Michelle and Dan are in their early thirties, and from the outside, they look like they’re in a great place financially. They make $225,000 annually, and they’ve saved $200,000 already. So, why do they feel so much dread, confusion, and fear about their money?

Their philosophy has always been to save as much as possible… so they’re afraid to spend or invest. But they don’t realize how much they’re missing out on, and it’s not just investment returns. 

Michelle and Dan have thousands of dollars, but they’re afraid to take a vacation. Will they ever feel good about money? They could be living their Rich Life today—but only if they address the real, emotional reasons they’re stuck. Let’s see how they do.

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How much do you think you need in your emergency fund? This is a number you should know.

– Ramit

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Transcript

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Michelle:  [00:00:02] Yeah, I feel like I’m just stockpiling money for when the world ends, like the apocalypse comes.

Dan:  [00:00:11] I think it’s fear. Not I think, it is fear.

Michelle:  [00:00:15] I don’t feel like I am savvy with my money. The world teaches most people that it’s confusing, and that’s what I have internalized. I don’t understand it. From the small amount that I have been exposed to, is I would say, negative. I’m just afraid of losing money also.

Ramit Sethi:  [00:00:35] Oh, you’re losing money right now.

Michelle:  [00:00:37] Good point, yes.

Ramit Sethi:  [00:00:39] I mean, you lost money since we started talking.

Michelle:  [00:00:43] Yeah, that’s pretty sad.

 [Narration]

Ramit Sethi:  [00:00:49] Michelle and Dan are in their early 30s and they make $225,000 a year. So why do they feel so bad about their money? As we’re going to learn in today’s conversation, Dan works in a volatile industry. He’s lost his job three times in the last six years. And so he’s worried about money. Michelle’s response to this is to save and save and save. They’ve accumulated $200,000, but they have no idea what to do with it. And because they are afraid of another layoff, they are paralyzed.

What do you do if money scares you and you find yourself playing defense, even though you’ve accumulated a lot? In this conversation, I give Michelle and Dan a lot of tools. I put together a cheat sheet with all of those tools mentioned in this episode. You can go to iwt.com/episode56 to get the cheat sheet, which also includes the follow up letter from Michelle and Dan. I’m Ramit Sethi, and this is I Will Teach You to Be Rich.

 [Interview]

Ramit Sethi:  [00:01:57] Well, let’s take a look at the numbers. So you make 220,000 a year, your investments are 23,550. So I can see why you say it’s low. You may not have invested as much as you could have or should have. Okay, fine. Your savings are $200,000. That’s a lot. How do you feel about having 200,000 in savings?

Michelle:  [00:02:25] Amazing. I love looking and seeing that number in my account.

Ramit Sethi:  [00:02:31] How often do you look at it?

Michelle:  [00:02:33] Not very often. But I love knowing it’s there even just without looking at it.

Ramit Sethi:  [00:02:39] Not often is how often?

Michelle:  [00:02:41] Twice a month.

Ramit Sethi:  [00:02:42] Okay. So you look at it like an art collector looks at their most prized piece of art, and they just feel good. Is that how you feel?

Michelle:  [00:02:50] Oh, yeah, I feel great security and almost pride, seeing that number in there.

Ramit Sethi:  [00:02:56] Security means what?

Michelle:  [00:03:00] If something happens, we are covered. We won’t get into a bad financial position that will plague us for years.

Ramit Sethi:  [00:03:10] Plague. Wow, it’s very dramatic. That also explains why your savings is at 18%, which is really high.

Michelle:  [00:03:19] It’s probably higher than that too.

Ramit Sethi:  [00:03:20] Is it? What is the real number?

Michelle:  [00:03:24] I don’t put a set amount. I just try to spend as little as possible.

Ramit Sethi:  [00:03:29] That sounds like a horrible life. Why do you do that?

Michelle:  [00:03:32] Well, I eventually like to spend it on travel. And the last two years, we did nothing because we couldn’t do anything because we were locked down.

Ramit Sethi:  [00:03:44] You can’t travel because you only have $200,000 in your savings account. Do you see how when you start to create these unconscious guidelines for yourself, it becomes very hard for you to change them, even though your numbers might be going way, way way up?

 [Narration]

Ramit Sethi:  [00:04:03] Did you catch what Michelle just said? She said, “I don’t put a set amount. I just try to spend as little as possible.” My response was, “That sounds horrible.” That is actually how most people live. They don’t take the time to create a realistic conscious spending plan. They tell themselves, “Oh, I got to cut back. I know I shouldn’t spend money on lattes, omelette, cheese, cake is probably a little expensive.” And they do that for their entire lives.

But do you know the ultimate irony? The ultimate irony is that they’re not even good at cutting back on spending. So they agonize on their Target bill, but they’ll go and buy an expensive car that’s financed on a 72-month loan. They don’t understand interest. They will tell themselves, “Oh I should get the cheaper shoes. I should not get those. They’re $99.” But they will never figure out how much they’re actually losing by not investing. What a terrible way to live! Who wants to look at the world through the lens of, “I’m going to try to spend as little as I possibly can”? It just seems like a defeatist way to look at the world.

