228. “I’m 30, broke, and tired of budgeting”
In this episode of I Will Teach You To Be Rich, a couple with contrasting financial mindsets discusses their struggles with budgeting and debt management on a $65,640 annual income. With 82% of their income going to fixed costs and $40,200 in various debts, they face significant financial pressure while trying to balance immediate needs with long-term stability.
The episode explores their different approaches to money—shaped by their distinct upbringings—and their strategies for improving their financial situation. Host Ramit Sethi examines their current spending patterns and debt repayment plans, while the couple shares their efforts to increase household income through side jobs and their attempts to incorporate guilt-free spending into their budget while building emergency savings.
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1-Page Summary
Kristen and Josh's Financial History and Mindset
Kristen and Josh bring contrasting approaches to money management, shaped by their distinct upbringings. Kristen handles the family's financial planning, creating budgets and debt payoff strategies, while Josh tends to offer reassurance without fully understanding their financial situation. Josh's optimistic outlook stems from finding silver linings in his financially challenging childhood with an alcoholic father and bankrupt mother. Meanwhile, Kristen's approach to financial transparency developed in response to her parents' secretive handling of money matters.
Their Current Financial Situation and Challenges
The couple faces significant financial pressure with their $65,640 annual income. Ramit Sethi points out that their fixed costs consume an unusually high 82% of their income, well above the ideal 50-60%. They carry $40,200 in total debt, including Canadian student loans, a line of credit, and credit card debt, requiring $800 in monthly payments. They've managed to reduce some expenses, like groceries to $400 monthly, but struggle to enjoy spending without guilt. Of their income, 10% ($462 monthly) is designated as guilt-free spending, though a significant portion goes to Josh's nicotine expenses.
Strategies to Improve Their Financial Outlook
The couple is actively working to increase their household income. Kristen aims to expand her nonprofit work and pet-sitting business, potentially doubling her monthly earnings from $600 to $1,200. Josh has obtained a commercial driver's license and is considering weekend dump truck driving for an additional $1,500 monthly. Ramit Sethi advises them to optimize their debt repayment strategy and suggests holding regular monthly money meetings to review their progress together.
Income vs. Expenses in Financial Stability
Sethi emphasizes the importance of increasing household income while maintaining reasonable expenses. The couple aims to build their emergency savings from $2,500 to $10,000 while balancing immediate enjoyment with long-term financial goals. They've created separate accounts for vacations and fun money, following Sethi's advice to save $1,800 monthly while still allowing for guilt-free spending on activities they enjoy, such as their shared Volkswagen GTI restoration project.
1-Page Summary
Additional Materials
Clarifications
- Ramit Sethi is a well-known personal finance advisor and author who often emphasizes the importance of optimizing debt repayment strategies, increasing income sources, and maintaining a balance between enjoying life now and saving for the future. In this context, Sethi advises Kristen and Josh to focus on increasing their household income through additional work opportunities, such as expanding Kristen's nonprofit work and pet-sitting business, and Josh obtaining a commercial driver's license for weekend driving. Additionally, Sethi recommends the couple to hold regular monthly money meetings to track their progress and make adjustments to their financial plan as needed. Kristen and Josh are also encouraged to optimize their debt repayment strategy to efficiently tackle their existing debts while working towards building up their emergency savings.
- Kristen's income sources include her work in a nonprofit organization and a pet-sitting business. Josh is considering weekend dump truck driving to increase their household income. Their total annual income is $65,640, with plans to boost it through additional work opportunities.
- The 50-60% income allocation guideline for fixed costs is a common financial rule suggesting that your essential expenses like housing, utilities, and transportation should ideally not exceed this percentage of your income. This guideline helps ensure that you have enough income left for savings, debt repayment, and discretionary spending after covering necessary fixed expenses. It provides a framework for balancing your budget and avoiding financial strain from excessive fixed costs. Adhering to this guideline can contribute to financial stability and flexibility in managing your overall finances.
- The allocation of 10% of income for guilt-free spending is a strategy to balance financial responsibility with personal enjoyment. It allows Kristen and Josh to indulge in activities they enjoy without feeling guilty about spending money. This allocation aims to improve their overall financial well-being by promoting a healthy relationship with money and reducing the likelihood of overspending or feeling deprived.
- Josh's nicotine expenses are referring to the money he spends on purchasing nicotine products, such as cigarettes or vaping supplies. These expenses can impact the couple's finances by reducing the amount of money available for other essential expenses or savings goals. It's important for the couple to consider these costs when budgeting and strategizing to improve their financial situation.
