186. “Was it a huge mistake to sell our house?”

Summary

Podcast Summary: Money For Couples with Ramit Sethi
Episode 186: “Was it a Huge Mistake to Sell Our House?”
Release Date: December 10, 2024

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Introduction

In this episode of Money For Couples with Ramit Sethi, Ramit delves into the financial challenges faced by Ava and Chris Negative Nancy, a couple struggling to align their financial strategies and manage overspending. This detailed discussion provides insightful lessons on money psychology, budgeting, and fostering financial harmony in relationships.

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Meet Ava and Chris Negative Nancy

[02:31 - 03:39]

Ava (36) and Chris (38) introduce themselves as a high-earning couple earning approximately $203,000 annually ($16,959 per month). Despite their substantial income, they find themselves trapped in a cycle of overspending and debt, primarily due to differing financial perspectives.

• Ava: "I want to be on the same page. I just don't see how we get there in the situation that we are in now."
  [02:48]

• Chris: "I don't feel negatively about our finances, but I think for sure do we have a different perspective towards our finances."
  [02:41]

Ava meticulously tracks their expenses using a traditional ledger, a practice she has maintained since college. However, despite her efforts, their credit card debt remains substantial at $278,000.

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Ramit's Financial Assessment

[03:57 - 07:47]

Ramit conducts a thorough analysis of Ava and Chris's financial situation, highlighting several critical issues:

• High Fixed Costs: A staggering 70% of their income is allocated to fixed expenses, primarily due to childcare costs amounting to $2,000 monthly.
  [34:15]

• Low Savings Rate: Their savings account holds only $1,300, equating to just one week’s emergency fund, which is dangerously insufficient given their financial obligations.
  [49:18]

• Overspending and Debt Cycle: Ava and Chris frequently overspend, relying on credit cards to manage unexpected expenses, leading to recurring debt without a strategic repayment plan.
  [03:14]

Ramit emphasizes the need for a Conscious Spending Plan (CSP) over a traditional budget, advocating for a more holistic approach that aligns spending with personal values and long-term goals.

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Critical Conversations and Realizations

[10:02 - 19:58]

A pivotal moment occurs when Ramit encourages Ava and Chris to discuss their financial vision without the constraints of their current situation:

• Ava’s Vision: "We're in a house that has enough room that he wants, has the safety and security that I want for us and our kids. We're comfortable. We are budgeting for and saving for a vacation every year to go on as a family."
  [27:40]

• Chris’s Vision: "A bigger house, a yard for the kids to be able to play in, for us to be able to entertain in fire pit with, you know, being able to have friends and family over."
  [28:55]

Through guided discussions, Ramit helps the couple recognize the disconnect between their financial tracking methods and their actual financial health. He challenges them to move beyond mere number-crunching to a more strategic and values-driven financial planning approach.

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Implementing Change: Shifting to a Conscious Spending Plan

[24:43 - 39:16]

Ramit introduces the concept of the Conscious Spending Plan (CSP), helping Ava and Chris reallocate their finances effectively:

• Savings and Emergency Fund:

  • Chris: "I would love to be able to put anywhere between $500 and $1,000 a month."
    [59:05]
  • Together, they decide to allocate $1,000 monthly to build their emergency fund, aiming for $12,000 in a year, which represents two months of expenses.

• Debt Repayment:

  • Ava commits to paying off the entire credit card debt ($6,500) from the upcoming house sale proceeds.
    [71:52]

• Guilt-Free Spending: They agree to responsibly allocate funds for vacations and personal expenses without resorting to credit.
  [75:02]

Ramit advises them to adopt automated systems like YNAB (You Need A Budget) to streamline their financial management, reducing the manual labor that previously led to stress and overspending.

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Strategic Planning for Major Purchases

[70:01 - 78:12]

The conversation shifts to the impending sale of their house and the financial implications:

• House Sale Impact:
  • Assets drop from $418,000 to $18,000.
  • Savings increase by $85,000.
  • Debt decreases from $278,000 to $16,200.
    [33:16]

Ramit walks them through recalculating their budget post-sale, highlighting the unsustainable 71% allocation to fixed costs and the need to adjust their housing plans accordingly.

• Adjusted Budget Insights:

  • Ava: "My initial response was to go back to negative Nancy. I don't know how we could do that with childcare costs currently."
    [78:47]

• Potential Solutions: Ramit suggests considering a more affordable house (~$340,000) and reallocating funds from reduced housing costs to other essential areas, ensuring their CSP remains balanced and sustainable.
  [80:22]

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Finalizing the Financial Strategy

[74:02 - 87:57]

Ava and Chris collaborate with Ramit to establish a robust financial strategy:

• Debt Elimination: Deciding to pay off all credit card debt immediately.
  [72:27]

• Emergency Fund Funding: Allocating $10,000 to their emergency fund.
  [72:34]

• Future Investments: Committing to prioritize investments to leverage compound interest for long-term wealth growth.
  [66:13]

• Reallocating House Sale Proceeds:

  • Chris: "I'd like to have a considerable amount go towards a down payment because I think that if we put a good chunk of it down on a reasonable house, then that significantly lowers our monthly payment."
    [71:25]
  • Ava: "We are going to pay off the credit card debt and fund our emergency fund."
    [71:52]

Ava and Chris agree to abandon their outdated ledger system in favor of automated budgeting tools, fostering a healthier and more efficient approach to managing their finances together.

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Concluding Insights and Future Outlook

[87:57 - 88:35]

In their reflections, Ava and Chris recognize the necessity of evolving their financial practices to match their growing responsibilities and ambitions. They commit to:

• Avoiding Credit Card Debt: Establishing firm rules against future credit card reliance.
• Automating Finances: Transitioning to tools like YNAB for streamlined budgeting.
• Joint Decision-Making: Ensuring all major financial decisions are made collaboratively with clear, data-driven discussions.

Ramit underscores the importance of aligning financial strategies with personal values and maintaining open, constructive communication to build a secure and prosperous financial future together.

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Key Takeaways

1. Adopt a Conscious Spending Plan (CSP): Move beyond traditional budgeting to a values-driven approach that allocates funds based on priorities and long-term goals.

2. Prioritize Savings and Emergency Funds: Aim for at least six months' worth of expenses to cushion against unforeseen challenges.

3. Eliminate Credit Card Debt: Develop a strategic plan to pay off existing debt and avoid incurring new debt.

4. Automate Financial Management: Utilize budgeting tools like YNAB to reduce manual tracking and stress.

5. Foster Open Communication: Engage in regular, honest discussions about finances to ensure both partners are aligned and supportive of shared financial goals.

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Notable Quotes

• Ava: "I want to be on the same page. I just don't see how we get there in the situation that we are in now."
  [02:48]

• Ramit Sethi: "If you want to have a Rich Life, it's about creating a shared vision and making informed, deliberate choices together."
  [Throughout the episode]

• Chris: "It's nice to have something that you can be able to plug in and be able to actually see just right in front of your face. If you can and cannot be able."
  [80:39]

• Ava: "My biggest takeaways are that managing money is less about the actual practice and more about establishing a healthy mindset in psychology around money."
  [86:31]

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Conclusion

Episode 186 of Money For Couples with Ramit Sethi serves as a compelling case study on the complexities of managing finances within a relationship. Ava and Chris's journey from financial disarray to strategic alignment offers valuable lessons for couples seeking to harmonize their financial lives. Ramit’s expert guidance underscores the importance of adaptive financial strategies, effective communication, and a proactive approach to money management in building a resilient and fulfilling partnership.

Transcript

[Ramit Sethi]

Last December, Cass and I sat down and we did our regular annual Rich Life Review. We started off by saying what went well over the course of the year. What would we change? Where would we spend more? Where would we spend less? Then, of course, we looked at our numbers, we went into all the details, and over the course of several days, we talked about what we wanted to do this coming year. Well, that is the opportunity for us to really dream about things like travel, about things like do we want to eat different stuff? Do we want to try a certain restaurant? Do we want to travel with friends? And that brought us to have these amazing experiences over the course of this year where we traveled to places like Italy and India and on and on. That all came from a decision that Cas and I made last year, sitting down and talking about what we wanted our next 12 months to look like. Now I want the same for you. I want to help you plan the perfect 2025. Whether it's a beautiful trip you want to take, whether you want to start taking certain adventures. Maybe you want to have somebody do your laundry, or you want to figure out a way that you and your kids can go to brunch every Sunday. Whatever the case, on January 7th I am hosting a free live online event. It's called Plan youn Perfect 2025 and I'm going to show you how to plan the perfect year for you and your partner. The call details are only available to those who pre order my new book, Money for couples. Go to iwt.com preorder to order your copy and then fill out the receipt info on that page and get details for this special online event. It's called Plan youn Perfect 2025, happening on January 7th, and I'm going to show you exactly how to have the best year of your life. That's iwt.com preorder to get your copy of Money for Couples right now. This January, I'm coming to a city near you. Tickets are now available for my Money for Couples Live Book Tour. Now if you love the podcast and you want to connect with hundreds of other people who are trying to improve their relationship with money, I would love to see you there. Go to iwt.com booktour and use the presale code Rich Life to get your tickets. Now I can tell you nothing beats the energy of being in that room and seeing couples live on stage. I'm coming to New York, LA, Chicago, SF and more. So get your [e-mail] booktour and use the presale code richlife. On today's episode, meet Ava and Chris Negative Nancy.

[Ava]

And I don't want to be. I don't want to be.