I don’t want to look at the world like that. I want to say, “I’m going to create the richest life I possibly can.” What a profound difference. That rich life might be expensive. It might not. It certainly involves me spending more on the things I love, and cutting costs mercilessly on the things I don’t. So this is how people go wrong with their money. It’s a profoundly deep belief that they should look at the world and try to cut back on everything, spend as little as possible, not realizing that that belief is one of the things that makes them miserable with their money. And you can see this because Michelle uses words like financial plague. She’s $200,000 in savings, and she’s over here talking about a financial plague. I need to find out where this is coming from.

 [Interview]

Ramit Sethi:  [00:06:06] Have you had any financial plagues?

Dan:  [00:6:08] Well, yeah, I think the biggest thing is Michelle and I have been together for six years now. And for three of those years, I’ve been laid off. My industry is extremely volatile. And so for 50% of our relationship, I haven’t had a job. And so I think there’s fear, extreme fear on my end that comes of losing out on work again. I’m in the oil and gas industry.

Ramit Sethi:  [00:06:23] And is that normal? Do you expect to be laid off about 50% of the time?

Dan:  [00:06:45] That’s more than normal. The last five or six years have been crazy, not even crazy swings, they’ve been very low lows in the industry. So it’s not usually like that, but I feel like I have this dark cloud over my head, and like I’m plagued or cursed.

Ramit Sethi:  [00:07:09] Dan, when you are unemployed, what do you do? How long does it take to get back employed? Tell me about that.

Dan:  [00:07:19] Ever since we’ve been in a relationship, the first time I got laid off it was for a full two years. That’s insanely long time. And then I got back into my career again for another year and a half, two years. And then once again, it happened again, for a full year. So they’re long, long stretches. It’s a long, long stretch.

Ramit Sethi:  [00:07:47] What do you do during that time?

Dan:  [00:07:51 I think, to be completely honest–

Michelle:  [00:07:55] You worked–

Dan:  [00:07:56] Sorry.

Michelle:  [00:07:56] You worked for a bit, not in your industry.

Dan:  [00:08:00] I did have to eventually. I was lucky enough to be on employment insurance, but it did get to a point where my bank account was getting dangerously close to zero. So I did have to take on another job, not in my normal career, where I was making a third of what I normally make. Push came to shove, and I had to do it.

Ramit Sethi:  [00:08:21] And you were going to say something, “To be honest..”

Michelle:  [00:08:26] I was going to say that he did work. He’s not really giving himself credit.

Ramit Sethi:  [00:08:33] Yeah, but, Dan, you were going to say, “To be honest…”

Dan:  [00:08:38] Yeah, to be honest, I think that firstly, I had the first two years, I think for the majority, the first six months, maybe a year, I think I just felt sorry for myself. And that didn’t really do anything or change anything. I was on employment insurance. But when push came to shove, like Michelle said, I did have to get a job in a different industry, but yeah, I think I carry some demons from that still to this day.

Ramit Sethi:  [00:09:12] So, Dan, you have demons from being laid off multiple times. I get that. And you’re still in that industry. So it’s possible it can happen again. Got it. That helps me understand why you might be playing a little bit of defense. And what about for you, Michelle?

Michelle:  [00:09:30] I feel like when Dan is making money, he’s making great money. And he has made nominal money when he hasn’t had a job. But I feel then I need to take my more reliable income and save that so then we have a buffer, we have that fallback if– and we’ve come to think of it not only just if, but just when he gets laid off again.

Ramit Sethi:  [00:10:01] How much of a buffer do you need?

Michelle:  [00:10:02] I think at minimum one year.

Ramit Sethi:  [00:10:06] Okay, one year of full income?

 [Narration]

Ramit Sethi:  [00:10:09] This is a number that you should know. How much do you think you need in your emergency fund? Here’s how you think about it. First, you figure out how much you need to keep the lights on every month. If you’re spending $3,000 a month on everything right now, to keep the lights on is going to cost you less than $3,000 because you’d immediately cancel discretionary expenses like cable, basically, most of the things in your guilt-free spending number.

So let’s say you’re spending $3,000 a month right now. But to keep the lights on, it would cost you $2,000 a month. That would cover your rent or mortgage, it would pay the minimums on your debt, it would let you buy cheaper groceries, etc. Okay, great. Now you know that number. Now the next step is, how many months of emergency reserve do you need? My general guidelines are three months at a minimum. So if your keep-the-lights-on number is $2,000, that’s $2,000 times 3, or $6,000 that you should aim to have in an emergency fund account. Now, three months is just a minimum recommendation. If you prefer six months, which is more conservative, that would mean saving up 2,000 times 6 or $12,000.

Now choosing that number can be an interesting exercise. During the early days of COVID, for the first and only time, I recommended aggressively saving one year of emergency reserve. I even recommended slowing down any debt payments and investments and stockpiling cash. That’s because we were looking at a true financial cataclysm. Since then, things have recovered quite a bit. And I’ve relaxed that recommendation to three to six months.

