173. “We spend 113% of what we make—but can’t do anything to fix it” (Part 2)
In this episode of the "I Will Teach You To Be Rich" podcast, a couple shares their financial struggles stemming from excessive spending on their three young children. Their monthly expenses, including $985 at Amazon, $563 at Target, and $1,000 on groceries, exceed their income by 13%.
Host Ramit Sethi unpacks the psychological barriers preventing them from curbing spending, such as an "all or nothing" mindset and an inability to say "no" to children's demands. He emphasizes the need for unified financial goals rooted in shared values, strategic spending cuts, and involving children in money decisions. By creating and adhering to a financial roadmap, the couple can regain control and reshape their spending habits.
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1-Page Summary
The couple's financial challenges and overspending
A couple is grappling with severe financial chaos due to excessive spending on their three young children. Caller #1 admits to a cluttered household overflowing with kids' items. According to Ramit Sethi, their monthly expenses include $985 at Amazon, $563 at Target, $1,000 on groceries, and $648 on miscellaneous costs - far exceeding their income with fixed costs at 113%.
The psychological and behavioral barriers to change
Despite Sethi proposing cuts to their spending, the couple struggles to acknowledge the severity of their financial situation. Callers express resistance, doubting smaller reductions will make an impact. There's a reluctance to set spending constraints, stemming from an "all or nothing" mindset and feelings of deprivation when considering cuts.
Notably, Sethi identifies their inability to say "no" to children's demands as a root issue. Caller #2 shows willingness for gradual progress but clarity on a unified approach is lacking.
The need for a unified financial vision and plan
Sethi emphasizes the couple's need for a clear, shared vision aligning their spending with values and priorities to escape their financial turmoil. Without envisioning their desired lifestyle, parents risk spending without focus. He urges open discussions to establish goals, make intentional decisions, and reshape their fixed cost percentage through strategic cuts.
Caller #1 realizes the importance of planning for valued areas like date nights. Creating and adhering to a synchronized financial roadmap is key.
The impact of their parenting approach on finances
The couple's inability to set boundaries by saying "no" to their children is a driving force behind their spending woes, according to Sethi. Their pattern of purchasing excessive items and activities stems from a desire to be "heroes" without considering long-term impacts.
To regain control, Sethi suggests cutting back on certain activities as a unified front while involving children in financial decision-making. This approach can instill financial responsibility in kids while easing the family's financial strain.
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Additional Materials
Clarifications
- Fixed cost percentage is a financial metric that calculates the portion of a person's income allocated to essential, unchanging expenses like rent, utilities, and loan payments. It is crucial because it indicates how much of one's income is already committed to these fixed obligations, leaving less flexibility for discretionary spending or savings. A high fixed cost percentage can signal financial strain and limited room for adjustments in case of unexpected expenses or income fluctuations. Monitoring and potentially reducing this percentage can help individuals achieve better financial stability and flexibility in managing their overall budget.
- A synchronized financial roadmap is a detailed plan that outlines a couple's financial goals, strategies, and actions in a coordinated manner. It involves aligning both partners' visions and priorities to achieve financial stability and success. This roadmap helps ensure that both individuals are on the same page regarding their financial decisions and actions. By following this roadmap together, the couple can work towards their shared objectives and navigate their financial journey effectively.
- Involving children in financial decision-making typically involves age-appropriate discussions about budgeting, saving, and spending. Parents can explain the family's financial goals and constraints to children in a transparent manner. This process can include allowing children to contribute ideas on how to save money or prioritize spending. By involving children, parents can teach valuable lessons about money management and foster a sense of responsibility early on.
Counterarguments
- While the couple's expenses exceed their income, it's possible that some of the spending categorized as "miscellaneous" could be essential or non-negotiable costs that were not properly accounted for.
- Resistance to making significant cuts in spending might be due to a lack of understanding of their financial situation rather than a simple reluctance to change spending habits.
- An "all or nothing" mindset might stem from past experiences with budgeting that were too restrictive and led to unsustainable lifestyle changes.
- The inability to say "no" to children's demands could be a reflection of deeper issues such as guilt, peer pressure, or a lack of alternative parenting strategies rather than just a financial discipline problem.
- A lack of clarity on a unified approach to financial changes could indicate a need for better communication or financial education, rather than just resistance to change.
- The need for a clear, shared financial vision might be complicated by differing values and priorities between the couple, which requires more nuanced discussions and compromises.
