192. “We spend 98% of what we make—Where is it all going?”
Despite a substantial income, Justin and Deepika were stuck in a cycle of credit card debt and living paycheck to paycheck, failing to understand where their money was going. In this episode of the "I Will Teach You To Be Rich" podcast, Ramit Sethi guides them through a transformation.
After reviewing their finances, Sethi helps Justin and Deepika get clarity by canceling costly insurance policies, setting up emergency savings, and aligning their spending with goals like homeownership. By adopting Sethi's system of weekly money meetings and simplified investments, the couple shifts from financial confusion to empowerment — seamlessly allocating funds while guilt-free spending within a clear plan.
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1-Page Summary
Justin and Deepika's Financial Struggles and Money Habits
Despite their high income, Justin and Deepika find themselves trapped in a cycle of credit card debt, living paycheck to paycheck with no savings. As Caller #1 explains, they scrutinize their statements but struggle to identify the root cause of their overspending.
Caller #2 discusses an attempt at entrepreneurship with family that fell apart, leaving Justin with the burden of a building and his brother living rent-free, straining their finances further. As Ramit Sethi notes, this toxic dynamic and lack of contribution worsened their money issues.
Justin's carefree attitude contrasts with Deepika's concerns about securing their future. While he feels little stress if basic needs are met, Deepika meticulously tracks expenses, worrying about unrealized business income and goals like homeownership.
Ramit Sethi's Review of Justin and Deepika's Finances
On a $260K income with $13K take-home per month, Justin and Deepika incredibly spend 98% on fixed costs like housing, utilities, insurance, transport, and debt. Costly insurance policies total $3,835 monthly. Despite Justin saving his full paycheck, they lack savings due to overspending.
Sethi says their spending misaligns with income goals like buying a home. High insurance and transport costs divert funds from investing for their future. Sethi urges canceling whole-life policies and trimming car/parking costs to potentially halve their 98% fixed cost ratio.
Steps Justin and Deepika Take to Fix Finances
Engaging with Sethi's "Money for Couples" book, Justin and Deepika align on changing their financial system through weekly money meetings. As Caller #1 notes, canceling $1,400/month whole-life insurance freed funds to pay debt and invest.
Following Sethi's guidance, they simplified finances with high-yield savings accounts and a $30K emergency fund, gaining clarity per Caller #1. Sethi still advised naming accounts for motivation and ease.
Justin and Deepika's Financial Future Impact
Initially spending 98% of net income on fixed costs, Justin and Deepika corrected a debt misconception, finding fixed costs were 72% then just 49%, allowing flexibility. As Sethi explains, investing $1,000 monthly could provide $56K annual retirement income, $1,500 monthly could mean $72K.
They plan home savings using investments over 10 years while maintaining a low fixed-cost lifestyle, directing bonuses/income to this goal. Caller #2 articulates shifting toward tangible investment targets for major expenses like homeownership.
Justin and Deepika's Financial Mindset Transformation
Sethi guided the couple from financial confusion to empowerment. Per Caller #1, concepts like optionality and safety nets, once confusing, now make sense through Sethi's simplified process to achieve dreams.
Sethi contrasts Justin's past avoidance and Deepika's anxiety as unproductive, asserting money skills can improve. The couple now aligns spending with values like transparency and family time, marks Caller #1.
Caller #2 cites selling possessions to match their agreed-upon strategy. Their evolved mindset embraces guilt-free spending within a clear financial plan.
1-Page Summary
Additional Materials
Clarifications
- Caller #1 and Caller #2 are individuals mentioned in the text who provide insights or anecdotes related to Justin and Deepika's financial struggles and journey towards financial stability. They offer perspectives on the couple's challenges and progress, contributing to the narrative presented in the text.
- Justin and Deepika have a high income of $260,000 annually, but they struggle with overspending and debt, with 98% of their income going towards fixed costs like housing, utilities, insurance, and debt payments. Ramit Sethi advises them to cut down on expenses like costly insurance policies and transportation costs to realign their spending with their financial goals. By following Sethi's guidance, they were able to free up funds, pay off debt, and start building an emergency fund and investments for their future.
- Ramit Sethi is a well-known personal finance advisor and author who is recognized for his practical and actionable financial advice. He emphasizes strategies for saving, investing, and managing money effectively to achieve financial goals. Sethi's approach often involves optimizing spending habits, eliminating debt, and setting up automated systems for financial success. His work aims to empower individuals to take control of their finances and build wealth over time.