Some people might be more conservative, that’s fine. Some people might be more aggressive. It’s your choice. But it’s important to understand the general guidelines. And unless you have a compelling reason to deviate, just follow the guidelines. It’s a good lesson for life. Unless you have a compelling reason to deviate, pick a system you trust, follow it, and then move on. 

If you’re not sure what to do after hearing everything I just said, the easiest thing you can do is set up a target of six months of emergency keep-the-lights-on money. It might take you two years to save. It might take eight years, whatever. At least you know the number and you have a plan in motion. Now, back to Michelle, I want to ask her more about why she plays defense with her money.

 [Interview]

Michelle:  [00:12:41] I mean, we could cut down a lot if we needed to. But I would feel more comfortable with one year of full income for all of our current expenses, yes, even if we did cut some.

Ramit Sethi:  [00:12:53] That’s totally fine. I want to understand it relative to the rest of your numbers. But I never fault anyone for saying, “Hey, I’m a little more conservative. I want a little bit more extra cash in the bank.” Cool. One thing we want to do when it comes to our finances, we want to understand what the cost of our beliefs are. So for example, if you have a year’s worth of cash sitting in the bank, that could be fine. However, what might you be losing because of it? And so these are things we can talk about. But overall, everyone has different beliefs. And Michelle, would you say that you have any, quote “demons”?

Michelle:  [00:13:32] I would maybe say I have set of ghosts– to use some of your terminology, Ramit, but I think in comparison to Dan, I would say no.

Ramit Sethi:  [00:13:45] Okay, what are your ghosts?

Michelle:  [00:13:47] Just where I think I shouldn’t be based on previous generations or what society thinks you should do.

Ramit Sethi:  [00:13:54] And what do you think that you should be doing that you’re not yet doing?

Michelle:  [00:13:57] I just feel behind. I feel like it’s nothing in particular. It’s just a feeling. I just feel like, I guess investing would be the biggest thing. I feel like we’re already behind in the game and catching up will take some serious sheets.

 [Narration]

Ramit Sethi:  [00:14:22] We’re a few minutes into this conversation and we have demons, ghosts, a plague, and an apocalypse all with a couple who has $200,000 in the bank and an income of $225,000 every year. You can understand why. Dan has been unemployed so many times. It is easy to become conservative. But there is a cost to being conservative with your money. And sometimes we need to evaluate whether their financial conservatism actually makes sense for them. Now remember, this isn’t just about the numbers. It’s about their money psychology.

The funny thing is we tend to overvalue math and undervalue money psychology. But in order for you to get ahead with your money, and to live the rich life, you have to get better at your money psychology. To do that, I put together a free mini-course on how to change your mindset. It’ll walk you through the process of uncovering your invisible scripts about money, and then replace them with a better mindset. I’ve included that in the Episode 56 cheat sheet. You can get it from iwt.com/episode56. Now, think about Michelle and Dan. How would you feel about having $200,000 in savings? Based on the tenor of their conversation, how do you think they felt when they filled out the conscious spending plan? Listen to this.

 [Interview]

Michelle:  [00:15:53] Honestly, when we found out what our guilt-free spending amount was, and thinking that that was all we had to go towards everything after fixed expenses, especially travel, I felt depressed because I quickly realized that what I have been thinking that I’d like us to do is far out of reach.

Ramit Sethi:  [00:16:21] Felt depressed.

Michelle:  [00:16:23] Yes.

Ramit Sethi:  [00:16:24] Why?

Michelle:  [00:16:27] I thought that we were in a better spot than it ended up showing us. And I wanted us to do the conscious spending plan because Dan was feeling a little stressed about me talking about some of the things I’d like us to do primarily around travel. And I thought that this exercise would ease our minds, that my dreams are bigger than our reality allows.

Ramit Sethi:  [00:17:01] So you’re excited to travel, you plugged in the numbers, what did you expect would pop out of the conscious spending plan?

Michelle:  [00:17:11] Just more money in our guilt-free spending because I don’t feel like– our fixed costs aren’t necessarily– I didn’t think they were small. But also I don’t think that we spend money frivolously on a lot of things. So I wasn’t expecting the amount after all of our expenses to be as low as they were.

Ramit Sethi:  [00:17:38] What did you expect to see when you went into the process?

Michelle:  [00:17:43] I thought it was going to tell us we had a lot more money than we did basically. I didn’t have a specific number in mind, just more.

Ramit Sethi:  [00:17:54] How much more?

Michelle:  [00:17:54] I would say four times more.

Ramit Sethi:  [00:17:56] Four times more for guilt-free spending?

Michelle:  [00:18:00] Yes.

Ramit Sethi:  [00:18:01] Okay. No wonder you were depressed. I’m going to add a new feature to the conscious spending plan where no matter what you type in, you click Submit, and then it does a little processing and then it goes, “You’re rich. You can buy anything you want.” The only problem is where do I go from there? Because the minute that I reveal, you actually can’t buy that stuff, people are going to be really mad at me.

Michelle:  [00:18:23] Maybe a little out of reality, again. Maybe two times would have been a little more realistic if that was in my mind to make me feel less depressed.

Ramit Sethi:  [00:18:37] Okay. And Dan, what was your experience going through the conscious spending plan?

