Ramit Sethi: 3 Signs You’re Unsavvy With Money
Written by
Daria Uhlig
Edited by
Nicholas Morine
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Of the roughly 15.5 million vehicles Americans purchased last year, the vast majority were SUVs or pickups, Motortrend reported. Owning either one could be a sign that you’re unsavvy with money, according to Ramit Sethi, best-selling author and host of the Netflix series “How To Get Rich.”
“Of the people I talk to in financial trouble, a huge percentage own trucks or SUVs,” Sethi wrote in a recent post on LinkedIn.
Signs You’re Unsavvy With Money: It’s All About Mindset
Certain mindsets often lead to major purchases like luxury vehicles, and they could be clues that you’re headed for financial trouble.
No. 1: Financial Security Is a Big Checking Account Balance
Your checking account balance tells you how much money you can spend. Financially savvy individuals are more interested in how they can leverage that spare cash to build wealth.
No. 2: Monthly Payments Make Big Purchases Affordable
Low monthly payments make it easier to purchase high-ticket items, but in an episode of his “I Will Teach You To Be Rich” podcast, Sethi likened basing purchase decisions on monthly payments to “a child eating crayons.” Savvy individuals look beyond the monthly payment to consider the total costs of ownership.
Say, for example, you purchase a $50,000 SUV using a $40,000 vehicle loan with a 7% interest rate. Your payment will be about $800 per month. You might have more than enough left in your checking account each month to cover that, but the payment is only part of the story. The other part is the nearly $7,500 you’ll pay in interest over 60 months, which increases the cost of that $50,000 vehicle to $57,500. You’ll also pay more for gas, sales tax and auto insurance compared to a lighter, cheaper vehicle — and you might even have higher registration fees.
No. 3: One Big Purchase Justifies Another
In his LinkedIn post, Sethi described a situation he called the “tail wagging the dog,” which is a backward decision-making process. In this case it referred to Sethi’s friend’s purchase of an RV he couldn’t tow — followed by the purchase of the pickup truck he needed to tow it.
Financially savvy individuals avoid letting their purchases spiral out of control.
How To Be More Savvy
Financial savviness starts with a few basic concepts. The first is a budget that prioritizes long-term savings and investing.
In a post on his IWT blog, Sethi recommended building an emergency fund first, then tackling high-interest debt. Next, learn how investing works so you can start saving for retirement: Read up on the benefits and risks of stocks, bonds, mutual funds and other types of investments as well as how to build a diverse portfolio.
While there’s nothing inherently wrong with large purchases, savvy individuals save up until they can buy the items outright. Delaying major purchases gives you time to think through the true costs and helps you avoid a major money trap: taking on debt for the sake of instant gratification.
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