- Whole-life insurance is a type of permanent life insurance that provides coverage for the policyholder's entire life. It typically has a cash value component that grows over time. Premiums for whole-life insurance policies are generally higher than term life insurance policies but can offer benefits like lifelong coverage and a savings component. Canceling whole-life insurance policies can free up funds for other financial goals like debt repayment and investing.
- The transition from spending 98% of income on fixed costs to 49% was achieved by canceling costly insurance policies and trimming transportation expenses, as advised by financial expert Ramit Sethi. By reducing these fixed costs, Justin and Deepika were able to reallocate funds towards debt repayment and investments, leading to a significant decrease in their overall fixed cost ratio. This adjustment allowed them to achieve a more balanced financial structure and create room for flexibility in their budgeting and savings goals.
- I understand the confusion. Here's a brief explanation:
Investing for retirement involves putting money into financial vehicles like stocks or bonds to grow wealth over time. The potential retirement income mentioned is an estimate of how much money they could receive annually if they invest a certain amount monthly. This estimation helps individuals plan for financial security in their later years. It's a common strategy to save and invest for retirement to ensure a comfortable lifestyle when no longer working.
Counterarguments
- High income does not automatically equate to financial literacy or responsible money management.
- Scrutinizing statements is not enough; effective budgeting and spending habits are necessary to identify and address overspending.
- Supporting family members financially should come with clear boundaries and agreements to prevent long-term financial strain.
- A carefree attitude towards money can be detrimental if it leads to neglecting long-term financial planning.
- Spending 98% of income on fixed costs is unsustainable and indicates a need for serious budget restructuring.
- High insurance and transport costs should be regularly reviewed and adjusted to ensure they are necessary and cost-effective.
- Canceling whole-life insurance policies may not always be the best choice; it depends on individual financial situations and goals.
- Simplifying finances is beneficial, but it requires ongoing discipline and monitoring to maintain financial health.
- Reducing fixed costs to 49% is a significant improvement, but continued vigilance is necessary to prevent backsliding into old habits.
- Projected retirement income from investments is subject to market risks and may not be as predictable as suggested.
- Saving for a home over 10 years with investments is a solid plan, but it should be flexible to adapt to changing market conditions and personal circumstances.
- Financial empowerment is a continuous process, and setbacks can occur; it's important to remain adaptable and resilient.
- Aligning spending with values is important, but it should also be balanced with practical financial considerations.
- Embracing guilt-free spending within a financial plan is positive, but it requires constant reevaluation to ensure it doesn't lead to overspending.
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Justin and Deepika's Financial Struggles and Money Habits
Justin and Deepika's situation provides a stark example of how high income does not always equate to financial freedom. Their story illustrates the challenges and dynamics of managing personal and family finances amidst differing perspectives and habits.
High-Income Justin and Deepika Stuck In Credit Card Debt Cycle
Despite earning a high income, Justin and Deepika find themselves entrenched in a credit card debt cycle that feels unending. Caller #1, presumably Deepika, voices the stress of living paycheck to paycheck, with no savings to break the cycle. The couple scrutinizes their credit card statements but struggles to pinpoint the cause of their debt, uncertain if they are overspending on items like Amazon purchases, gas, or tolls.
Justin's Partners Weren't Invested In Growing His Side Business
Caller #2, presumably Justin, discusses the entrepreneurial attempt of buying a building with his brother and family to transform it into a recording studio and venue. However, following the payoff of the building, the familial partners disbanded and showed no interest in further developing the business. This left Justin with both the opportunity and the burden of progressing the venture on his own.
Toxic Family Dynamics Stalled Progress
The family dynamics are further complicated as Justin has his brother living rent-free upstairs in the building. The brother, using the space for business, does not contribute financially. Through therapy, Justin has come to recognize this situation as toxic. Previously, Justin’s entire paycheck supported his family, including a church where his father presides as pastor, which significantly influenced their financial choices and created a tense dynamic.
Justin and Deepika's Differing Money Management Approaches
Justin and Deepika approach their financial situation from vastly different perspectives, which adds to their monetary complications.
Justin Was Carefree About Their Financial Situation
Justin exhibits a carefree attitude, feeling no stress about money as long as ...
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Justin and Deepika's Financial Struggles and Money Habits
Additional Materials
Counterarguments
- High income can sometimes mask underlying financial issues, and it's possible that Justin and Deepika's spending habits are not the root cause of their debt, but rather a symptom of a larger issue such as a lack of financial literacy or planning.
- It's not uncommon for family businesses to face challenges, and while Justin's partners' lack of interest is a setback, it could also be an opportunity for Justin to take full control and steer the business in a direction that aligns with his vision.