Dan:  [00:18:43] It was kind of the same thing. I think we’re almost doing it to find validation that, hey, we’re going to have a heck of a lot more in our guilt-free spending. And I know we have some vacations that we’re thinking of making for the future. And I don’t think we got that validation. And I immediately felt anxious, just pure anxiety. This is not what we were expecting.

Ramit Sethi:  [00:19:15] And what did you both do after you looked at the numbers? Was there a moment where you looked at each other and then the music started playing? What happened?

Dan:  [00:19:25] Yeah, we looked at each other and we could just tell just like a pin dropping, and immediately after that, we just didn’t want to talk about it anymore. We almost were just like, we need to drop this, pretend we did do it.

Michelle:  [00:19:43] Yeah, we closed the laptops, turned the TV on and zoned out, completely tried to forget about what we just did.

Ramit Sethi:  [00:19:51] I know you’re both from Canada, but that’s like the caricature of an American. They finally get up the courage to tackle their problems, they look themselves in the eye, they put some numbers in, and they don’t like what they see, and they go, “That didn’t happen. Let’s go back to watching TV passively.”

Michelle:  [00:20:01] The next day I went on and I applied for this podcast. We need some help. We need to get in here.

Ramit Sethi:  [00:20:16] All right, so I looked at your conscious spending plan. I’m quite amazed that you two were depressed looking at this.

Michelle:  [00:20:27] Yeah, I feel a little silly if you put it in context, we aren’t doing bad. Again, I feel like I’m at the next stage with my dreams of what I’d like us to do with our life, and so I think maybe that’s where it is coming from.

Ramit Sethi:  [00:20:46] What are your dreams?

Michelle:  [00:20:48] Just lots of travel.

Ramit Sethi:  [00:20:50] Where do you want to go to travel specifically?

Michelle:  [00:20:55] It’d be easier probably to tell you where I don’t want to travel.

Ramit Sethi:  [00:20:58] Give me the top two or three, the ones that really you love.

Michelle:  [00:21:02] The idea of spending two to three months leasing somewhere and actually, since we have remote jobs working, the first place I want to go to is I want to do that in New York.

Ramit Sethi:  [00:21:12] How much will it cost you?

Michelle:  [00:21:14] I roughly looked up like what an apartment would cost per month and it was around like 4,000. And then I bumped that up to 5,000 to give a buffer. And then I thought maybe $2,500 per month to spend, so about $7,500 per month.

Ramit Sethi:  [00:21:34] Great. So when can you do that?

Michelle:  [00:21:38] That’s as far as I haven’t planned or figured out how much I need to save to do that. I almost don’t think that that’s real. I almost don’t think that that will happen. I just like to dream about it.

Ramit Sethi:  [00:21:51] Of course, you do.

Michelle:  [00:21:51] And then I did look up these numbers, knowing we were coming on with you. But I still almost don’t allow myself to do that because I don’t know if it’ll actually happen.

Ramit Sethi:  [00:21:58] I just want to remind everybody listening that you have just sketched out this beautiful vision of $7,500 to stay in New York and have a great time for however many weeks, and you don’t know if you can afford it, but you have $200,000 in your savings account.

Michelle:  [00:22:23] I feel like that is money that can’t be spent on something like that.

Ramit Sethi:  [00:22:27] You believe that because it’s one big mess of money just sitting there. That’s why we got to chop it up. We got to put it into categories. Otherwise, it’s just going to sit there. It’s going to haunt you. That little ghost is going to turn into a horrible ghost that’s going to sit over you. And it’s the weirdest kind of ghost because it’ll turn into a million dollars, by the time you’re 60, and you’re going to feel good about it. But then you’re going to call me up again. And I’m going to be like, that actually could have turned into $10 million, if you’d properly invested.

 [Narration]

Ramit Sethi:  [00:23:02] There’s something weird going on here. They have $200,000 in savings, but they are depressed about their money. They say they want to travel, but when I ask where, they give me these vague answers. Are you noticing it? I want to dive into the numbers so that we can really find out why they feel so bad about money. And to start, I list off a few key numbers from their conscious spending plan.

[Interview]

Ramit Sethi:  [00:23:29] So just looking at just the top part of this, the net worth part where we look at your investments are 23,000, your savings are 200,000, and your debt is 259,000, what jumps out to you if anything?

Michelle:  [00:23:42] Just like the ratios are wrong. There should be way more in the investments. At least savings to investment, I think should be more equal or our debt should be a lot lower.

Ramit Sethi:  [00:23:59] Dan?

Dan:  [00:24:01] Yeah, I think the ratio of the investments to savings is off. I think the cost of those ratios we’re not doing enough for our retirement or our future.

Ramit Sethi:  [00:24:15] You two are pretty smart. So you intuitively understand that these ratios are a bit off. What do you think is really stopping you from adjusting those ratios? Why haven’t you already done it?

Michelle:  [00:24:33] Fear.

Dan:  [00:24:34] Yeah, I think it’s fear. Not I think, it is fear. To be honest, like Michelle said, most of that is her money. I should view it as our money, but what fears me is getting into a scenario where we do invest a bigger chunk of that and I get laid off again and we need access to that money, but we can’t get it.

