230. “We spend 168% of what we make. What are we missing?”
In this episode of I Will Teach You To Be Rich, financial advisor Ramit Sethi works with a couple facing severe financial challenges, including over $768,000 in total debt and monthly expenses that exceed their income by 68%. The situation is further complicated by trust issues stemming from concealed business debt and poor financial communication between the partners.
The episode covers the couple's plan to address their financial crisis through increased transparency and new income streams. Sethi outlines specific recommendations, including implementing weekly financial reports and avoiding additional debt. The couple develops action steps, with one partner pursuing a new career as a nail technician while the other explores business opportunities to boost their income.
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1-Page Summary
Couple's Financial Situation and Debt Severity
A couple, Amy and John, are struggling with a staggering $768,181 in total debt, including a $514,000 mortgage, $100,000 in tax debt, and various other obligations. Their financial advisor, Ramit Sethi, points out that their fixed costs represent 168% of their income, meaning they're overspending by 68% each month. With only $2,160 in savings, the family is extremely vulnerable to financial emergencies.
Financial Trust and Communication Breakdown
The situation is complicated by what Amy calls "financial infidelity." John had concealed significant business debt for nearly two years, which only came to light when the CRA contacted him. The discovery has severely damaged their relationship, with Amy feeling betrayed and John feeling defensive. The couple's communication about finances has broken down, as evidenced by Amy applying for a Tesla loan without knowing their true financial situation.
Ramit's Advice and Recommendations
Ramit Sethi emphasizes the need for immediate and decisive financial changes. He recommends implementing a weekly financial transparency report where John details big checks and expense allocations by Friday night for Amy's review on Saturday. Ramit warns against taking on new debt, calling it "kryptonite," and encourages the couple to be honest about their situation and take drastic action to address it.
Specific Action Steps
The couple has developed a concrete plan for improvement. Amy is training to become a nail technician, aiming to earn $3,000 monthly, with a six-month deadline to evaluate the business's success. Meanwhile, John is exploring additional income opportunities, including renting out his shop space for $700 monthly and pursuing an $80,000 contract that would require longer work hours. To support this, Amy has agreed to handle more domestic responsibilities while John focuses on increasing their income during weekdays.
1-Page Summary
Additional Materials
Clarifications
- "Financial infidelity" is a term used to describe situations where one partner in a relationship hides financial information or activities from the other, often involving secret spending, undisclosed debts, or financial decisions made without the knowledge of the partner. It can lead to feelings of betrayal, mistrust, and can severely impact the dynamics of a relationship. This behavior can damage communication and trust between partners, making it challenging to work together on financial matters effectively. In essence, it involves breaches of financial honesty within a relationship, akin to emotional infidelity but related to money matters.
- Ramit Sethi advises the couple to implement a weekly financial transparency report where John details significant financial transactions for Amy's review. He warns against taking on new debt and stresses the importance of honesty and drastic action to address their financial situation. Sethi emphasizes the need for immediate and decisive financial changes to improve their financial health.
- Amy's plan to become a nail technician involves her undergoing training to provide nail care services professionally. This career path typically includes learning about nail health, various nail treatments, and techniques for applying nail enhancements like acrylics or gels. John's additional income opportunities may include renting out his shop space to other businesses or individuals for a monthly fee and pursuing a contract that could potentially bring in a significant amount of money.
- Amy and John's breakdown in financial communication stemmed from John concealing significant business debt for almost two years, which Amy only discovered when contacted by the CRA. This lack of transparency led to feelings of betrayal and defensiveness between the couple, highlighting a breach of trust in their financial relationship. The situation was further exacerbated by Amy making financial decisions, like applying for a Tesla loan, without being fully aware of their actual financial standing, indicating a lack of open dialogue and shared decision-making in their financial matters.
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Couple's Financial Situation and Debt Severity
A couple, Amy and John, faces a dire financial situation with overwhelming debt and unsustainable expenses that are causing significant strain on their familial and romantic relationships.