[Ramit Sethi]

Ava is 36 and Chris is 38. And when it comes to their finances, they don't see eye to eye and they are stuck in a cycle of overspending.

[Chris]

I don't feel negatively about our finances, but I think for sure do we have a different perspective towards our finances.

[Ava]

I want to be on the same page. I just don't see how we get there in the situation that we are in now.

[Ramit Sethi]

Ava is a worrier who uses a labor intensive ledger to track expenses. It takes tons of time every month, but they're still in debt.

[Ava]

Ever since college I've kept a ledger. Definitely don't think we're using the right approach.

[Ramit Sethi]

Why do you have credit card debt?

[Ava]

Because we overspend on a monthly basis.

[Ramit Sethi]

Chris doesn't like Ava's approach, but he is done fighting about it.

[Chris]

Look, when we do our bills, it feels like it's a drain. At the end of it, I'm like, ugh, this is what we got left. I'm just going to let it be. But letting it be obviously is worse than me just constantly trying to have the fight.

[Ramit Sethi]

They just sold their house and they need my help to get on the same page before they make their next move.

[Ava]

I'm down for moving, but I just want to sit down and put on paper like what that really looks like.

[Ramit Sethi]

Can Ava and Chris set aside their finances and create a new way to talk about money together?

[Ava]

I don't feel like we have a handle on it and I want us to do it together.

[Chris]

It's honestly just haven't shifted from when we were not making a lot of money. The approach is still the same and I think that's what the issue is.

[Ramit Sethi]

Let's meet Ava and Chris. Okay, looking at Chris and Ava's CSP, let's take a look. 36 and 38. Okay. $418,000 asset, probably a house. Investments 150K. That's good. Savings 1,300. That's a huge disparity between the two. It's a bit of a red flag. Debt278 for a total net worth of $291,000. Okay, let's take a look at the income. Whoa, that's a high income. 16,959 per month. That's $203,000 a year. Fixed cost at 70%. Why that's high at that income. Let's take A Look, housing is low 13%. So where are they spending the rest of the money? Car payment is 655. That's very reasonable. Including gas, etc. Groceries? 1,000. Fine. Phone. Oh, childcare? $2,000 a month. Okay. This is so frustrating for so many parents and there's often no easy solution. There's no discount childcare that you can magically cut your costs. I mean they are they living above their means? Maybe. But I also have to acknowledge that for a lot of parents you have to spend more, especially when kids are young. I don't mind that. That's just a natural part of life. And that is why ideally, before you have kids, you have your numbers dialed in so you can be saving extra. And then in the first few years of having a kid, you can draw from those cut your investment or savings contributions and put them towards things like an in. Okay, let's take a look at the rest. Investments are at 3%. They're probably doing some pre tax stuff, which is okay. And their investments are at 150k, so maybe they've intentionally cut that down a bit. Savings are at 1%. That's crazy. Especially with $1,300 in savings. No way. If one of them loses their job, they're over. They're over in one month. That's a problem. And guess what? I knew it. Once I started scrolling down guilt free spending at 26%, there's no way. Typically it's 20 to 35%. For young parents it probably becomes 15, maybe 10, not 26. If you're going to hire a nanny, that's a lot of money. And if you can afford it, that's okay. We can find a way to make it work. But you need to ask yourself, where's the money coming from? And simple dollars in, dollars out would mean if we're spending $2,000 a month on a nanny, it needs to come from somewhere. Now probably some of it comes from our savings rate, some of it comes from investing, but some of it should come from guilt free spending. You choose, it's your call. But the numbers have to add up somewhere and right now they are not adding up. Looking back at my notes, they spend a significant portion of their income on childcare because of their schedules. Whenever they sit and talk about finances, it turns into doom and gloom. Chris operates on the mentality of I work, so if I want to buy something, I buy. They've been in a cycle of overspending, racking up debt, paying it off and getting back to square one. Yeah. All right. What I see here is probably a lack of focus paid to the organization level. Right. It's like, okay, we got to pay the nanny, let's pay the nanny. Fine, but zoom one level up. Where's the money coming from? How does it affect our investments? How does it affect our savings rate? What does it mean for us this year, next year, the year after? Very few couples pay attention to that, and I'm willing to bet this couple has not either. We'll take a look though, when I talk to them soon.

[Ava]

We were in the process of deciding what we were going to do next from a house perspective. We were on the same page about our house now is not where we want to be long term. And when that conversation started, Chris was very much like, okay, you know, let's start looking for the next thing. And I was nervous. I don't think that we are in a position to look for the next thing, which is going to cost more because I don't feel like we're doing a great job of like handling what we have now. Chris said, well, no, we can, like, we can do it. You know, I've run. I've run the numbers. We have room to take on a higher mortgage. And I was like, I don't think that we can. And I said, I want to look at everything that we have on a monthly basis in what we pay. Because I am the one that I'm not going to say handles the finances because I admit I don't do well, but I pay the bills. And so I know that I see on a regular basis what we have. And I was like, I just don't feel like there's a way that we can make this work.

[Chris]

Ava's approach towards finances has been very hands on. On a day to day basis. I'm not, and it doesn't mean that I'm not paying attention. I'm just not necessarily a pen and paper type person when it comes to it. I do a lot of it in my head. I don't feel negatively about our finances, but I think for sure we have a different perspective towards our finances. We rely very heavily on opinions and not necessarily facts to be able to base our arguments on. But I don't think that we are really nailing down why I think we can be able to afford something versus why she thinks that we may not be able to afford something. I want more for our family. I want more for Ava. I want more for me. I do get discouraged when I get told no, constantly. I do get discouraged when every financial conversation turns into what we don't have, it does make me not want to be involved and literally just. I'm just going to work, provide the paycheck, just make sure the bills are paid.

[Ramit Sethi]

Can we just do the conversation right now? Like, I'd love to see how this actually plays out. Let's talk about the house.

[Ava]

I'm down for moving, but I just want to sit down and put on paper, like, what that really looks like and what we can, if any, spend and go up a month based on everything else that we're paying.

[Chris]

I have looked at the numbers. I know that we can be able to do more. We just don't necessarily use the money that we have currently the best way possible, which is why I think that there is a cushion that's there to be able to actually go up on our mortgage.

[Ava]

I don't know how that works right now without significantly looking at where we're spending and cutting.

[Ramit Sethi]

Okay, let me pause you right there. First of all, that was pretty interesting. I appreciate getting a look into how you communicate because it tells me a lot. What did you both notice about that conversation?

[Ava]

I don't want to say frustrating. It just feels hard because I feel like that conversation just goes in a circle and it never really ends in a resolution.

[Ramit Sethi]

Like, you haven't decided on what to do about the house. Correct.

[Ava]

Well, we close next week, so we're definitely selling our house.

[Ramit Sethi]

Oh, really? What the hell? How did I not know that? Good. Let's keep me on my toes here. Chris, what did you notice about that conversation?

[Chris]

It was easy to have that conversation because we still didn't necessarily bring facts and figures to the conversation. Because of that, as Ava said, we are just talking in circles.

[Ramit Sethi]

Yeah, I agree. She said, I want to look at the numbers. Did the two of you ever look at the numbers together?

[Chris]

No, not recently.

[Ramit Sethi]

How do you make the biggest decision, financial decision of your life without looking at the numbers?

[Chris]

We could not agree on what we could afford to buy. We did agree that we wanted to sell. We knew that where we were was not where we wanted to be. We do have a temporary solution that does give us an opportunity to kind of reset.

[Ava]

Fortunately, both sets of parents were open to letting us come and stay for a while. So we definitely were like, we don't know what the next step looks like as far as buying, but we do know that right now we have a very small window when we can sell. We have two kids. They're both very young, so we can pick up and temporarily Go somewhere and take our time to figure it out. So we were 100% aligned on that. Where if we're going to sell, we're going to do it now.

[Ramit Sethi]

Nice job agreeing on the decision. I think that's important. And now we get to talk about how you make decisions. So getting back to that conversation, both of you said it sounds like opinions. I'll note that on a multi hundred thousand dollar decision, no numbers. What do y'all think about that?

[Ava]

It seems a little reckless, but I swear it's not.

[Ramit Sethi]

But I swear it's not.

[Ava]

Okay, tell me because we weren't spending multiple hundreds of thousands, we were gonna make something.

[Ramit Sethi]

That's not how you make big financial decisions. We're talking about big money. This is one of the biggest financial decisions in your life until now, probably in your entire life. Are you two looking at separate numbers and then just coming to different conclusions or are you not looking at numbers at all?

[Chris]

We have a budget file that we go off of on a month to month basis. I think we're looking at the same numbers.

[Ava]

It tells me that there's not room to go much more than where we're at now.

[Ramit Sethi]

What does it tell you, Chris?

[Chris]

That we can do more. We just need to find something that's going to fit within the budget that we have.

[Ramit Sethi]

Okay, should we just pull off the budget and look at it? Yeah, let's do it. Here it is. Let's look. We have 42 lines and there are three columns in this budget. One of them is category. Categories include utilities, insurance, savings, health, household, etc. The second is vendor, such as gas, preschool, pest control. And then the third column is expense. And this is just a list of numbers. $10, $100, $280, 101.61. And on and on and on. 42 lines of this. Can you tell me, looking at this right here, what does this tell you?

[Chris]

It's our list of expenses from a. From a month to month basis.

[Ramit Sethi]

I take nothing away from this. I don't know if you have enough or if you don't. I don't know if you're spending correctly based on your values or not. So if you want to get a bigger house, how do you use this to make that decision?

