Ramit Sethi 0:02
You're not just lecturing. That's not the relationship with money. It's first getting internally healthy on your own, and then it is demonstrating it to your kids and giving them increased autonomy. That's how you build a healthy culture of money in a family.
T-minus 10 seconds, welcome to the journey to launch podcast with your host jameelah. So frogs as a money expert who rocks her talk, she helps brave juniors like you get out of debt, save, invest and build real Whoa. Join her on the journey to launch to financial freedom. For three two one.
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Jamila Souffrant 1:48
Hey, John here is back with another What I hope to be exciting episode for you educational inspirational with a returning guest, New York Times best selling author meet Satie who's been on the podcast before he was on Episode 177, where we talked about how to live a rich life and make your own money rules because remate is all about living life on your own terms, which is what I'm about what I teach you guys to live your life about. And so I'm excited to invite remote back on not only to talk about his new project, so his New York Times bestselling book, I Will Teach You To Be Rich, he has just come out with a companion journal. That's right for me.
Ramit Sethi 2:27
Jamila Souffrant 2:28
So a companion journal to help everyone who's read it, who needs to still read it, but to also help deepen the philosophies you talk about and help them really plan out how to live a rich life. So we'll talk a little bit about the journal. But I thought to do something a little differently this time for me is that I sourced questions from my audience. No, I said, Hey, I'm doing a special podcast episode with a special guest. And I want to take some of your questions so we can answer them together. And because I always love how real and straight up you are, with how you give advice, I thought you'd be the perfect person to help me do this. And so I'm going to read a couple of questions, we'll see how many we can get through. And you'll get some advice from myself and roommate. So how does that sound?
Ramit Sethi 3:10
I can't wait. Let's do it.
Jamila Souffrant 3:12
All right. So one of the first questions that came up, and I get asked this a lot, especially as a mom, myself, is about children and financial responsibility. So this question comes from Jackie, she says, What is the best way to teach my children financial responsibility? And how would it differ from my 16 year old versus my six year old? And then the follow up question is, should I consider getting a debit card for them? So what do you think meet?
Ramit Sethi 3:40
Well, let's start with your advice. You're the parent, I want to hear what you have to say first.
Jamila Souffrant 3:45
So yeah, I have pretty small children in terms of age eight, six, and four. But I'm of the opinion that it's never too early to start talking about money, especially because we live in an age where money is so digital, like, you know, we are doing a lot of transactions on our phone. And when I was growing up, you know, most of it was paper money. And so I do believe that that essence of understanding the value of money and how quickly we receive things online, like just ordering things can be lost on children. So in my opinion, actually having physical money, regardless of the child's age is important, because so much of our society now doesn't deal with it. And so with my children, what we started doing is giving allowances. And so literally, I go to the bank, I ask for singles. And then we tell them that we're giving them money each week, and it's not a lot. You know, they're so young that they don't need that much. But they have enough where they have to divvy it up between two envelopes, saving and spending. And they put their money in their envelope, but we help them put it in their envelope. And so that way when they're asking mommy and daddy to buy ice cream or to do certain things that we just, it's not a priority for us in our budget. We say to them, how much money do you have in your spend envelope, and that helps them understand like how long it takes to save up, like it's this ice cream cone for $4. Which, by the way, is pretty crazy that ice cream cone cost $4 At the ice cream truck nowadays is worth it. So we do kind of real life examples based on what they enjoy, and what they have. So that's like my real life experience with younger kids. And I'd say I don't have older kids yet. But let's just say you're just coming into the world of being conscious with your money. And so your your older child has not had the experience of you ever talking to them as they were going up, it's still never too late. sitting them down and being transparent about how things work in your household. You know how things are bought, I'm actually advocate of sharing income with your people in your household and your children. Not necessarily you don't have to go all into detail. But hey, mommy and daddy, we earn this much the mortgage is this much like this is how much we are spending to like create this life for you, and having those transparent conversations. And then last thing I'd say about the debit card is I do believe that you can start giving a debit card attached to an account, they have tons of different types of accounts for kids nowadays that limit how much they have in it. So that way they can start getting used to the idea of spending on a card and that the first time is not in college, when you're not there to help guide them.
