“Our spending was fine when it was just the 2 of us...”

This week I received a Conscious Spending Plan from a couple in their mid-30s. Can't view this email properly? [View in Browser]() [Podcast Newsletter Header Final.png]() {NAME}, This week I received a Conscious Spending Plan from a couple in their mid-30s. They’re about to have a baby and move to a bigger apartment. Can their plan handle all these additional expenses? Let’s find out! --------------------------------------------------------------- Paid client of Betterment. Views may not be representative, see more reviews at the [App Store]() and [Google Play Store](). No guarantee of future performance or success is being made. [Learn more]() about this relationship. “Where should I put money I’ll need in 3-5 years?” I get this question every month in my Money Coaching program. My answer? A savings account or a high-yield cash account. If you want to keep your money safe but have it work for you, check out the [high yield cash account from Betterment](), this newsletter’s sponsor. 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Cash Reserve is only available to clients of Betterment LLC, which is not a bank; cash transfers to program banks conducted through clients’ brokerage accounts at Betterment Securities. **The national average savings account interest rate is reported by the FDIC (as of July 17, 2023) as the average annual percentage yield (APY) for savings accounts with deposits under $100,000. --------------------------------------------------------------- Check out this couple’s spending Now let’s get to another real couple who sent in their [Conscious Spending Plan](). They’re both 35 with a baby on the way. Here’s what they shared with my team: “I have struggled with our CSP, because when it was just the 2 of us in our current apartment our fixed costs were about 60% which I thought was great! Add in baby, day care and higher rent....it will increase significantly.” “Our financial goals include opening some type of education/investment account for our daughter.” “We had been saving for a down payment for a home, but decided now is not the right time for us to buy (after crunching ALL our numbers and really looking at the rent vs buy analysis).” Let’s take a look… NET WORTH $ Assets (current value of car, home, property, business) $20,000 Investments (include 401K, non retirement — all investments) $43,578 Savings $62,000 Debt (student loans, credit card debt, mortgage) $159,000 TOTAL NET WORTH $-33,422 INCOME Gross monthly income (all income before taxes added up) $16,225 Net monthly income (how much you take home after taxes) $11,326 FIXED COSTS (50-60% of take home) 86% Rent / Mortgage $2,800 Utilities (gas, water, electric, internet, cable, etc.) $400 Insurance (medical, auto, home / renters, etc.) $90 Car Payment / Transportation $381 Debt Payments - Student Loans $1,665 Groceries $800 Pets $200 Phone $119 Day care $2,201 Subscriptions (Netflix, gym membership, meal services, Amazon, etc.) $134 Miscellaneous (automatically adds 15% for things you forgot) $988 FIXED COSTS TOTAL $9,778 INVESTMENTS (10% of take home) 6% Post-Tax Retirement Savings--Spouse A $400 Stocks $0 Retirement contribution--Spouse B $300 INVESTMENTS TOTAL $700 SAVINGS GOALS (5-10% of take home) 4% Vacations $100 Gifts $100 Long Term Emergency Fund $200 Add your own here SAVINGS TOTAL $400 GUILT-FREE SPENDING (20-35% of take home) 4% GUILT-FREE SPENDING TOTAL (Dining out, movies, anything you want!) $448 My thoughts Net worth - It looks like they have $20,000 in assets. That’s typical for people who don't own a house, they don't have a lot of assets. In my case, my most expensive asset is probably my clothes! So low assets are not inherently a problem. - Investments are $43,000. If they’re making minimum wage, this is extremely good. If they're making six figures, this is not particularly great. But we'll take a look. - Savings at $62,000. Wow, that's high relative to investments. It's quite surprising that they have more in savings than invested. Not something I would want, but other people have different opinions. - Oh, and they mentioned that they've been saving for a down payment for a home, which explains it. - Debt at $159,000. Hmmm. Probably student loans. Income - Okay, their gross monthly income is $16,225. That's a lot of money. That's $194,700 a year. Wow! How come they only have $43,000 saved? Let's keep going. Fixed costs - Whoa, their fixed costs are 86%. That's too high. What are they doing? - First let’s look at housing costs. $2,800 is their rent + $400 in utilities = $3,200. Divide that by their gross monthly income $16,225. That's 20% of gross income on housing costs. Not bad! That tells me that they have margin to play with. So I'm guessing they have some very heavy other fixed costs. Let's take a look. - Yep. Debt payments at $1,665. That's huge. - Groceries and pets, fine. I don't have any feedback on that. - Daycare at $2,200. That’s a lot. I’m going to skip my commentary on how hard America makes it for young parents to get by. - Then miscellaneous which they are probably overestimating a bit, but not much. - Well, the fact is they can't afford this. Not on their current income. So let's take a look at the rest… Investments - They're putting about 6% each month into investments. Okay. I don't have much feedback on that. - Often parents of very young children realize that there are a whole bunch of costs they didn't anticipate. That extra money needs to come from somewhere. Often couples were not even saving or investing anything, so they're just like “oh my god!”