[Chris]

I look at the expenses that go towards the house and then try to be able to compare it to what it would cost for us to be able to go somewhere else.

[Ramit Sethi]

You can't make meaning from that. It's actually not the right tool. It's like me telling you to build a skyscraper and giving you a hammer, and it actually keeps you small. Ava, you're the one who manages that budget, right?

[Ava]

Yeah.

[Ramit Sethi]

How many minutes or hours per month do you put into it?

[Ava]

Four to five hours a month.

[Ramit Sethi]

Mother of two young kids, five hours a month. And when was the last time you sat down and actually looked at those numbers and talked about them?

[Chris]

15 days ago. We've been doing it for every pay period, so.

[Ramit Sethi]

So you'll go in there and you go, hey, this time we actually spent extra on gas or less on groceries or something like that. So you put it in the budget right together, which is great. And then what?

[Chris]

Then the bills are paid.

[Ramit Sethi]

This is how people play small. They think that they're managing money is filling out a budget. How do you escape from this hell that is updating a 42 row spreadsheet for the next 60 years of your life?

[Ava]

Lower our fixed cost.

[Ramit Sethi]

Okay, that could work. But then what? Let's say you lower your fixed cost by 2, 3, 400 bucks a month. Then what?

[Ava]

I don't know. That's what's hard. It sounds ridiculous. So hard for me to let go of the concept of just spending or paying and then not seeing what everything is like.

[Ramit Sethi]

I don't think.

[Ava]

I don't trust myself.

[Ramit Sethi]

The problem is you have no vision. It's just a bunch of numbers. And if I ask, how do we get beyond the next two weeks, do you know what it would look like to get beyond thinking two weeks out?

[Ava]

I don't.

[Ramit Sethi]

Okay. That's an honest answer. I appreciate that, Chris.

[Chris]

Yeah, I've done it before. I used to set monthly goals versus yearly goals. I would put money away in order to be able to go on trips or if there are big games I'd like to be able to go to. I'm a big sports fan. I put money off to the side for that. I would basically earmark some of my money, but then I would still leave a cushion that's in there to not completely earmark everything.

[Ramit Sethi]

Okay, I like what you're doing. So do you do that right now?

[Chris]

Not completely.

[Ramit Sethi]

Why?

[Chris]

When I shared that approach initially, it. It wasn't agreed upon. So basically I did what I felt like was more comfortable for her. And the things that I was doing previously, I just. I just didn't do anymore. I was like, hey, if this is the way you want to do it and this is going to make you feel good, that's fine. Because when I tried to do it my way, it would be more of an Argument. It was a my way versus her way thing, as opposed to like a. Let's actually come up with a way that works for both of us.

[Ramit Sethi]

All right, Ava, you agree with that?

[Ava]

Mostly. Ever since college, I've kept a ledger, like a paper ledger.

[Ramit Sethi]

That sounds like it's from the prehistoric age. Pull that thing out. What is this ledger? Dust it off for us. Show everybody what it is. I already love this camera. Oh, my God. Look at that thing. Hold on, everyone. Hold it up to the camera real tight. I feel like we're in Egypt right now. It's like a book, but it's got a weird binding. It literally says ledger on it. Most people these days don't even know what that freaking word means. And then show us that sign. Turn it to the side. It's used like it's been worked through. Look at this thing. This is an artifact. I have to ask, where on earth did you learn to use a ledger?

[Ava]

When I got my first bank account and I got my first set of checks. My big thing was that if I was writing a check and it didn't get cashed right when I thought it would, I didn't want to spend that money and not realize that I actually didn't have it. So I started using a ledger. I mean, I was undergrad, a broke College student, making $300 a week in my work study job. So I was like, that was the best way that I could think of to just balance and keep track of what I had. And I never let go of it.

[Ramit Sethi]

You never let go of it. So when the two of you got together and got married, started discussing money together, you dusted off this ledger, right? You open up the safe like freaking Inspector Gadget. And then you were like, look at my ledger really proudly. And then Chris was like, all right. And then he basically said, all right, you deal with this. Is that how it all went down?

[Ava]

More or less? Kind of, yeah.

[Ramit Sethi]

Okay. They're both nodding their heads. All right. Okay. So how many years ago was that where you had that conversation?

[Ava]

That was when we got married, so it was eight years ago.

[Ramit Sethi]

Okay. And that kind of tells me that, Ava, you've taken on more of the daily management of the money. Chris, what does that mean for your role as it relates to money?

[Chris]

It's minimal, to be honest with you. I think that we got ourselves to a point where so young, newly employed, earning money, so we're like, oh, we have money to spend, right? And then when we had our first kid, we didn't travel as much and then we have our second child. So, like, we know these expenses are going up, so we know. We know that other expenses have to go down, but it's not necessarily in a way where we're really painting the picture of, like, what that looks like.

[Ramit Sethi]

I agree. I think that's a good way to put it. If I can describe it, it feels very simplistic. I think I understand where we are today. I think I also understand why your conversations feel like you're just spinning. Because one of you, Ava, is managing this money. And the way that you have set the money up is to be worried about it. You have structurally set your day to day management to be worried. Unless you end up with a huge amount of money every single month, there's no way for you to feel good about this. Because guess what you're looking at. Every single month, literally every line is just where money's going out. I actually feel overwhelmed looking at it. You're not actually using numbers effectively, and that's one of the things that I want to show you how to do. Ava is using her ledger, unaware that it might have worked when they were dual income, no kids. But now that things have changed, she clings to the ledger even though it's clearly not working anymore. You can also see that their lack of agreement has caused issues. When their expenses went up, they didn't have the foundation to sit down, talk about their numbers together, and jointly decide how they wanted to reallocate their spending. In fact, they sold their house without really running real numbers. And you can imagine how much trouble their approach will lead them to if they continue this way. I have to tell you, honestly, I'm grateful that we have the chance to talk now before they decide their next move. After the break, we'll explore how they see money together. I know, I'm disgusting. I used to make eggs multiple times a day for protein. And then of course, I wouldn't clean the pan. I would just let it sit there. So by the end of the day, you have this disgusting looking pan and I wake up in the morning like, oh my God. Well, thanks to this episode's sponsor, Our Place, you won't have that problem. Our Place makes beautiful, high quality cookware and appliances free of forever chemicals. My coworker's actually been testing the cookware and loves their titanium Always Pan Pro. It's the first ever non stick technology that's coating free and made without pfas, otherwise known as forever chemicals. She said, we don't even need butter or oil to cook with. It you just move the eggs around, they don't stick and it's really easy to clean. Find out why Our place has 75,000 five star reviews on their award winning products and why they've been mentioned in places like the New York Times. If cooking is part of your rich life, upgrade to our Place and say goodbye to forever chemicals in your kitchen. Go to from Ourplace.com and enter my code RAMIT at checkout to receive 10% off site wide. That's from Our Place.com code RAMIT Our Place offers a free 100 day trial with free shipping and returns. I remember asking my co worker at one of our work retreats, how many cups of coffee do you have in a day? And she told me zero. I love the taste but I'm way too sensitive. It'll keep me up for days. Now that surprised me because I love coffee and I have a whole morning ritual around it. But I realized that some people like caffeine, but they're a little too sensitive for coffee. Enter this episode's sponsor Peak and their coffee alternative Nandaka. With Nandaka, slow release caffeine from probiotic teas provides sustained energy while functional mushrooms and cacao provide stress and gut support. No jitters, no crashes, no sluggishness. My coworker actually drinks it when she has a craving, but doesn't want jitters or the crash that comes along with coffee. Nandaka comes in easy to carry packets that taste like a creamy spiced hot chocolate and for a limited time get up to 20% off Nandaka plus a free rechargeable frother and cup with my link peaklife.com Ramit let me spell it for you. P-I Q U E L I F E.com Rameet R A M I T Now let's get back to our conversation with Ava and Chris. The approaches that you took when you were younger or even single probably have stopped working for you. Now think about it. You have two kids, heavy expenses when kids are young, unpredictable expenses. And even though you're making more than ever, it doesn't really feel like it. So you but your approach has been let's track even more.

[Chris]

I do think that there's a, there's a sense of if at least you can be able to see it in front of you, then you at least have an opportunity to control it.

[Ramit Sethi]

And that's, that's the very thing that you all talked about. And it, it didn't work like you the, the way that you talked about Selling and buying a house was like, hey, I want to look at the numbers. That's what Ava said. And then Chris's response was, I have looked at the numbers. But you never actually sat down and looked at the numbers in a meaningful way together. I think that there's this invisible script you both have that if we look at some numbers magically, we will make the right decisions. But guys, you have the numbers. You don't even look at them for the biggest decision of your life. So either there's something wrong with you, which I don't think there is, or you're not using the right approach.

[Ava]

I definitely don't think we're using the right approach. I thought we were for a while. And as of late I told Chris that when we sat down in Dara CSP a couple weeks ago, I said, I don't feel confident about this. I don't feel like we have a handle on it and I want us to do it together.

[Chris]

It's honestly just haven't shifted from when we were not making a lot of money. The approach is still the same. And I think that's what the issue is.

[Ramit Sethi]

Yes, your money grew faster than your money psychology. You're both playing small. You can keep doing it if you want, but the way I look at it, you will simply keep doing this bi weekly thing for the next 20, 25 years. Ava, you'll continue worrying about money. The two of you will make financial decisions based on whoever argues the loudest or brings it up the most, and that's it. You'll save some money for a vacation because I know you like to travel, Chris, but that's. It seems kind of like a waste considering how accomplished both of you are. Your incomes, the potential here. What do you think?