Ramit Sethi 6:26
I love it. I love your approach with money and your children is awesome. My philosophy is similar, I want to add on to what you said, which is that wealthy people talk to their children about money. It is a normal topic of discussion. It's not hidden. It's not something that is shameful or guilt ridden. It is a normal part of business, just like a family that is focused on being healthy, talks about going for a walk going for a hike, what type of food choices they make. It's totally normal. It's a course of business. And so when I speak to couples on my podcast, some of them who have really good relationships with money and others who do not. You notice this striking pattern, which is that wealthy people speak to their children about money all the time. And those who have an unhealthy relationship with it, hide it from their kids. Why? Because they view money as negative and therefore they want to protect their children. I don't want to protect kids from money. I want to expose them to it, I want to talk about it. But here's the key. If you want to teach your children to have a healthy relationship with money, you have to have it first. It all starts with you. How do you treat money? Are you in debt? If you are do you have a debt payoff plan? Are you saving and investing? These are the kinds of things that you have to get right, internally first, first alone and if you're in a relationship with your partner, and then you can demonstrate it to your kids. So how would you demonstrate it? It would be things like Daddy's going to log into the checking account so we can make sure that everything's working right, come on, can you help me push the button? That's for a very young child, as you get older and allowance perhaps, or perhaps we're going to go to the grocery store and we have $25 Here's the things we need to get. How should we do it? Little little task, even if they get it wrong? That's okay. You let them fail. And then by the time they're 16, if you have been doing this for their entire life. Now we're talking about fairly sophisticated tasks, our family is going to go on vacation. How much should we spend on this vacation? Okay, I would like you to plan Thursday through Saturday, here's the money you make the decisions. Now the problem is that your kids might pick something horrible. It's like, I don't want to go to that terrible hotel, and I definitely don't want to eat it that horrible restaurant. So that's another story for how far do you let your kids go? Your kids are like, Daddy, I really want us to go to TGI Fridays. I go, Ah, god, we gotta go to TGI Fridays. All right, fine, I guess we need to let kids fail. They're going to learn when they eat that dish. This was a terrible decision. But aside from that, what you're hearing is, you're not just lecturing them. That's not the relationship with money. It's first getting internally healthy on your own. And then it is demonstrating it to your kids and giving them increased autonomy. That's how you build a healthy culture of money in a family.
Jamila Souffrant 9:27
I totally agree. And I love how you brought up that you have to be whole and okay with your relationship first. Because then you're just teaching from a place of it's not authentic. And I believe the people who know us best actually are our kids because they really see us in our, in our various forms, and moments, especially being a parent myself. So I know that and similar to also when I get questions from people to say, Well, how do I save and invest on behalf of my children, which is you know, it's great. And it's that you want to do that but do you are you okay first before you do At
Ramit Sethi 10:00
Jamila Souffrant 10:01
the greatest gift you can give your child speaking from someone whose mom is thank God staple herself financially is the gift to not have to worry about taking care of their parent.
Ramit Sethi 10:11
I agree 100% I get questions from parents constantly on Instagram on Tik Tok, and on my email newsletter, and this is how it goes, I'll play it out for you because it happens dozens of times a week, they go meet, I finally got your book, and I want to invest for my son, he's two years old, should I open up a 529? And I go, first, tell me about yourself, what is your portfolio look like? And invariably, they will go? Well, I'm 42 years old. And I make $70,000 a year and I have $13,000 in debt and I have nothing saved. I go, No, no, no, no, no, we're going to focus on you first. And what they are really saying psychologically, when they're asking about their two year old, this is what they are saying, I know that I have lost the game of personal finance. But at least my son won't lose that game. They are already approaching this entire world of money with their kids from a position of having lost and they haven't lost at 40. Even if you have dead, you could pay that off, you can accumulate a lot of money and a healthy relationship with money. But it means making choices. And that means prioritizing yourself first.
Jamila Souffrant 11:28
So true. And I think what comes up for me also is this idea of the only wealth that can be passed on to our kids, it's just financial. And that's not true. Obviously, it's great to give them a foundation and to give them a jumpstart right in life. Amazing. But let's not discount this idea of emotional generational wealth, and the competence and education that you can instill in your kids. Were giving them a platform like building them up as a whole person. And I know it sounds corny, but I guess coming from a single mom who had nothing who poured into me, the little that she had, which was not a lot of money, but allowed me to be the person I am today with money is that you can do this with your kids, it does not always have to mean setting them up and having them have a lump sum by the time they graduate college, you know, it's okay, if you can't necessarily help them with college, if you're still working on yourself. I think really, ultimately, it's about pouring into them emotionally, educationally. And that that doesn't really cost much. I mean, of course you could do the extras. But that just takes a lot of intention, and care, which are more important or just as important as the money.