Debt Burden: Mortgage, Credit Card, and Tax Debts
Amy and John are in a combined $400,000 of debt, excluding their mortgage or car loan. Their total debt is staggering at $768,181, with a breakdown as follows:
- Mortgage: $514,000
- Credit card debt: $7,000
- John's income tax debt: $53,500
- Amy's income tax debt: $43,680
- Car loan for a Tesla Model Y 2023: approximately $50,000
- Source deductions for unemployment insurance and CPP contributions: $180,000
Their monthly debt payments come to $5,888, which is over half of their take-home pay. John mentions falling behind on payments for source deductions that he was responsible for as an employer.
Couple's Unsustainable Expenses and Lack of Savings
The couple's financial advisor, Ramit Sethi, has pointed out that their fixed costs represent an astonishing 168% of their income, meaning they are overspending by 68% each month. This causes them to incur more credit card debt to cover day-to-day expenses. The fixed costs alone explain their financial hardship, where they are essentially spending $4,190 more than what they earn every month.
When Amy's income is factored in at a modest $1,000, their situation remains dire with fixed costs still amounting to 126%. Their already unsustainable situation is worsened with actual debt payments reaching around 151% of their take-home pay, which Ramit describes as an unsustainable financial condition.
Amy and John's savings amount to a mere $2,160, which is drastically low, especially considering they are a family with children. This leaves them vulnerable, one emergency away from potential disaster such as losing their home or their children having to leave their schools.
Impact of Financial Troubles on Relationships and Fam ...
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Couple's Financial Situation and Debt Severity
Additional Materials
Clarifications
- Source deductions for unemployment insurance and CPP contributions are amounts withheld from employees' paychecks by employers. These deductions are then remitted to the government on behalf of the employees. The $180,000 mentioned represents the total sum withheld for these purposes, indicating the significant financial responsibility John had as an employer.
- Ramit Sethi is a well-known personal finance advisor, author, and entrepreneur. He is recognized for his practical financial advice, particularly on topics like saving, investing, and managing debt. Sethi often emphasizes the importance of automating finances and making conscious spending decisions to achieve financial stability and success. His work includes books like "I Will Teach You to Be Rich" and online courses focused on personal finance education.
- The fixed costs representing 168% of their income indicate that their essential expenses exceed their total income, leading to a deficit each month. This means they are relying on credit and increasing debt to cover basic living expenses, contributing to their financial distress. The high percentage highlights the severity of their overspending and the urgent need to reduce expenses to align with their income. This situation is unsustainable and requires immediate action to avoid further financial deterioration.
- Fixed costs are expenses that remain constant regardless of production levels or sales volumes. In this context, fixed costs are calculated by adding up all the essential expenses that do not fluctuate with changes in income, such as rent, utilities, insurance, and loan payments. These costs are crucial to cover each month to maintain a certain standard of living or business operations. Understanding fixed costs helps in budgeting and financial planning by providing a clear picture of the minimum expenses that must be met regularly.
- The fixed costs being 168% of their income means that they are spending more than they earn each month just to cover essential expenses, leading to a significant deficit. This overspending on fixed costs contributes to their increasing debt burden and financial strain. It indicates a severe imbalance in their budget, with a substantial portion of their income going towards non-negotiable expenses. This high percentage highlights the urgent need for the couple to reassess their spending and financial priorities to achieve a sustainable financial situation.
- John falling behind on payments for source deductions means he has not remitted the required amounts withheld from his employees' paychecks for taxes and other obligations like unemployment insurance and CPP contributions to the appropriate authorities. This can lead to serious consequences, including penalties and legal actions, as these deductions are crucial for funding government programs and ensuring employees receive benefits they are entitled to. It indicates a potential financial mismanagement issue on John's part, impacting both his employees and the couple's overall financial situation. This situation requires immediate attention and resolution to avoid further complications.
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Financial Trust and Communication Breakdown in Relationship
The conversation between Amy and John hinges on the lack of financial transparency and communication, which has led to significant relationship strain.
