think about that? Instead, we give so many benefits to the wealthy and ultra-wealthy, and we strip the resources and the hope of young people. Okay, what's next?

I won $100,000 after winning America's Next Top Model in 2017, and here is the story of my biggest financial mistake of my life.

That is one of the best hooks I've ever heard online. Can I hire you to teach me how to do that? You're good at this.

So after I won the show, they actually gave me a check for $100,000. Boom, baby, I'm rich. And for some reason, my little itty-bitty undeveloped brain thought that that meant it was $100,000 post-tax. Like, they obviously already took out the game show tax because I got a check for $100,000. Newsflash, not the case. So anyways, I go and spend the $100,000. I paid $60,000 for an apartment in New York, but I had a roommate paying me back, and then I subleased it and they paid me back. Anyways, it wasn't That horrible of an investment, but obviously not the smartest thing I could have done. And then the rest of the money I spent taking my family on like nice dinners and I bought one pair of shoes. And anyways, I spent the entire $100,000.

Hold on. I like how her examples of how she spent the money goes from a $60,000 apartment to a pair of shoes. Like, are we in the same universe right now? Come on. I know how expensive nice shoes are, but come on, get real. What else did you spend it on?

I also got a car. Like, yeah, I spent the money. Okay. What I should have done was put aside 35 to 40% of the money for taxes so that I'd be ready to pay that, but I didn't do that. I spent it all. And so I spent the next several years paying back the money in taxes to the IRS. Whenever you watch a game show and you see like, oh my God, they won $10,000, or they won a new car, or whatever it is, just take that with a grain of salt. Because not only are they going to be taxed on the actual cashola that they bring home, but like when you get a free car, you don't really get a free You have to pay the taxes and then all the other things that come.

This is a good lesson. I think that most people do not encounter this situation because they work at a company that already withholds amounts for taxes. When I do compensation reports for people at my company, we always make it a point to tell them what is their salary, but we also show them how much are we paying for health insurance, taxes, And on and on and on because they're actually being paid way more than they think. It's just that it's being set aside. The only type of people who have to encounter a situation like this are the unlikely scenario of winning a bunch of money, or you're an entrepreneur. So when entrepreneurs run their business like I do, I have to set my own money aside. Any entrepreneur has to do the same. And this is kind of surprising to people. I actually wish people had to do this a little bit more manually Because it would make you appreciate where your money is going and more civically involved. There's another example of where the money is just taken from you and you don't even notice it. Can anyone guess what it is? It's paying a financial advisor 1%. When most people pay their advisors, taken right out of the money, they don't even notice it. But if they had to manually write a check for $28,000 a year, they would quickly change. And that is one of the reasons that the financial advising industry is petrified of having people manually pay, because consumers become much more discerning when they have to manually write the check. Anyway, great video, very eye-opening for a lot of us who do not realize what is happening behind the scenes. I find that people who have started on their personal finance journey sometimes do not know when they have done enough. Like, they'll constantly ask, What did I miss? I need to read 10 more subreddits. What about this one obscure thing that might happen? And it doesn't feel good to constantly worry that you got something wrong. That is exactly why we created Road to $100K. For most people, reaching your first $100,000 invested is a massive financial milestone. It's often the point where you stop feeling like you are guessing because you can finally see that the decisions you've made are really starting to add up. Inside Road to $100K, you will get a personalized path based on your actual numbers, not generic advice. You'll see exactly where you stand today, what's holding you back, and what to focus on next. You will also get access to live coaching and a community of people working towards the same goal. If you are ready to start making real progress towards $100,000 invested, scan the QR code on screen or click the link below to learn about Road to $100K. I'm 26 years old and in $95,000 of debt. Okay, without even hearing any of this video yet, that doesn't necessarily bother me. I wanna know what type of debt and why. If it's student loans and you went to graduate school and you carefully calculated that your new job or industry is gonna make you an extra $40,000 a year, this is excellent. If on the other hand, you decided that you love French bulldogs And you're gonna buy 10 of them, and now you're in $95,000 of debt for puppies? Not a good move. Let's take a look. Puppy lovers, do not write me. I don't want to hear it.

I recently posted about the fact I'm 26 years old and I'm in $95,487.73 worth of debt, and I want to talk about it. Up until 24 hours ago, I did not know that was actually the total of all of my debt, credit cards and student loans.

Keep in mind that 90% of people in debt do not know how much debt they owe. Very important for you to know.

That number also does not include my auto loan. And if we are adding in my auto loan, the total number is $110,938.83.

It's getting worse and worse as I listen, 'cause we're hearing about an auto loan and credit cards. I wanna know about the student loans though. Let's find out.

Since totaling up all of my debt, I don't think I've actually gotten one good breath of oxygen in the last 24 hours. I feel like there is an elephant Sitting on my chest, and I don't think I can sit still because all I keep repeating is $95,487 and—

Okay, I want to point out 2 things that are quite common. The first is people describing the weight of debt like a physical weight on their chest. I've heard this many, many times, and it is important for you to know that when people have a lot of debt, it's not just something to make fun of them for. It actually causes physical maladies. It is the thing they think about when they wake up in the morning. It is the last thing they think about at night. It is really, really hard to deal with.