Ramit Sethi:  [00:25:02] Is there a possibility, an option where you don’t go from zero to 100, maybe you don’t even take all the savings and dump it into the market, but rather some middle ground?

Dan:  [00:25:15] I think so, yeah.

Michelle:  [00:25:17] Definitely, yeah. I just don’t know what that–

Dan:  [00:25:22] I think there’s still fear there.

Michelle:  [00:25:23] Yeah. And what is the middle ground? I’m not sure.

Ramit Sethi:  [00:25:29] Sometimes it’s just not knowing that stops us, like paralyzed.

Michelle:  [00:25:34] That’s how I feel.

Ramit Sethi:  [00:25:36] Yeah, we could do this, it’s probably a good idea, it’s definitely crazy what we’re doing, but if we make this move, we’re not sure what to do and we are worried about something going wrong. Any of that sound familiar?

Michelle:  [00:25:49] Yeah, spot on.

Ramit Sethi:  [00:25:50] So your investment is at 4%. It’s pretty low, 500 bucks a month. 500 bucks a month making $220,000 a year is too low. I’m just going to tell you right now. Is the reason that you’re so low on that, that you don’t know how to invest and you’re afraid and all that stuff?

Michelle:  [00:26:08] Yeah, basically.

Ramit Sethi:  [00:26:10] And you said something, Michelle, “What if I invest–” And what was your fear with investing?

Michelle:  [00:26:17] Many fears. What if we can’t get the money out or we’re paying a lot of tax to get that money out if we’re putting it in a retirement fund, and then investing that? That’s the main fear. And then also, I don’t understand it. From the small amount that I do or have been exposed to is I would say negative. I’m just afraid of losing money also.

Ramit Sethi:  [00:26:54] Well, you’re losing money right now.

Michelle:  [00:26:56] Good point, yes.

Ramit Sethi:  [00:26:58] I mean, you lost money since we started talking.

Michelle:  [00:27:02] Yeah, that’s pretty sad.

Ramit Sethi:  [00:27:07] You’re afraid of the big wipeout. I put money in, I put 50k in and it goes down to 25k. And oh, my God, I lost 25k. And fair enough, okay. A lot of people are scared of that. A lot of people have people around them saying, investing is like gambling. You never know if the market is going to be up or down. That’s why you buy real estate, it’s secure. They’re not building any more land, all this nonsense. What most people don’t talk about is the fact that every day you are not investing, you’re losing money, and a lot of money. Because both of you in your early 30s, you have a lot of time to compound. And with a high income, that number can turn into millions and millions.

And if we did the calculations and amortize it out, it’s possible you’re losing hundreds a day by not investing, maybe more, I don’t know. So you are worried about a hypothetical loss, which over the long term is extremely unlikely, but you’re actually not worried about what’s happening right now with 100% certainty, you are losing money. Putting 4% towards your investments is really based on fear as opposed to a calm, cool, methodical, educated understanding of investments. Is that’s depressing?

Michelle:  [00:28:30] I mean, very, yeah, that’s more depressing than when we did the gorgeous spending plan.

 [Narration]

Ramit Sethi:  [00:28:43] I love it. I love it. I said, I love it because sometimes you got to show people the gamut of emotions. Listen, people, this isn’t a Hallmark movie channel. You didn’t come here for me to blow smoke up your ass and hand you some chocolate chip cookies. Go to grandma’s house for that. Sometimes money is depressing. Sometimes money is scary. Sometimes it makes you cry. That’s fine. Let’s accept that. And then let’s make a plan. 

Right now, Michelle and Dan are paralyzed by all these small fears in the back of their heads. What if I get laid off? What if I lose money? What if I make a mistake? These are all legitimate fears, but they’re not big enough to do anything about. And in the meantime, it’s true they are saving money, they are making progress, sort of. So why do they still feel so bad? Because those fears aren’t big enough to do anything about. They’re almost the worst kind of fears like a mosquito, big enough to annoy you, but small enough that you don’t really have to do anything about it.

[Interview]

What are the major things stopping you from having a smooth automated system?

Michelle:  [00:29:50] For me, I feel like it goes around investments where I– just lack of knowledge and understanding.

Ramit Sethi:  [00:30:00] Just so everybody knows, Michelle showed up to this call and she has a very nice plain background behind her. And there’s only one thing in the shot, it is a copy of my book, sitting behind her on a shelf. I mean, it’s got huge fonts, it’s very clearly I Will Teach You to Be Rich. So, Michelle, you own a copy of my book, and yet you don’t feel educated about money. Can you please explain that to me?

Michelle:  [00:30:30] It’s because I’m only on page 175.

Ramit Sethi:  [00:30:33] What a shock?

Michelle:  [00:30:34] Even though I’m reading the content, and you’re someone that I trust to be giving me good information, there’s still that thing in the back of my mind, am I understanding it correctly? Will this work for me? I don’t feel like I am savvy with my money. I don’t have the knowledge base that I think that I should because finances are confusing. I think the world teaches most people that it’s confusing, and that’s what I have internalized.

Ramit Sethi:  [00:31:08] Who around you has taught you that?

