194. “$0 savings, $0 investments. Is it too late for us?” (Part 2)
In this episode of the "I Will Teach You To Be Rich" podcast, personal finance expert Ramit Sethi addresses the financial struggles of a couple, Lakeisha and James, who have no savings or investments but carry a combined debt of $190,000. Despite their substantial combined income, they lack spending discipline and squander a significant portion on impulsive purchases and frequent dining out.
Sethi provides recommendations to improve their financial situation, stressing the importance of decisive action and honest financial dialogue. He also delves into the couple's relationship dynamics, highlighting the need for mutual support while treating each other as capable adults in their financial decision-making. Additionally, Sethi examines Lakeisha's history of conflict avoidance and its impact on their finances, underscoring the potential costs of avoiding tough conversations about money.
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1-Page Summary
The Couple's Financial Challenges
Lakeisha and James, ages 38 and 45, are facing significant financial struggles. According to Ramit Sethi, they have no savings or investments but carry a combined debt of $190,000, putting them at major financial risk. Lakeisha has $165,000 in debt under an income-based repayment plan, while James owes $26,000.
Despite a $150,000 combined income, neither contributes to retirement accounts. They lack spending discipline, squandering 33% on "guilt-free" splurges like dining out 9 times per week and making impulsive purchases.
Ramit's Recommendations
Sethi advises organizing finances individually before marrying. He recommends limiting fixed costs to 60% of income, investing 20%, saving 5-10%, and using the rest for guilt-free spending.
Investing aggressively, Sethi projects they could accumulate $2-3 million over 20-25 years. He stresses decisive action, like returning impulse buys, and honest financial dialogue.
Relationship Dynamics and Money
Sethi notices a parent-child dynamic where Lakeisha seeks James's input on personal finance decisions like her 401(k) contribution. He deems this unnecessary, reinforcing an unhealthy dynamic.
Sethi urges becoming equal partners. He implies developing individual financial skills before combining finances, advocating for mutual support while treating each other as capable adults.
Lakeisha's Avoidant Behaviors
Sethi examines Lakeisha's history of conflict avoidance impacting her finances. Despite recognizing her $20-30k debt didn't warrant bankruptcy, she avoided canceling the process.
Sethi links her reluctance to dismiss an unhelpful therapist to her struggle with tough money conversations. He estimates her avoidant tendencies cost her family significant sums.
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Actionables
- Create a "splurge audit" by tracking all non-essential expenses for a month to identify patterns and potential savings. By writing down every time you dine out, make an impulsive purchase, or spend on entertainment, you can visually see where your money is going. For example, if you notice you're spending excessively on coffee every morning, consider brewing at home to cut costs.
- Establish a "financial date night" where you and your partner discuss money matters in a relaxed setting once a month. Use this time to review your individual financial contributions, set shared goals, and make decisions together. This could involve reviewing your budget, discussing investment plans, or strategizing on how to tackle debt, all while keeping the conversation constructive and supportive.
- Implement a "24-hour rule" for all non-essential purchases to combat impulsivity. Whenever you feel the urge to buy something on a whim, wait for 24 hours before making the purchase. During this time, evaluate if the item is a need or a want, and consider the impact on your financial goals. This pause can help reduce the number of impulse buys and save money in the long run.
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The Couple's Current Financial Situation and Spending Habits
Lakeisha and James are grappling with financial challenges marked by considerable debt and a lack of savings or investments.
Couple With No Savings, No Investments, $190,000 Debt
Lakeisha and James have no savings or investments and are carrying a combined debt of $190,000. Ramit Sethi notes this significant financial vulnerability could have severe consequences should an unexpected event occur, especially given their ages of 38 and 45—recovering from a financial setback would be challenging.
Lakeisha's $165,000 Debt in Income-Based Repayment Plan
Lakeisha has $165,000 of debt and is enrolled in an income-based repayment plan. She contributes minimally to her debt with the belief that it will be forgiven after seven more years.
James Has $26,000 in Debt
James, on the other hand, carries $26,000 in debt.
Couple's $150k Income, Excluding Retirement Savings/Investments
The couple makes a combined annual income of $150,000 but does not appear to invest in retirement accounts. This indicates a lack of long-term financial planning. There are no specific details provided about their income excluding retirement savings.
Lakeisha and James Aren't Contributing To Retirement Accounts
Despite their sizeable income, neither Lakeisha nor James are contributing to any retirement accounts, such as a 401(k), putting their future financial security at risk.
Couple Lacks Clear Spending Plan or Discipline
Lakeisha and James lack a clear spending plan or discipline. Ramit Sethi reveals the couple has been spending more than they earn and has no money in savings, highlighting a dire need for a conscious and controlled approach to their finances.
