214. “I’m 45 but my parents still control my money”
In this episode of I Will Teach You To Be Rich, Ramit Sethi examines a case where childhood experiences and family dynamics have created complex financial dependencies. Through his conversation with Kate and her partner Keith, Sethi explores how inherited wealth, parental control, and deep-seated beliefs about money have shaped their financial decisions and relationship.
The discussion reveals how Kate's $1 million trust fund has underperformed due to poor management, potentially costing millions in lost returns. Sethi helps the couple develop a plan for financial independence that includes removing Kate's father as trustee, taking control of their investments, and creating a retirement strategy that aligns with their lifestyle while increasing their monthly discretionary spending.
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1-Page Summary
Personal Beliefs and Attitudes Around Money
In this podcast episode, the discussion centers on how childhood experiences shape our emotional relationship with money. Kate shares her deep-seated discomfort with wealth, stemming from parents who warned her about financial disasters and taught her that having money was burdensome. Meanwhile, her partner Keith reveals how he intentionally accumulated debt early in their relationship to prove he wasn't interested in Kate's money, highlighting complex power dynamics in their relationship.
Ramit Sethi explores Kate's struggle with managing her inheritance, noting that recipients of wealth often lack emotional and practical preparation. Kate expresses a desire to gain confidence and autonomy in her financial decisions, particularly as she lives on her parents' property and must navigate their involvement in her finances.
Management and Performance of Inherited Wealth
Analyzing Kate's family trust, Ramit Sethi uncovers significant underperformance over three decades, with only a 2.9% annual return rate instead of the expected 7%. The trust, burdened with complex, high-fee investments, has dropped from $1.2 million to $1.02 million over four years. Sethi calculates that better management could have resulted in the trust being worth $6 million today, rather than its current $1 million value.
Relationship Dynamics and Power Structures
Kate's financial independence is limited by her father's role as trustee of her trust fund, requiring his approval for access to funds despite her being an adult. This arrangement, combined with living on her parents' property and having them cover medical expenses, creates a dynamic that reinforces dependence. Sethi advises removing Kate's father as trustee to promote independence and control over the trust.
Financial Planning and Decision-Making
Looking forward, Sethi presents several scenarios for Kate and Keith's financial future. The couple opts for a plan that maintains their current income while doubling their travel and leisure budget by $4,000 monthly, allowing them to retire at 62 with an estimated $4 million net worth. This choice allows them to maintain their professional activities without pressure for major life changes. They also decide to take active control of their investments by removing their financial advisor and managing their wealth directly.
1-Page Summary
Additional Materials
Counterarguments
- While Kate's discomfort with wealth may stem from her parents' teachings, it's also possible that her discomfort is influenced by broader societal attitudes towards wealth and the responsibilities it brings.
- Keith's accumulation of debt to prove a point about not being interested in Kate's money could be seen as a financially irresponsible act that may have had long-term negative consequences for their relationship and financial health.
- The notion that recipients of inherited wealth often lack preparation may be an overgeneralization; there are many individuals who receive wealth and are well-prepared to manage it, either through their own efforts or through education provided by their families or advisors.
- Kate's desire for financial autonomy is commendable, but it's important to recognize that financial decisions can benefit from collaboration and advice from others, including family members, as long as it doesn't compromise her independence.
- The underperformance of Kate's family trust could be due to a variety of factors, and not solely the complexity and fees of the investments. Market conditions, the specific investment choices, and the risk tolerance of the trustee could also play significant roles.
- The calculation that better management could have increased the trust's value to $6 million assumes a consistent 7% return, which may not account for economic downturns, inflation, or other variables that could affect investment performance.
- Removing Kate's father as trustee could promote independence, but it also removes a potentially valuable advisor with experience and knowledge of the family's financial history.
- While living on her parents' property might reinforce dependence, it could also be a strategic financial decision that allows for wealth preservation and familial support.
- Doubling the travel and leisure budget might enhance quality of life, but it could also be argued that this money could be better invested or saved for future financial security.
- The decision to retire at 62 with a $4 million net worth assumes that their investments will perform as expected and that they will not encounter any significant financial setbacks.
- Managing investments directly can be empowering, but it also comes with risks, especially if Kate and Keith lack investment experience. Professional financial advisors can provide expertise and help mitigate risks.