. But for the highly disciplined couples that were investing, they might dip into money they would have been investing. For example, instead of investing 8%, they might drop it down to 6% or even 5% or 4%. My request to you is that you at least keep it going at 1-2%. Don't turn the factory off because it's really hard to set up automatic investing again. By keeping it going at even 1-2%, it’s sending a signal to yourself that investing is important. It's also keeping the automatic investing conduit open for later increasing your investments. Savings - Savings are at 4%. Why do you have $100 a month for gifts when you have $1,665 in debt payments? Not anymore. Not under Ramit Sethi's watch. Take that $100 a month and put it towards your debt. Knock that out a lot faster. - Vacations? I don't think so. How are you going to take a vacation when you have $159,000 in debt? And a baby. It doesn't make sense to me. Guilt-free spending - Guilt-free spending is at 4%. This is problematic to me unless it’s truly intentional and dialed in, which I doubt (see below). Here's my overall assessment: - First off, what is extremely impressive is that this couple was able to save $62,000. To me, that is the most promising thing of all because there is nothing better to predict your future behavior than your past behavior. - And the fact that they were able to create a goal, actively save for it, and accumulate $62,000 is great. Doesn't matter how much money they make, just the fact that they set a goal and were able to save a lot of money, very impressive to me. - Next, that money is just sitting there because they ran a buy vs rent calculation. Great job. Another impressive sign. - What is confusing to me is that so far they've demonstrated three really fantastic things. #1, they saved a bunch of money. #2, they ran a buy versus rent calculation. #3, they have a high income. All three of these combined to tell me that they're pretty financially savvy. - So the question becomes, why do they have $159,000 of debt? Now if it is student loans, okay, but I would be surprised that they have $1,665 a month in payments unless it's high-interest debt. So this is a bit of a puzzle piece that I can’t figure out since I don’t actually speak to these couples — all I see is their CSP. - My suggestion is that having 86% on fixed costs is unsustainable. What can you do about it? Well, you can do a few minor things. You can redirect an extra $100, an extra $200 or $300 even towards that debt. Without knowing the terms of that debt, I can't tell you how much that's going to help. But knowing that you have $159,000 of it and we assume that it's all the same interest rate, that will save you a few years of payments. You should do that, but that's not enough. - Next, there's not a lot of margin to play with when it comes to your investments and your savings. It's not like you're investing 35% of income. You're investing 6%. So sure, you want to take that down to 5% or 4%. It might provide a little bit of cash flow, but it doesn't really materially change anything. - Your guilt-free spending apparently is already cut to the bone. So now we're talking about two options. - Option 1: increase your income. I hope you do, but maybe you will, maybe you won't. But that would be something I would consider and make it strategic. - Option 2: Tap into that $62,000 of savings. This is a tricky decision so let’s play it out. You have accomplished a lot by saving that money up, but candidly, it's probably not in the cards for you to buy anytime soon — not with $159,000 of debt. So you may want to take at least some of it and put it towards this debt. Of course I don’t know the terms of the debt, but if you have $159,000 in credit card debt, I would take most of that savings and I would put it right into there. - If on the other hand it's student loan debt at, say, 6%, then maybe you keep $20,000, but take the rest and put it towards your loans. There's no specific answer here. You need to run a model on all different scenarios saying, "What if we put $10,000, $25,000, $50,000?" - But assuming that debt is high interest, that will help you in the long term by cutting the duration you have to pay that money and also saving you a ton on interest payments. - Couple of last things I want to point out… - Day care will go away eventually, but as a lot of parents will note, other expenses will come up. Think ahead. If you're a first-time parent, talk to parents who are a few years ahead of you and ask them what changed in their finances after day care ended. That will allow you to carefully model what to expect, 3-5 years from now. Right now, it can feel like you're simply treading water — there are times where this has to be the case, but make sure you have a path to something more than that. - I also want to highlight a common mistake I see people make which is making too many financial changes all at once. Having a baby (which requires all kinds of expenses that you never considered, including time and maybe even a reduction in income), moving to a larger apartment, and maybe buying a new car — all at the same time. This is almost always a recipe for a very, very hard few years. Unless you have so much money that you can do all of these things with no material impact, this is usually a big mistake. There's not much this couple can do now, but I want to point this out for everybody else. Be very careful about making more than one major financial change per year. - Notice this couple wrote to me: "When it was the two of us, our fixed costs were 60%, but now we have a baby, day care, and higher rent." That’s too many changes all at once. - Finally, they say “Our financial goals include opening some type of education/investment account for our daughter.” I don’t recommend this at any time in the near future. You don't have the money for it. Instead, focus on paying off this debt: redirect unnecessary expenses towards that debt, consider using part of your savings towards the debt, and work strategically to increase your income. Wishing this couple the best of luck! What did you take away from this CSP? [Signature] P.S. Join me in NYC live on April 10th! [I’m hosting a live event in NYC]()! Over the last few years, I’ve talked to hundreds of couples about their money. Now, for the first time, I’m sharing what I’ve learned with you, live on stage. 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