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Ramit Sethi on Financial Horror Stories: Shame, Student Loans, and the Money You Don't See Leaving

I Will Teach You To Be Rich · ▶ 21:09 · 15 min read
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Overview

Ramit Sethi opens with a claim that frames the rest of the video: most financial disasters do not start with one huge mistake. They start with something small, like putting off investing for another year or no longer checking a credit card balance closely because you already know it's bad. Eventually, he says, money becomes "this constant cloud hanging over" a person. He reacts to four clips from around the internet. His stated aim is to show how people slowly get trapped and which warning signs they miss. Along the way he also argues about how people with money problems should be talked to, and about the policy choices he thinks make those problems worse.

15 min read

A Drained 401(k) and the Question of Bullying

The first clip is from an interview-style show. A woman says her 401(k) holds about $5,000 and she has no other retirement accounts. She explains that she has taken money out of her 401(k) multiple times, in 2019 and 2020, because "people have told me like you can just take it out." She used part of it toward the down payment on her first house. The host first suggests that might have been penalty-free. Then, after checking, the host concludes she probably still paid a penalty plus taxes, which amounts to "a 10% interest rate at minimum" on the money she withdrew. The host asks why the money was in a 401(k) at all if she knew she wanted a house. The host tells her she is "desperately behind on retirement" for the second half of her twenties.

Sethi's reaction: "I feel like I'm watching a bullying session happen in front of my eyes." He says many guests on his own show don't know technicalities like hardship withdrawals, and he finds it hard to judge someone for simply not knowing something. His comparison is that he didn't learn about progressive overload in weightlifting until he was about 30, because nobody taught him and he never thought to ask. He says it has become popular to judge people for not knowing things about money, and he doesn't like that. His preferred response to someone who doesn't understand the difference between a 401(k) and an IRA is to explain it and walk through why someone might choose one over the other.

He does not excuse the decision. He says she was irresponsible with money. She didn't know better, but she is an adult and should take responsibility to learn. He estimates the withdrawals will likely cost her hundreds of thousands of dollars in lost gains. His objection is to the method of "relentlessly bullying" people over what they don't know or over a bad decision. He says he asks himself how someone will feel after talking to him, because that feeling is "very likely to determine what they do." Someone who feels ashamed is likely to do what he says so many Americans do, which is avoid their money. He would rather the person feel understood, even if that means he admits a dumb mistake of his own and explains how he got out of it. He wants them to feel that even after a couple of mistakes they still have a good chance of living a rich life.

A 17% Student Loan That Keeps Growing

The second clip is short. A young woman says she has been paying $1,500 a month on her student loans for two years. She has just discovered they carry a 17% interest rate, and she now owes more than she started with.

Sethi calls this frustrating and frames it as a question of what kind of society the U.S. wants. He says he doesn't mind that college costs money and doesn't mind a modest amount of student debt, but 17% is "insanely high." He notes that neither he nor his viewers can get that return in the stock market, so the balance keeps rising even when someone pays more than the minimum. He adds that student loans are not dischargeable in bankruptcy. He calls this "a policy decision that we made that locks people in student loan debt forever."

Should she have known? He agrees she probably should have read the documents. He returns to the fitness analogy. He also should have known how to work out properly and why deadlifts matter when he was 18, but nobody around him knew or told him. The difference, he says, is that his ignorance didn't lock him into a financial trap likely to cost tens of thousands of dollars over many years, which he suspects is her situation.

He argues that documentation matters, but the average student realistically doesn't understand what they're signing up for and is entering "a Byzantine system of confusing numbers." He challenges viewers directly: ask an 18-year-old to explain interest, or explain it yourself. Do you know what an amortization chart is? Do you know that, as he puts it, for the first 20 years of a 30-year mortgage you're paying more toward interest than principal? His point is that the average person doesn't understand this language even though it's English.

His stated philosophy is that people should take responsibility for their decisions, but he wishes the system were "just a little bit easier." He recounts meeting a couple in New York. The woman, from Germany he believes, told him that student loans there are basically 0% interest and capped at a certain amount. He criticizes the attitude he hears from many older Americans, which he paraphrases as "I went through it. You should go through it too." He asks why the education system couldn't be reimagined and why lenders couldn't face limits "in the same way that you limit my taxes as a wealthy guy." Instead, he says, the country gives many benefits to the wealthy and ultra-wealthy while stripping resources and hope from young people.

$100,000 From a Game Show and a Surprise Tax Bill

The third clip comes from a woman who says she won $100,000 on America's Next Top Model in 2017 and made the biggest financial mistake of her life with it. Sethi first praises her opening line as one of the best hooks he's heard online.

She explains that she received a check for $100,000 and assumed it was already post-tax, since the amount was a round $100,000. It wasn't. She spent $60,000 on an apartment in New York, though a roommate paid her back and she later sublet it, so she says it wasn't a terrible investment. She spent the rest on nice dinners with her family, one pair of shoes, and, after a pause, a car. She says she should have set aside 35–40% for taxes. Because she didn't, she spent the next several years paying the IRS back. She warns viewers that game-show prizes deserve skepticism: winners are taxed on cash, and a "free" car still comes with taxes and other costs.

Sethi teases her for going straight from a $60,000 apartment to "a pair of shoes" as her examples, but calls it a good lesson. Most people never face this, he says, because their employer withholds taxes automatically. When his company prepares compensation reports, it shows employees their salary along with what the company pays for health insurance, taxes, and more. He says people are actually paid much more than they think, but it's set aside before they see it. The only people who run into the ANTM winner's situation, he says, are the rare big winners and entrepreneurs. Entrepreneurs, himself included, have to set their own tax money aside.

