177. “We’re stressed about cash flow—but I refuse to sell any of my 8 cars” (Part 2)
In this episode of I Will Teach You To Be Rich, the podcast host Ramit Sethi counsels a couple expecting their first child on financial planning. The discussion centers on establishing an emergency fund for the baby's expenses, paying off debt, and aligning on shared financial values for quality family time.
Sethi advises the couple to create a dedicated "baby fund," pay off credit card debt aggressively before the baby arrives, and have transparent communication about managing spending. The couple aims to prioritize family time while reducing financial risks. Sethi stresses the importance of setting specific budgets, defining financial goals collaboratively, and establishing clear rules around debt and allowances to strengthen the couple's partnership.
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1-Page Summary
Financial planning for a new baby
Expecting parents Jason and Megan focus on establishing a safety net and aligning their core values. Financial advisor Ramit Sethi recommends creating a dedicated "baby fund" to cover unexpected expenses and prepare for the new arrival. Caller #2 suggests a $12,000-$20,000 range for this fund, while another caller plans to save $13,000 for the baby's first year. Ramit advises doubling the budgeted amount for a doula and adding it to the fund.
Jason and Megan aim to prioritize quality family time over solely maximizing financial gains like 401(k) contributions. Caller #2 aligns with reducing risk, while Caller #1 emphasizes intentional family time - these shared values set priorities.
Managing debt and spending
The couple plans to aggressively pay off $26,000 in credit card debt before the baby arrives. Caller #2 volunteers to pay the remaining $7,000 using funds like a Coinbase account, establishing a rule of no future credit card balances. Sethi approves allocating "guilt-free" spending money toward the debt.
Megan expresses concern about financial equity, desiring equal "guilt-free" allowances despite their income disparity. Sethi suggests temporarily allocating $250 each for guilt-free spending during debt repayment. Megan insists on equal allowances to feel equal in the partnership. Sethi floats allocating $500 per person and $1000 for joint expenses.
Improving communication and aligning financial values
Sethi prompts the couple to define core values beyond just optimizing numbers, like making time for family. Caller #2 emphasizes progression through risk reduction. Looking ahead, Caller #1 plans weekend family time.
Sethi notes their lack of a "baby" budget category, advising specificity with numbers and a shared financial vision, which Jason acknowledges as needed. Caller #2 proposes prioritizing debt repayment and banning new credit card balances.
Sethi highlights the need for transparent, collaborative money discussions. If something is important to one partner, it should be to both. He encourages rules and structure, with Caller #2 shifting from feeling behind to celebrating successes together.
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Counterarguments
- While establishing a "baby fund" is prudent, the suggested amounts may not be feasible for all families, and a one-size-fits-all approach may not be appropriate.
- Doubling the budget for a doula may not be necessary if the couple finds more affordable support or decides against using a doula.
- Prioritizing family time over financial gains like 401(k) contributions could have long-term financial implications that might compromise future family stability and retirement security.
- Aggressively paying off credit card debt is important, but it should be balanced with the need to maintain an emergency fund, especially with a new baby on the way.
- Allocating "guilt-free" spending money toward debt repayment may not address underlying spending habits that led to the debt.
- Equal "guilt-free" allowances may not be financially practical if there is a significant income disparity and could potentially hinder debt repayment efforts.
- Allocating $500 per person and $1000 for joint expenses may not be sustainable or necessary for all couples, depending on their financial situation and priorities.
- While defining core values is important, it should not come at the expense of neglecting the practical aspects of financial planning.
- Banning new credit card balances is a strong stance, but responsible credit card use can be part of a healthy financial strategy if managed correctly.
- Encouraging rules and structure in financial discussions is beneficial, but flexibility is also important to adapt to changing circumstances and unexpected expenses.
- Celebrating successes together is important, but it should not lead to complacency in financial planning and risk management.