Ramit Sethi 12:36
I agree. My parents are immigrants from India. And we didn't have a lot of money growing up. My dad worked, my mom stayed home with the kids. And we had a pretty big family. So it's not like we were expecting to be handed over some huge inheritance. No, in fact, my parents laughed about it. They're like what inheritance. And on the other hand, what they taught us is the value of hard work. Right? They taught us that getting good grades is important. They taught us that showing up to school every day is important. And they taught us that if you work hard, then you will be in a financially fine position. If you're educated, you work hard. And yes, if you get a little lucky. Overtime, we took their lessons. And my family did well, right. We were educated and we went off to have good jobs. It doesn't mean that they had to hand us a huge check. If anything, they told us okay, we're meet, you're gonna go to college, you got to find scholarships, because we don't have any money for you. So I did. And I learned that from my parents. So you're right, that there are so many different types of wealth. That's why I talk about I Will Teach You To Be Rich. Yes, money is important. It is a small but important part of a rich life. But being able to have a healthy relationship with money. Being able to understand where you want to spend more on and also where you want to spend less on. Wow, my parents really taught me that we didn't need to spend a lot of money to have fun. And when I think about our vacations growing up, it was I mean, it was not exotic. It was getting in a van and driving from Northern California to Southern California. And we would stay with relatives. And it was simple. And I appreciate that having grown up with that sense of frugality. Now, I've had to learn other lessons about how to spend money and how to enjoy money. Those are different lessons. But yes, I completely agree with you that you do not have to pass on huge checks to your kids in order to give them a rich life.
Jamila Souffrant 14:35
And I will say this it's funny as you just said that I don't know if this is a good or bad thing but my son my eight year old I started to buy flowers recently when I go to Trader Joe's because they're not that expensive. And he's starting to like he's just like why are you spending your money on the flowers? They're gonna die. It's a waste of money and you can you can you can buy more things with this or do something different. And while like I disagree with his thought, like I'm glad that he is actually thinking about for him The value of money and how he would spend his money because he's like mom to waste, I would spend it differently.
Ramit Sethi 15:06
There you go. Totally agree. I love the philosophy.
Jamila Souffrant 15:09
Yes. Okay. So let's go on to the next question that we got. And it's from Natasha. Now this one, the sentiment of this question I hear a lot. She says, Where do I start in order to take back control of my finances? I am making six figures. But I'm still broke, and can't save any money. So this is a big general question. But remain, I'd love for you to take this one. First. What do you tell Natasha,
Ramit Sethi 15:33
here's what people think I want to start with, oh, let's keep a budget and you've got to cut back on coffee and you can't go out and you can't buy jeans and you can't take the cat. And maybe when you're 90 years old, you can get out of your cave, and go enjoy life for the few remaining years that you have. And then you're going to move to Florida so you can evade taxes and then sit in the sun for two days and die. What kind of life is that is not for me, that's not my rich life. And now if you really want to move to Florida, okay, great. I have no problem with it. But if you decide to defer your life until Sunday, that's not there's plenty of other people that talk about that. Here's what I would say, first off the fact that she's making six figures, quite impressive. That tells us that she has skills. Fantastic. You know, here's an interesting thing. Okay, so that's good. Now let's talk about what needs a little work. She's probably overspending. In my work, I find that people who are making high incomes and feel behind are typically overspending in two critical areas. The first is housing. And the second is their cars. Now, there are exceptions, it's okay, some people might be eating out a lot, but it's not usually the case with the six figure earner. It's housing. And it's cars. And those are both examples of fixed costs. So you know, I put together this template, it's called a conscious spending plan. And what I would tell Natasha is go take your current spending, you don't have to open up any accounts or documents, just top of your head, go to iw t.com/csp. Plug in how much you spend in the basic key areas. That's like your housing, your car, any debt, even going out. Drinks, vacations, all of it. I have these recommended percentages. For example, for fixed costs, I recommend 50 to 60% of take home pay, I would be willing to bet Natasha is way over that. And if Natasha is over that 50 to 60% for fixed costs. That's why she feels underwater. And so suddenly you go from oh my god, I make all this money. But I have no idea where it's going to a surgical view on the problem. And once you understand the problem, then you have some pretty clear options. If you your car is too expensive, okay, you have options. You could sell the car, you could keep the car and wait until it's paid off and then redirect that money. You could earn more, you have lots of options. But what happens is people don't understand usually what the problem is, so they start to try doing a little bit of everything. Let me cut back on flowers. Let me cut back on soy sauce. Let me cut back on everything. It's like, you just feel horrible. And you save no money anyway. So what I would tell Natasha, use the conscious spending plan. And make sure as you go through this, that you have a clearer sense of what your rich life is. Typically, Natasha, I bet you she's tried to cut back on everything. It doesn't work. Because you don't have a vision of your rich life. So Jamila, when I talk to folks like Natasha always ask, okay, first, what's your rich life? And they'll go, Oh, I just want to feel like I'm in control memory. Okay. Okay. How would you know you're in control? And we go very deep, so that they have a beautiful crystal clear vision. Then once they have that vision, they can make the changes to their conscious spending plan.