[Ava]

I agree. I just don't know how to get out of it.

[Ramit Sethi]

Okay, well, I can help with that. What would it look and feel like if the two of you were truly on the same page with your money?

[Chris]

I think we could be able to accomplish more if we were on the same page because we would be able to walk on the same path.

[Ramit Sethi]

Okay.

[Chris]

Together.

[Ramit Sethi]

Okay. Love it. How about you, Ava?

[Ava]

I want to be on the same page. I want us to want the same things and be excited about planning for the same things. I just don't see how we get there in the situation that we are in now.

[Ramit Sethi]

Put the past aside just for two minutes, even put the present aside and dream with me. What would it look like to be on the same page? And I want you to walk me into your house.

[Ava]

We're in a house that has enough room that he wants, has the safety and security that I want for us and our kids. We're comfortable. We are, you know, budgeting for and saving for a vacation every year to go on as a family. We can do those things and just be comfortable about it. Be on the same page about Cool. This is where it's coming from. We got it. We plan for this.

[Ramit Sethi]

I love that vision. How did that feel to say, I.

[Ava]

Feel lighter saying it to. Even though it's not the reality right now, but it just feels exciting.

[Ramit Sethi]

Yeah, I can see it in your smile. Sometimes we even have to just pretend, just for a moment, just to know that something is possible. Because everything you just said to me is extremely possible as far as I'm concerned. I've looked at your numbers. If we were purely talking about numbers, I could get you there and pretty quickly. But obviously, money is way more than numbers. It's about how the two of you come together, show up, change your money, psychology, it's all those things. But I can tell you that, numbers wise, everything you just said, we can make it happen. Okay, Chris, what would it look like to be on the same page?

[Chris]

Bigger house, a yard for the kids to be able to play in, for us to be able to entertain in fire pit with, you know, being able to have friends and family over.

[Ramit Sethi]

Okay. I love these conversations. Have the two of you talked about this stuff? I know you've talked about the house, but have you talked about it under the purview of money? Meaning, hey, how can we use our money to get those goals? Okay, so the conversations are what? Like, we need a bigger house. And then the other person says, like, there's no way we can afford it because the numbers don't. We don't have enough. And then, Chris, you go, well, I've looked at the numbers. We can. And then each person starts to get entrenched on their side of the boxing ring. Right? All right. Do you see the difference in how those two conversations happen? One of them is just like one partner is trying to convince the other. The other's trying to shut the other one down. And it's just a doom loop. It's just you get negative and negative and negative and negative. And you two are pretty young, pretty new to your marriage. Imagine you do that for 30 more years. It's not good. But the other one was actually the opposite. It was an upward loop. It's like, I want this. Oh, that would be amazing. And I would have that and we would do this now. Notice we haven't yet talked about how to make the numbers work, but even just the possibility of dreaming of what you want got you both leaning forward. Did you see that? All right, let's talk about the numbers, because I love the dreams. Ava, can you read off the word in bold and the full number next to it?

[Ava]

Assets, 418,000. Investments, 150,810. Savings, 1300. Debts, 278 to 610. Total net worth, 291,500.

[Ramit Sethi]

All right, cool. What do you all think about those numbers?

[Ava]

They could be better.

[Chris]

I don't look at it as being bad. It's just like, okay, this is what I have to work with. Like, would I like to be able to have my investments grow? Yes, absolutely. Would I like to be able to have my assets grow? Yes, absolutely.

[Ramit Sethi]

Hey, can I tell you how I would answer the question? I would go, I feel really proud. I intentionally chose to have no assets because I'm currently renting by choice. I have a lot of investment because I prioritize that I've created a bunch of rules so that when I have unexpected income, 70 plus percent goes towards investments. I'm doing that because I know the power of compound interest. My savings are currently a little bit low because I just used a chunk of it for a planned vacation and I had a blast. Now I got to build it up for the next one. And then my debt, I have no debt because this is a no debt household. So overall, I feel really good. I have my plan, but I still need a little bit of time to make it work. What do you notice about my answer versus yours, Chris?

[Chris]

You seem like you got a plan forward. You seem more encouraged about it.

[Ramit Sethi]

Yeah, I like money. Not because I like to sit there and log in and kill my dollars and cents, but because money gives me the ability to travel like you like to travel. The other thing I would notice is that I could clearly explain why this number was high or this number was low. In fact, I even knew if the number was high or low for somebody my age and my situation. Right. There's like a deeper level of knowledge about these key numbers. This is what I want you to get to. Both of you. These are some of the most important numbers in your entire life. And I don't want to simply accept, like, oh, it is what it is. No, you chose. You made decision after decision to get those numbers there. So let's own it and let's explain it. And if there are areas where you're not feeling great about it or you want it to be better. Amazing. Everyone has areas of improvement, but at least be clear about why it's this and what it's going to take to get it to the next level. Okay, can we go back to your net worth? It says 418,000, but that's not really true anymore, right?

[Chris]

That's correct.

[Ramit Sethi]

So what is it jumping in? We're throwing lots of numbers at you, so I'm just going to summarize them right here. According to Ava and Chris, the sale of their house will roughly have this impact on their finances. Assets will reduce from 418,000 to 18,000. Savings will increase by 85,000, and debt will decrease from $278,000 to 16,200. Really quick, before we continue on, if you enjoy these videos and you want to be the first to know when we drop a new one, make sure you hit that subscribe button now because it helps my team and me grow this channel. All right, so your total net worth is $237,000, obviously being very approximate here. We're also fiddling with numbers. This is normal. Chris, can you read off your combined monthly income?

[Chris]

16,959.

[Ramit Sethi]

You make $203,000 per year. Your fixed costs. Ava, what's that number?

[Ava]

70%.

[Ramit Sethi]

What do you all think about that number?

[Ava]

It's high.

[Ramit Sethi]

Yeah, it's high. So you know, all this time you've been worrying about the price of gas, but this is really the number that actually matters. You can't get anywhere trying to optimize on the price of lettuce. That's not relevant. It's this number that you have to focus on. So your fixed costs. I'm going to leave your housing how it is for a second. Let's just go through this and then we'll talk about what it looks like now that you've made the decision to sell. So I want to point out a couple of things. Your mortgage was quite low. That was amazing. 1,751 bucks. I added in your utilities and all that stuff. And then I added in even your household maintenance, which was 470amonth. All of that ended up being about 16% of gross income. That's great. That's fantastic. The question is, what's taking you to 70% on a very high income? Well, let's look down. Car payment. Pretty reasonable. I don't have any comments about that. Groceries, 1,000 bucks. I have no comments about that. Phone. All right. Whatever. Subscriptions maybe a little high at 232, but fine. Oh, nanny 2,000 bucks. Okay, that explains it. And in fact, if I just zero this out, just so you can see, we take the nanny away, your fixed cost dropped to 52%. Okay, so what does that tell you?

[Ava]

I was surprised that we were reasonable with, like, household expenses. I always felt like those were high.

[Ramit Sethi]

Yes. Do you know why you thought that? Because the way you set up your infrastructure was constantly pinpricking yourself. All you saw was red, red, red, red, red, red, red. Target, Amazon, da da da, da, da. But you had no comparison. When you look at it this way, in a conscious spending plan, not a budget, you go, wait a second. It's not crazy. Why am I agonizing over this little piece of the overall pie that's actually irrelevant? What is the primary expense that is relevant to your fixed costs?

[Ava]

Our nanny.

[Ramit Sethi]

Yeah, yeah, that's it. The rest of it is fine. And we saw that because if I zero it out, 52%. So when I looked at your CSP, I said, they're not spending anything crazy here. In fact, they have extra money to spare because of how low their housing costs are. So where's it all going to be? At 70%, I still have the nanny. Chris, what meaning do you make out of this fixed cost category?

[Chris]

I've always felt like we live pretty much at our means, but I do think we put a lot of money into, you know, childcare and making sure they're good.

[Ramit Sethi]

What else?

[Chris]

Trying to invest in ourselves as well, too. You know, just mentally, emotionally.

[Ramit Sethi]

I think that the two of you tell yourself a lot of stories about who you are, about what decisions you've made, about what you're doing. You all need to align with reality over here. This is reality. So sometimes you can keep your stories, just set them aside and say, what do the numbers actually tell me? The numbers tell me that this couple has very reasonable housing costs, that they spent a lot of money on a nanny. So they probably have a young kid or young kids. The big takeaway from this is they're spending a ton of money for a temporary amount of time. That's it. No stories, no past, no nothing. It's just cold, hard numbers. The question then is, where's the money coming from? So do the two of you know that answer? Where is this considerable amount of money for $2,000 a month for a nanny coming from? I'm going to guess that basically the two of you just said, like, hey, we need a nanny. Let's look at all the expenses going out the door and we got to find a way to do this. So let's just write the check every month, right? BOTH nodding so that is not the way that I want you to think about money. In order to build a connection about money. And actually in order to become much more sophisticated with money, I want you to think about it a little differently. If you look at the conscious spending plan, there are four key numbers. There's your fixed costs, there's your savings, there's your investments, and there's your guilt free spending. Now each of those has a very specific number that I typically recommend for people. So if my wife and I were discussing a $2,000 a month expense that came up, how do you think we would talk about it?

