242. "Our couples therapist couldn’t fix this. Please help."
In this episode of I Will Teach You To Be Rich, financial advisor Ramit Sethi helps a high-net-worth couple struggling with financial stress. Despite having $1.35 million in net worth, Chris and Natalie face challenges stemming from their different financial backgrounds, overspending habits, and communication issues around money.
The episode explores how their relationship with their financial advisor has created an imbalance in their partnership, with one spouse being excluded from financial discussions. Sethi examines their investment strategies, discusses the impact of their current advisor's fees, and guides them toward developing a shared financial vision. The couple's journey includes addressing emotional blocks around money and implementing practical solutions like automatic savings transfers to help align their financial goals.
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1-Page Summary
The Couple's Current Financial Situation and Spending/Saving Habits
Financial advisor Ramit Sethi discusses the case of Chris and Natalie, a high-net-worth couple experiencing financial stress despite having $1.35 million in net worth. The couple overspends by $3,000 monthly, with fixed costs consuming 81% of their income. Their savings are minimal at $33,850, and they lack a consistent emergency fund system.
Their financial attitudes stem from their distinct upbringings: Chris comes from a wealthy but frugal background, while Natalie grew up in a lower-middle-class household with a single mother. These different money mindsets have created communication barriers in their relationship.
Financial Advisor's Role and Investment Strategy Impact
The couple's relationship with their financial advisor, Leonard, has created an imbalance. Leonard communicates exclusively with Chris, marginalizing Natalie from financial discussions. Ramit Sethi points out that their advisor's 1% fee could amount to $400,000 over 20 years. While the couple actively contributes to investments, including an ESOP, Sethi questions their strategy of prioritizing long-term investments over short-term liquidity.
Defining and Working Towards Their "Rich Life" Vision
Ramit Sethi emphasizes the importance of developing a shared financial vision. He challenges the couple to think beyond their current scarcity mindset, noting their potential to reach $6.3 million in wealth. Sethi encourages them to view money as a tool for possibility rather than just bill payment, suggesting they could benefit from automatic savings transfers to help unify their financial goals.
Improving Communication and Overcoming Emotional Blocks Around Money
Chris tends to emotionally withdraw during financial crises, becoming "zombie-like" and focused solely on fixing problems. Ramit Sethi recommends therapy to help Chris develop better coping strategies. Meanwhile, Natalie feels excluded from investment decisions. The couple has begun addressing these issues through therapy sessions and is working to make their financial planning more collaborative, including setting up monthly auto-deposits into savings.
1-Page Summary
Additional Materials
Counterarguments
- The couple's high fixed costs might be due to necessary expenses that are not easily reduced, such as healthcare or education for children, which could justify the high percentage of income going towards fixed costs.
- The 1% fee charged by the financial advisor might be justified if the advisor provides exceptional service, has a strong track record of performance, or offers comprehensive financial planning that goes beyond investment advice.
- Prioritizing long-term investments over short-term liquidity could be a strategic choice if the couple has a high risk tolerance and a long-term financial plan that accounts for their current overspending.
- The potential to reach $6.3 million in wealth is speculative and may not account for unforeseen life events, economic downturns, or changes in the couple's income.
- Automatic savings transfers are not a one-size-fits-all solution and may not be suitable for everyone, especially if the couple's income is highly variable or if they have other financial priorities.
- Therapy is a personal choice and may not be the only or most effective way for Chris to develop better coping strategies; other methods such as financial education or coaching might also be beneficial.
- The focus on therapy and emotional blocks might overlook other practical steps the couple could take to improve their financial situation, such as creating a more detailed budget or seeking a second opinion from another financial advisor.
- The emphasis on collaboration in financial planning might not address the root cause of the couple's financial stress if there are underlying issues related to trust, power dynamics, or differing financial goals that need to be resolved first.
Actionables
- You can create a "money date" with your partner to foster open communication about finances, where you discuss goals, review spending, and make adjustments to your budget together. By setting a regular time each week or month to sit down in a relaxed setting, you can make financial discussions a positive and collaborative experience, helping to bridge any communication gaps and align your financial visions.