Actionables
- You can create a visual debt payoff tracker to make your financial goals more tangible and engaging. Start by drawing a large thermometer on a poster board and divide it into increments that represent chunks of your debt. As you pay off each increment, color it in. This visual representation can be a motivating and fun way to see your progress, and you can hang it in a common area to keep your financial goals front and center in your daily life.
- Develop a family values charter to ensure everyone's core values are recognized and integrated into your financial planning. Gather as a family and have each person write down what they value most. Then, create a document that lists these values and how they relate to your financial decisions, such as prioritizing family time or risk reduction. This charter can be referred to during financial discussions to keep your family aligned with your shared values.
- Implement a "family financial hour" once a week to foster transparent and collaborative discussions about money. During this time, sit down with your family members to review your budget, discuss upcoming expenses, and celebrate financial successes, no matter how small. This regular meeting can help maintain open communication about finances and ensure that everyone is on the same page with the family's financial goals and progress.
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Financial planning for a new baby
For new parents Jason and Megan, financial planning has taken on a new dimension with the anticipation of their baby’s arrival. Recognizing the need to balance their spending with the allocation of resources for impending changes, they focus on establishing a safety net and aligning their core family values.
Establishing a dedicated "baby fund" to cover unexpected expenses and prepare for the new arrival
Jason and Megan realize the importance of having a reserve of funds set aside specifically for the baby’s needs. Financial advisor Ramit Sethi champions this idea, suggesting that the money normally used to max out a 401(k) be redirected into a family fund. This dedicated "baby fund" provides a cushion for quality time together and underpins their core values.
Ramit introduces the concept of the baby fund as a defense against unexpected expenses. Caller #2 discusses having a range of $12,000 to $20,000 for the baby fund but shows concern about maintaining this without altering investments. Ramit subsequently questions the reluctance to slightly reduce investment contributions to support the baby fund. One caller's plan to save $13,000 for the first year of the baby’s life underlines the trend towards earmarking funds for new family necessities. Ramit advises possibly lowering the investment rate for a couple of years to create a pool of baby money, which would head off stressful financial discussions.
Furthermore, Ramit suggests that Jason and Megan double the amount needed for their doula and add it to the baby fund, ensuring they can afford a doula they really love without financial strain.
Aligning on core values and priorities for the first year ...
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Financial planning for a new baby
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Counterarguments
- Redirecting money from a 401(k) to a family fund could potentially compromise long-term retirement savings and the benefits of compound interest.
- A dedicated "baby fund" might not be necessary if the parents already have a robust emergency fund that could cover unexpected expenses.
- Saving $12,000 to $20,000 for a baby fund might not be feasible for all families, and setting such a specific target could create unnecessary stress.
- Lowering investment contributions to support a baby fund could lead to missed financial opportunities, especially if the market is performing well.
- Doubling the amount needed for a doula may not be the most cost-effective use of funds, especially if there are other areas of baby-related expenses that could use more financial attention.
- Focusing on risk reduction as a core value might lead to overly conservative financial decisions that could hinder potential growth or returns on investments.
- Emphasizing intentional and quality time together is important, but it should be ...
Actionables
- Create a visual savings tracker to gamify your baby fund goals by drawing a thermometer or progress bar on a poster and coloring it in as you save, making it a fun and visible reminder of your progress.
- By turning your savings goal into a visual and interactive experience, you can maintain motivation and involve your family in the process. For example, for every $100 saved, you color in a section of the tracker, and you can celebrate mini-milestones with small family activities, reinforcing the value of teamwork and shared goals.
- Develop a "baby's first year" time capsule with your partner to encapsulate your core values and memories, including letters to your future selves and your baby, photographs, and mementos from the year.
- This activity encourages you to reflect on what's important to your family and to document the journey of your baby's first year. You might include a letter about the importance of financial security, a family photo from a no-cost day out, or a receipt from the baby fund's first deposit, creating a tangible representation of your shared values and experiences.