Michelle:  [00:31:12] I mean, the media. Even when I go on to, like I see that you like to use Vanguard to invest, I go on to Vanguard website and it’s in another language. I can read the words, but it’s not connecting somehow.

Ramit Sethi:  [00:31:32] It’s confusing. I agree. That’s the reason that I wrote my book. It’s like, I don’t want everyday people to have to be financial experts to get their money going where they want it to go.

Michelle:  [00:31:45] Also reading it, but he’s a little bit further behind than me, but I’ll be like, oh, go to page x and read this thing because it’s– I really liked the part where how Dan described that like he has these financial demons and the dark cloud above him because of being laid off. I love in your book where you call out the crybabies because I told him he needs to read that chapter. You need to stop feeling sorry for yourself. We’re doing okay.

Ramit Sethi:  [00:32:14] Dan, how did you receive that comment?

Dan:  [00:32:18] She’s right. I didn’t disagree with her. It’s sad, but I am like that. Yeah, it’s sad.

Ramit Sethi:  [00:32:32] I like you two. I like a couple that can tease each other. I like anyone who can make fun of themselves, and like, yeah. Okay. Boohoo a little bit. All right. Both of you have a little bit of playing defense. Okay, guess what, you can play defense, and still grow incredible wealth. You need to change some of this stuff with your money. You need to play offense in a couple of key areas, like you need to set up automatic investing. 

But if you want to spend the rest of your life going to the local bakery and agonizing over buying a croissant, okay, go ahead. I don’t know, it sounds like it sucks to me, but if that’s what you are going to do, fine as long as you’re investing 10 to 20%. And with your high incomes, that’s great. We don’t have to change everything about you. We just have to change a couple of things.

I’m loving the attitude here. They’re smiling, they’re joking with each other, even though they feel stressed out about money. This is a big positive sign for me. So right now this conscious spending plan shows 18%. I’m probably guessing it’s more like 25. I don’t like hearing people say, “I don’t save consistently. I just spend as little as I want.” That’s like a horror movie to me. I don’t want that.

Michelle:  [00:33:49] I don’t want that either.

Ramit Sethi:  [00:33:51] Okay, well, you must want it in some way because you do it.

Michelle:  [00:33:54] True.

Ramit Sethi:  [00:33:55] Most people do the opposite. They go, “I don’t save automatically and at the end of the month, I don’t have anything left. So I can’t do that.” I go, “It’s because you’re doing it manually. That’s why it doesn’t work.” In your case, you’re doing it manually, but you’re saving too much. Now if we just zoom out, boohoo, this couple makes 220k a year and they have $200,000 in savings. Boohoo. But I actually think it’s a problem nonetheless. 

You’re underinvested, you don’t believe you can afford a vacation, and you’re playing defense by miss allocating your money mostly based on fear. So I don’t want to dismiss the problem. I think it’s a real problem. I think we have a pretty good shot at making some changes here. So you’re reading the book, you’re getting to the section where you’re going to start learning about investing. Have you gotten to any of that yet?

Michelle:  [00:34:53] No, not yet.

Ramit Sethi:  [00:34:55] Okay. Well, that explains a lot. So as you get to that, you’re going to become much more informed about investing. I’m a little confused why she didn’t finish the book before coming on this podcast with millions of listeners, but whatever. They’re moving towards solutions. And like many people, I find that Michelle and Dan are willing to do the work. Here they are. They got a copy of the book, they’re talking about their numbers, this is a very good sign.

I think at a very high level, there are a few major things stopping you from getting your money in order. The first is a basic education. If you want to do money right, you got to learn the basic language of personal finance, basic. I’m talking about, what’s an index fund, why should you probably not buy individual stocks, how are you losing money by not investing, things like that, all that’s in the book, read it. The second thing is the irregular income and the potential for layoffs. We need to address that, because it’s definitely casting a shadow over both of you, particularly you, Dan. So, Dan, just a couple of questions. Do you want to stay in this industry or do you want to switch?

Dan:  [00:36:11] That’s a hard question to answer. I do because when I am in the industry and employed, I make good money. But when I’m laid off, and as of late, there are long stretches of being laid off, it almost turns me off from doing it again, and makes me just want to abandon it and not be part of it.

Ramit Sethi:  [00:36:38] So what do you want to do now?

Dan:  [00:36:42] After this last layoff that lasted a full year, I’d like to give myself a bit of credit, and say that I wasn’t a complete crybaby this time, and I started to learn some other skills. I took some other online courses. I feel like I’m only scratching the surface with this new opportunity, but I feel like I do have a bit of a backup plan right now. If shit was to hit the fan again, at least I’m not completely in the dark and feeling sorry for myself.

Ramit Sethi:  [00:37:14] Two principles that I might apply here, the first is better to plan when things are good, instead of having to make a plan when things are bad. So this is commonly found with prenups, with deciding when you start a business, how long am I going to go on making no money, etc? You want to make a plan when things are good. So right now you’re employed. If you were to get laid off, how long would you stay laid off before you just switched industries completely?

Dan:  [00:37:48] That is a question I’ve asked myself a lot.