[Ava]

I'm sure you would probably present it and say, okay, here's the expense that's coming up. How are we going to fit this in? Where is this coming from? Does this pick anything, any of those four categories out of the recommended? And if so, how can we adjust to make sure that we can account for this cost but still keep everything where it should be?

[Ramit Sethi]

That's right. We would start to make trade offs. And you notice that because we would say like, hey, we normally have our savings rate at 10%, but right now if we add $2,000 a month, we can't. So we got to start making some trade offs. We're probably going to have to cut a little bit of our savings, maybe a little bit of investment, guilt free spending. And then we discuss and we have that discussion together versus just feelings. What I did there was show Ava and Chris how to really talk about an added expense. And I want you to do the same thing. If you are considering taking on a new expense, maybe it's a new house, a new car, even a vacation. I want you to use real numbers to decide if you can afford it. The simplest way is to use the conscious spending plan, almost like a game of Tetris. Download the CSP for free, plug in your numbers, and as long as you keep your numbers within the parameters, you win. So if you want to spend $2,000 a month on a nanny, you just have to decide where the money's going to come from. And as long as everything fits, you can do it. Just remember, it's tempting to tap into your investments or savings to pay for something now, but if you do that, it will cost you later. Download the CSP to see for yourself. It's [e-mail] CSP please notice that Ava And Chris have not been doing this at all. They've been having conversations where each person just talks. They share the stories of how they think they should make this decision, how they feel about money. But do you notice that they're not actually using numbers? It's like two chefs sitting around talking about ingredients and taste, but never actually cooking anything. When we come back, we're going to break down how their behavior with money is affecting their relationship in a deeper way. I've got the perfect gift for you to get for the holidays. If you have someone who's impossible to buy for, they already get everything they want and you don't know what to get them. Consider today's sponsor Masterclass. With Masterclass, your loved ones can learn from the best. It's quite amazing. Masterclass is the only streaming platform where you can learn from over 200 of the world's best people. For example, you can learn from Judd Apatow on comedy, you can learn how to be a better cook. With Thomas Keller, you can learn from Steph Curry. Don't know what he's going to teach you. I don't know anything about sports, but you can learn from tons of people at elite levels in their own words. My team has actually used Masterclass as a great gift for the person in their life that's difficult to buy for. I've purchased Masterclass myself and if I was stumped on what to buy someone else, I would consider giving them Masterclass. Plus, there's no risk. Every new membership comes with a 30 day money back guarantee. So consider giving your loved ones a year of learning with Masterclass. Masterclass always has great offers during the holidays, sometimes up to as much as 50% off. Head over to masterclass.com ramit for the current offer. That's up to 50% off at masterclass.com/ramit masterclass.com/ramit There are a few things I never want to do in my rich life anymore. Number one, taking my own returns to the post office. I don't know why, I just don't like it. I love the post office. Great job, very reliable. I just don't want to have to take a bunch of boxes over there and do it myself. Next, finding a doctor, searching for who's in my network, calling around, waiting on hold with reception, not even sure if I need a podiatrist or a dermatologist. And then their office is closed Wednesdays from 2 to 5. Finally you find one and then the next available appointment is nine weeks from now. Thanks to this episode Sponsored though Zocdoc, you don't have to deal with any of that. Zocdoc is a free app and website where you can search and compare highly rated in network doctors near you and instantly book appointments with them online. Once you find the doctor you want, you can book them immediately. No more waiting on hold with receptionists. And these doctors all have verified reviews from actual patients. If I needed to find a doctor right now, this is what I would use. Go to Zocdoc.com/Ramit and download the Zocdoc app for free. Then find and book a top rated doctor today. That's Z O c d o c.com/ramit zocdoc.com/ramit now back to Ava and Chris. Right now, Ava, you are playing Negative Nancy. Whatever Chris comes to you with, you instantly start by saying, we don't have enough and that's off putting right. At the same time, Chris will say phrases like I'm more intuitive with the numbers. I do it in my head. That doesn't work. In a relationship with complex financials where you're making almost 20k a month. There's got to be specificity around how you are talking about money. That is why I think so many of your conversations have been stuck. The way to change is for you to both understand the roles that you are currently playing and understand why. Because if you want to change these numbers, you actually have to totally recalibrate your relationship with money and your relationship with each other. Are you both open to that?

[Ava]

I definitely agree. I don't leave much room for consideration when it comes to new expenses. I don't want to be that way.

[Ramit Sethi]

All right, beautiful then. I feel good. I feel really good so far. Let's continue. All right. We got fixed costs at 70%. It's a little high, but it's a nanny. How long are you going to have the nanny for?

[Ava]

I would probably say at least another year.

[Ramit Sethi]

Okay, great. So I don't mind that. Let's take a look at the rest. Investments are at 3%. Anybody do a 401k or any pre tax investing?

[Ava]

We both do.

[Ramit Sethi]

How much do you put in their total every year?

[Chris]

I'm at 6% of my annual because that's what the match is.

[Ramit Sethi]

Okay, so that's 4,600 bucks. And then what about for you, Ava?

[Ava]

Right Now I'm at 4%. My employer matches 100% of my contributions, but only my first 3%.

[Ramit Sethi]

So that's 9,700 bucks a year. That's really good. That's 800 bucks extra that you are putting in. Look at that. Okay, let me show you what just happened. So their investments currently show as 3% combined. Okay. But I'm going to add their pre tax in here just so I can get a better view on what's going on. And suddenly their investments are at 11%. That's good. I like that. Okay, cool. All right, so let's look. You got your investments at 3%. We'll change it in a second. Your savings are that 1%. Can we talk about that? Why is that?

[Ava]

Because we are paying off the credit cards.

[Ramit Sethi]

Why do you have credit card debt?

[Ava]

Because we overspend on a monthly basis.

[Chris]

Usually this time of year, we put ourselves in credit card debt and then we end up having to pay it off basically with whatever income that may come in. So, like tax money, things like that. August is our anniversary and it's her birthday. So I usually try to, especially this year with birth of a new child and just a lot of transition and everything going on, I wanted to be able to make sure she had a really good birthday. And we were also traveling this month, so we took a trip with the family and we just had added expenses from that that ended up pouring into the credit card. Plus my truck hit 150,000 miles. That was a additional expense. So all that kind of hit at the exact same time.

[Ramit Sethi]

How do you all make decisions about how much to spend on these things?

[Chris]

It's not necessarily something that we discuss. Can we do. It's, you know, we need to just find a way to make it work.

[Ramit Sethi]

I don't think it's acceptable to go into credit card debt at $200,000. No way, no how. And I especially do not think it's acceptable to go into credit card every year and then pay it off with a tax refund or hope that something else comes our way. In order to live a rich life, you have to be extremely clear about what is acceptable and what is not. In my family, no credit card debt. No way. Okay. Have you all had a conversation where you talk about the culture of money? What is acceptable and what is not in your family? No. Both shaking their heads? No. So if you haven't had that conversation, it's no surprise that you're in, in and out of debt. I understand that August is a big month for birthdays, et cetera. I get that. What would be a different way that you could handle those expenses, knowing that you're probably going to spend a little bit more than usual? That month.

[Chris]

I mean, if we know it's going to be something that's going to happen on an annual basis, we need to be putting away for it.

[Ramit Sethi]

Exactly how much you want to put.

[Ava]

Away for it Every month we're putting at least like $200 away for the next big thing.

[Ramit Sethi]

Okay, 200 bucks a month. So that's 2,400 a year. And that would cover what?

[Chris]

That would cover the trip that we normally take at the end of August every year. Any sort of birthday, celebration, anniversary. Usually we do a dinner.

[Ramit Sethi]

Okay, let me put this at 200 bucks a month. Okay, so. So your savings goals just went from 1% to 3%. Good job. I think this is great. This is exactly how you plan for expected expenses. You know that you have a family event every August. Put money aside for it. And if you do it every single month, it becomes quite a manageable amount. Right. It's totally fine. Where's the emergency fund?

[Ava]

We don't have an emergency fund. So if we're replacing tires, if the something goes out, we're putting that on a credit card.

[Ramit Sethi]

That's not an emergency. An emergency fund is a true emergency. Like one of you gets laid off, family member gets sick, and you have to hop on the first plane. That is an emergency. Are you aware that if one of you lost your job, that the two of you could last about one week?

[Ava]

I never looked at it that way.

[Ramit Sethi]

You've all been so busy focusing on a lot of busy work with numbers that you have totally missed out on the important parts of setting up your financial infrastructure. Two parents earning parents who have two young kids. This is a very high risk situation you're in. Your Savings account was $1,300. That's enough for about a week. Like, that's it. And then suddenly you start to have to make really, really bad decisions because your back is up against the wall. What do you make of that?

[Ava]

I think I end up going by every month just hoping nothing crazy happens.

[Chris]

It doesn't feel good. And especially for somebody who has been unemployed multiple times, you don't want to put yourself in a situation that basically we're putting ourselves in right now.

[Ramit Sethi]

Yeah. And luckily everything is going okay right now. But you all know that one day it won't. That's life. People get laid off, people get sick. Things happen. And with two young kids, you cannot be exposed to this kind of risk. Are you starting to see that the way that you both relate to money is why there are these issues with your csp? You have the money, we could fix this all quite quickly. But the fact that no one has brought up the idea of an emergency fund and actually suggested this is what we need to do. The fact that you're being caught by surprise every single August and you have not come up with something a little bit more forward looking, that's a problem, right? We can fix it. Let's get down to the guilt free spending 2,988 bucks a month. You added household supplies, et cetera. 500 bucks. Fun funs like eating out, nails, hair, et cetera. 400. And then social, such as eating out, baseball tickets and kids activities. 500. Are those numbers accurate?