He says he actually wishes people had to handle this more manually. It would make them appreciate where their money goes and would make them more civically involved. He then offers another example of money taken so quietly people don't notice: paying a financial advisor 1%. Because the fee comes straight out of the account, most people never feel it. If they had to write a check for $28,000 a year, he says, they would quickly change. He claims this is one reason the financial advising industry is "petrified" of having clients pay manually, because consumers become much more discerning when they have to write the check themselves.

$95,000 of Debt at 26: What Kind of Debt, and Why

The final and longest clip features a 26-year-old who says she is in $95,487.73 of debt. Before hearing the details, Sethi says the number alone doesn't necessarily bother him. What matters is the type of debt and why it exists. If it's student loans for graduate school and you carefully calculated that the new job or industry would pay an extra $40,000 a year, he calls that excellent. If you bought ten French bulldogs and are $95,000 in debt for puppies, not so much.

She explains that until 24 hours earlier she didn't know her total. The $95,487.73 covers credit cards and student loans. Adding her auto loan brings it to $110,938.83. Sethi interjects that "90% of people in debt do not know how much debt they owe" and says knowing the number is very important. As the auto loan and credit cards come up, he says it's "getting worse and worse," and he wants to hear about the student loans.

She describes the effect of totaling it all up. She hasn't gotten "one good breath of oxygen" in 24 hours, feels like an elephant is sitting on her chest, and can't stop repeating the number. Sethi highlights this as a common pattern. People often describe debt as a physical weight on their chest. He says heavy debt isn't something to mock, because it causes physical problems. It's the first thing people think about in the morning and the last thing at night.

Living Expenses, Not Tuition

Her education path explains how the debt built up. Her first associate's degree came from a community college and was covered by a Pell Grant. She then went to a university for a bachelor's degree, which is where the debt really started. In the last two years she finished a nursing degree at a community college and added more. The part she says "really sucks" is that most of the student loan debt didn't come from tuition. It came from living expenses and "living way above my means." Much of it went to rent, which she says has been about $1,200 a month for the last two or three years.

Sethi seizes on this. He says it's very common among people who take on college and graduate school debt. Once the balance feels huge and they don't even know exactly how big it is, they start thinking, "What's this dinner going to make a difference? What's this trip? Everybody's going." He says he hears the same reasoning from business school students. His response is that it does matter. He has no problem with someone in debt going out to dinner occasionally. The unhealthy part is having no control and no plan, and shrugging because "it's already so big." That, he says, is how people end up where she is.

Sallie Mae Rates and Sethi's Argument About Government Loan Guarantees

She breaks the debt down into two credit cards, five federal student loans, and five private loans from Sallie Mae. She says she can handle the federal loans, at 4–6%, which she considers manageable. She calls Sallie Mae "genuinely evil" and says it preys on young students, because anyone turning to a private lender like that genuinely needs the money. Her Sallie Mae rates range from 9.88% at the lowest to 16.28% at the highest.

Sethi reacts with disbelief at 16.28%, then makes a political argument. He says one reason education has become so expensive is that the government guarantees the loans. If you wanted to bring costs down, one way would be to get the government less involved. He acknowledges this is politically infeasible because it would mean some people who want to go to college couldn't get loans. In his view, the loans are so large because lenders are willing to lend to essentially everybody, knowing borrowers will have to repay and that the loans are backed by the government.

He anticipates being labeled a big-government liberal and rejects it. He describes himself as favoring limited government "in specific ways." He wants public money to go to things like feeding poor kids, not to guaranteeing massive loans that indirectly trap people in high-interest education debt. He predicts that if the government stopped guaranteeing these loans, "the price of education would fall immediately and dramatically." He says most people have never made that connection, and that this is why "money is political."

A Payoff Plan, and Why Sethi Credits Her Honesty

The creator says she doesn't regret her experiences between 18 and 26 but wishes she had managed her finances much better. Her boyfriend, whom she calls a "finance bro," is helping her. They plan to use the snowball method on her loans at their current rates, without consolidating, and she projects she can pay everything off by 2032.

Sethi calls that "not bad." He reads it as roughly six or seven years of aggressive repayment and contrasts it with the 20- or 25-year loan terms many people end up with. He says he appreciates how honest she is and that she's clearly taking responsibility. She acknowledges she shouldn't have done certain things while saying she doesn't regret her experiences. He expects this to become a defining lesson for the rest of her life. He adds that some of the people he most wants to learn from are those who went through adversity or made mistakes and learned from them. He tells her he's sorry she's going through it and thanks her for sharing.

The Heavy Backpack and the Case for Automation

Sethi closes by stepping back from the individual stories. He says he kept noticing how much energy people spend carrying money stress in the background, like a heavy backpack they've worn so long they no longer notice the weight. He describes a loop. Someone stops checking their account because they know it's bad. Each purchase compounds that, and they feel worse. Eventually they feel bad about not checking, which is what made them feel bad in the first place. Then they conclude, "I'm bad. I just need to be more disciplined."

That, he argues, "is not how it works." The bigger problem is that they've built a financial life that depends on manually staying on top of everything all the time, which is exhausting. A good money system should reduce stress, and a powerful system should mean spending less time on finances, not more. That's why he pushes automation and why he wrote a book on it, I Will Teach You To Be Rich. Once investing, savings, and bills are automated, he says, a person's relationship with money changes completely.

His one concrete assignment: automate one thing this week. It could be a Roth IRA contribution, $100 a month going into a savings account, or paying a credit card in full automatically every month. He says people "massively underestimate" how good it feels not to have to pay attention to everything all the time.

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