Michelle, 42, and Ryan, 43, adore their three young children — and they’re spending a lot of money to show it.
“I don’t say, ‘I don’t have the money, I can’t buy it.’ I don’t say things like that,” Michelle told self-made billionaire Ramit Sethi on a recent two-part episode of his podcast, “I Will Teach You to be Rich,” asking that both men not use their last names.
Ryan makes about $140,000 a year as the sole financial supporter, and the couple’s net worth is about $970,000, but they find themselves stressed about their finances and constantly dipping into their savings to cover regular expenses.
“This is a sinking ship,” Ryan said. “We can’t continue like this because we’re going to run out of money.”
Their combined fixed expenses, including their mortgage, insurance, transportation, and other necessities, exceed their monthly income. Plus, spending on what the couple calls “the little things” has added up and gotten out of control. Some are essential purchases, like carbon monoxide detectors, but many are discretionary purchases, like a beach canopy. They spend nearly $2,000 a month on Target and Amazon alone.
“You’re losing money every month,” Sethi told them. “You’re bankrupt.”
Here’s why the couple is stuck in their current situation and Sethi’s advice for moving forward.
“I’ll die if I’m cut with 1,000 pieces of paper.”
When Sethi asked about their spending issues, Michelle and Ryan repeatedly mentioned buying from Target and Amazon.
In addition to essentials like groceries and diapers, the couple also make $15 to $30 impulse purchases, like sunglasses for the children, soccer equipment and bike tires, that add up in the end. “Shopping on Amazon is literally like getting cut by a thousand paper cuts,” Michelle says.
But Sethi wasn’t convinced. While making a conscious effort to cut back on unnecessary spending could help, couples needed to look at the bigger picture, he said.
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It’s not just that they make a lot of impulse purchases, but also that they don’t have systems in place to make better decisions. When Sethi asked the couple where they could save money, Michelle was skeptical they could cut back significantly, since she felt many of these expenses were necessary.
“This is what happens when you allow your spending to get out of control,” Sethi says. “The human mind tricks you into thinking that everything you save is absolutely necessary, so it becomes very difficult to cut back.”
He recommended looking at your big discretionary spending areas, like eating out or shopping at Target, and gradually cutting your spending by 50% over six weeks until you stabilize. From there, you’ll be able to see things more clearly.
Telling your kids “no” can take some getting used to, but it can also help them develop a better relationship with money as they get older, Sethi says.
“Now we’re in a bind.”
Sethi doesn’t advise people to save too much money, but in Ryan and Michelle’s case, that’s part of the problem.
Michelle prides herself on sticking to good habits and building up savings and investments throughout her 20s, and while Ryan wasn’t as careful with money, she says he bought himself a house before they started dating.
Overall, the couple has been able to accumulate assets of about $585,000, including about $468,000 in their home, retirement savings and other investments.
“I’ll have everything covered when I retire, but now I’m struggling,” Michelle said.
At the time of recording the podcast, the couple was allocating 14% of their take-home pay to retirement savings and other after-tax investments, which is a great strategy for growing your investments, especially when you’re younger, but not for the rest of their monthly expenses.
“When it comes to spending, you are spending way too much,” Sethi told them, “and when it comes to investing, you already have enough money if you literally stopped today.”
The couple realized that cutting back on their monthly investments would give them the cash flow they needed to cover their necessities and give them the peace of mind to splurge on the things that were important to them but that they’d neglected, like date nights.
“The biggest breakthrough came when they finally realized they could get control over their spending,” Sethi said. “They had been overinvesting, so being able to reallocate cash was a nice bonus.”
Check out parts 1 and 2 of Sethi’s conversation with Michelle and Ryan.
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