- The situation with Justin's brother living rent-free could be re-evaluated to establish a more equitable arrangement, but it's also possible that there are non-financial reasons for this setup that are important to the family's values or dynamics.
- Justin's carefree attitude might be a coping mechanism for the stress of financial issues, and while it may seem perplexing to Deepika, it could also be a way for him to maintain a positive outlook and mental health.
- Deepika's meticulous financial ...
Actionables
- You can create a "spending freeze" challenge with a partner to tackle debt by choosing a period, like a month, where you both agree to only spend on essentials. This can help you identify spending habits and areas where you might be overspending. For example, if you typically make several Amazon purchases a month, a spending freeze will highlight how often you feel the urge to buy non-essential items and help you develop resistance to impulse buying.
- Establish a "business health day" each month where you assess the progress and commitment levels of any business partners or stakeholders. During this day, you could set clear expectations, review contributions, and make decisions about the future involvement of each partner. If someone, like a family member, is not contributing as agreed, this is the time to address the issue and consider alternatives, such as setting a deadline for involvement or finding new partners.
- Develop a "financial harmony workshop" for couples with differing money management styles, focusing on creating a joint ...
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Ramit Sethi's Review of Justin and Deepika's Finances
Ramit Sethi reviews the finances of Justin and Deepika, a couple with a high income but disproportionate spending and fixed costs. Their situation reflects a pattern of overspending, misaligned financial priorities, and lack of a clear financial vision, despite their substantial earnings.
Ramit Found Justin and Deepika Had High Fixed Costs Despite Income
Justin and Deepika's financial situation is puzzling; they earn a combined $260,000 per year, with a take-home of $13,000 per month. Their housing, utilities, insurance, transport, and debt payments reflect 98% fixed costs, leaving them with little for savings or investment. They have high expenses in various areas, particularly utilities and insurance, with utility bills sometimes hitting $900 and insurance costs amounting to $3,835 per month. Despite Justin directing his paycheck into savings, they are not accumulating savings and are struggling with credit card debt.
Spending Misaligned With Income; Unclear Financial Vision
Sethi states that Justin and Deepika lack a financial vision, which leads them to indecisiveness and getting lost in minor expenses without addressing the larger issues. Although they have a future vision that includes buying a home and funding their son's education, their spending does not support these goals. Their significant expenditures on insurance and transport are particularly concerning. They are unsure about managing expenses for necessary items while spending on substantial fixed costs such as car payments and parking, which do not contribute to their future aspirations.
Ramit Urged Justin and Deepika to Tackle Insurance Costs and Cut Unnecessary Expenses
After a thorough review, Sethi found that their high insurance costs, including health, auto, renter's, life, whole life policies, and term insurance, amounted to nearly $ ...
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Ramit Sethi's Review of Justin and Deepika's Finances
Additional Materials
Actionables
- You can create a visual spending tracker to align daily expenses with long-term goals. Start by listing your main financial objectives, like buying a house or funding education, on a board or digital app. Every time you spend money, place a sticker or mark next to the goal that the expense supports. This visual representation will quickly show you if your spending habits are contributing to your aspirations or detracting from them.
- Implement a "future fund" for every non-essential purchase you consider. Before buying anything that isn't a necessity, transfer an equal amount to a savings account earmarked for your future goals. This practice doubles the immediate cost, making you think twice about the purchase and simultaneously boosting your savings for important goals.
- Engage in a monthl ...
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Steps Justin and Deepika Take to Fix Finances
Justin and Deepika are determined to get their finances in order and have taken several steps to do just that, including engaging with financial expert Ramit Sethi's advice and resources.
Read Ramit's Book: Financial Commitment For Couples
Aligned For Meaningful Change
Justin and Deepika are in possession of Ramit Sethi's book "Money for Couples," which is designed to help partners align their financial goals and create a vision for a rich life together. Although they initially hadn't read the book, Ramit humorously suggests that the answers to their financial troubles could be found right in front of them. They express a willingness to make significant changes and spend one hour a week discussing the book to change their financial system and become more aligned together. As a result, Caller #1, which could refer to either Justin or Deepika, indicates that they are no longer scared of their monthly money meetings because they now have a systematic plan and are on the same page.