- To increase emergency savings from $2,500 to $10,000, Kristen and Josh need to allocate a portion of their monthly income specifically towards savings. They should prioritize this goal by setting aside a fixed amount regularly until they reach the desired $10,000 threshold. This process involves adjusting their budget to ensure that they are consistently contributing to their emergency fund without compromising their other financial obligations. By following a structured savings plan and monitoring their progress, they can gradually build up their emergency savings over time.
- Separate accounts for vacations and fun money involve setting up dedicated accounts to save and spend specifically on leisure activities and trips, ensuring that these expenses are planned for and managed separately from regular household expenses. This approach helps individuals allocate funds for enjoyment without impacting essential financial obligations, promoting a healthy balance between responsible budgeting and leisure spending.
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Kristen and Josh's Financial History and Mindset
In their podcast appearance, Kristen and Josh discuss their contrasting approaches to managing finances, influenced by their distinct upbringings.
Kristen and Josh's Differing Approaches to Money Management
Kristen and Josh have contrasting behaviors when it comes to managing their money.
Kristen Manages Finances; Josh Reassures Without Understanding Numbers
Kristen is in charge of the family's financial planning. She tracks their money, pays attention to budgets, does the grocery shopping, and has constructed a debt payoff strategy. She wants Josh to partner with her in managing finances, not just follow her lead.
Josh, on the other hand, reassures Kristen that "everything's going to be okay," and encourages her to treat herself without fully grasping their financial situation. Kristen finds this frustrating at times, but simultaneously appreciates Josh's ability to find joy in small things. Their interaction highlights a dynamic where Kristen desires more financial involvement from Josh, while Josh remains the optimistic "ignorant reassurer," as characterized by Ramit Sethi.
Josh's Outlook Shaped by Financially Challenging Upbringing
Josh’s past experiences deeply influence his view on money management.
Josh's Challenging Upbringing: Finding Silver Linings
Despite his challenging upbringing with an alcoholic father and a bankrupt mother, Josh has maintained a positive perspective. He acknowledges growing up poor and appreciates his early experiences with money, such as receiving an allowance which taught him the value of money and allowed for family trips. Josh’s ability to find joy in his childhood experiences and his optimistic nature is a conscious response to his past's uncontrollable elements.
Kristen's Family Secrecy and Mixed Messages Around Money
Kristen also s ...
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Kristen and Josh's Financial History and Mindset
Additional Materials
Counterarguments
- While Kristen's desire for Josh to be more involved in financial planning is valid, it's possible that their current dynamic plays to each partner's strengths and may contribute to a balanced relationship.
- Josh's reassurances, although not grounded in a detailed understanding of their finances, could provide emotional support that is beneficial for Kristen's stress levels and overall well-being.
- The value of Josh's optimistic outlook should not be underestimated, as positivity can be a powerful tool in managing financial stress and could contribute to better financial decision-making in the long run.
- Kristen's approach to transparency and mindful spending, while commendable, might not be the only way to achieve financial security; other strategies could also lead to a healthy financial future.
- The implication that secrecy around finances is inherently negative may not consider cultural or personal reasons for privacy; some families may choose not to discuss finances openly for valid reasons.
- ...
Actionables
- You can create a "Finance Date Night" with your partner to make financial planning a shared experience. Set aside a regular time, such as once a month, to sit down together with snacks and music to review your budget, discuss upcoming expenses, and track your debt payoff progress. This can transform financial management from a solo task into a collaborative and enjoyable activity, fostering a sense of partnership.
- Start a "Money Story" journal to reflect on your financial upbringing and its impact on your current attitudes. Write down memories of how money was handled in your family, how it made you feel, and what lessons you took from those experiences. This exercise can help you identify patterns you may want to change and reinforce positive behaviors you wish to continue.
- Implement ...
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Their Current Financial Situation and Challenges
Kristen and Josh are finding it challenging to manage their financial situation, grappling with high fixed costs and debt while trying to balance savings and free spending without guilt.
Income: $65,640, Fixed Costs 82%
Despite their combined annual income of $65,640, Kristen and Josh are struggling with fixed costs that consume 82% of their income. Ramit Sethi notes that this percentage is exceptionally high, suggesting that ideally, it should be between 50 to 60%. Josh's sense of never being able to get "ahead to freedom" accentuates the couple's financial stress. Adding to their woes, Kristen faces monthly debt payments of $800 stemming from a blend of student loans from Canada, which are interest-free, and a line of credit at 8% interest.
$800/Month Debt Payments For Kristen's Student Loans and Line of Credit
Kristen and Josh's burden is compounded by a significant debt load, including $40,200 in total debt. This is made up of approximately $16,000 in Canadian student loans without interest, a line of credit with 8% interest amounting to $17,000, a Visa card at 15% interest with a $5,500 balance, and a balance transfer that is expected to be paid off by October. Their $800 monthly payments toward these debts add to their financial constraints.
