Ramit Sethi on CBS Money Watch

The economic downturn has had enormous implications for all age groups. Today we're talking about the recession's effect on younger workers with 27 year old Ramit Sethi, author of the New York Times bestseller I will teach you to be rich. Hi Ramit, thanks for joining us.

Thanks for letting me be here.

You've got a blog, it attracts quarter of a million people. What are they saying about what happened in this recession?

The good news is that they're talking about it for the first time since I can remember. I have friends that are saying, no, I can't go out this Saturday. I'm trying to save money. That was never the case before. And I'm talking about people who at all levels of income. So that's good. They're talking about it. It's not taboo to talk about money. On the flip side, there are a lot of young people who are not investing anymore. And you have to remember they weren't even investing in the first place. So even that small percentage of young people who were investing are battening down the hatches and stopping investing.

And when I think about that, I think about this generation after the Depression. These were people who just did not take risk. They lived quite frugally and they were worried about investing. Do you think that our 20 something generation is going to really have a different risk appetite over the long term as a result of this economic meltdown?

I do. The New York Times called it a generation shy of risk. And I think that is a great term because there's great research indicating people who grow up in these kind of conditions, they're shy for the long term, meaning they're going to be skeptical of investments forever. And while that may seem rational right now, there are tons and tons of phantom costs over time that they're simply going to not have enough money as they grow older and older because they didn't start investing when it was the most important time.

When I read your book, I see that one of the ways that you think is sort of an easy way to get people to use investments is something called a lifestyle or a target fund. Explain why you think that's a good idea.

Because we are horrible investors. Investing, first of all is not about picking stocks, despite what you read in the newspapers and see on tv. It's about long term, systematic, disciplined investing. So to put it very bluntly, Grandma should not have lost 50% of her money when the economy dropped. It should have never happened. But that's because we're misallocated and we think that investing is about picking stocks. Target date funds are great. They remove our need for discipline, which is great because we have none. And it simply says, pick a fund based on your age and they'll change and rebalance as you get older. That's great because it limits options for young people. They don't have to pick from a universe of choices. All you have to do is one thing, funnel as much cash as possible into that fund.

But one of the criticisms of those particular funds were that they may have had more risk in them than people knew about. So how do you get people to accept the that kind of risk?

Two points on that. The first is that often doing something is better than doing nothing. So much more is lost from inaction than from doing a bad action. The second part is that obviously there needs to be more transparency. There needs to be a lot of wrinkles ironed out in these funds, and people need to understand what they're getting into. But that is perhaps the hardest thing of all, because no one cares about financial literacy. No one wants to be a financial expert. They just want to get their money doing what it needs to do and then get on with their lives. So if they can get 85% of the way there and get on with their lives, then I think it's great.

Well, I just want to read a passage from your book because, you know, maybe you're the person to deliver this financial literacy. This would get you to pay attention. Listen up, crybabies. This isn't your grandma's house and I'm not going to bake you cookies and coddle you. A lot of your financial problems are caused by one person. Instead of blaming the economy and corporate America for your financial situation, you need to focus on what you can change yourself. What can people change themselves? Especially the 20 something generation that you speak to constantly.

They can change a tremendous amount. Have you ever heard someone talking about complaining about Obama's bailout or the health care plan? And I always have to bite my tongue because the first thing I want to say is, have you ever looked into your 401k and rebalanced it? Have you ever chosen a good asset allocation? Have you ever set up automatic savings? We have far more control over our own money than any bureaucrat ever will. So simple things we can do. We can negotiate our subscriptions down. We can set up an automatic savings plan. We can invest as much as possible today.

Now, you also make a point about how we spend money. You're not one of these people who says that you should really deny yourself everything. What's the best way to go forward so that we don't feel like we're giving up everything? We don't do that binge dieting thing.

I never, ever, ever tell people, don't spend money on lattes. I think it's ridiculous. It clearly hasn't worked. It's time to take a new approach. And one of the things I talk about in my book is conscious spending. Spend extravagantly on the things you love. If you cut costs mercilessly on the things you don't. So if you like $300 jeans, get them. Just figure out how you're going to afford to pay for them with the rest of your budget. So it's important to be very conscious about what you're spending. And you can do that by looking closely at your spending and also never forgetting that you can always earn more. That's something we forget. But earning more is one of the most powerful strategies we have for being able to spend on what we love.

And here at MoneyWatch, we call that human capital. And I want to thank you for sharing your human capital with us. It's Ramit Sethi. And for more about Ramit, hop onto.

His blog, which is called iwillteachyou to Be rich. Com Ramit.

Thank you very much.

Thank you.