Canceled Whole Life Insurance, Saving Over $1,400/Month
Money Freed Up Paid Debt and Boosted Investments
The couple's financial turnaround began when they made the decision to cancel their custom whole life insurance policy, which had been costing them close to $1,400 a month. This move is part of the guidance they received, which serves as a potential roadmap for financial commitment as a couple. They reallocated the money saved from canceling the policy to pay off debt and increase their investments, as opposed to considering it as extra cash. Caller #1 also notes that having a conversation with Ramit led them to reassess their assets and realize their true worth, which included selling one of their cars and acknowledging that they could afford to invest for the future.
Simplified Financial System: Savings Accounts and Emergency Fund
Provided More Clarity and Control Over Money
Justin and Deepika ...
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Steps Justin and Deepika Take to Fix Finances
Additional Materials
Counterarguments
- Reading a book and discussing it weekly is a positive step, but it may not be sufficient without actionable steps and consistent follow-through.
- While canceling a whole life insurance policy saved money, it's important to ensure they still have adequate insurance coverage for their needs.
- Reallocating funds to pay off debt and invest is wise, but they should ensure they're not sacrificing necessary liquidity or emergency funds.
- Selling assets like a car can provide immediate financial relief, but it's important to consider the long-term implications on mobility and lifestyle.
- Simplifying finances is generally beneficial, but oversimplification can sometimes overlook important details or financial opportunities.
- High-yield savings accounts are a good tool for earning interest on emergency funds, but th ...
Actionables
- You can enhance your financial collaboration by setting up a joint rewards system for meeting your money goals. For example, if you and your partner successfully stick to your budget or hit a savings milestone, reward yourselves with a shared experience that doesn't break the bank, like a movie night or a special home-cooked meal. This positive reinforcement can make financial planning something to look forward to.
- Consider using a mobile app that gamifies saving and budgeting to make the process more engaging. Apps like this often allow you to set specific financial goals and earn points or rewards for logging expenses, staying within budget, or contributing to savings. It turns the sometimes tedious task of money management into a fun challenge that can motivate you to stay on track.
- Explore the possibility of creating a personal fi ...
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Justin and Deepika's Financial Future Impact
Justin and Deepika have made significant strides in managing their financial future by correcting misconceptions about their debt and committing to strategic investments.
Fixed Costs Fell From 98% To 49% of Net Income
Initially, Ramit Sethi points out that Justin and Deepika’s fixed costs accounted for a staggering 98% of their net income, which was a major concern. However, after correcting a misconception about their debt, they found that their fixed costs were actually 72% of their net income. This revelation provided them with added flexibility in their spending and the allocation of funds towards their goals. Eventually, they discover that their fixed costs are really just 49% of their net income, which gives them even greater flexibility to reallocate money toward future targets, surely a relief for the couple.
Flexibility In Allocating Money Towards Goals
With their fixed costs significantly reduced, Justin and Deepika now enjoy the flexibility of having almost half of their net income available to direct towards their financial goals. By fixing the error in calculating their fixed costs, they can feel more at ease about their capacity to allocate funds and manage future financial planning.
Started Investing Significantly More For Retirement
Justin and Deepika took proactive steps in their financial planning by beginning to invest more for their retirement. Ramit Sethi lays out the advantageous outcomes of their investment choices: if they allocate $1,000 a month to investments, they could see an annual retirement income of approximately $56,000. Pushing that monthly investment to $1,500 could increase their annual retirement income to around $72,000. This forward-thinking approach is implemented post-discussions with Sethi, as they acknowledge the need to review and possibly increase their investments after realizing the newfound flexibility in their budget.
Plan to Save For Future Home Purchase
Beyond retirement, Justin and De ...
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Justin and Deepika's Financial Future Impact
Additional Materials
Clarifications
- Ramit Sethi is a well-known personal finance advisor and author known for his practical financial advice and strategies. In the context of the text, Sethi plays a crucial role in guiding Justin and Deepika towards understanding and improving their financial situation through insightful discussions and recommendations. His expertise helps the couple identify misconceptions, adjust their financial planning, and make informed decisions about investments and savings goals. Sethi's guidance empowers Justin and Deepika to optimize their budget, increase their investments, and work towards achieving their long-term financial objectives.
- Ramit Sethi provided advice to Justin and Deepika on managing their finances, including correcting misconceptions about their debt to reduce fixed costs, reallocating funds towards financial goals with increased flexibility, and increasing investments for retirement to secure future income. Additionally, Sethi advised them to track their financial growth over time to make informed decisions about major expenses like purchasing a home.
- Caller #2 is a participant in the conversation who shares insights or perspectives related to Justin and Deepika's financial journey. They contribute by highlighting the transformation of dreams into tangible savings goals, emphasizing the ...