- Develop a personalized financial stress reduction plan that includes non-financial activities, such as exercise, meditation, or hobbies, to manage the emotional impact of money-related issues. By identifying activities that help you relax and incorporating them into your routine, especially during times of financial stress, you can maintain a clearer head for making sound financial decisions.
- Experiment with a "spending freeze" challenge for a set period, like one week per month, where you only spend money on essentials. This can help you identify areas of habitual overspending and increase your short-term savings. Track your spending during this period and compare it to your regular spending weeks to gain insights into your spending habits and potential savings.
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The Couple's Current Financial Situation and Spending/Saving Habits
Chris and Natalie, a high net worth couple, face significant financial stress and conflict despite a sizable gross income and assets. Their current economic challenges and spending habits are inextricably tied to their upbringings.
High Net Worth Couple Faces Financial Stress and Conflict
High Fixed Costs: 81%, $3,000 Monthly Overspend
Ramit Sethi brings to light that Chris and Natalie spend $3,000 more per month than they make, possibly leading to financial instability in about ten months. Despite an impressive net worth of $1,350,118 with $893,500 in assets and $634,624 in investments, liquidity is a concern, as they hover around $33,850 in savings.
Their fixed monthly costs, which make up 81% of their income, present a significant burden. These costs include daycare expenses of $2,000, a mortgage payment of the same amount, insurance around $1,000, groceries at $1,118, as well as payments for gas, clothes, phones, and subscriptions.
Savings Fluctuated, Lacking an Emergency Fund System
The couple's approach to savings is hesitant and inconsistent. They have no formal allocation of their income toward savings, and any savings contributions are sporadic, usually amounting to $100-$200 quarterly. They discuss the need for a solid emergency fund, but the amount in this fund fluctuates. While they hold $23,000, which is about three months of savings, Sethi advises against dipping into it regularly. He stresses the importance of maintaining an emergency fund and establishing a fund for house maintenance given their home's age.
Unexpected Expenses Lead Chris to Emotionally Withdraw From the Family
Financial stresses, such as the necessity for continuous repairs on their 1970s home and the high cost of living, lead Chris to withdraw and push for household austerity measures, especially around year-end. The couple admits to padding their end-of-year finances with bonuses and tax returns but also acknowledges their high burn rate and a lack of cash on hand.
Upbringing Influences Couple's Spending and Saving Habits
Raised to Be Frugal and Skeptical Of Spending
Chris's background is defined by a frugal mindset despite having access to wealth. Discussions on finance within his family centered on responsible spending, such as investing only in a house, a business, or education. Chris's skepticism towards spending is rooted in this upbringing, as he associates expenses with the number of workdays required to af ...
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The Couple's Current Financial Situation and Spending/Saving Habits
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Actionables
- You can create a visual spending tracker by using a whiteboard or a digital app to categorize and monitor your expenses in real-time. By assigning colors or symbols to different types of spending, you can quickly see where your money is going and identify areas where you might be overspending. For example, use green for essential expenses, yellow for discretionary spending, and red for anything that exceeds your budget.
- Establish a "money date" with your partner to discuss finances in a neutral, stress-free environment. Set aside a regular time each week or month to review your budget, discuss upcoming expenses, and make joint decisions about savings and investments. To make it more enjoyable, combine it with a favorite activity or treat, like a coffee outing or a home-cooked meal.
- Experiment with a "work ...
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Financial Advisor's Role and Investment Strategy Impact
Chris and Natalie face an imbalance with their financial advisor, Leonard, resulting in an expensive and disconnected investment strategy that they are now reconsidering.
Couple's Relationship With Advisor Leonard Has Created Imbalance
Leonard, who has been Chris's financial advisor since his teenage years, has also served the financial advisory needs of his parents and grandmother. After marrying Chris, Natalie attempted to get involved in the financial advising process but has felt continuously excluded.
Leonard Talks to Chris, Excluding Natalie, Causing Her to Feel Marginalized
All communications regarding financial matters, such as emails and updates, are directed to Chris, never to Natalie, despite her efforts to be included. Natalie has never met Leonard and was unaware of his visit, making her feel marginalized and disrespected in the financial discussions.