Jamila Souffrant 19:04
Yeah, yes. Spot on. I mean, I think it's all about the awareness. All right. Like she said, a good point, right, she has a six figure income. But I also find that people who are earning a lot oftentimes, either they are the only one in their circle that has elevated to that level and family. So maybe there's some responsibilities there that we don't know about, right? Like, there's so much little we don't know about her situation, but I'm going to speak to maybe someone who has a six figure income but also has a lot of responsibility or pressure from others to feel like they need to either keep up with like a lifestyle. I mean, depending on especially where you work, or who your friends are. It can feel like you need to spend in order to keep up and being conscious and aware of that is the first step. So it's like are you spending on things that are ultimately really important, like you said, and you can't get out of weather? Maybe it's helping family members or are you kart trying to uphold the standard that you think you need to for society purposes for your job for your friends, and being real with that is like the first step. So there is this, like self reflection and introspection that needs to happen when it comes to why you're doing or spending the way you are, but then being realistic about the changes that you can make, because oftentimes, you know, we can say to someone, we'll just cut that out, just don't do that. And it's not as easy right? It may take some time to make the changes. So being real about what could be the root of those, whether it's the spending issue, because it doesn't sound like it's an income issue is important?
Ramit Sethi 20:41
Well, I'll tell you what, it's hard for somebody from the outside to come and tell someone cut back on that. Even if people come and ask for help. They're like, eff off. I don't want to why am I going to do that? They don't want to hear it. Because nobody wants someone to judge them for their spending. I mean, I've talked to couples who have $350,000 of debt. If I sat there and told them, Look, you're overspending on this, this, this, this this, go fix it, they would say thank you very much for me hanging up the phone and never do anything I said ever again. So my approach is to incorporate psychology. I think in personal finance, we overvalue math, and we undervalue psychology. Anyone can put your numbers in a spreadsheet, it's not that hard. What is way harder is to help you identify what led you to this position, going all the way back to childhood? What do you remember your parents talking about? When it came to money, a lot of times people will go, mom used to say we can afford it. Dad used to say, you know, we don't talk about money in this family, etc, etc. And so you grow up 40 years later, still acting out on those beliefs that somebody wants set over the dinner table. And then you buy certain things, which is fine, I have no problem buying luxury goods. You want a beautiful coat or a nice car, no problem. But most of us buy something because it's in front of us. And it looks good. We rarely apply any ratios or parameters to the biggest purchases of real life. For example, buying a house. Hey, everybody listening, what percentage of your gross pay should your total housing costs represent? Most people have no idea what I'm even talking about the words I just said are Martian. Because we see a house and we go ooh, that's pretty I like the bathroom. And the monthly payment will only be $2,300 or, or $500 a month, whatever the numbers. So what I've been trying to do with I will teach me rich is to show people, there are much more sophisticated ways to make big decisions, things like a house a car investments, you should spend a lot of time on that. And stuff like coffee, avocado toast, Diet Coke, it's irrelevant. You want to buy two cokes Be my guest, you want to get three coffees a day, it makes basically no difference in your financial life. But the five to 10 big wins, like how much you're paying for investment fees. What's your allocation? Are you paid? Well? Do you know how to negotiate your salary or your investments automatic? That's what I call big wins. And if you get those right, you don't have to worry about the price of pickles ever again.
Jamila Souffrant 23:16
Yes, and exposure is important too. So I find sometimes, if you are in an environment where the norm is to, you know, work, spend vacation not think about money too much until it's kind of too late or you're scrambling, then that's the world you live in. And for me what changed my life was immersing myself in podcasts, blogs, books, like seeing what other people were doing. And sometimes it was things that I would never do like, I don't know this podcast, I've had the pleasure of interviewing people who have done extreme things like dumpster dive. And while I necessarily wouldn't do that right now, who knows, I don't know, maybe I'll find something intriguing about it in the future. What I love about hearing other people's stories about how they're spending, saving, living their lives, even if it's not something I think I want to do is it always plant a seed for me about what's possible. And maybe I won't do that. But maybe I can do this. So I always encourage people, like if you're looking to make a change with how your finances are going, maybe you need to earn more. You need to control your spending, whatever that means for you. You need to learn how to invest is to immerse yourself in this world in this space, because it's so easy to do now, with the internet and podcasts and blogs that you can start to learn from others. And so maybe Natasha or whoever else needs a little bit of inspiration on how they can either, you know, live a life that's more intentional with spending or maybe even earn more. Maybe Natasha also just wants to earn more money. They can see what that looks like for other people.
Ramit Sethi 24:44
Jamila Souffrant 24:49
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All right, here's another question that I feel like a lot of people are in this situation. So let's get to it. This one is from Melissa. She says how can I fast track reaching financial independence at 44 with two young kids, I have a long commute and hate that I can't have more time with my family. I work for the state and have 15 years left until I can collect the pension. My husband is a self employed and she wants to continue to support him and his business. She'd like to work for herself and reach financial independence. So the question is, Should I stay? Or Should she stay at her job for the next 15 years, in order to get the pension or find something else that she really enjoys doing?