[Chris]

Yeah, those will be accurate, yep.

[Ramit Sethi]

All right, so that's 1400. So where's the other 1500?

[Ava]

That's where I think we got a little bit confused. I looked at that and I was like, we don't spend 3,000amonth on everything else.

[Ramit Sethi]

Where's your debt payments? I don't see them in fixed costs. Where's your credit card debt payments?

[Ava]

They're not in fixed costs because it's essentially what's left over what we feel comfortable paying.

[Ramit Sethi]

What does that mean?

[Ava]

Every two weeks, I'll sit down, we'll sit down. I'll pay the bills and say, okay, we have X amount left over for the month. Well, let's take this chunk of it and put it toward the credit card. Some months it pays it off, some months it doesn't.

[Ramit Sethi]

No, can't do this anymore. Do you all realize why I'm so alarmed?

[Chris]

Yeah, I get it. Because basically anything goes wrong, we can't get ourselves out of it.

[Ramit Sethi]

Correct.

[Ava]

And Ava, there's no like, there's no plan.

[Ramit Sethi]

This system is a mess. No wonder this is so confusing. Your credit card debt should be consistent because it allows you to project. It allows you to know exactly when you'll be debt free. And most of all, it's not focusing attention on all these random things. How much do you pay?

[Ava]

We at least pay 500 on the card.

[Ramit Sethi]

500 bucks a month? Let's put it. Look at watch here. Debt payments, which currently says zero. It's not zero, it's 500. Watch this. Watch what happens to this fixed cost number. Are you ready? It jumped up to 74%. That's not sustainable. 70 I can work with. Just because temporarily you're young parents and you have a nanny. Fine, 74%. No way. This is a problem. And we have to still acknowledge that you're only saving 300 bucks a month. That's Also not acceptable. You're at way too much risk. The two of you realistically need something like, if we look at your fixed cost, which is about 8,000 bucks a month, you need at least $24,000 in an emergency fund that you do not touch. What do you think about that number?

[Ava]

It feels a lot.

[Ramit Sethi]

You cannot save up an emergency fund in one month, six months, even 12 months. It often takes years. I don't mind that. But the fact that there's nothing being saved towards it is a huge problem. There's a lot happening here, and the more I ask, the more alarmed I get. The first lesson is that people's money behavior is just an output of how they think and feel about money. That's why it's so important to spend time understanding your money psychology, not just playing whack a mole with random behaviors that you exhibit. For example, Ava feels the need to control her money system. That's why she uses a ledger. That's why she laboriously tracks all of these numbers even though they're in credit card debt. It's clearly not working. But the more it's not working, the more she feels the need for control. It doesn't matter because people respond to their feelings, not to numbers on a page. Next, my wish for you is to set high standards for yourself and for your relationship. They make $200,000 a year. It's not acceptable to go into more debt for random expenses. I want you to start using phrases like this. That's not acceptable for us, or in this family, we prioritize expenses. In other words, I deeply want you to know, what do you stand for? What kind of money culture are you creating for yourself? Please remember they have kids who are always watching. Now they have time. They can make changes. That is why I'm so hopeful for them. And after the break, I'm going to talk to them about their strategy. I recently spoke to a mom who spends all of her guilt free spending on clothes for her kids. And she admitted that she herself can't even afford to get a manicure. If you're a parent and you would do anything for your kid, one of the best things you can do is to make sure they are protected in case you get hit by a bus tomorrow. And that means not just buying them things, but making sure that you have term life insurance. Because if, God forbid, something does happen to you and your family is not protected, that could be devastating. Today's sponsor fabric by Gerber Life gets that. If you have people who depend on you, you want to make sure that they are protected in case something happens to you. You do that often with term life insurance. Fabric by Gerber Life is term life insurance you can get done right here, right now. You could be covered right from your couch in under 10 minutes with no health exam required. Fabric has flexible, high quality policies that fit your family and your spending needs like a million dollars in coverage for less than a dollar a day. It's all online, it's on your schedule so you can apply when it's convenient for you. There's no risk because there's a 30 day money back guarantee and you can cancel at any time. They have over 19005 star reviews on Trustpilot with a rating of excellent. So join the thousands of parents who trust fabric to protect their family. Apply today in just [e-mail] ramit that's M E E T fabric.com/ramit me T fabric.com/ramit the policy is issued by Western Southern Life Insurance Company. Not available in certain states. Prices subject to underwriting and health questions. Welcome back. Let's keep going.

[Ava]

I think what you're saying is a lot of what I've been feeling but just like didn't know why and now it makes sense. I probably was feeling nervous because deep down if something happened, I didn't know how we were going to get through it.

[Ramit Sethi]

I think that's probably true. I think people have intuitions and clues, but when it comes to money, your intuition is not enough. You have to back it up with actual numbers. You have to use percentages and real numbers. And if you don't, it's actually really frustrating for your partner because they just see someone who's constantly worrying, constantly looking at what can go wrong and there's no actual facts. So that's why in order to be really good with your money, you have to know your numbers and you have to master your money psychology. Both of those things that will help you really improve.

[Chris]

I can see now how much I've decided just sit back and just be like, look, you're not really open to too many ideas at this point. So I'm just going to let it be. But letting it be obviously is worse than me just constantly trying to have the fight.

[Ramit Sethi]

I think that if you immediately assume that when we talk about money, we fight, that's a problem. Because talking about money should not be fighting. Talking about money should be joyful. It should sometimes just be routine, like taking out the trash and there should be a vision. So what I want to do is kind of just flip it right now. I want you two to tell me what you would like to do with your money.

[Chris]

I want to put money away. I want to actually have savings accounts that are dedicated to doing things in the future so that I don't feel like every time I'm asking to do something, we have to figure out, where's the money coming from?

[Ramit Sethi]

Hey, how much? I love the vision. How much?

[Chris]

I really would love to be able to put anywhere between 500 and $1,000 a month. I'd love to just be able to put off to the side and it.

[Ramit Sethi]

Can be earmarked a thousand bucks a month. I love that vision. And what would you put the money towards?

[Chris]

Vacations, gifts, maintenance, and then your oops fund. You're just like, hey, something happened and we need to be able to take care of that, and we have somewhere to be able to pull it from.

[Ava]

I love that vision. I remember that vis. Before kids, one of the most fun vacations that we had right after we got married were vacations that, you know, we had planned for. It was the best feeling in the world. Everything was paid for. And that. I want that feeling every month, not even just in vacations, but just a new month. What do we want to do this month?

[Ramit Sethi]

Great.

[Ava]

We have this feeling because we planned for it. I want to, yes, dream, but I also want to marry that with. Okay, logistically, like, tactically, numbers wise, what does this look like?

[Ramit Sethi]

Beautiful. Beautiful. Chris, it's got to feel good to hear a different response than the typical negative Nancy one.

[Chris]

It does.

[Ramit Sethi]

I like seeing the two of you have that conversation. And it turns out that, Ava, you actually agree that's pretty cool to me. That's. That's 80% of the battle right there. You both have said something that's important to you. Now let's talk about how to make it happen. But put these numbers up on screen, and I want you to tell me, what do you want to do?

[Ava]

I feel like we should be realistic about. Okay, you know, rent, mortgage, like that line item going away or going down.

[Chris]

The only thing that I worry about as far as taking that line away is that eventually that line's coming back.

[Ava]

Right? And it's going to be more.

[Ramit Sethi]

Tell you what, let me show you how to deal with it in both ways, okay? We can't ignore the fact that you currently have zero rent, which means you're going to be saving a lot of money every month. We got to use that time. We can't pretend like it's not Real. It's real. And by acknowledging reality, that allows you to make that reflect on the plan and you will create a plan for when you go and get your next place to live. Okay, so let's start with reality. You are in a situation where you're going to be paying no rent. So what do you want to do?

[Ava]

So can we just earmark, let's say we'll call it rent. It's 500amonth.

[Ramit Sethi]

I love it. Okay, 500amonth. What else do you want to do on the fixed costs?

[Ava]

I mean, we can take away utilities.

[Chris]

The grocery bill should go down 800.

[Ava]

I would welcome the challenge of getting it to 800amonth. So yeah, let's go with it.

[Ramit Sethi]

Pick another category.

[Chris]

Household maintenance. Zero.

[Ramit Sethi]

Nice. Done. Ava and Chris's guilt free spending is currently at 26% and that's too high. Especially since they have a $2,000 per month nanny cost. They probably need to reallocate some of that money towards fixed costs. I'm also concerned how low their savings rate is and I want to start funneling money in that direction. Listen, as I walk them through that and please notice where I push them harder. You talked about wanting to do $1,000 a month for savings. Let's start there.

[Ava]

Yeah, I think it makes the most sense to start with a long term emergency fund.

[Ramit Sethi]

Great. How much you want to put there? 500. Nice. Let's put 500 down, see what happens. We can always change it. Love it. 500 bucks. We're currently at 7% on the savings. We're moving in the right direction. I love this. 500 bucks a month towards your emergency fund means what? Fast forward one year, how much are you going to have in that emergency fund?

[Ava]

$6,000.

[Ramit Sethi]

Now let's make meaning out of that number. Look up here. Your fixed costs per month are how much?

[Ava]

6,000.