Actionables
- You can reframe your mindset about wealth by journaling your thoughts on money and actively challenging any negative beliefs with positive affirmations. Start by writing down any negative thoughts you have about money and then counteract each one with a positive statement. For example, if you believe "Having a lot of money makes people greedy," you could write a counter-statement like "Wealth can be used to create positive change and help others."
- Establish financial literacy by enrolling in a basic personal finance course or workshop. This will empower you with the knowledge to make informed decisions about your investments and savings. Look for local community colleges or online platforms offering courses on budgeting, investing, and financial planning, ensuring you understand the fundamentals of growing and managing your wealth.
- Create a financial independence plan by setting clear goals and a timeline for achieving them. Use a spreadsheet to track your progress and adjust your strategy as needed. For instance, if you aim to retire with a certain net worth, calculate how much you need to save each month, what kind of investments you should make, and how to cut unnecessary expenses to meet your target.
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Personal Beliefs and Attitudes Around Money
A podcast dives into the ways our upbringing impacts our emotional relationship with money and how that influences our financial decisions as adults.
Podcast Explores Emotional Baggage and Shame Around Money From Upbringing
Parents’ Lessons on Money Cause Kate's Wealth Concerns
Kate opens up about her deep-seated discomfort with money, explaining that she feels uneasy about withdrawing money from investments, as it represents a loss rather than a gain. Kate's upbringing left her with a set of fears and prejudices about wealth, taught by parents who instilled the belief that having money is burdensome. They warned her about financial disasters and chronic illnesses, fostering a sense of impending doom and the need for a safety net. They even suggested she would need to marry someone wealthy to be financially secure, which adds to her wealth concerns.
Keith Aimed to Prove Disinterest In Kate's Money, Highlighting a Power Dynamic With Kate Leading Financially
Simultaneously, Keith discusses his previous efforts to prove that his interest in Kate was not financial by accumulating debt to pay for early relationship expenses like dinners. This reflects a power dynamic where Keith aims to demonstrate disinterest in Kate's financial status, while Kate harbors fears of others wanting her money.
Recognizing how Childhood Messaging Influences Adult Money Relationships
Kate Struggles to Manage Her Inheritance
Ramit Sethi sheds light on Kate's difficulty managing the mixed emotions surrounding her inheritance, such as guilt, shame, and unworthiness. He notes the contradictory feelings that money can evoke, different from the cultural narrative that significant wealth only brings joy. Sethi points out that the preparation of the recipients for inheriting wealth, both emotionally and ...
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Personal Beliefs and Attitudes Around Money
Additional Materials
Counterarguments
- While Kate's unease with money is attributed to her upbringing, it's also possible that her discomfort could stem from a lack of financial education or experience, rather than just emotional baggage.
- The belief that having money is burdensome may be a reflection of a specific cultural or familial attitude, but there are alternative perspectives that view wealth as a tool for positive impact and personal freedom.
- The idea that one needs to marry someone wealthy for financial security can be challenged by the modern emphasis on individual financial independence and the success of self-made individuals, regardless of marital status.
- Keith's accumulation of debt to prove disinterest in Kate's financial status could be seen as an unhealthy financial decision that doesn't necessarily reflect a power dynamic but rather a personal choice that may require reevaluation.
- While childhood messaging undoubtedly influences adult money relationships, individuals have the capacity to learn, grow, and change their financial behaviors and beliefs through education and personal development.
- The struggle to manage an inheritance can be mitigated through seeking professional financial advice, education, and support, rather than solely focusing on emotional preparedness.
- The desire for confidence and autonomy in financial decisions is commendable, but it's important to recognize that financial interdependence, such as family support, is not inherently n ...
Actionables
- Create a financial vision board to clarify your aspirations and redefine your relationship with money. Start by gathering images, quotes, and symbols that represent your financial goals and positive associations with wealth. Place your vision board somewhere you'll see it daily to reinforce a healthy financial mindset and remind yourself of the autonomy you aim to achieve.
- Start a 'money emotions' journal to track your feelings about finances over time. Each day, write down how financial interactions make you feel, whether it's paying a bill, receiving income, or thinking about your investments. This practice can help you identify patterns in your emotional responses and work towards overcoming negative feelings like guilt or shame.
- Engage in role-play scenario ...
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Management and Performance of Inherited Wealth
Ramit Sethi delves into the intricate issue of managing inherited wealth, zeroing in on Kate’s family trust which has significantly underperformed over three decades, leaving millions in potential earnings on the table.