Lack of Transparency and Communication Around Couple's Finances
Amy, Caller #1, did not know the full extent of their debt until the CRA contacted John. His business, started before their relationship and one which Amy had no involvement in, had accumulated significant debt. When John eventually disclosed this to Amy, she felt defeated and wanted the business gone. John himself was ashamed and felt defeated, having tried to manage the debt, which he had plans to tackle with upcoming big jobs, but his last backup plan failed.
Amy recalls that detailed communication about the implications of the debt on their personal finances was lacking when John stopped taking home an income. This suggests a pattern of poor financial communication, as evidenced by the couple's frequent financial situation talks, which lack clarity and mutual understanding.
John admits he was scared and tried to handle the debt alone, which eroded Amy's trust. This resulted in a unilateral decision-making process, as illustrated by Amy applying for a car loan under the assumption that they were financially stable, only to discover the hidden debt while driving a new Tesla.
Husband's Hidden Debt Erodes Trust in Financial Talks
Amy refers to the situation as a case of "financial infidelity," indicating a deliberate concealment of debt for 18 months to two years. This greatly damaged the trust in their relationship, with Amy feeling humiliated and angry about the situation. John, on the other hand, feels as though he is being painted as the "enemy" and admits to significant mistakes with the business financials but highlights that not all details have been accurately addressed.
Impact of Financial Infidelity on Relationships
Wife Calls Debt "Financial Infidelity," Damaging Relationship
The term "financial infidelity" is used by Amy to describe how the hidden debt has affected their relationship. She explains that this secret has turned what was believed to be a strong financial standing into ...
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Financial Trust and Communication Breakdown in Relationship
Additional Materials
Actionables
- You can create a shared digital finance dashboard to maintain transparency with your partner. Use a simple spreadsheet or a budgeting app that both of you can access to track income, expenses, debts, and savings. Update it together during a bi-weekly finance date night, where you discuss any changes, goals, and concerns in a relaxed setting.
- Establish a 'no-surprises' financial policy in your relationship by setting up automatic notifications for large transactions and new debts. Both partners can receive alerts from your bank or credit monitoring service whenever there's significant financial activity, ensuring that both are immediately aware of the state of your finances.
- Develop a financial contingency plan together that outlines steps to take in c ...
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Ramit's Advice and Recommendations for the Couple
Ramit Sethi is advocating for immediate and decisive financial changes for John and Amy, emphasizing honest discussions and drastic action to address their strained situation.
Ramit's Emphasis on Decisive Changes
Ramit Urges Immediate Financial Changes for the Couple
Ramit Sethi indicates that John and Amy need to make immediate financial changes, suggesting the situation's gravity requires quick and drastic action. He prompts John to acknowledge the significant debt accumulated, implying that honest conversations and significant actions are necessary to resolve their issues. Ramit states, "Bad news in the short term is good news in the long term," pointing to the urgent need to alter their financial situation drastically.
Ramit Urges the Couple's Honesty and Drastic Action
Ramit underscores the couple's unsustainable financial state, noting that they spend more than they make every month. He questions the couple about their plan for addressing secret debts and their overall financial health. Ramit Sethi also advises John to consider significant changes, such as selling their home to save money, and applauds the couple's joint discussion regarding financial and work-related changes.
Ramit's Tips for Better Couple Communication
Ramit Advises a Weekly Financial Process With Set Expectations and Accountability For Partners
Ramit Sethi emphasizes the need for a specific transparency report, updated weekly, where John will explain big checks, how the money will be divided, and that expensive purchases will be discussed between the partners. He suggests a structured approach where Amy reviews a financial document every Saturday that John prepares by Friday night, following a detailed template.
Ramit Suggests Involving Family Support to Help the Couple
Additionally, Ramit notes the benefit of involving family support, specifically emphasizing being super specific about what they need from John's parents to ma ...
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Ramit's Advice and Recommendations for the Couple
Additional Materials
Counterarguments
- While immediate action is often necessary, it's important to ensure that decisions are not made in haste without fully understanding the long-term implications.
- Honest discussions are crucial, but they must be handled sensitively to avoid additional stress and conflict, which could exacerbate the financial strain.