Ramit Sethi 26:19
I feel like staying at a job you don't love for 15 years from 44 to 60 is a pretty big gamble. It's scary to imagine leaving a job when you have a pension on the horizon when you have kids when you have a husband who has his own business. But there are ways to start taking steps in a direction that will open up a lot of opportunities. The first thing we should get clear about is What does financial independence look like? Is there $1 amount a lot of people just go I want to be free, or I want to have a million dollars. But this is a big decision one of the biggest of your life, you've got to run the numbers and understand how much do you need to be financially independent. Sometimes when I probe couples on my podcast, they will end up saying I just want to be able to go to yoga on Tuesdays and Thursdays at 1pm. Okay, that's a beautiful vision. If that's the case, we could probably work something out with your boss, where you might be able to have a bit of a flexible schedule. But if it's that I want to live in a different city and travel all over the place, well, that requires something different. So there are a few pieces of the puzzle I would be putting together here. First off, if you stay at your current job for 15 more years, how much exactly will you be making? That is your default base case. Next, let's talk about your husband. You're in this together. So if he is starting out on a business, I totally get it. When you start a business. You can't expect to make a million dollars overnight. But I would sit down and have an honest discussion with him about what what kind of lifestyle are we looking for. I'm really frustrated with having to drive so far every single day. I can do it for a while longer. But I can't do it more than 18 months from now. It's I need to make a change and I need your help. So typically, when you're talking to an entrepreneur, that means getting candid about how much they need to earn. All right, you're you're not making your goal is to make 10,000 a month. Okay, right now you're just starting out, you're making 1500. Let's set a timeline. If we get to six months, and you're making 8000 Oh, that's fantastic. You're on the path. We're close. Let's keep going. But if you're making 1800 instead of 10,000, it might be time to call it. Alright. And then finally, in her case, I would suggest starting something on the side. So she seems pretty entrepreneurial. You know, she's writing for this question. She wants to be financially independent. She's in her early 40s. I love her energy. There are lots of ways you can find income. In her case, maybe she can create a program on how to win contracts. Maybe I've people who are dog walkers, personal stylists, home organizers, Excel consultants, there's a million different things you can do. Some of them make 500 bucks a month and that is meaningful to them. Some of them want to make more than $50,000 a month. Okay, that takes more work, a little luck. But that's also feasible for some people. What she would have to do is really get honest, honest with herself about what kind of lifestyle she wants and how much that's going to cause honest with her partner about what they need to do as a partnership. And then honest with herself about her time. She's where she is today that she really want to wait 15 years until she's about 60 years old to really begin living the kind of life she wants. No, I would never wait that long.
Jamila Souffrant 29:58
I agree with that. I think Before Melissa, you run off and quit your job, I would just say first, let's create like a plan for you to really think through this. Sometimes, you know, math can keep us stuck or fiddling too much. But sometimes math helps solidify a decision. So first, I do the math on this. And sometimes depending on how long you've been at the job, like to offer you some sort of pension, like if you don't say the whole time, do you walk away with something? So I'd want to know, if I walk away at these different stages in these different options in the future? How much will I walk away with? If it's zero? It's zero. But maybe there's something there. That's a plus. The other thing I'd want to understand before I make my decision is, am I going to stay in the same career? Or am I changing to something else? Like, what about your job, don't you like now, I already saw you don't like to commute? I also had an hour and a half to two hour long driving commute. And for me like that was just unacceptable. So I don't I know part of it is to commute. But is it just that? And is it possible that you can work from home or negotiate more flexible work hours, so before you make any rash decisions, because sometimes you just never know, until you have the conversations, what's available to you. Also, sticking with the plan of wanting to leave, let's just say they come back to you. And there's no flexible work arrangement. It is what it is. I agree 15 years is too long to give up like living your life with this commute without having something done. And so I would make a plan not quit work right away. But make a plan to look for something else closer to you, or something that you enjoy more with more flexible hours. Because the time with your kids like that is really short lived, right? Like they grew up really quickly. You don't really want to miss those important moments. And you want to be able to be there. So I just don't want anyone thinking they have to stay somewhere just for a check. But I also understand the importance of responsibility. And when you have kids, it's not just about you, especially if you have the more secure job, right if your husband is just starting out. And so that can be very scary. So before you make any rash decisions, just to recap, you know, run the numbers, how much money do you need to have saved up so that way, if it takes you a little bit longer to find something, or if your your job doesn't work out, right, sometimes we are moving away from something thinking it's going to be better, and it's not. So I'd want you to just think through those things like Rumi said, have that conversation with your husband, and create a up to three year plan on how you can exit this in a way that feels good. And then in the meantime, try to do things that really spark your spirit and that you can enjoy that can hopefully help alleviate the dread of this commute.