Trapped and Unable to Enjoy Spending Due to Finances
The couple feels trapped by their financial challenges and has difficulty enjoying their spending without feeling guilty. The mere act of going out to eat is a mental exercise in reallocating money, typically subtracting it from other essential budget categories like groceries or savings. Kristen mentions feeling confined by their financial situation, and Josh echoes this sentiment, lamenting the difficulty of finding financial freedom given everything's cost and his current earnings. Their negotiations between saving, spending, and guilt suggest an effort to balance immediate desires with long-term goals.
Kristen and Josh Balance Debt, Savings, and Guilt-Free Spending
In their pursuit of financial health, Kristen and Josh take deliberate steps to manage their obligations. Kristen, determined to manage her debts, paid off her 2008 Volkswagen GTI in four years. She also took on a restoration project, a 1987 Volkswagen GTI, bought for $4,000, indicative of their limited leisure spending. They have made progress, improving t ...
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Their Current Financial Situation and Challenges
Additional Materials
Counterarguments
- Fixed costs consuming 82% of income may not be sustainable, but it's important to consider regional cost of living differences which can impact this percentage.
- While Kristen's monthly debt payments are a significant burden, it could be argued that prioritizing higher-interest debts could be more effective than a flat $800 across various debts.
- Feeling trapped by financial challenges is subjective and can be influenced by personal attitudes towards money and spending habits, suggesting a potential benefit from financial counseling or education.
- The decision to allocate 10% of income to guilt-free spending while carrying high-interest debt could be reconsidered; applying more to the debt could save money on interest in the long run.
- Josh's preference for allocating 75% of extra funds to savings is conservative; some might argue for a more balanced approach between savings and debt repayment, especially if the debt carries high interest.
- The suggestion to reduce fixed costs from 82% to 55% is ambitious and may not be feasible for everyone, depending on their circumstances and obligations.
- The purchase of a restoration pro ...
Actionables
- You can create a visual debt payoff tracker to maintain motivation and see progress. Draw a large thermometer on a poster board and divide it into sections that represent portions of your debt. As you pay off each section, color it in. This visual representation can make the process feel more rewarding and keep you focused on your goal.
- Consider starting a side hustle that aligns with your hobbies or skills to increase your income. For example, if you're good at crafting, sell your creations on an online marketplace. If you enjoy writing, offer freelance writing services. The extra income can be directed towards your debt or savings, accelerating your financial goals.
- Implement a "substitution savings" t ...
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Strategies to Improve Their Financial Outlook
Kristen and Josh are on a journey to better their financial situation. Through a mixture of hard work and focused strategy, they've outlined a plan to advance their household income and manage their spending for a brighter future.
Increasing Their Household Income Through Additional Income Streams
Kristen Expanding Nonprofit and Pet-sitting Opportunities
Kristen is looking to expand her opportunities through her nonprofit work and pet-sitting business. Ramit Sethi coaches Kristen on how to start a conversation with the board about increasing her income at the nonprofit, indicating that she has to communicate her value and negotiate the needed earnings to deliver growth for the organization. The nonprofit is applying for grants, and Kristen believes she could potentially double her monthly earnings from $600 to $1200. Additionally, she has set up a pet-sitting business which brings in an inconsistent amount of money each month. Ramit advises taking a conservative average of $450 a month in additional income.
Josh Getting a Driver's License and Considering a Side Job
Josh has made strides towards his earning potential: he's obtained a commercial driver's license and is considering driving a dump truck on weekends for an additional $1500 a month. Every year, he receives a $1 to $2 raise, and with the new certification, he might see his income go from $31,321 to $34,441.
Optimizing Their Spending and Debt Repayment
Kristen centers her focus on paying off high-interest debts before adding to her emergency fund, while Ramit suggests sometimes using available money to pay off debt more aggressively. To amplify these efforts, Kristen decides to redirect some of the money she has been investing towards building an emergency fund up to $10,000.
Meanwhile, Josh looks to cut back on his $300 per month nicotine habit. Ramit proposes reallocating resources, reducing savings from $1700 to $1600, and directing $100 to a vacation sav ...
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Strategies to Improve Their Financial Outlook
Additional Materials
Clarifications
- Ramit Sethi is a well-known personal finance expert, author, and entrepreneur. He is known for his practical advice on money management, investing, and entrepreneurship. In this context, he provides coaching to Kristen and Josh on strategies to increase their income and manage their finances effectively. Sethi's expertise lies in helping individuals optimize their financial decisions and achieve their money goals through strategic planning and negotiation techniques.
- Ramit Sethi advises Kristen to negotiate for increased earnings at her nonprofit by demonstrating her value and discussing the potential for growth. He also suggests that Kristen conservatively estimate an additional $450 per month from her pet-sitting business. Additionally, Ramit recommends that Josh consider driving a dump truck on weekends for an extra $1500 per month with his commercial driver's license.