Ramit Sethi:  [00:37:54] Well, let’s just answer it.

Dan:  [00:37:58] To be honest, I don’t think I would wait for any time. I think I would just try and transition.

Ramit Sethi:  [00:38:06] Then in that case, why don’t you just start looking right now?

Dan:  [00:38:11] I have fear again. There’s fear of failure.

Ramit Sethi:  [00:38:16] Well, just like Michelle is worried about losing money, but she’s actually losing money every day and so are you. Only you know, and maybe luck knows how likely it is you get laid off in the next two years, but if you had to guess a percentage chance of getting laid off within two years, what would it be?

Dan:  [00:38:34] Oh, I think it’s 60, 70%.

Ramit Sethi:  [00:38:38] Okay, that’s cool. So that’s cool. I don’t say cool because I’m glad you’re going to get laid off. I’m not. I say it because that’s like a very clear answer, you’re going to get laid off. So you can either wait until it happens and then you’re afraid and you got all these financial constraints, or you can start looking right now. So why don’t you start looking right now?

Dan:  [00:39:01] I agree. It’s in my best interest.

Ramit Sethi:  [00:39:02] Okay, great. So start. There’s lots of ways you can do it. We have a dream job program, or you can just look on your own. There’s lots of ways to do it. But the second principle I was going to share is the best time to find a job is when you are employed. So I love to be able to groove from one opportunity to the next. It can become very tricky when one ends abruptly and you’re like, “Oh oh, now I have my backs against the wall.” My general principle for money in life is I never want to have to make a decision with my back against the wall.

Financially speaking, I would recommend that you put some money aside now because your job is uncertain. I think it’s in chapter five of the book, basically build a buffer. In your case, because your monthly income is pretty high, it might take you a while to save even a month’s worth of income, but you could certainly set some money aside every single month, put it in a savings account, and target one month, two months worth of savings. That would give you a lot of breathing room. Any questions about that?

Dan:  [00:40:15] No, I love that idea. Yeah, I love it.

Ramit Sethi:  [00:40:15] This one’s easy. If you have a 70% chance of being laid off, it’s time to start looking for a new job. You can learn more about how to do this in my dream job program, which is going to help you identify your dream job, create an amazing resume, and then bypass all these other jokers who are submitting their resume through some random job website and praying someone will respond to their resume. Once you do that, it’ll show you how to interview and negotiate often a 10,000, $15,000, even $40,000 raise. You can find more info about the dream job program in the Episode 56 cheat sheet at iwt.com/episode56.

All right, let’s tackle the $200,000 in savings that is just sitting there. Right now it’s just like money sitting in a junk drawer. We got to do something with it. Michelle, I think the thing about you not going that last step is really the crux of this entire call. If we talk again in five or 10 years, all these numbers will just be so much bigger, but the two of you won’t have crossed that chasm to actually do something with your money. That’s why I’m here. I don’t find there are many people who talk seriously about the importance of spending your money on the things you love. So I’ve talked about it a lot. You’ve heard it on every single podcast. But you’re still stuck. What do you want to do to solve it?

Michelle:  [00:41:55] Take action, make a plan.

Ramit Sethi:  [00:41:57] Perfect. All right, great. Michelle, let’s talk about your savings. So let’s just pretend that we live in a beautiful world where everyone just listens to what I have to say and doesn’t talk back. This is called utopia. And in utopia, everyone just reads my book, follows me on Instagram, subscribes to my newsletter, and then just follows my specific recommendations for the conscious spending plan. If we did that, what number would be in your savings goals?

Michelle:  [00:42:33] Around 10%.

Ramit Sethi:  [00:42:34] Yeah. Great. So then what would you do with the extra money?

Michelle:  [00:42:40] Invest, spend some.

Ramit Sethi:  [00:42:44] Very good. Great. So that money if you took that down, it’d gives you roughly $1,000 a month extra. That’s a lot of money. That’s pretty good. Do you want to calculate how much that money would make you in terms of investments?

Michelle:  [00:43:02] Yes, definitely.

Ramit Sethi:  [00:43:04] Okay, what do you think it would if we just took $1,000 a month, and until you turned 65, let’s just say 30 years from now, how much do you think that would make you?

Michelle:  [00:43:15] Oh, my gosh, Dan, you’re the math person here.

Ramit Sethi:  [00:43:19] No, no. I want to hear from you. Just guess. You’re not going to really guess but just guess.

Michelle:  [00:43:23] Oh, I want to say I’m hoping a million. I would like it to be a million. Again, I’m not sure if I’m anywhere close.

Ramit Sethi:  [00:43:34] And a million where’d you get that number from?

Michelle:  [00:43:39] Arbitrary number that I think would be nice to have in investments.

Ramit Sethi:  [00:43:44] Well, it’s 1.2 million.

Michelle:  [00:43:46] Okay, that sounds amazing.

Ramit Sethi:  [00:43:49] And that’s just from $1,000 that you pulled out from over saving. What do you think about that?

Michelle:  [00:44:00] Incredible.