Alright, let's go on to the next question. So the next question is, I want to buy a home and I don't know if now's a good time to buy one. Interest rates are pretty high. What are some ways in which someone should evaluate? They should buy a home This one came in from Kendra. But it's a question that I'm seeing a lot now because of the interest rates. And everyone wanted to buy a home. So what do you think?
Ramit Sethi 33:05
Well, first of all, why do you want to buy a house? A lot of people buy a house because they have been told that they are throwing money away on rent. Okay, that's a lie. Do you throw money away? When you go and eat at a restaurant? No, it's ridiculous. So you're not throwing money away on rent, you're paying for value, which is a roof over your head. Other people have been told that real estate is the best investment of all? Well, actually, that's not really true. There are oftentimes a lot of better investments. But we are taught from a young age, these almost religious phrases. They're not building any more land, you're throwing money away on rent, you need to buy a house because it's about security and and you need something to pass on to your kids for generational wealth. Listen, there's a lot of generational wealth you can pass on besides the house, like a fat portfolio. So what I want to emphasize first is that buying a house is something you can do. But it's not the only choice. Do you know I rent by choice. I've lived in San Francisco, LA and New York, I could afford to buy a house right now. And I rent and guess what I make more money renting than owning? How can that be? Because in some cities, it is so much cheaper to rent, that you can take the difference in what you would pay to own and you can invest the difference and make way more. This is blowing a lot of people's mind right now. They're just like this guy is saying the sky is green. What are you talking about? This is why I emphasize for everybody for the biggest purchases of your life. You have to run the numbers. I just want to spend another second here and then I will give some specific advice about how to know if you're ready to buy a house a lot of people think some story about grandma granny bought a house in Texas in 1970 for $50,000 and she sold it 40 years later for $350,000 She made $300,000 in profit fit. No, Granny did not make 300k in profit because granny and you forgot about factoring in interest, she basically pay double for that house because of interest. You forgot about all the expenses, such as the $20,000 roof repair that happened in year 18, which has to be amortized out, you forgot about the maintenance, the deck, the broken refrigerator, and on and on, you also forgot about inflation, you forgot about opportunity cost of that downpayment, there's a whole bunch of stuff you forgot about. Now, the human mind is not wired to think about this. That's why you literally have people on Tiktok going, hey, everybody put down 3.5%, take $10,000, buy another house rented out by 10 other houses and you're a gajillion air, all those people will go broke very soon, it's going to happen. I'm going to post about it. Because I need you to see the truth to happen with crypto, it's going to happen with real estate. Now, if you run the numbers, and you go, Hey, either in my city, it makes financial sense to buy, which it does in a lot of cities. Or I actually don't care that I'm paying more to buy a house because I just want it I want to redecorate or I want to live in this specific house or this school district or whatever. Totally cool. I have no problem with people saying I'm actually going to spend a ton of money on a house just purely because I want to it's a luxury. That's what it will be for me. When I buy a house one day, which I will, it will be a horrible financial decision. But it'll be an amazing luxury. There'll be the most expensive luxury in my entire life. So how should you know if you're ready to buy a house? Five questions. Question number one. Will you live there for 10 plus years? You should say yes to this question. Because buying and selling a house has such huge transaction costs that you have to spread those costs out over 10 years, otherwise, they eat all of your profits up. Everybody's heard the phrase, the minute you drive a car off the lot, it loses 30% of its value. Well guess what? Basically, the same thing happens when you buy a house, you put down 20 3040 $50,000 In closing costs. And any maintenance, you might immediately do your down. Plus, when you sell it, you have other fees. So we want to at least be confident we're going to stay there for 10 plus years. Okay, that's number one. Number two, is your total monthly housing costs less than 28% of your gross monthly income. Just to pick really, really easy math. If you This is well, let's just say if you make $1,000 a month gross, well, first of all, you're not making that much. If you're making $12,000 a year, it's just a math example.