Couple Spends 33% On "Guilt-Free" Splurges
Lakeisha and James spend a significant amount of their income, 33%, on "guilt-free" splurges. They receive a monthly "guilt-free" spending allowance, but despite this, their excessive dining habits reveal a lack of spending discipline.
Couple Dines Out 9 Times Weekly
Lakeisha and James initially underestimated how frequently they dined out, thinking it occurred three to four times weekly. However, after a d ...
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The Couple's Current Financial Situation and Spending Habits
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Actionables
- You can track your spending habits by using a finance app that categorizes expenses and identifies patterns over time. By seeing where your money goes each month, you'll be able to spot areas where you might be overspending, such as frequent dining out or impulse buys. For example, if you notice you're spending a significant amount on coffee each week, consider brewing at home and saving the difference.
- Create a visual representation of your debt and income to motivate repayment and savings. Draw a chart or use a spreadsheet to map out your debts versus your income, and update it as you make payments. This visual aid can serve as a constant reminder of your financial goals and progress. If you're artistic, you might even turn this into a creative project, like a debt repayment thermometer that you color in as you pay off each chunk.
- Establish a "guilt-free" spending limit by setting aside a specific, reasonabl ...
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Ramit's Financial Advice and Recommendations for the Couple
Financial expert Ramit Sethi offers guidance to a couple on the cusp of marriage, emphasizing the need for honest dialogue and strategic planning to ensure a secure financial future.
Ramit Advises the Couple to Organize Finances Before Marriage
Sethi suggests that the couple become financially skilled before moving forward, implying they should save and invest a certain amount of money individually before joining finances or getting married. Although no specific advice about organizing finances before marriage is directly mentioned, Sethi’s emphasis on emergency savings and saving for future expenditures like vacations or a new car suggests he would advise them to build savings and investments before combining finances.
Ramit's Income Allocation: 60% Fixed Costs, 20% Investments, 5-10% Savings, Rest For Guilt-Free Spending
Sethi instructs the couple to aim to reduce their fixed costs to 60% of their income and to become aggressive with their finances by investing 20% of their gross income, equating to about a thousand dollars a month for one partner. He also suggests that James can afford to save around 13% of his net income, aiming for a 5-10% savings range, per Sethi's conscious spending plan.
Potential Investment Growth: $2-3 Million Over 20-25 Years
Sethi discusses the power of compound interest, explaining that the couple could potentially accumulate about $1.3 million with a 7% interest rate over 20 years. If they give it another five years, the amount could grow to $2 million. Moreover, if the couple were to continue investing for 30 years, the projected growth could reach $3 millio ...
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Ramit's Financial Advice and Recommendations for the Couple
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Counterarguments
- While Ramit's advice to become financially skilled before marriage is sound, some couples may find that navigating financial challenges together strengthens their relationship and prefer to learn and grow their financial skills as a team after marriage.
- The emphasis on emergency savings and saving for future expenditures is important, but it may not account for the varying financial situations of all couples. Some may need to prioritize debt repayment over savings, depending on their circumstances.
- The income allocation suggestion of 60% fixed costs, 20% investments, and 5-10% savings may not be feasible for everyone, especially those with lower incomes or higher cost of living areas. A one-size-fits-all approach may not suit every individual's or couple's financial situation.
- The potential investment growth figures are based on a consistent 7% interest rate, which may not reflect the reality of fluctuating market con ...
Actionables
- Create a "pre-marital financial bootcamp" with your partner where you both take online courses on personal finance, budgeting, and investing over a period of three months. This shared learning experience can help you both develop financial literacy and align your financial goals before tying the knot. For example, you might enroll in a course on budgeting together, then discuss how the principles apply to your future household.
- Design a "future expenses vision board" to visualize and plan for significant future costs like a home purchase, children's education, or retirement. Use images, cost estimates, and timelines to make these goals more tangible. This can be a physical board in your home or a digital one using apps like Pinterest, which can serve as a daily reminder and motivation to save.
- Start a "decisive dialogue journal" where ...
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Couple's Relationship Dynamics Impact Finances
Ramit Sethi addresses how the dynamics between partners, specifically a parent-child dynamic, can significantly impact their financial decisions and overall financial health.
Parent-Child Dynamic in Couple's Financial Decisions
Ramit Sethi notices an apparent parent-child dynamic in the couple’s financial relationship, which he believes needs to change. Lakeisha and James exhibit this dynamic when Lakeisha asks James for his input on how much to contribute to her 401(k). This action not only delayed her contribution but also reinforced an unhealthy dynamic where one partner seems to be seeking permission from the other on individual financial decisions.