My first associate's degree I got from a community college, and I didn't have to pay for it because of the Pell Grant. But I decided to go to a university and got my bachelor's degree, which is where I really started to rack up the debt. Then in the last 2 years, I decided to finish a nursing degree at a community college in the last 2 years, but that's where I started to rack up even more debt. What really sucks is realizing that the majority of these student loans is not from tuition. It's actually from living expenses and living way above my means.

Wow.

Okay, so there, there it is. She said the majority of the debt is not from tuition, it's from living expenses, specifically living way above her means. This is really common with people who go into debt for things like college debt, graduate school debt. They will go, well, the debt's already so big, I don't even know how much it is, but it's huge.

Fuck it.

What's this dinner gonna make a difference? What's this trip? Everybody's going. You hear a lot of people who are in business school say the same thing. The problem is that it actually does matter. And I don't mind if you want to go out to dinner once in a while, even if you're in debt. That's okay. But not having control and not having a plan, just saying like, it's already so big, fuck it. That's a very unhealthy relationship with money. You end up in a situation like this. Let's keep listening.

My debt comprises of 2 credit cards, 5 federal student loans, and 5 private Sallie Mae loans. I can handle the federal student loans, but when I tell you Sallie Mae is bending me over and not in a way I like, it's actually insane. Sallie Mae is genuinely evil and they prey on young students. And the reason why they take advantage of young students is because they know if you're reaching out to a private loan like that, you genuinely need it. Out of the 5 Sallie Mae loans I have, one of the interest rates that is the highest is 16 16.28%.

What the fuck? One of the reasons that education has become so expensive is that the government guarantees the loans. So do you know that if you wanted to bring the cost of education down, one of the ways to do it is actually to get the government less involved? And that is politically infeasible because what it would mean is suddenly people who want to go to college cannot get loans. But the only reasons that the loans are so high is that these companies are willing to give loans to everybody, essentially everybody, because they know these kids will have to pay them back. They are backed by the government. So ironically, people think like, oh, I'm Mr. Big Government, I'm a liberal. No, I'm actually for limited government in specific ways. I want to feed poor kids. That's what I want to do with money. I do not want to guarantee massive amounts of loans that indirectly put tons of people stuck and trapped in these massive high-interest education loans. If the government were to stop guaranteeing these loans, the price of education would fall immediately and dramatically. But most people have never made that connection. This is why money is political.

The lowest interest rate I have with Sallie Mae is 9.88%. Now my federal student loans are between 4% and 6%, which I think is manageable. I don't regret any of the experiences I've had between the ages of 18 and 26 or any of the things that I've done, but I do wish that I managed my finances way better than this. I think what's even more sad is a lot of these student loans were going to rent, which my rent was around $1,200 a month, and that's been consistent over the last 2-3 years. Thankfully, I do have a finance bro as a boyfriend, and he is really great at managing money and managing And so I am working with him to do a snowball effect. If I snowball all of my loans at the current rates that they are without consolidating them, I can pay all of this off by 2032.

That's not bad. So we're talking about 6 or so years aggressively paying it off, maybe 7. That's not bad. There are a lot of people who have 20, 25-year loan terms because of the way that they are paying them off. What I really appreciate about this creator is she's super honest. You can tell that she's taking responsibility. She's like, hey, I shouldn't have done this. I don't regret that, but I wish I had done X. I appreciate that. And if anything, I think this will be a defining lesson for her throughout the rest of her life. Incredible. I find that some of the people who I want to learn from the most are the ones who went through a certain type of adversity. Maybe they even made a mistake themselves and they have learned from it. I'm sorry you're having to go through this. I think this is probably one of the most valuable lessons you could learn, and I appreciate that you shared it with all of us. Watching these stories, I kept thinking about how much energy people are spending keeping this money stress in the background. It's almost like they're walking around with a heavy backpack, and it's become so customary that they don't even notice how heavy it is. Somebody stops checking their account because they already know it's bad. Then every purchase is compounding off of that, making them feel worse and worse and worse. Eventually, they feel bad about not even checking their account, which is what made them feel bad in the first place. And you know what they do then? They go, I'm bad. I just need to be more disciplined. But that's not how it works. The bigger problem is that they have set up their entire financial life to depend on them manually staying on top of everything all the time. It's exhausting. You don't need to do that. A good money system should reduce stress. You should actually spend less time on your finances with a powerful system. That's why I am always encouraging you to automate your money. That's why I have an entire book about it called I Will Teach You to Be Rich, because once your investing is automated and your savings and your bills are being paid, then your relationship with money changes completely. So here's one practical thing to do after this video: automate one thing from this week. Could be your Roth IRA. Could be $100 a month going to a savings account or automatically paying your credit card in full every month. Just one system because you massively underestimate how good it's going to feel when you don't have to pay attention to everything all the time. If you want help building a money system that works for you, I want you to watch How to Have Better Finances Than 95% of People next.