- Open discussions about financial goals are important, but they may not be sufficient without professional guidance or support systems to help implement those goals.
- Planning for valued areas like date nights is important, but the couple may need to find more cost-effective ways to enjoy their time together rather than cutting it out entirely.
- The couple's parenting approach and desire to be "heroes" might be influenced by societal expectations or personal upbringing, suggesting that broader cultural factors could be at play.
- Involving children in financial decision-making is beneficial, but it should be age-appropriate and done in a way that does not cause undue stress or burden on the children.
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The couple's financial challenges and overspending
A couple is facing severe financial challenges due to their excessive spending habits, particularly related to their three children.
The couple's household is in a state of "chaos" due to excessive spending on their three young kids
Caller #1 admits to a house cluttered with “way too much stuff,” and Ramit Sethi labels this glut the result of buying excessively for their kids, thus causing household chaos. The day-to-day life reflects this disorder, and the sheer volume of items is overwhelming their living space. The couple has acknowledged that their spending patterns are chaotic and have led to this situation.
Caller #1 talks about the various items and activities they spend money on for their children, such as water shoes, baby wipes, snacks, gymnastics, and swimming lessons. Sethi reveals that their monthly expenses include $985 at Amazon, $563 at Target, $1,000 on groceries, and $648 on miscellaneous expenses. This indicates a significant outlay across various retail and grocery stores.
The couple is deeply in debt and struggling to maintain financial stability
The couple's fixed costs are at an unsustainable 113% of their income, which means they are spending more than they are earning every month. Sethi points out this discrepancy, indicating that they are deeply in the red. Despite suggestions to drop $200 from their budgets at Target and Amazon and $200 from their grocery spending, the couple finds themselves resistant to closing the door on these habits.
They also have no savings, relying on credit cards to bridge their shortfall. Suggestions to move children's activities to a skill-free expense category and to cut miscellaneous expenses in half from $650 to $325 are considered, but these measure ...
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The couple's financial challenges and overspending
Additional Materials
Clarifications
- Ramit Sethi is a well-known personal finance advisor, author, and entrepreneur. He is recognized for his expertise in money management, budgeting, and investing. Sethi is the author of the bestselling book "I Will Teach You to Be Rich" and the founder of the website with the same name, where he provides practical financial advice to help people achieve financial success. His approach focuses on psychology and behavioral change to help individuals improve their financial habits and build wealth over time.
- Caller #1 is a person who contacted Ramit Sethi for financial advice regarding their excessive spending habits and financial challenges. They play a crucial role in the narrative by providing insights into their household's chaotic state and spending patterns. Their willingness to acknowledge their financial situation and make changes is essential for addressing their financial instability.
- The couple's monthly expenses include $985 at Amazon, $563 at Target, $1,000 on groceries, and $648 on miscellaneous expenses. Their fixed costs are currently at 113% of their income, indicating they are spending more than they earn each month. The couple has no savings and relies on credit cards to cover their shortfall. Despite attempts to reduce expenses, they struggle to bring their fixed costs down to a more sustainable level.
- Fixed costs being 80% of income means that ideally, a significant portion of a person's income should be allocated to expenses that remain constant each month, like rent or mortgage payments, insurance premiums, and loan payments. This guideline suggests that around 80% of one's income should cover these essential fixed expenses, leaving the remaining 20% for flexibl ...
Counterarguments
- The couple's spending on children's items may reflect a desire to provide the best for their children, not merely a lack of discipline.
- Clutter does not necessarily equate to chaos; some families thrive in environments that others might consider cluttered.
- High spending in certain areas like groceries and children's activities could be indicative of prioritizing healthy eating and child development, which are positive values.
- The couple's fixed costs exceeding their income might be due to a temporary situation, such as one-time expenses or a recent loss of income, rather than chronic overspending.
- Reliance on credit cards isn't inherently negative if managed properly and if the debt is being used as a strategic financial tool.
- The suggestion that fixed costs should be 80% of income is a general guideline and may not be applicable to all families or regions, depending on the cost of living.
- Reducing spending on children's activities could have ...
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The psychological and behavioral barriers to making changes
The discussion with Ramit Sethi uncovers the psychological struggles that a couple is facing when it comes to addressing their financial woes, with resistance to change being a notable theme.