Advisor Fees Exceed $400,000 Over 20 Years
Caller #1, presumably Chris, was under the impression that the advisor fees from Leonard were around $500 a year. However, discussions with Ramit Sethi point to calculations that suggest the 1% assets under management fee could round up to approximately $400,000 over the next 20 years, amounting to a significant $1,666 per month. Ramit criticizes the idea of paying such AUM fees.
Chris and Natalie Switch to a New Advisor
Implicit in the conversation is the couple's decision to part ways with Leonard as their financial advisor. This change is seen as part of improving their financial situation and engaging with a more suitable investment strategy.
Couple's Esop and Other Investments Boost Paper Net Worth
The couple has actively been contributing to an ESOP and other investments with the intent of creating significant long-term wealth.
Financial Security Despite Account Fluctuations
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Financial Advisor's Role and Investment Strategy Impact
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Clarifications
- A 1% assets under management (AUM) fee means the advisor charges 1% of the total value of the investments they manage each year. This fee is deducted annually, reducing the overall investment returns. Over time, especially with large portfolios, these fees can add up to substantial amounts. High AUM fees may incentivize advisors to grow assets rather than focus on client needs.
- An ESOP (Employee Stock Ownership Plan) is a retirement plan that gives employees ownership interest in the company through stock shares. Companies contribute shares or cash to buy shares, which are held in an ESOP trust for employees. Employees typically receive the stock upon retirement or leaving the company, aligning their financial interests with the company's success. ESOPs can provide tax benefits to both the company and employees.
- Ramit Sethi is a well-known personal finance expert and author of the book "I Will Teach You to Be Rich." He specializes in practical advice on managing money, investing, and reducing unnecessary fees. His opinion matters because he advocates for cost-effective investment strategies and often critiques high-fee financial advisors. His guidance is trusted by many seeking to improve their financial health.
- An IRA (Individual Retirement Account) is a tax-advantaged account for retirement savings. Contributions to an IRA reduce the amount of cash available immediately because the money is set aside and not liquid. Reducing IRA contributions frees up cash for short-term needs or expenses. However, it may slow down retirement savings growth due to less invested capital.
- Long-term investing involves putting money into assets expected to grow over many years, focusing on future financial goals like retirement. Short-term liquidity means having readily accessible cash or assets that can quickly be converted to cash for immediate needs or emergencies. Balancing both ensures you grow wealth while maintaining enough funds for unexpected expenses. Prioritizing one over the other depends on personal financial situations and goals.
- High Assets Under Management (AUM) fees are often seen as expensive because they are charged as a percentage of the total investment value, which grows over time, increasing the absolute fee amount. These fees can significantly reduce overall investment returns, especially when compounded over many years. Many investors feel that passive or low-cost investment options can achieve similar or better results without such high fees. Therefore, paying high AUM fees may not be justified if the advisor's service or investment performance does not clearly exceed cheaper alternatives.
- A financial advisor helps clients plan and manage their money to ...
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Defining and Working Towards Their "Rich Life" Vision
Chris and Natalie are working to define and realize their "Rich Life," but they have not openly discussed their financial desires and needs.
Couple Lacks a Shared Financial Vision
Ramit Sethi emphasizes the importance of a shared financial vision for couples, pointing out that clear logic and reasoning should underpin financial decisions. He encourages open discussions about finances, but notes that relevant information about the couple's specific ideas for a "Rich Life" was not provided.
"Vision of a 'Rich Life' Guides Financial Choices"
Natalie expresses a desire to focus on goals for themselves after ensuring their children's needs are met. Ramit illustrates the importance of this vision, particularly discussing how Chris and Natalie are treating money with a scarcity mindset despite being on track to have a significant sum in the future. He suggests that changing their mindset about money and understanding how to manage it effectively is crucial for their financial health, as simply inheriting money doesn't equip them with these skills.
Ramit Encourages Bold Aspirations Beyond Current Financial Habits
Ramit challenges the couple to think beyond minor financial disputes and consider the larger financial picture, potentially reaching 6.3 million dollars. He encourages the couple to use money as a tool for possibility and empowerment, rather than just a means to pay bills.