Lakeisha Seeking James's Input on Her 401(k) Was Unnecessary, as Ramit Says It Reinforced the Unhealthy Dynamic
James feels uncomfortable upon learning that there is a parent-child dynamic in their relationship regarding finances. Ramit points out that this dynamic is detrimental and compares it to a parent-child relationship. He explicitly states that Lakeisha does not require James's input to make financial decisions like those about her 401(k), especially since they are not living together yet. By asking for James's input, Lakeisha reinforced this unhealthy dynamic, effectively asking James to play a role concerning her money that he should not be in.
Ramit Urges the Couple to Become Equal Partners With Money
Ramit encourages a partnership dynamic where both members support each other in making financial decisions. He suggests that acknowledging the challenges and taking small steps toward better financial habits can fortify a couple's financial relationship.
Ramit Advises Financial Skills B ...
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Couple's Relationship Dynamics Impact Finances
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Counterarguments
- While Ramit Sethi suggests that seeking a partner's input can reinforce an unhealthy dynamic, it could also be argued that in a healthy relationship, partners should feel comfortable discussing and seeking advice on individual financial decisions, as it can foster communication and joint planning for a shared future.
- The notion that Lakeisha's action in asking for James's input is inherently reinforcing a parent-child dynamic may not consider the full context of their relationship and individual personalities. It's possible that in some cases, such interactions are part of a balanced and respectful decision-making process.
- The idea that each person needs to become financially literate before merging finances might not account for the reality that many couples successfully manage their finances together while still learning and growing their financial knowledge as a team.
- The emphasis on becoming equal partners with money might overlook the fact that different couples have different dynamics and strengths, and ...
Actionables
- You can create a financial book club with your partner to boost mutual literacy and independence. Start by selecting a range of personal finance books, one for each month, and schedule regular discussions to share insights and learnings. This encourages both partners to contribute equally to financial conversations and decisions, fostering a sense of shared responsibility and equal partnership.
- Establish a monthly "finance date night" where you and your partner review and discuss your individual financial goals and progress. Use this time to set short-term and long-term financial objectives, celebrate achievements, and support each other in areas that need improvement. This practice helps to create a collaborative environment where both partners feel involved and respected in financial matters.
- Develop a "financial independence challenge" for yourself a ...
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Lakeisha's Personal Finance History and Avoidant Behaviors
Lakeisha's financial decisions, characterized by avoidance and conflict aversion, emerged during a discussion with personal finance advisor Ramit Sethi, revealing how these behaviors have affected her economic stability.
Lakeisha's Bankruptcy for $20-30k Debt: An Overreaction, According to Ramit
Lakeisha had accrued a debt of between $20,000 and $30,000 and made the crucial decision of declaring bankruptcy. Ramit Sethi expressed surprise at this choice, suggesting that such an amount could be settled quickly without resorting to bankruptcy. He indicates that declaring bankruptcy for that sum might have been an overreaction.
Lakeisha Avoided Canceling Bankruptcy, Demonstrating Her Tendency to Avoid Conflict
Midway through the bankruptcy process, Lakeisha recognized the potential redundancy of her decision but opted to proceed due to her propensity to avoid conflict. Even though she felt silly for filing it and deemed it unnecessary, her inclination to evade uncomfortable situations prevented her from canceling the procedure.
Ramit Links Lakeisha's Avoidance of Tough Money Talks to Her Struggle In Dismissing an Unhelpful Therapist
Ramit Sethi draws parallels between Lakeisha's financial decisions and her personal interactions, notably her difficulty in terminating her relationship with an unhelpful therapis ...
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Lakeisha's Personal Finance History and Avoidant Behaviors
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Counterarguments
- Declaring bankruptcy can sometimes be a strategic financial decision to manage insurmountable debt, and without knowing the full context of Lakeisha's financial situation, it's not fair to label the decision as an overreaction.
- Avoiding conflict is a common human behavior, and while it can have negative consequences, it may also be a coping mechanism for underlying issues such as anxiety or past trauma, which could require a more empathetic approach.
- The comparison between financial decisions and personal interactions, such as the difficulty in terminating a relationship with a therapist, may oversimplify complex psychological behaviors and disregard the nuances of individual circumstances.
- The financial impact on Lakeisha's family due to her avoidance is presented as a direct correlation, but it may not account for other fa ...
Actionables
- You can practice assertiveness in low-stakes situations to build confidence for tougher conversations. Start by expressing your preferences in everyday decisions, like choosing a restaurant or movie, and gradually work up to more significant discussions, such as negotiating a bill or asking for a raise. This gradual increase in stakes will help you become more comfortable with conflict and assertiveness, which can then be applied to financial negotiations or discussions that might otherwise be avoided.
- Create a "financial health day" once a month to address money-related tasks you've been avoiding. On this day, tackle one financial task you've been putting off, such as reviewing your bank statements, comparing insurance plans, or calling to negotiate a better rate on your credit card. By dedicating time specifically for these tasks, you'll prevent the accumulation of financial issues that could lead to larger problems down the line.
- Develop a personal ...
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