The couple struggles to see the severity of their financial situation
Despite clear financial chaos, the couple does not fully acknowledge the gravity of their situation. Caller #1, Michelle, comes across as "down" during the podcast, lacking belief in the impactfulness of the changes proposed by Sethi. She questions whether it's realistic to reduce her Amazon spending and seems unimpressed with the proposed cuts, as they don't appear to be substantial enough in her eyes.
Both callers are resistant to making drastic cuts to their spending, as they consider it a feeling of "deprivation." This exhibits the "all or nothing" thinking pattern where small changes are dismissed because they do not seem to make a significant difference.
Ramit highlights resistance to setting constraints as a significant issue. Michelle, for example, struggles with the idea of intentional spending given their increased income compared to their childhood. While she recognizes the need for change, she sees the financial issues as temporary rather than catastrophic, causing a lack of urgency in her actions.
The couple has difficulty saying "no" to their children's demands
The couple continues buying unnecessary items and activities for their kids. This inability to set boundaries emerges from a segmented reflection on past finances, among other issues.
Michelle feels specific reductions in their spending, such as cutting $200 off their Target expenses, would lead to deprivation. This psychological barrier limits their ability to modify their spending habits. There's an acknowledgment of being "underwater," however, there is also doubt expressed as to whether making small adjustments can be effective.
Moreover, Caller #2 expresses the feeling of deprivation when thinking about making financial cuts, while Michelle ...
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The psychological and behavioral barriers to making changes
Additional Materials
Counterarguments
- The couple's struggle to see the severity of their financial situation may be due to a lack of financial education rather than mere resistance to change.
- Resistance to making drastic cuts could be a rational response to the fear of losing quality of life, rather than simple stubbornness.
- The "all or nothing" thinking pattern might be a result of feeling overwhelmed by the financial situation, which could be mitigated with proper support and guidance.
- Difficulty in saying "no" to children could stem from a desire to provide a stable and happy childhood, which is a valid parenting goal.
- Feeling deprivation when considering financial cuts is a natural emotional response and does not necessarily indicate a lack of willingness to change.
- Struggling with setting constraints on spending could be due to a lack of clear financial goals or understanding of how to budget effectively.
- Doubting the effectiveness of making small adjustments might be due to not seeing immediate results, which is common in financial planning.
- The psychological barrier to modifying spending habits could ...
Actionables
- You can visualize the impact of financial decisions by creating a "Future Snapshot" collage with images representing your goals and potential outcomes of current spending habits. Gather magazines or print images that reflect both your financial goals (like a modest home, college fund, or retirement) and the consequences of overspending (such as debt collectors, eviction notices). This collage serves as a daily visual reminder of what's at stake, helping to break the "all or nothing" mentality by showing the spectrum of outcomes based on different financial choices.
- Develop a "No Questions Asked" fund for each family member by allocating a small, specific amount of discretionary money monthly. This approach allows each person to enjoy spending on small pleasures or wants without guilt or the need for approval from others, thus reducing the feeling of deprivation. It also helps in setting clear constraints on spending, as once the fund for the month is used, no further discretionary spending is allowed until it replenishes.
- Implement a "One Month Delay" rule for non-essential purchases to combat ...
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The need for a unified financial vision and plan
A couple's financial security requires a clear, shared vision and plan for their future. Relationship coach Ramit Sethi emphasizes this through his guidance of a couple struggling with their finances, suggesting that without a unified approach, their spending may continue unchecked.
The couple lacks a clear, shared vision for their family's financial future
The couple's relationship with money is less than ideal. Sethi points out that they have difficulty envisioning a healthy financial future. They haven't constructed a "unified rich life system" that links their spending with their core values. Instead, they find themselves unable to say no to their children or prioritize spending, leading to a nonsystematic approach.
They have difficulty envisioning what a "healthy relationship with money" would look like for their family
Caller #2 voices that they can't picture a future where they enjoy life, instead of just surviving, in the context of their finances. Sethi urges them to discuss and create a vision for their children and their lifestyle that includes financial well-being.
They have not built a "unified rich life system" that aligns their spending with their values
Sethi encourages the couple to determine together what is part of their "rich life" and what is not, highlighting the absence of a cohesive financial vision. He states that in lacking such a vision, parents are likely to spend all of their resources without focus.
Developing a clear financial vision and plan is crucial for the couple to get their spending under control
For their spending to align with their actual desires, the couple must engage in open dialogue about their financial aims and set priorities accordingly. This ensures that funds are appropriately allocated to areas they value, such as their children's activities and household responsibilities.