- Initiate a monthly "family finance night" where you and your partner revi ...
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Managing debt and spending
In a discussion with Ramit Sethi, a couple strategizes how to handle their finances by aggressively paying off credit card debt before their baby arrives and restructuring their "guilt-free" spending to ensure financial equity between the partners.
Aggressively paying off credit card debt before the baby's arrival
The couple recognizes the importance of paying off their $26,000 credit card debt, especially with a baby on the way. Sethi underscores the necessity of maintaining a mature relationship with money during this stressful period. Caller #2 volunteers to pay off the approximately $7,000 remaining and suggests taking drastic measures, like pulling $7,000 from a Coinbase account to reduce the debt to about $6,600. Caller #2 also considers redirecting money from both partners' funds to pay off their debt, with a goal to not carry a future balance on the card. The couple agrees that this approach would also help them establish a new household rule of no credit card debt. Sethi approves of allocating funds from "guilt-free" spending to pay off the debt more rapidly, while cautioning about potential tax implications.
Restructuring "guilt-free" spending to create more financial equity between Jason and Megan
Megan expresses her concern about financial equity in the relationship and the desire for equal "guilt-free" spending allowances. Although Jason initially feels entitled to more because he earns more, they acknowledge they have not handled finances well individually. Sethi proposes a temporary allocation of $250 for each partner's guilt-free spending to allow for debt repayment while preserving equity. Megan asserts that equal allowances are crucial for her to feel equal in the relationship, so the couple considers reducing guilt-free spending from 33% to 14% of ...
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Managing debt and spending
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Clarifications
- Ramit Sethi is a well-known personal finance advisor, author, and entrepreneur. He is recognized for his practical financial advice and strategies to help individuals manage their money effectively, save for the future, and achieve financial success. Sethi often emphasizes the importance of conscious spending, investing wisely, and taking control of one's financial life through his books, online courses, and public appearances. His approach focuses on behavioral psychology and practical steps to improve financial habits and build wealth over time.
- Caller #2 in the text appears to be a participant in the financial discussion with Ramit Sethi and the couple. They suggest strategies for paying off credit card debt and restructuring spending habits. Caller #2's perspective on equal discretionary spending and financial equity in the relationship is highlighted during the conversation. Their full perspective is not fully captured in the transcript, but they engage in the dialogue to help the couple navigate their financial decisions.
- Guilt-free spending typically involves allocating a portion of one's income for personal discretionary expenses without feeling guilty. It can vary based on individual preferences and financial circumstances, aiming to balance enjoyment and responsible money management. In the context of the discussion, the couple is reevaluating their guilt-free spending to ensure fairness and equality in their financial decisions. This adjustment reflects their efforts to align their spending habits with their financial goals and values.
- Financial equity in a relationship involves ensuring fairness and balance in financial matters between partners, regardless of income disparities. It aims to promote a sense of equality and shared responsibility in managing money within the relationship. This can include equal access to discretionary spending, joint decision-ma ...
Counterarguments
- Aggressively paying off credit card debt before the baby's arrival might not account for the potential need for liquid cash once the baby arrives, which could be important for unexpected expenses.
- Pulling funds from a Coinbase account to pay off debt may not be the best financial move if it incurs high taxes or if the cryptocurrency investments are expected to appreciate significantly.
- Establishing a household rule of no credit card debt is a strong stance, but it may not be flexible enough to accommodate future situations where leveraging credit could be beneficial.
- Allocating funds from "guilt-free" spending to pay off debt more rapidly might lead to feelings of deprivation or resentment, which could strain the relationship.
- Equal "guilt-free" spending allowances may not fully address underlying issues of financial equity if there are significant disparities in personal income or financial responsibilities.
- A temporary equal allocation of $250 for each partner's guilt-free spending may not be sustainable or reflective of each partner's personal financial needs and contributions.