Adopt Gratitude; Avoid Complaining About Chi ...
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Defining and Working Towards Their "Rich Life" Vision
Additional Materials
Counterarguments
- While a shared financial vision is important, individual financial autonomy within a relationship can also be healthy and necessary for some couples.
- Clear logic and reasoning are important, but emotional factors and personal values also play a significant role in financial decisions.
- Focusing on personal goals is valid, but it's also important to balance individual desires with family needs and long-term financial security.
- A scarcity mindset can be a rational response to past financial instability or uncertainty about the future, and not everyone can easily shift to an abundance mindset.
- Inheriting money may not teach money management skills, but it can provide a safety net that allows for learning and growth in financial literacy.
- Thinking beyond minor financial disputes is good advice, but addressing and resolving small issues can prevent them from escalating into larger problems.
- Using money as a tool for empowerment is ideal, but practical realities often necessitate that a significant portion of income goes toward bills and living expenses.
- Adopting gratitude and av ...
Actionables
- You can create a "Dreams and Dollars" date night where you and your partner discuss your individual and shared financial dreams over a homemade dinner. During this time, set the table with not just food but also pens, paper, and calculators. Start by each writing down personal financial goals and then share them with each other. This can help align your financial visions and make the conversation about money more positive and future-oriented.
- Develop a "Gratitude Ledger" by keeping a journal where you write down three financial transactions you're grateful for each week. This could be anything from being able to buy groceries to paying for a child's extracurricular activity. The act of writing down these transactions with a sense of gratitude can shift your perspective from scarcity to abundance and can help improve your overall financial well-being.
- Initiate a "Spare Change Challenge" by setting up a j ...
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Improving Communication and Overcoming Emotional Blocks Around Money
Financial guru Ramit Sethi addresses the challenges faced by a couple, Chris and Natalie, as they navigate emotional distress and communication barriers related to their financial life.
Chris's Emotional Withdrawal and Catastrophizing Over Unexpected Expenses Create Strain
Big unexpected expenses cause Chris to emotionally collapse, leading to prolonged stress and withdrawal from family life. He becomes "zombie-like," focusing solely on fixing financial problems, sometimes spiraling into concern if the issue cannot be resolved with hands-on efforts.
Ramit Advises Chris to Seek Therapy for Coping Strategies
Ramit notes words such as "hurt" and "catastrophizing" used by Chris, suggesting significant emotional strain. Seeing that money issues trigger deep emotional reactions, Ramit suggests therapy or coaching might help Chris to progress through such events more constructively, addressing both the psychological and numerical aspects of their finances.
Enhanced Communication and Shared Financial Insight Can Help the Couple Overcome Challenges
The emotional distance created by Chris during financial crises causes Natalie to feel the absence of her partner, putting strain on their relationship. However, they've started biweekly therapy sessions, where they seem more at ease, working on improving communication and managing their financial fears together.
Natalie's Exclusion From Investment Decisions
Natalie, feeling excluded from financial conversations, especially regarding investments, wants to increase her involvement and knowledge.
Ramit Urges Natalie to Advocate For Herself and Be an Equal Partner in Finances
Ramit encourages Natalie to ask Chris about financial decisions, like maintaining a $10,000 cushion in their account, and to feel included in discussions. It is essential for Natalie to engage meaningfully in investment discussions. Ramit stresses the importance of making finances a shared and collaborative aspect of t ...
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Improving Communication and Overcoming Emotional Blocks Around Money
Additional Materials
Actionables
- You can create a "Financial Emotion Journal" to track your feelings and reactions to money-related events, helping you identify patterns and triggers in your financial behavior. Start by jotting down your emotional state whenever you encounter a financial decision or unexpected expense. Over time, you'll be able to spot trends and work on strategies to manage your reactions more effectively.
- Develop a "Money Date Night" ritual with your partner to make financial discussions a regular and positive part of your relationship. Set aside a specific evening twice a month where you both review your finances, discuss goals, and make decisions together. This can include reviewing your budget, discussing upcoming expenses, or learning about investments. The key is to keep the atmosphere positive and collaborative, turning what might be a stressful activity into a bonding experience.
- Implement a "Famil ...
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