[Ramit Sethi]

6,000 bucks. So what that tells you is by the end of an entire year, you will have one month of an emergency fund saved up. What do you think about that?

[Chris]

It's progress.

[Ava]

It's more than we have now. It's the fact that it took a year to save a month. It is progress. It's more than we're doing now, so it's somewhere to start.

[Ramit Sethi]

At 200k per year, you can do more than 500 bucks a month. Embrace the fact that you are young parents right now. You're not going out to bars all the time. You're at home. Let's build up financial security now so that over time we will look back and thank our young 30 something selves. Go bigger than 500amonth. This is too low.

[Ava]

Let's do a thousand.

[Ramit Sethi]

If you do that for 12 months, how much do you have?

[Chris]

12,000?

[Ramit Sethi]

Yeah, 12,000 bucks, which is two months of an emergency fund. That's bad.

[Ava]

Yeah, that makes me feel better.

[Ramit Sethi]

That's not bad at all. Beautiful. So I like where we're going. I like it. Let's stay down here in savings. Chris had talked about wanting to save up for August trip, birthday and anniversary. You're currently saving 200 bucks a month for that. Are you good with that?

[Ava]

I'm okay with that, Chris. Are you?

[Ramit Sethi]

Chris, can we add, say, 200 bucks a month for just a Life Happens fund? What do you say? Notice what's happening to these numbers, these savings goals. The savings percentage is 12%. That's actually quite reasonable. Typically, I recommend 5 to 10%. The two of you are young high earners, so your savings should actually be higher. Especially because you have basically no emergency fund. Your fixed costs are right down the middle of where I recommend 50 to 60%. So what this tells me is if we have 55% fixed costs right now, we should be using that money elsewhere. So the question becomes where do we want the money to go? Anybody want to tell me? Tell me.

[Chris]

We don't have a car maintenance line.

[Ramit Sethi]

You want to put some extra money in the car maintenance? Let's do it. Car payment and transportation. All right. Put an extra $100 aside per month for something really bad to happen to your car. I'm going to put an extra 100 bucks in your savings account and we'll just call it Life Happens. Okay, Great. You're at 13% savings. I don't mind. That's solid. That's good. Okay, great. Hey, does anyone care about investments at all? Like how the hell are we talking about freaking breaks? And we're not talking about investments, which is worth a lot of money.

[Ava]

I think we both just assumed because we're contributing to a 401k that was.

[Ramit Sethi]

And now in my opinion, we have spent so much time focused on little expenses, which I'm okay with. I'm here to meet you where you are. But when I am talking about money, I'm talking about investments because 99% of the value is created in that section. So I would like to spend a lot of time talking about that. Let's take a look at the numbers here. Here's a simple compound interest calculator. You currently have $150,000 invested. Great job. That's awesome. Let's play it out. You are currently investing 9,700 bucks. I always use 7% as a very conservative calculation. Let's take a look. $1.8 million.

[Ava]

That was definitely way more than I thought.

[Ramit Sethi]

But go ahead, finish the sentence. I want to hear what the the second clause was, but I don't know.

[Ava]

If it's going to be enough.

[Ramit Sethi]

Oh, okay. So then tell me this, how much is it now?

[Ava]

I would like to be able to say we could spend 200 to 250,000 a year.

[Ramit Sethi]

If you want $250,000 a year, then you would need 6.25 million. What do you think of that?

[Ava]

It's pretty unattainable right now.

[Ramit Sethi]

If it's unattainable, maybe you don't need it. Sometimes people pick an unattainable goal and then they get down that they can't achieve it. It's like me saying I want to run a 3:15 mile and then I'm like, oh ho hum, I'm so sad I can't run it. It's like, no, it's not possible. I don't even run, so why would I get depressed about a goal that's just made out? Secondly, when you say you want to have $250,000 a year to spend, I can respect that. But I think also I don't actually see evidence on your spending that you are a couple that would need $250,000. Your day to day expenses are quite reasonable. Right.

[Ava]

And we're not still going to be paying a nanny at that age.

[Ramit Sethi]

No nanny, not investing anymore. You don't need that stuff. Right? That's a lot of money. So I'm sharing this because this is how you start to get more nuanced about the numbers that you pick. And we could kind of tell because I love that you picked a number. You were like 250k. Okay, great, 6.25 million. Then you both were like, oh sus. But when it's that far off, you start to go, maybe my number was wrong, maybe my assumption was wrong. And it was, you don't need that much. So that's good news. Let's talk about what you can do. I want to show you some stuff. Okay. How much do you currently have in your savings account as a result of the sale of the house that you will get next week?

[Chris]

Just say conservatively 80.

[Ramit Sethi]

What will we do with $80,000? Have you all talked about that?

[Ava]

Really? No. I think eventually we both are on the same page that we'd like to then apply that to a down payment for the next house when that is. But in the meantime, before that, we haven't talked about what we do with it.

[Ramit Sethi]

Please notice the consternation on my face. How do you think that I would deal with having a large sum of money coming into our household?

[Ava]

You would probably look at areas of your CSP that maybe weren't hitting where you wanted them to.

[Ramit Sethi]

Good. What else? Would I just do this on my own?

[Ava]

No. You talk about it with your wife. Absolutely.

[Ramit Sethi]

How would I bring it up?

[Ava]

Hey babe, we're going to have $80,000. Let's sit down and talk about what we're going to do with it.

[Ramit Sethi]

AK this is awesome. We're going out to a great restaurant, we're going to have an amazing meal, we're going to get a coffee and walk in the park. What are your dreams? What would you do if you could take all 80k and do anything you wanted? And then she dreams and I go, you know what I would do? I would do this, I would do that. But also, what do we want to do in our rich life together? Notice that I'm excited. I can't think of the last time the two of you were excited talking about money. And you can tell because you have $80,000 and neither of you have even thought about getting excited regarding discussing this money. Do you see that it's time to turn the page with money and create a new chapter for both of you? Yeah. That's how you do it. And let's talk about it right now.

[Chris]

I would like to have a considerable amount go towards a down payment because I think that if we put a good chunk of it down on a reasonable house, then that significantly lowers our monthly payment.

[Ava]

I agree with that. I think that we are, we are lucky in that we have a chance that a lot of people don't get to temporarily almost like wipe the slate clean. Right. So I'd like to take a chunk of that, pay off the credit card debt that we both agree we don't need and shouldn't have. I think we should then decide what we're comfortable with a chunk of putting aside from an emergency fund, and then, yeah, take the rest and put that away for a down payment.

[Chris]

Is there anything that you would like to do since we now have this money that we probably aren't going to have for a while? Like, do you want to go anywhere? Do you want to do something for yourself or for the family?

[Ava]

This is where I'm glad to have you because you provide that other. Whereas my mind automatically goes to anything extra. We put it to debt. So, like, yes, we'll wipe out the credit card. Let's go somewhere.

[Ramit Sethi]

I love that conversation. Here we go. 80,000 bucks. How much you want to pay off the credit card debt?

[Ava]

All of it? Yeah.

[Ramit Sethi]

Great. What's next?

[Ava]

Fund an emergency fund.

[Ramit Sethi]

How much?

[Chris]

10.

[Ava]

That's exactly the number I had in my head.

[Ramit Sethi]

Okay, I like this. This is when you start to actually get on the same page. Whoa. And what does 10 mean to you? Why 10?

[Chris]

Ava loves even numbers.

[Ramit Sethi]

Hold on. That's like when I asked my mom one time, my mom told me that she does a leg press at the gym, and I was like, wow, mom, leg press. That's pretty cool. I go, mom, how many reps do you do? And she goes, four. I said, wow. Rep range of four. That's very interesting. Mom, how did you choose that? She goes, four for four kids.

[Ava]

That's adorable.

[Ramit Sethi]

Too cute, right? So, all right, that's kind of like the answer I just got from you. 10k. Because you both like round numbers. Now, I like that the two of you are saying you want to put some towards your emergency fund. I think that is correct. What I would like to see you doing, both of you, is actually using your conscious spending plan. Look at this. I would simply go up here and say, oh, my gosh, we need six months of an emergency fund. So when you both say 10k, if you go, hey, let's do 10k, because it's one third of the way there, I can get behind that. If you just pick 10k out of the orbit. No numbers are based on other numbers. We need to actually start using our numbers. And that is what my challenge to you is.

[Ava]

Actually, I think that's a good point, Chris. What I'm thinking is we're on the same page. So that 10k gets us at the base to start, but then we've also accounted for contributing additionally to that on a monthly basis.

[Chris]

What I don't want to necessarily do is fully fund everything. We need to actually set up some sort of a routine.

[Ramit Sethi]

Yes.

[Chris]

We're used to actually paying it.

[Ramit Sethi]

Yes, yes. Good. Great. That's exactly the point, because you could pretty much fund a lot of stuff right now, but the problem is your habits wouldn't change at all, and then you would be back in debt. And when you go to rent or buy a place, you would be in big trouble. You need to be thoughtful about. How much of this money are we using? For one time, things like paying off credit card debt. That's a no brainer. That debt is toxic. Get rid of it and never get back into credit card debt. Your emergency fund. I think 10k is reasonable. And then you want to take a trip. Give me a number.

[Ava]

I think we can go somewhere for 2000.