- Josh decided to cut back on his nicotine habit to reduce his monthly expenses and improve his overall financial situation. By reallocating the money spent on nicotine, he aims to make progress towards his financial goals, such as saving for a vacation. This decision aligns with the strategy of optimizing spending and prioritizing financial goals outlined in their financial plan.
- Ramit's proposed financial structure for spending behavior changes involves reallocating resources to reduce savings slightly and direct a portion towards a ...
Counterarguments
- Kristen's goal to double her earnings at the nonprofit may be overly optimistic without considering the organization's budget constraints and grant funding variability.
- Relying on pet-sitting income can be unpredictable and may not provide a consistent additional income stream as it is subject to market demand and competition.
- Josh's plan to drive a dump truck on weekends could lead to burnout or reduce his availability for rest and family time, which might not be sustainable in the long term.
- The anticipated income increase from Josh's commercial driver's license may not materialize if job opportunities are scarce or if market rates for drivers do not align with expectations.
- Prioritizing debt repayment over building an emergency fund could leave Kristen and Josh financially vulnerable in case of unexpected expenses.
- Redirecting investments to an emergency fund may be a conservative approach, potentially missing out on higher returns from the market, depending on the investment vehicles they are using.
- Cutting back on a nicotine habit is a positive step, but Josh may require additional support or resources to successfully reduce this expense, as habits can be challenging to change.
- Reducing savings to fund a vac ...
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Income vs. Expenses in Financial Stability
The conversation surrounding financial stability often revolves around the delicate balance between income and expenses. For many, like Kristen and Josh, that equilibrium can be challenging to achieve.
Low Income: Focus On Increasing Earnings to Improve Finances
Trim Expenses, Boost Income For Transformation
Ramit Sethi underscores the necessity of increasing household income as a crucial step for stability, especially in cases like Kristen’s, where her current nonprofit income stands at $600 a month with potential to double. He posits that radical changes such as reducing fixed costs play a vital role in escaping low-income traps. Despite the lack of specific strategies provided, it is implied that focusing on enhancing income is far more transformative than merely trimming expenses. Josh's mention of an ideal income between $70,000 and $80,000 further reinforces the importance of aiming to increase earnings.
Strengthening Finances Through Savings and Debt Reduction
Emergency Savings and Debt Payoff Strategies For Expense Buffer
Kristen and Josh hold a modest savings account but aspire to build a robust emergency fund. With only $2,500 saved, they face the precarious possibility of financial instability should job loss occur. They consistently save small sums for specific emergencies, such as pet expenses and car costs. Sethi proposes an aggressive savings strategy for them to put away $1,800 monthly, targeting an emergency fund that can sustain them for over six months within a year. Diverting money from investments to reach a $10,000 emergency buffer is also a pathway they consider to create a safety net.
Balancing Immediate Financial Stability With Enjoying Life Now
Integrating "Fun Money" for Balanced, Guilt-Free Spending
Achieving financial stability does not mean postponing all forms of enjoyment. Kristen and Josh illustrate this by sharing their combined restoration project—a 1987 Volkswagen GTI—as an example of "fun spending." They also express a desire for spontaneous expenditur ...
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Income vs. Expenses in Financial Stability
Additional Materials
Clarifications
- "Fun money" in budgeting refers to a designated portion of one's budget allocated for discretionary spending on enjoyable activities or purchases without guilt. It allows individuals to indulge in personal pleasures or spontaneous expenses while still maintaining financial responsibility. By setting aside a specific amount for "fun money," individuals can strike a balance between enjoying life in the present and working towards their broader financial goals. This concept helps prevent overspending and promotes mindful financial decision-making.
- Ramit Sethi suggests setting aside $100 each month specifically for a vacation. This allocation is part of a broader financial strategy that emphasizes the importance of enjoying life while also sa ...
Counterarguments
- While increasing income is important, it's not always immediately achievable for everyone, and some individuals may have more success with reducing expenses due to their specific circumstances or job market conditions.
- Trimming expenses can sometimes be more immediately impactful than trying to increase income, especially if there are significant unnecessary expenditures that can be cut.
- An ideal income of $70,000 to $80,000 may not be necessary or realistic for everyone, as cost of living varies greatly by location and personal circumstances.
- Aggressive savings strategies may not be feasible for individuals with very low income or those who are already minimizing expenses; there may be a need for more nuanced advice tailored to individual financial situations.
- The concept of "fun money" might not be practical for those in severe debt or those who struggle to meet basic needs; financial advice should be sensitive to different income levels and obligations.
- Having separate accounts for vacations and fun money could potentially lead to overspending or a false sense of security for some individuals wh ...
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