Counterarguments
- Fixed costs at 49% of net income, while improved, may still be high for some financial advisors who advocate for the 50/30/20 budgeting rule, suggesting that only 50% of income should go to needs, which includes fixed costs.
- The assumption that investing $1,000 or $1,500 a month will lead to a specific annual retirement income does not account for market volatility and the potential for investment returns to be lower than expected.
- The focus on investing for retirement and a future home purchase may not leave room for an emergency fund, which is critical for financial stability.
- The plan to maintain a low fixed cost lifestyle after buying a home may be challenging, as homeownership often comes with unexpected costs and higher fixed expenses.
- Directing all unforeseen income towards savings goals may not take into account the need for balance in life, such as spending on experiences or personal development.
- The 10-year grow ...
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Justin and Deepika's Financial Mindset Transformation
Justin and Deepika experienced a significant shift in their financial mindset, going from a state of confusion to a place of empowerment with control over their finances, aligning their spending with their values, and adopting purposeful money management strategies.
From Confession to Empowerment: Regaining Control Over Finances
Achieving Financial Dreams With the Right Strategies
Ramit Sethi's involvement has been instrumental in guiding the couple from a state of confusion to one where they feel empowered to make informed financial decisions. For instance, Ramit suggested to Caller #1—presumably Justin—to increase the checking account balance by $5,000 to alleviate a sense of scarcity rooted in their financial past. This adjustment has helped shift their perception from anxiety towards feeling more in control and confident about finances. Ramit also notes that in their initial discussion, Caller #1 had confusion about basic financial concepts. Still, now they are conversant with sophisticated concepts like optionality and creating safety layers.
The last session, which felt like couples' therapy to Caller #1, opened their eyes to the simplicity of the concepts discussed, and Caller #1 and Caller #2, presumably Deepika, now understand the simplicity of the process to achieve financial dreams. Even with their high income, the couple did not feel in control of their finances. This sentiment extended to their business aspirations, with Justin expressing the desire to grow the business to bring in sufficient income without excessive hours.
According to Ramit, Justin's previous casual and avoidant attitude towards money contrasted with Deepika's worry and stress about their financial future. Ramit asserts that both attitudes are counterproductive and that managing finances, like any skill, can be learned and improved upon.
Aligned Spending With Values and Goals
Intentional and Purposeful Money Management
Justin and Deepika's journey toward financial clarity involved aligning their spending with their core values and becoming proactive in their approach. For example, Caller #1 talks about being transparent about money, discussing it, and not having surprises in terms of not meeting goals. The realization that investments and savings need to be a priority led to taking action towards intentional and purposeful money management. Deepika acknowledges the opportunity to lower transportation costs to align with their financial goals.
Ramit Sethi sparked a discussion about intentionality by suggesting that the couple should have an annual Rich Life review to ...
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Justin and Deepika's Financial Mindset Transformation
Additional Materials
Counterarguments
- While increasing the checking account balance can alleviate a sense of scarcity, it may not address underlying issues of financial literacy or behavioral spending habits that could lead to future financial stress.
- Understanding sophisticated financial concepts is beneficial, but practical application and consistent behavior are crucial for long-term financial stability.
- High income does not automatically translate to financial control, but without a detailed understanding of expenses and cash flow, the sense of control may be superficial.
- Growing a business to reduce working hours can be challenging and may require trade-offs, such as slower growth or reduced income, which should be considered.
- Learning and improving financial management skills is important, but individual learning styles and access to resources can affect the pace and effectiveness of this process.
- Aligning spending with core values is a positive step, but it requires ongoing reflection and adjustment as values and circumstances evolve.
- Prioritizing investments and savings is a sound strategy, but it must be balanced with current needs and the potential for unforeseen expenses.
- An annual Rich Life review can help maintain financial alignment, but it may not capture changes that occur more frequently, necessitating more regular check-ins.
- Intentional spending is a good pr ...
Actionables
- You can create a "Financial Empowerment Journal" where you document your daily spending and reflect on how each expense aligns with your values. Start by jotting down every purchase you make and at the end of the week, review your entries to identify patterns and determine if your spending truly reflects what's important to you. This could lead to more intentional spending and a better understanding of where you can cut back without sacrificing what brings you joy.
- Develop a "Rich Life Game Plan" by setting aside an hour each month to play a financial board game you design with your family or friends. Use play money to simulate your income, expenses, savings, and investments. The goal is to make financial planning engaging and to encourage discussions about money management in a relaxed setting. This can help demystify complex financial concepts and make them more approachable.
- Initiate a "Value-Based Savings Challenge" with a g ...
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