Money & Coronavirus: How Much To Save Right Now?

Good evening. I am back after a much needed weekend. I'm Ramit Sethi, CEO of I will teach you to be rich. And tonight we are talking about coronavirus and money. How much do I need to save? Alright, this is gonna be fun. Because I know what you're thinking, Ramit. I've heard a lot of other people tell me how to save money. I know what you're gonna tell me to do. You're gonna tell me, first of all, cut back on lattes. Second of all, go open up my oven, put on some gloves, turn that lefty loosey. Ready tighty. Thank you. Lamp. Disable that oven light. Because over the course of the next five years, you could indeed save 13 cents. That's 13 cents you could put right in your pocket. You otherwise wouldn't have had it. Save the money for me if you think I'm kidding. In my book I cite an actual article. This is a real published article by some person who wrote in a national publication something like the $50,000 cup of coffee. And he said, if you don't buy that one three dollar coffee or that one dollar seven salad and you extrapolate it over 18,000 years, indeed you could have $70,000. It's just $70,000 salad. I'm like, you actually got paid to write that? Are you kidding me? We're not going to talk about that tonight, okay? We're going to talk about to save money right now. We're going to go one, not one level. We're going to go about 10 levels up from the minutiae that consumes most of America. And we're going to talk about structure. How much do you need to save? How do you save it? The psychology of saving it. And even, yes, not just saving, actually spending. We're going to talk about the psychology of spending your emergency fund. So that's what I want to talk about tonight. Why does this get me so mad? Well, a lot of things get me mad. That's probably for another discussion. But I like to talk. I think that saving is an important part of your personal finance infrastructure. Chapter four, conscious spending plan means you know how much you're saving, you know how much you're investing, and you also know how much you're spending. And I think that especially in times like today, a lot of us are wondering, like, am I okay with the amount I have saved or I don't feel safe. So I need to figure out a way to save more money right now. And I want to talk about all of those things. I am Going to be taking questions. I will say that I get some of the worst questions on the Internet from my readers. I don't know what the issue is, but you guys are horrible at asking questions. So today I posted something on my IG stories. I was like, hey, ask any questions. I got one question for today. It's actually a pretty decent question, but that was one I think people either don't want to click, swipe up and fill something out, that's fine, or they figure I'll wait until I come tonight and then do those one word questions in the chat room. Either way, we're gonna see what happens tonight with these disastrous questions. So if you have them, type them in the question box. Meanwhile, I want to talk about three things. Oh, I'll just answer your question. How much do you need to save? You need to have a one year emergency fund. Okay, that is what I am recommending you Target. Now I didn't used to recommend that for everyone. That was my personal on my personal rule you can go look at my Twitter account or Google for Ramit's 10 money rules. I have for a long time. I've said I always want to have one year of cash just sitting there. But I'm a bit conservative, right? I want to have it just in case. Generally what is recommended is three to six months. And I've said if you really want to be conservative, do a year. I'm now recommending that for everyone. So I'm going to talk to you today about why you need it, how to build it, and the psychology of building and spending that emergency fund. Alright, so let's do it. So first off, let me show you an example. Let's say that right now, today you have a job. How many people here have a job and you see what's going on with unemployment numbers. But for now you feel safe. How many people here have that situation? Alright, let's say that you've also got some money in savings, but you don't know how many months it is. It might just be 500 or 5,000 or even $25,000, but it's just sitting around in a checking or savings account. You don't quite know how many months of expenses that is, how many people here are in that situation. A lot of people. Okay, now let's say three months go by and unemployment continues to rise. More people are laid off, more businesses close, more industries close, some for the foreseeable future. And let's just assume for the worst case that you also are laid off. Nothing personal Remember, I've been laid off myself, but the industry contracts and you are laid off. What do you do? What most people do is they wait until that minute and then they panic. They don't know how unemployment works, they don't know how much they had in savings, but they know that they should have done it a long time ago. I'm seeing this on Twitter and Instagram all day long right now. I really wish I'd read that book 10 years ago. Okay, one of the key differences between the rich and everybody else is that people who are living rich lives plan before they need to. In general, you do not want your back to be up against the wall. It's a bad place. Look at this. I don't like this. I don't want to be up against the wall. I want to have room to breathe, to maneuver, to think ahead. So that's what we're going to talk about today. I want you to remember one critical factor in times like this. If you are laid off, it's not just you looking for a job, it's millions of other people. So it is at that very moment when things go wrong where pre planning becomes even more powerful Again. Remember, when, if and when you get laid off, God forbid, it's not just you who's looking for job, it's