- Reducing guilt-free spending from 33% to 14% of their income could be too drastic and might not be necessary if there are other areas of the budget that can be adjusted.
- Viewing the f ...
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Improving communication and aligning financial values as a couple
Ramit Sethi addresses the challenges and solutions faced by a couple, Megan and Jason, who are expecting a baby and seeking to align their financial values and improve communication about money.
Developing a shared vision and financial plan for their family's future
The couple recognizes the need to go beyond just optimizing numbers to focus on creating a rich life together, including quality time with their new baby. Ramit suggests they define their core values for the coming year, which gives them a reason to change their financial behavior. Caller #2 wants to avoid stepping backward and emphasizes the importance of progression, especially in regards to financial risk reduction.
They are challenged to incorporate core values into their life after the baby's birth, related to creating space for quality family time. Jason is considering a work-from-home model to be with his family more, which aligns with this value. There is a call for a strategy that connects risk reduction with the ability to continue working, balancing professional engagement with family life. Looking forward, Caller #1 stresses the significance of the next five years and plans to spend weekends and quality time together to provide a diversified life for their child.
Ramit prompts the couple for specificity with numbers and to commit to a financial plan for their family's future. This involves clear expectations and agreements around spending and a shared financial vision. Jason realizes that if they were further along in their financial journey, their situation might be clearer, indicating a need for a collaborative approach.
Committing to more transparent and collaborative financial discussions
The couple decides to address their need for more transparent and collaborative discussions about finances. Caller #1 questions what Caller #2 means by "risk reduction" and its implications for their family, indicating a lack of clarity and shared understanding. Concerns include time off work and whether it aligns with their financial goals and the need for quality time together.
Ramit points out that there is no budget category for the baby, highlighting a gap in their financial planning. Caller #1 admits to not knowing the cost of the baby, indicating the need for more detailed financial discussions. Ramit suggests that numbers should guide them and stresses the importance of sticking to a plan as a good example for their baby and family.
Transparent and collaborative discussions are inferred to be important for creating a dedicated baby fund and a financial plan. Caller #2 proposes prioritizing paying off Caller #1's credit card debt and creating a rule against ...
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Improving communication and aligning financial values as a couple
Additional Materials
Counterarguments
- Defining core values and a shared vision is subjective and may not always lead to a change in financial behavior if underlying financial literacy or discipline issues are not addressed.
- Emphasizing progression and avoiding stepping backward could create pressure that might not account for life's unpredictable financial setbacks.
- A work-from-home model, while beneficial for family time, may not be suitable for all job types or industries and could impact Jason's career progression or income.
- Balancing professional engagement with family life is complex and individualized; what works for one family may not work for another.
- Planning for the next five years with specificity might be unrealistic due to the unpredictable nature of life, especially with a new baby.
- The idea that numbers should guide financial planning does not consider the emotional and psychological aspects of money management.
- Transparent and collaborative discussions, while ideal, may not always be possible due to differing communication styles or financial understanding between partners.
- The concept of a dedicated baby fund is sound, but the execution may be challenging for families with limited income or other financial obligations.
- Prioritizing paying off credit card debt is generally sound advice, but it may not be the best approach for all couples depending on their overall financial strategy and other debts.
- Establishing transpar ...
Actionables
- You can create a visual financial roadmap by drawing a timeline of your family's life events and financial goals on a large poster board. Place it somewhere visible in your home to keep these objectives top of mind. For example, mark the expected birth date of your child, projected dates for paying off debts, and milestones for savings goals. This visual aid can serve as a daily reminder and conversation starter about your shared financial journey.
- Develop a "values jar" where each family member contributes slips of paper with written values or goals they believe are important. Regularly, perhaps during a weekly family meeting, draw a slip from the jar and discuss how you can incorporate that value into your financial planning. If "education" is drawn, for instance, you might explore setting up a college fund or investing in learning resources.
- Initiate a monthly "finance date night" where you and your partner spend time re ...
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