Kate's Family Trust Underperformed Over 30+ Years
Trust's Complex, High-Fee, Underperforming Investments
Over the last 30 years, the trust set up for Kate by her parents when she was a teenager has returned only 2.9% annually, a figure far below the often-quoted 7% return rate. Ramit Sethi, analyzing the trust's performance, finds it laden with complex, high-fee, and underperforming investments. He notes the trust's portfolio contains "a crazy amount of funds and individual investments," likely burdened with hefty "Expense ratios" and potential "front end or back end loads."
Mismanagement Cost Kate and Keith Millions in Growth
The advisors' choices have resulted in a mess—excessive trading led to additional fees and taxes, a lack of diversification implied by overlapping investments, and cumulatively high fees over time. Kate expresses deep concern, highlighting her parents' intent to pass down wealth in a tax-efficient manner and her decision to take control and fire the trust manager due to its "completely unacceptable" performance. Ramit Sethi points to the trust's drop in value from $1.2 million to $1.02 million over four years, suggesting that the lack of management could have cost Kate and Keith a difference of up to $5 million.
Participants Shocked by Trust's True Value and Growth Potential
Trust's Worth: $6M Vs. $1M
In a shocking revelation, Sethi discovers that the trust's value currently stands at one million dollars, which startlingly contrasts with an estimated potential of six million dollars if its funds had been invested in simple index funds. Keith is perplexed as to why the trust value isn't closer to $5 million or more, based o ...
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Management and Performance of Inherited Wealth
Additional Materials
Counterarguments
- The 2.9% annual return might be due to a conservative investment strategy that prioritized capital preservation over growth, which could be suitable for certain risk-averse investors.
- High fees do not always correlate with underperformance; sometimes, they can be associated with active management that aims to outperform the market, although this does not seem to have been the case here.
- The trust's underperformance might be due to a series of unfortunate market conditions or investment strategies that did not pan out as expected, rather than mismanagement.
- The potential value of $6 million is based on the assumption that the trust would have been invested in simple index funds, which may not take into account the trust's risk tolerance or investment objectives.
- The trust's current value of $1 million could be the result of distributions made to beneficiaries over the years, which is a common practice for trusts.
- The shock and frustration of the participants may be based on hindsight bias, as investment decisions that seem obvious in retrospect were not necessarily clear at the time they were made. ...
Actionables
- You can start by conducting an annual financial health check-up to assess the performance of your investments. Just like visiting a doctor for a physical, set aside one day each year to review your investment portfolio's performance, fees, and management strategy. Compare your results with industry benchmarks to ensure you're on track, and if not, consider seeking advice from a financial advisor or exploring low-fee investment options like index funds.
- Create a simple spreadsheet to project future values of your current investments. Using basic formulas, input your current investment amounts, estimated annual returns, and time horizon to see potential future values. This exercise can highlight the impact of fees and underperformance on long-term growth, encouraging you to make informed decisions about managing your wealth.
- Engage in a peer-to-peer investment study group to share knowledg ...
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Relationship Dynamics and Power Structures Within Family/Couples
Kate deals with complex dynamics and power structures within her relationship with her parents, which hinders her independence and control over her finances.
Kate's Relationship With Her Parents Fosters Dependence and Disempowerment
Kate does not have control over her trust fund despite being an adult capable of running a business. She experiences a lack of control as she must go through her father, the trustee, to access the funds.
Kate Needs Father's Approval For Trust Funds
Kate's father remains the trustee, and Kate has not gained access to the trust when she turned 25, against a verbal agreement made by her parents. This situation leads to her dependence on her father's approval.
Financial Dynamics Restrict Kate's Control
Kate depends on her parents to pay her medical expenses, using it as an opportunity for them to pass on wealth without taxes, but acknowledges it is disempowering. Kate feels judged living on her parents' property and deals with the awkwardness of reverting to childhood behaviors around them, such as having her parents pick up the bill for the sake of financial safety. This reinforces a dynamic where Kate's control is limited. Additionally, the financial dynamics in question may be further exacerbated by an investment advisor charging excessive fees.
Participants Acknowledge the Need For Independence From the Family Dynamic
Kate and her partner, Keith, are seeking independence and control over their finances.
Clear Boundaries and Transparent Communication in Finance
Ramit Sethi advises creating a vision of life without being enmeshed with her parents, which includes removing her dad as the trustee, hence promoting indepen ...
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Relationship Dynamics and Power Structures Within Family/Couples
Additional Materials
Counterarguments
- Trust funds often have stipulations and conditions that are legally binding, and it may not be as simple as removing a trustee to gain control.