millions of other people. So you really want to have that room to make good decisions and frankly, just to have a roof over your head at a critical time like that. Okay, how many people here resonate with what I'm talking about? You might have some in savings, you might have a secure job right now, or maybe some of you may have recently been laid off. But knowing that it's not just you looking for a job, it is millions of other people. And so as much as possible, we want to plan ahead. Alright, so I said one year of emergency fund, what does that mean? How do you actually calculate it? What I found is that much of the expert advice out there gives you these sort of generic phrases. But I want to take it down a level and connect it with you so you see exactly how much that means for you. Now, does anybody here have a sense of how much one year of emergency expenses would equal for you? Type that in the chat room if you do, or type it in the comments. Let me give you an example of how you can calculate that. While we are seeing those numbers come in and Cas, I'll ask you for some of those numbers in just a minute. So let's assume easy math that I spend $1300 a month on everything. Rent, car, whatever. Again, just easy math. Alright, so I get laid off. So. Or I'm planning ahead. The first thing I do is I say, you know what? In a time like this, I'm going to cut some of my discretionary expenses. I don't need this. I don't need to go out to dinner that much. So right there I cut 300 bucks off the top. Not going to do it, not going to take that trip I was planning, etc. 300 bucks off. Now I know that I need $1,000 a month, bare minimum, to live, to keep the lights on, to be eating, etc. So what does that mean? How much do I need to save for 12 months? 1,000 times 12. $12,000. So in that very simple example, do you see what I did? First off, I calculated the basic number I need just to live. Then I said, you know what? Do I really need to take that trip to go out to dinner? No, I chopped off some percentage of that. I would say target 10 to 20%. In my case I did 30%. Now I've got a number. Multiply that by 12. That is the one year emergency fund amount that I need to be targeting. Now in just a second I will talk to you about how to do that. But let's see what some of those numbers are. Cass, what have people said? How much is their one year emergency fund equal to. We have 60k. Okay, 40k in the 20s, 25, 72. Some 50s. Yeah, lots of 50s actually, and then some 35k. Okay, so good numbers. A couple of things that stand out to me. First of all, notice how there's no six figure people, so why do you think that is? They don't, they don't speak up at times like this. Right? This is why in a couple of days I'm doing a special session for high earners where we can talk about things that are normally not talked about. High earners do not speak up in chat rooms like this and on Reddit because everybody hates them. Okay? I don't think we should hate them. I think we should have a space where we can safely talk about those issues. But in general, those are different issues. The second thing I know is that a lot of people hovering around the 50k range. What I suspect is that most of those people make 50k. And so just as a rule of thumb, they're just going, Well, I make 50k. I think I pretty much spend what I make, so 50k, don't do that. You guys are, you're trying to. You're being intellectually lazy. If you make 50k, do you contribute to your 401k? If you read my book, you do. If you haven't read my book, get off this Instagram account and go get my book right now and start reading it. So you contribute to your IRA, your 401k, you have some expense for your children, sending them to daycare, you have this, you have that. It's not really 50k that you need to fully keep the lights on. I'm asking for your minimum expenses. Minimum. If you just get lazy and say I make 50k, so my 50k is my no, that's lazy and that's going to mislead you. It's also going to make it harder because you're going to be trying to save 50k, when in reality you might only need to be saving, let's say 40K. That's a big difference. So I want you guys to take the time and go through the process of calculating your minimum expenses, then multiplying by 12. Okay, now let me talk about what people's first reaction is. What is your first reaction when I say one year of emergency expenses? I know, I know most people like, I'm not going to do that. There's no way I can save that much money. That would take too long. That will take me years. I'm not going to bother at all. See, that is the normal thing that we do when confronted with a big challenge, especially one where that does not feel like it's within our control. All right, Think of anything. You know, I need to make this much money, I need to save this much money. I need to run 10 miles. Impossible. But of course, how do you run 10 miles? You run it by putting on your shoes and taking one step and another and training and doing it over a long period of time. Nobody's expecting you to save this much by tomorrow. Oftentimes it takes years to save up a full scale emergency fund. In this case, we're going to try to compress that. We're also going to say, hey, look, if you can't save a year, but instead you can save seven months, that's better than nothing. So we're not going to target perfect. We're going to target the 85% solution from my book and we're going to get on with our lives. Okay? That is the psychology of accepting that you need to build an emergency fund. Alright, so how do you do it? Well, first of all, we talked about cutting those expenses that you don't need to do that. You may have been thinking about spending later in the year, etc. Just to give you a sense of how I'm thinking about money, I have basically written off the rest of the year in terms of going anywhere. So we don't. We're not taking our trip at the end of the