They need to have open discussions to create a shared understanding of their financial goals and priorities
The couple must address the cultural approach to money within their family, which involves making uncomfortable decisions and setting clear financial boundaries ...
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The need for a unified financial vision and plan
Additional Materials
Counterarguments
- A unified financial vision is important, but individual autonomy within a relationship should also be respected; a balance must be struck between shared goals and personal financial independence.
- Envisioning a "healthy relationship with money" can be subjective and may not conform to a single standard; what is healthy for one family might not be for another.
- A "unified rich life system" may not account for unexpected life changes or individual aspirations that evolve over time, which could require a more flexible approach to financial planning.
- While a clear financial vision and plan can help control spending, it is not the only factor; psychological, emotional, and behavioral aspects also play significant roles in financial management.
- Open discussions a ...
Actionables
- You can create a visual financial roadmap by drawing a literal map with milestones that represent your financial goals. Start by sitting down with your partner and drawing a path on a large poster board. Mark the starting point as your current financial status and add significant milestones along the path, such as paying off debt, saving for a vacation, or buying a home. Each milestone should be something you both agree on and feel is important. This visual representation can make abstract financial concepts more tangible and help keep both of you motivated and on track.
- Develop a "values jar" where you and your partner write down values that are important to each of you on separate pieces of paper. Once a week, each of you draws one piece of paper from the jar and discusses how you can align your spending to reflect that value in the coming week. For example, if one of you values education, you might decide to invest in books or courses. This exercise ensures ongoing communication about your shared values and how they translate into financial decisions.
- Initiate a mo ...
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The impact of the couple's parenting approach on their finances
The couple's struggles with finances are closely tied to their parenting style, particularly their inability to set boundaries and say "no" to their children, which has led to unnecessary spending and financial chaos.
The couple's inability to set boundaries and say "no" to their children has contributed to their financial struggles
Sethi points out the couple's resistance to reducing spending, especially on their kids' activities, as a significant factor in their financial difficulties. Despite acknowledging having "way too much stuff," the couple continues to buy gifts and items from places like Amazon and Target, failing to curb their spending. Caller #1 purchases these items as a demonstration of love and care, while Caller #2 admits he cannot imagine not being able to spend on his kids, wanting them to enjoy life and engage in activities they like. Their financial chaos is exacerbated by this pattern of behavior, with Sethi indicating that this inability to say "no" is a common trait he has observed among couples in credit card debt.
This behavior stems from a desire to be "heroes" and provide for their children, without considering the long-term consequences
The couple appears to struggle with the desire to provide for their children without considering long-term financial consequences. The implication is that they want to avoid feeling horrible by not being able to afford enjoyment for their kids, even though this spending contributes to their financial problems. Sethi emphasizes the need for the couple to stop trying to fix their financial issues with "a thousand band-aids" and instead address "the knife at the source" - their excessive spending on the kids.
Changing their parenting approach is key to gaining control over their finances
Sethi implies that setting boundaries with their children, such as refusing additional snacks like pretzels, can help the couple gain control over their finances. He suggests that by cutting back on some of the children's activities, they are not taking away from ...
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The impact of the couple's parenting approach on their finances
Additional Materials
Clarifications
- A high yield savings account is an online savings account that typically offers a higher interest rate compared to traditional savings accounts. These accounts often have no minimum balance requirements and can be easily managed online. They provide a way for individuals to earn more interest on their savings while still having easy access to their funds. High yield savings accounts are popular for those looking to grow their savings with minimal risk.
- "A thousand band-aids" is a metaphorical expression used to describe the ineffective approach of trying to fix a problem with temporary or superficial solutions that do not address the root cause. In this context, it signifies ...
Counterarguments
- While setting boundaries is important, it's also crucial to consider the emotional and developmental benefits of children's activities, which may justify some expenses.
- Financial struggles can stem from a variety of factors, not just parenting style; other sources of financial strain may include job loss, medical expenses, or economic downturns.
- Saying "no" to children can be complex and may not always directly translate to financial savings; for example, denying a child an experience or item could lead to other costs, such as the need for alternative childcare or educational resources.
- The desire to provide for children and be their "heroes" is a natural parental instinct and not inherently negative; the challenge lies in finding a balance between generosity and financial prudence.
- Involving children in financial decisions is beneficial, but it's important to ensure that the burden of financial stress is not placed on them; children should be educated about money without feeling responsible for the family's financial situation.
- The concept of "needs" versus "wants" can be ...
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