- Dependence on family for financial support can sometimes be a strategic choice, not just a lack of independence, especially if it offers tax benefits.
- The dynamics of family relationships are complex, and what appears as disempowerment may also be a form of familial support and care.
- Seeking independence is important, but it should be balanced with the understanding that interdependence among family members is a natural part of many cultures and family structures.
- Removing a family member as a trustee can lead to family conflicts or misunderstandings, and it's important to consider the emotional and relational costs alongside the financial benefits.
- Transparent communication is crucial, but it must be approached sensitively to ensure that it does not damage the ...
Actionables
- You can create a financial independence plan by mapping out your income, expenses, and savings goals. Start by listing all your sources of income and your monthly expenses. Identify areas where you can cut back and set specific savings goals. For example, if you're aiming to build an emergency fund, decide on a percentage of your income to save each month and stick to it.
- Establish a personal finance education routine to enhance your understanding and control over your money. Dedicate time each week to read books, watch videos, or take online courses on personal finance management. This knowledge will empower you to make informed decisions and could include learning about investment strategies, understanding taxes, or exploring ways to optimize your savings.
- Engage in role-playing exercises with a trusted friend ...
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Financial Planning and Decision-Making for the Future
Participants Explore Leveraging Wealth For Lifestyle and Long-Term Goals
The discussion reflects on various scenarios focusing on how individuals plan to balance their lifestyles with long-term financial aspirations.
Scenario 1: Sustaining Income, Boosting Travel and Leisure Spending
Caller #1 is considering moving towards higher yield investments to afford greater leisure and travel flexibility, in line with personal values. Facet presents a scenario where the participants maintain the same income while doubling their travel and leisure budget by an additional $4,000 per month. This allows them to retire at age 62 with an estimated net worth of $4 million by the stated ages for Keith and Kate. Ramit Sethi emphasizes the importance of meaningful spending, a skill critical when dealing with surplus funds, as well as the need to spend time with people who use money to create happiness and build relationships.
Scenario 2: Increase Income to Buy Home In 5 Years
In this scenario, by increasing monthly spending by $2,000—not $4,000—the participants could anticipate buying a home worth $750,000 in five years, assuming their annual income rises to $50,000. The inclusion of vehicle purchasing plans is tabled for the time being as more immediate financial matters are prioritized.
Scenario 3: Retiring and Living Off Their Invested Assets
Sethi outlines a retirement scenario where callers would no longer earn an income, resulting in monthly expenses of $8,500 due to increased spending. This could lead to a fragile financial situation later in life if market returns are low.
Participants Opt For Scenario 1 to Maintain Work Activities and Avoid Major Life Change Pressures
Flexibility and Predictability Enable Focus on Health and Happiness
Kate and Keith select Scenario 1 as it aligns with their desire to maintain their professional activities and does not pressure them into major life changes. This scenario provides parameters, flexibility, and predictability, which resolves Caller #1’s dilemmas around spending and m ...
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Financial Planning and Decision-Making for the Future
Additional Materials
Counterarguments
- Scenario 1 may underestimate the risk associated with higher yield investments, which could potentially jeopardize long-term financial stability.
- Scenario 2's goal of buying a home may not account for market fluctuations in real estate, which could affect the home's affordability and value.
- Scenario 3 might not consider the impact of inflation on living expenses, which could increase the required nest egg for a comfortable retirement.
- Opting for Scenario 1 assumes that work activities can be maintained without disruption, which may not be realistic due to unforeseen circumstances like health issues or job market changes.
- While flexibility and predictability are beneficial, too much predictability could lead to complacency and missed opportunities for financial growth.
- Removing a financial ...
Actionables
- You can create a personal wealth leverage plan by mapping out your current financial status and desired lifestyle changes on a timeline. Start by listing your assets, income streams, and expenses. Then, set specific lifestyle goals, such as travel or leisure activities, and determine the financial milestones needed to achieve them. For example, if you want to travel more, calculate the additional monthly income required and identify potential investment opportunities or side hustles to generate that income.
- Develop a savings and investment simulator using a spreadsheet to visualize the impact of different financial decisions on your goal to purchase a home. Input variables like your current savings, expected income increases, and potential investment returns. Adjust these figures to see how changes, such as saving an extra $500 per month or achieving a 1% higher return on investments, could accelerate your timeline for buying a $750,000 home.
- Experiment with a DIY investment ap ...
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