- Selling their home could provide a quick influx of cash, but it might not be the best long-term solution if it leads to higher costs in the future or negatively impacts the family's stability and emotional well-being.
- A weekly financial process is helpful, but it must be flexible enough to adapt to the couple's changing circumstances and not add undue administrative burden or stress.
- Involving family support can be beneficial, but boundaries must be set to maintain the couple's independence and prevent potential familial tensions.
- Paying off the highest-interest debts first is a common strategy, ...
Actionables
- You can create a visual debt payoff tracker to maintain motivation and clarity on your financial goals. Draw or print a chart that represents your total debt, and color in sections as you pay off portions, giving you a visual representation of your progress and a psychological boost as you see the debt shrink.
- Develop a "financial fire drill" routine to prepare for potential financial emergencies. Set aside time to simulate a financial crisis, like a job loss or unexpected expense, and practice how you'd adjust your budget and lifestyle. This can help you identify weaknesses in your financial plan and encourage proactive adjustments.
- Initiate a monthly "financial date ...
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Specific Action Steps the Couple Plans to Take
The couple has laid out a plan that hinges on both of them taking on different roles, with the wife aiming to become a nail technician for a new source of income and the husband seeking to expand his business opportunities.
Wife's Plan to Become a Nail Technician
Wife in Nail Tech Program, Aims For $3,000/Month Net Income
Caller #1, the wife, has enrolled in a nail tech program and is conducting it at home, working around the children's schedules. She anticipates that once the kids are back in school, she will be able to dedicate more time to the program. Her goal is to open a nail studio, and she has estimated, after discussions with others in the field, that she could potentially net an income of $3,000 per month. The couple also has considered how the wife's new income might impact their fixed costs, with Ramit suggesting that they adjust her projected take-home income in their financial planning tool to help evaluate the impact of potential income changes.
Couple Sets 6-Month Deadline to Evaluate Business Success Before Other Options
The couple has agreed upon a deadline to assess the success of the wife's nail studio business. They are comfortable with a six-month period to establish significant clientele and income. Should progress not meet their expectations, they plan to reconsider and make changes.
Husband's Plan for Additional Work and Income Opportunities
Husband Seeks Business Space Rentals for Lucrative Contracts to Boost Income
The husband is exploring additional opportunities to increase his take-home income by renting out space at his shop, which could potentially earn them an additional $700 a month. He is also considering taking on extra work, such as a new job before Christmas that could be worth $80,000. Although this venture could require working 12-hour days, he is open to the possibility for the short-term boost in income but is cautious about the impacts suc ...
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Specific Action Steps the Couple Plans to Take
Additional Materials
Clarifications
- Ramit is a financial advisor or consultant who is involved in the couple's financial planning. He suggests adjustments to the wife's projected income to assess its impact on their finances. Ramit's role is to help the couple evaluate the financial implications of the wife's new income from becoming a nail technician.
- The husband's name is John, as mentioned in the text. Initially, the text referred to him as "the husband" before revealing his name later on. This transition may have caused confusion for readers trying to follow the narrative.
- A financial planning tool is a software or application used to track, manage, and analyze one's financial situation. It helps individuals or couples create budgets, set financial goals, and forecast outcomes based on different scenarios. By inputting income, expenses, savings, and investments, users can see a comprehensive view of their financial health and make informed decisions. It aids in understanding how changes in income, expenses, or investments can impact overall financial stability.
- Amy's role involve ...
Counterarguments
- The wife's goal of making $3,000 per month may be optimistic, especially if she is new to the industry and has to build a clientele from scratch.
- A six-month deadline to evaluate the success of the nail studio might be too short to establish a stable business and clientele, which often takes longer in the beauty industry.
- Relying on renting out space for additional income assumes there will be consistent demand for the rental space, which may not be guaranteed.
- The husband's potential new job and longer working hours could lead to burnout or negatively impact family dynamics and his relationship with the children.
- The wife taking on more domestic tasks could lead to an imbalance in the division of labor at home, potentially affecting her ability to focus on her new bus ...
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