year. We have some weddings. Either they've already been canceled or I expect they will be canceled. I am anticipating that nothing will be basically be open until the end of the year now. Again, what do I know? But I'm planning conservatively, so that is how I'm thinking about my expenses. It's crazy, but I hear people that are still planning for a trip in July. That's up to you. If you want to still plan it. But under the auspices of a savings goal, much less the health issue going on in this global pandemic, you might want to just say, not going to do that. All right, there are some other ways that you can save money. First off, if you are unemployed, please avail yourself of unemployment. There are lots of options right now. Lots. A lot of people don't know about this. Please go online, search for unemployment. There are a lot of resources out there for you business owners as well. You should get educated. Speak to your accountant. As I've said, I want to remind you that you should call up your credit card company, your student loan company, even your landlord and you could say, look, I'm being negatively affected by COVID 19. I need to discuss what options you're making available for people like me. You need to save. Some companies are waiving fees, some are extending payment plans over long periods of time. They're doing grace periods. There's lots of things you can do. Please take advantage of them. And finally, just by paying attention to this, you're going to start to see changes. It's like anything. If you start tracking your money, if you start tracking your eating, if you start tracking your steps, you're going to see changes just by virtue of looking at it. There's a principle, some scientific principle that's slipping my mind right now. But basically, just by the action of observing something, you are going to change it. And that's a good thing. If you sit down tonight, you calculate your savings, your one year emergency amount, you start thinking, what can I cut? You're going to change it. You're going to start building that up. Let's finally not forget one thing. Of course you can earn more and you can take that money and put it right into your emergency fund, alright? And That's a lot of what I talk about in my programs, etc. Okay, let's go now to the psychology of using it, using your emergency fund. And then we're going to take any questions that we've got. So if you've got questions, type them in the question box. I am seeing a lot of people who have money saved up, but they are terrified to use it. And this is the opposite of people who have a spending problem. You know, there's a lot of people who spend 105% of what they make every year or every month. The other side are these hyper frugalistas whose entire life is logging into their personal capital account and looking at, oh, my God, I had a. I had a 29% savings rate last month, but my average is 33.3%. I'm really slipping. What's wrong? I gotta get back on track because otherwise the fire community is not gonna respect me enough. I need to get to 40%. Get a life. Okay. Please do not end up on your deathbed feeling morally superior to other people because you have a 38% savings rate. I have heard people still going to work even though they have a huge emergency fund account. Why? They don't connect the two. They mentally do not connect the two. You ask them, why are you still going to work and exposing yourself and exposing. Potentially exposing other people? Well, what do you mean? Like, that's my job. And then you say, like, don't you have a savings account? You've, like, been saving for, like, 10 years, and they go like this. They don't make the connection. It's called an emergency fund for emergencies. Cass, do you think maybe a global pandemic that has stopped virtually 100% of business across the world would be classified as an emergency? Yes. Wow. Thank you, guys. Get real. This is an emergency. If you've got the money, it's time to use it, okay? Use it to live. Use it to help other people use it. It's there for a reason. If you need it. Remember, you can always refill it later. But the craziest thing is that you have people, and this is a small amount, but it's really important, who have done the right thing in saving, but they never built the muscle of spending. It's an emergency. Fund it. You need it, spend it. So that's the basic framework for how much to save right now. Now, before I get a million questions about Ramit, one year is gonna take me three years to save, etcetera, I want you to remember this, that is my recommendation. If you take a look at your numbers and you say, you know what, that's impossible, but I think I can do eight months over the course of the next six months. Great. Round of applause. Pat yourself on the back. That's great. What I want you to do is take action. I don't want you to hear this number and get demoralized because you can't do it overnight. Part of money is its patience. In fact, one of the biggest parts of earning a lot of money is being patient. In this case, you focus on what you can control. Cut your expenses, earn more, optimize your spending on all your bills. Call them up, negotiate them, but take control. That is what I'm really urging. Alright, so in just a second we're going to take questions from the question box. But first I want to answer Camille from Minneapolis, the best and only question that came in tonight and she. Camille, what a great question. Would you recommend halting or minimizing your 401k contributions, your student loan payments, your HSA contributions until we build up at least one year of emergency fund? Yes, yes I would. Crazy to hear me say this, but yes I would. The HSA contributions you might make, for example, HSA is a great tax advantaged account. It's amazing. I talk about it in chapter three or seven of my book. The amount you could make this year if you compound that over the.