Your total housing costs should be roughly less than $280 a month, just skip map, multiply that out for whatever you you make. Now, here's the problem. Especially recently, and especially in high cost of living cities like New York, San Francisco, Seattle, etc. It's almost impossible to pay less than 28% of gross. So in certain cities, you can stretch that a bit you can go to 32, maybe 33, especially if you have no debt. Okay. But remember how I talked about people getting in trouble because they spend too much on their housing costs. This is where it happens. This is where you become house poor, you buy his dream house and you go monthly payments. That's how I made my decision, which is terrible way to buy a house. And then one day you wake up you go, I can't afford to eat out. I can't afford to go on a vacation. I can't afford this car repair. Why am I stuck? You're stuck because the decision you made because there's somebody on Tiktok who told you you need to buy a house in order to be a successful American. It's not true. 28% is a good guideline, deviate from that at your own peril. Three more steps three have you saved the 20% downpayment doesn't mean you have to put 20% down in some cases, especially when interest rates were low, didn't make financial sense to put 20% down. However, this is a good conservative rule because it shows yourself that you can actually save money and when you buy a house you will encounter tons of phantom costs. These are phantom costs you do not pay as a renter. As a renter your rent is the maximum you will pay. As a homeowner your mortgage is the minimum you will pay. You will pay more for your roof, repair your fridge, repair your broken water pipe, and on and on and on and on and on. Okay, you can't even well you can factor these things in but most don't. Number four, are you okay? If the value of your house goes down? You know, a lot of people have they genuinely believe that houses only go up. I'm like, Ah, do you understand anything about math or prices? First of all in the aggregate, sure, if you look at a chart, the aggregate prices have gone up, but the aggregate prices of a lot of goods go up forever. Okay, that's just inflation. But you should remember that your costs are what really matter with a house. So this is number four, are you okay? If you know your housing prices go down, if you're buying it just to live in, you shouldn't care what the price is. A lot of people, though, they delude themselves and go, Oh, I'm just buying it because I love it. But actually, it's an investment. You should be very careful about thinking of your primary residence as an investment. It's not, okay, it's consumption. Or if you buy in a really high cost of living area, it's a luxury. And finally, are you excited about buying? You'll know that you don't have to buy a house? Nobody's telling you, you have to You're not any less of a person. If you don't buy a house. Look at me, I'm you think I wake up every morning and start crying? Because I don't own a house? No, I prefer instead, to build a large investment portfolio, which is much more liquid. And I prefer to travel and spend on other things I love. Why am I going to just spend 2.5x as much so I can brag on Instagram that I own a house makes no sense. So again, that's for this season of life, there is a future season where I will happily buy a house. So these are the five guidelines. But overall, I hope that I've provided some unconventional perspectives on buying a house. Now, after my long rant about buying a house, let's make sure that I answer the question year. What is your advice about buying a house? How do I know if I'm ready to buy one? Oh, well, we answered that is now a good time to buy a house if interest rates are high. Okay, so here's how you want to think about that. First off, interest rates, although they seem high, if you talk to your parents, they had interest rates that were even higher the differences, the prices were way lower. Right now we have a very toxic combination of high interest rates, and historically high prices. I can't tell you where house prices are gonna go. Nobody can. But looking at the market right now, affordability is down in many cities 40%, from what it was just four to five months ago. That's crazy. So if I would be waiting, because higher interest rates will bring the price of houses down. Ultimately, though, you don't want to listen to me, you or anyone else, you want to calculate the numbers and see if you can afford it. And if it makes sense to buy. That is how I would think about it.
Jamila Souffrant 42:24
All great points for me. And I agree. I mean, it's hard not to agree with that even as someone myself who owns in New York City, and what again, I came in and I bought my property at a different time, like you said, and so I think the last thing I'll just add on because you really had all the great points was, you know, the American dream, for some has become the American nightmare. So at some point, it was to own the house, have the 2.5 kids, the white picket fence, all these things. And that's just not reality anymore for a lot of people. So you have to redefine what your dream is. And that might not include a house. And that's okay. And so you continue to spark your own path, or write your own steps and not just follow what other people want. But in the case that you do want a house, I think it's important to follow the steps that we talked about making sure you can actually afford it.
Okay, I think I'm gonna make this a fire round or FIRE FLASH question or meet like something that hopefully you can answer quickly, because I know I want to be respectful of your time. But this last question came in from Jasmine, and she says, I've saved up $100,000. Amazing, Jasmine, especially if that's in cash, like liquid cash. Great. She says In your opinion, what is the best use of that money to accelerate me reaching financial freedom and financial independence? So we're meet? What do you say,
Ramit Sethi 43:40
invest the money. That's great. You saved it. That's amazing. But you can't just let it sit there in cash, it's losing value every single day. Put that money to work for you. How do you do it? Well, you can start reading chapter three and seven. In my book, we talk about investing in low cost long term funds, a really simple way to do it would be index funds. Here's a couple of quick rules. You can use these at cocktail parties. If you're a huge nerd, there's something called the rule of 7272 divided by your return rate is how many years it takes you to double your money. Just as a quick let's just assume 10% for easy math, it's it's actually around there in the nominal amount. Means if you put 100k in, it will double in seven years, roughly, to about 200k. Well, it doesn't sound like that much. Do you understand what's the big deal, then it goes to 400 then 800, then 1.6 million, and on and on and on, it starts to grow very quickly. A lot of people they're hesitant to invest because they go Investing is for rich people wrong. The way you get rich is by investing and some crazy stats are out there like Warren Buffett's something like 98% of his wealth was accumulated after he was 80 years old. That is the power of compounding. So take that 100k You can invest it lump sum, or you can what's called dollar cost averaging out put it in over the course of 12 months it's up to you. Stats show you get a little bit advantage on a lump sum I'm investing but whatever. And let that money grow. What's more important, actually, is that the fact that you have been able Jasmine to save 100k tells me, you could probably save a lot more, put that money to work every single month, automate it, you don't need to be writing manual checks, it should happen on its own. And you will see your wealth grow incredibly large. And after a while, it will start to compound very quickly, you're in a great place, keep it up, I have total confidence in
Jamila Souffrant 45:26
you. I agree, I agree with what roommate said invest the money. But I understand if you haven't done it yet, that there's probably a block for you to do that. And so it probably realistically won't be putting it all in at once. But if you have to, you know, earmark some for your emergency fund, or fu fund is like a call that you may need. In some, if you want to do something big, you know, career change, travel the world, you know, you can earmark that if you don't have that earmarked already somewhere else, and take your time if you need to, but invest that money sitting in a savings account, it only loses with inflation. All right remain. So I do want to take just a moment to talk about your newest project that you just released. I would love for you to share more about your journal and where people can find out more about that. And just all the amazing things you're working on like your podcast, who knows you're working on another book, let us know what's going on with you.