[Ramit Sethi]

That's solid. You currently have spent $18,500 of your 80k. Okay. Can I show you something? I want to take you back to investing for a second. Everyone's like, let's take a vacation. Let's pay off this and that. No one ever thinks about putting money in investments. I have a rule for myself. With unexpected income. This is at a more advanced level where you create a rule of what you will do when you get unexpected income. And you do it on percentages and it just goes through the funnel. Something like 70% goes straight to investments. What message do you think that sends to my wife and to me?

[Chris]

That you're looking out for the future.

[Ramit Sethi]

That's exactly right. And it's not even a question we're not asking each other. This is just a decision that was made. So let's play it out. Let me just show you what happens if you take an extra $30,000 just to show you what happens. You're now at $2.2 million. We're talking about hundreds and hundreds of thousands of dollars. From one decision you made once. What's your conclusion?

[Ava]

I like to see the longer term impact that one decision has. What I get nervous about is the balance of taking care of our future, but also not screwing ourselves in the now. We will get to a point where we want to move again, buy another house or, you know, whatever, and want to make sure that we haven't, that we don't put ourselves in a situation where we have nothing for that.

[Ramit Sethi]

I agree. You should have a very healthy amount of liquid cash for when you move. I think that this is when the two of you start to discuss things like when would we want to move, how much approximately would we spend? Are we going to buy? Are we going to rent? What fits our goals at this stage of our family right now? You took a step, you know, you just said, look, we're going to sell it, but there's no vision. You don't know which direction you're going. It's like you're walking in the dark. In order to truly know what to do with this considerable amount of money, you actually need to be thinking three, four or five steps ahead.

[Ava]

Those are the things that I've been thinking about. But we haven't talked about just together, the two of us.

[Ramit Sethi]

Why don't you do it right now?

[Ava]

I'd like to be settled before school starts next year.

[Chris]

I would like to buy now. I'd like to buy in the spring.

[Ramit Sethi]

All right, you're all basically on the same page. You guys see how easy it is Sometimes it's like we don't need all this preamble. Now, here's my question to you. Have you looked at the numbers for a potential house that you would buy?

[Chris]

Yes.

[Ramit Sethi]

Okay. What's the. What is the price of that house?

[Chris]

4:20.

[Ramit Sethi]

Okay. And the monthly.

[Chris]

The monthly would end up being, I think, with taxes, like 2,700.

[Ramit Sethi]

Okay, let me show you the numbers. So that's Your monthly payment. $2,945. However, is the payment going to be actually higher or lower than that number?

[Ava]

Payment's going to be higher because mortgage is the minimum that we're going to pay.

[Ramit Sethi]

Bingo. So we're talking about, in my opinion, in my high cost of living area, I literally add 50 plus percent onto the price of the monthly payment. So in my case, if this was a $3,000 payment, it would actually be $4,500 a month total. When you factor in transaction costs, probably new furniture, all kinds of stuff, maybe $3,600 a month. What's your current payment?

[Ava]

1751.

[Ramit Sethi]

More than double. What do you make of that? What's going through your head?

[Ava]

My initial response was to go back to negative Nancy. I don't know how we could do that with childcare costs currently.

[Ramit Sethi]

Good news. We actually have a conscious spending plan. We can plug it into right now and see. You want to do it? Sure. All right, so this is a future state. Like a year from now, you are not living at home anymore. So let's just make that mortgage. Let's be really conservative. Okay? Really conservative. 3,700amonth. Your debt payment, we could take that away because you all paid that off. Good job. We're down to 78%. Car payment still going on. Groceries, you're at 1,000 bucks. Fine. Not changing that phone, not changing subscriptions, not changing childcare.

[Ava]

It might go down a little bit. We'll target like 1500.

[Ramit Sethi]

1500. Okay. Any other changes we want to make.

[Ava]

That 1500 is inclusive. Like, we could get rid of the preschool line item.

[Ramit Sethi]

Oh, beautiful. Let's take that out, too. Okay, great. Beautiful. You all ready to look at the fixed cost number now? 71%. It's too high. This is how you actually Start to plan for major purchases. First, we took a house price that you gave me. We plugged it into a mortgage calculator. Then we took the numbers and we added on extra because we know that there's going to be additional costs. Then we came into our CSP and we plugged it in and we adjusted all the things that are going to change. And now we look at our numbers and what does it tell us?

[Ava]

Fix costs are still too high.

[Ramit Sethi]

Correct. This is the very minimum of what you've got to do when it comes to major purchases. This is the basic expected level of financial rigor. Chris, what's going on in your head?

[Chris]

It's nice to have something that you can be able to plug in and be able to actually see just right in front of your face. If you can and cannot be able.

[Ramit Sethi]

To afford it, my guess is in order to make your fixed costs fall to roughly 60%, my guess is the house you could afford is like $340,000 or so.

[Chris]

When we first started, you said that it was okay that it was at 70 because we were paying for the nanny. Is it purely the nanny? I just want to be able to make sure.

[Ramit Sethi]

I love this question. This is a great question, very specific. We're currently at 71% of fixed costs. 71% may be okay if it's temporary. However, buying a house where you are putting your housing costs higher, that puts you at a higher risk. I will say that the housing costs themselves are still pretty reasonable. So it's not a crazy housing expense. I'll tell you that it is. That you have a nanny for 1500 bucks as well as these other expenses. Let's play it out though. Let's see. Let's just play and see what happens. All right, let's. Let's say we take away the kids chiropractor subscriptions. No way. Are you kidding me? All right, that's at 50. Childcare, we keep the same groceries, 800 bucks. We're at 66%. Let's keep looking. So right now you can see that you currently have $961 a month to spend on guilt free spending. I don't think that's enough for the two of you. The good news is that you do have money set aside for things like your trip and life happens fund. All of those are fantastic. But 8% is extremely low in your case. My gut says I would do something like 15%. Okay. So what I'm doing now is I'm basically treating this like Tetris. I'm like what? Numbers make sense in each of these categories so that you have enough for guilt free spending. Because if you don't have enough for guilt free spending, guess what happens.

[Ava]

Credit card debt.

[Ramit Sethi]

Exactly. The two of you are just going to stop paying attention to any of this, be like this csp, and you're just going to do what you've done in the past, which is to get in a credit card debt. And that is catastrophic. So we got to give you enough healthy amount of spending. The crux of the problem here is that you are living day to day, month to month, but there's no vision. You have $80,000 or so coming your way. You have two things to think about. First off is set the money aside for a second, put it in a savings account. You got to build up a healthier csp, and you can do that specifically because you're so fortunate to be able to live with your family for a while. You are in the mode where you can save and invest a ton of money for the next six to 12 months. I highly encourage you to take advantage of that. If I were in that situation, I would be trying to aggressively invest knowing that every thousand dollars I put in now as a young couple will turn into so much more down the line. That's number one. Number two, I would build a healthier relationship with money. First. It would start by how we talk about money. The two of us would be talking about money regularly, positively, proactively, and we would actually be making big decisions, not smaller ones. You've seen that we're now talking about millions of dollars with compound interest. I would take the money from the house. I would immediately pay off the credit card debt. That's an absolute no brainer. The rest of it I would keep in a savings account and I would have a series of discussions about what do we want to do with it. Finally, the house. That's the kind of elephant in the room. I want to encourage you to really slow down and think about where your next housing unit is. Sometimes buying is not always the best decision. And in your financial situation, you might be able to make it work. You might. But things would have to go right in a lot of different ways. Like a lot. I would encourage you to really think about it before you jump in to any major purchase. You actually have this pivotal time in your life where you two can take control of your money. What an amazing opportunity for Ava and Chris to lay the groundwork for their rich life. I want to thank both of them for coming here and talking with me. Their story indicates the importance of having a shared rich life vision and talking using actual numbers. Let's hear what their follow ups are. Let's start with Chris.

[Chris]

What I learned is that it was a better way to handle our finances and our current approach to basically just tracking our expenses really kind of made us more worrisome than anything else and really weren't getting to the bottom line of what we really wanted to be able to accomplish. I think what surprised me was that basically us trying to make it work when our finances on a month to month basis translated into a basically a lack of respect for our money because we were not really saying no very often when it came to our finances. We weren't going broke, but we're definitely setting ourselves up on a path in which we couldn't really build and we would just be disappointed in our actions on a month to month basis.

[Ramit Sethi]

And now let's hear from Ava.

[Ava]

My biggest takeaways are that managing money is less about the actual practice and more about establishing a healthy mindset in psychology around money. Chris and I have spent time discussing and deciding on what we're calling our non negotiables that will guide us moving forward. We came up with we do not carry credit card debt, we pay ourselves first. We make big financial decisions together and with the specific plan and we use our CSP to guide our financial approach. We say no or not right now if it does not fit. Some of the specific changes that we're making are that we're burning our register and killing our expense tracking spreadsheet. We've decided to move to YNAB as a way of keeping a track on our finances, which now will all be automated. We close on our house next week and we're immediately going to pay off the $6500 in credit card debt and put 10k to fund our emergency fund. After that we'll leave the rest in a savings account. While we take advantage of the time and opportunity we have not paying a mortgage to be aggressive about saving for our future, we've decided that investing is going to be a priority.

[Chris]

They called it the happiest place on the high desert, home to a tight knit group of 30 somethings who like to party.

[Ramit Sethi]

It starts as a Playboy Channel fantasy, but this is real life where passion leads to murder and a killer seeks.

[Chris]

God's help with the COVID up. I'm Josh Mankiewicz and this is Deadly.

[Ramit Sethi]

Mirage, an all new podcast from Dateline. Listen to new episodes for free each week. Wherever you get your podcasts.