Ramit Sethi 46:18
I realized that some people are simply never going to pick up a book and learn about a Roth IRA and asset allocation. You know, they may be listening to this podcast, and they really care about money, but they're just not in the learning style of reading a book. And I also learned that a lot of people have lost the ability to dream. When it comes to money. They've spent so long with debt over their heads or with a partner that they're not on the same financial page, that when I asked them, what's your rich life, they actually have no idea. They forgotten what it's like to dream. So I created the I Will Teach You To Be Rich journal, it is so beautiful. You can get it at Amazon, any independent bookstore, you can get it anywhere. And I want you to grab your favorite cup of coffee, your favorite pen, sit down, give yourself 15 minutes, you deserve that much. And as you open it up, you're gonna get these prompts about what your rich life really is. What do you really love, you're gonna get the chance to be honest with yourself, what do I love? What do I want to spend more money on? And what's actually not that important to me? What am I out of alignment with, when it comes to my values, you're going to learn about peer pressure. And it's going to be very realistic. It's not like just stop caring what other people think we all care, this journal is gonna guide you through knowing how to navigate that, how to navigate money and relationships. And even how if you make a considerable amount of money, how to live an even richer life. So this is what I call a no numbers journal. It's fun, it's dreamy. It's something that you get for yourself, because I think people deserve the opportunity to dream about a rich life. That's what I'm really excited about right now.
Jamila Souffrant 48:10
And they can pick that up one more time where
Unknown Speaker 48:12
they can get it on Amazon, at any independent bookstore, like from bookshop.org, et cetera. And when you pair that journal, with some of the work that I've been doing on the podcast, where I interview couples, I mean, you've never heard couples talking about real money issues like, like a couple who has $825,000 in debt, and they're wondering if they should even have children because they can't afford it. Another couple where she's 21 years married, she's about to divorce him because he's too cheap, their net worth $13 million.
Jamila Souffrant 48:45
Ramit Sethi 48:46
and real numbers, and you hear the actual amount real people are spending. No one has ever heard these kinds of conversations before. So that is the I Will Teach You To Be Rich podcast, which pairs beautifully with the journal and the I Will Teach You To Be Rich book.
Jamila Souffrant 49:02
All right. I mean, I will link all of that in the episode show notes. I hope that my junior has got a lot from this conversation and listening in to the answers for these questions. So thank you once again.
Ramit Sethi 49:12
It was a pleasure.
Jamila Souffrant 49:16
Oh, don't forget we are giving away a copy of this week's guest book. So if you want your chance to win, go to journey to launch.com/win for more details, and make sure you're following me at journey to launch on Instagram, Twitter, and Facebook.
Don't forget you can get the episode show notes for this episode by going to journey to launch.com or click the description of wherever you're listening to this and you can still grab your jumpstart guide for free to help you on your journey to financial freedom by going to journey to launch.com/jumpstart. If you want to support me and the podcast and love the free content and information that you get here, here are four ways that you can support me in the show. One Make sure you're subscribed to the podcast wherever you listen. Whether that's Apple podcasts, that purple app on your phone, your Android device, YouTube, Spotify, wherever it is that you happen to listen, just subscribe so you are not missing an episode. And if you're happening to listen to this and Apple podcasts, rate review and subscribe there, I appreciate and read every single review number to follow me on my social media accounts. I'm at journey to launch on Facebook, Instagram, and Twitter. And I love love love interacting with journeys, they're three support and check out the sponsors of this show. If you hear something that interests you, sponsors are the main ways we keep the podcast lights on here. So show them some love for supporting your girl for and last but not least, share this episode this podcast with a friend or family member or co worker so that we can spread the message of Journey to launch. Alright, that's it until next week, keep on journeying journeyers
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