Ramit Sethi:  [00:44:02] It’s that consistent investing every single month. Do you want to play a little game just for fun? You’re in your early 30s, you’re at the beginning of your careers. So instead of 2,000 a month, let’s just say 3,000 a month. Now, you may not be able to do that today, I actually think you could, but over time your incomes going to grow. You’ll be very easy to do this. How much does that turn into?

Michelle:  [00:44:35] 5,000,00.

Ramit Sethi:  [00:44:36] 3.7 million. Just as a final example, instead of starting it with 20k, you start with 50k out of that 200, you now have over $4 million. The crazy thing is with your income, you could actually invest pretty aggressively and take a nice vacation. You could do all these things, but you do need to make a few different choices. 

Investing does not have to be complicated. So many of you believe that investing is this complicated thing, you have to watch CNBC, track P E ratios, and learn options trading. That is how you lose money. Investing is simple, straightforward, and boring. This is why I wrote my book. But there’s one other thing that Michelle and Dan need to know. So you guys can make $4 million plus, but what’s the catch and all that stuff? Fine, finish the book, then you’ll understand what the catches are and how I prevent you from getting tricked by the many tricks that are out there. Anything else preventing you from making these changes?

Michelle:  [00:45:43] I mean, our mindset on spending or the money scripts that we have, the money psychology that we need to work through.

Ramit Sethi:  [00:45:55] Yeah, I agree. I think that there’s not really a powerful vision that the two of you have about your rich life. So even in your CSP, it’s quite clear. It says savings for a vacation. You’re saving $1,000 a month. That’s pretty cool. I’m actually really happy to see that. Do you have a separate account called a vacation sub-savings account?

Michelle:  [00:46:21] No.

Ramit Sethi:  [00:46:22] No, of course, not. You haven’t gotten to chapter 5, right?

Michelle:  [00:46:26] I think I just started.

Ramit Sethi:  [00:46:28] Well, you will in about a day. I say this because when both of you did your CSP, and you looked at each other, and you’re like, oh, it’s kind of depressing, we can’t actually spend the way we want, but when I look at your conscious spending plan, I go, “Oh my gosh, they’re already saving $1,000 a month for vacations. That’s amazing. And if they want to do more, they certainly could.” Because you’ve been over-saving for a long time. I think that you have a big pot of money that just feels good. And when people start out, especially if they come from a place where they did not have money, they just want to know that they have enough. That’s okay, that’s the first step of money, but it’s rudimentary. It’s an amateur way of looking at money.

A savvier way of looking at money is to say, “Okay, I have this much. Now, let me break it down. I want three months or six months of an emergency fund, I want x months for whatever, I want to have a sub-savings account for my vacation, I want a sub savings for this and for a down payment on a car or a house, whatever.” That’s a more savvy way to treat your money. Money has a purpose, and that purpose should align with your rich life. What is the rich life for the two of you? I’m sure you’ve talked about it.

Michelle:  [00:47:50] Yeah–

Dan:  [00:47:50] We have, for me– sorry. Go ahead, Michelle.

Michelle:  [00:47:55] I think just for us again, I know that you like specifics. So I feel like we need to dial into way more specifics.

Ramit Sethi:  [00:48:06] You listen to every podcast episode, and you guys haven’t done that?

Michelle:  [00:48:09] Oh, we have. It’s just hard. It’s hard to– the blanket word would be travel. But–

Ramit Sethi:  [00:48:17] You want to do it right now?

Michelle:  [00:48:19] Sure.

Dan:  [00:48:19] Yeah.

Ramit Sethi:  [00:48:20] All right. Who wants to start? What is your rich life?

Michelle:  [00:48:26] Do you want to start, Dan? I actually wrote it down. We did this exercise. And I tried to grill Dan, pretending to be you and being like, but why? I mean, it was long. I’m glad we did it before we came on here.

Ramit Sethi:  [00:48:39] Wait, did you record this? I want to hear impressions of me.

Michelle:  [00:48:43] Oh, I was just trying to emulate you, but still be myself. But I was really trying to drive it home like but why? Like, go further.

Ramit Sethi:  [00:48:51] Let’s do it. And maybe it will end up being the same thing you did. Michelle, what is your rich life?

Michelle:  [00:48:57] So big things I want to travel a lot, months-long trips. I would love– we don’t currently, but I would love to see ourselves doing more luxurious trips, staying in nicer hotels, doing more extravagant outings. I would love to live and work and experience a new city or country for two to three months every year. I want more time to spend with each other and our family, more quality time. I want to be able to be investing and knowing our money is working for us and I want to be able to be more generous with my money.

Ramit Sethi:  [00:49:44] Okay, love it. I’m going to zoom in on a couple of those things. I’m going to talk about generosity. What does being generous look like?

Michelle:  [00:49:52] I love to buy gifts for people. And I sometimes feel like I can’t do it to the extent that I would like to now.

Ramit Sethi:  [00:50:04] So you have savings goals here of $200 a month for gifts.

Michelle:  [00:50:09] Yes.

Ramit Sethi:  [00:50:10] Do you spend that?

Michelle:  [00:50:12] Oh, yeah, that was based off of what we’d normally spend per year currently.

Ramit Sethi:  [00:50:17] Very good.

Michelle:  [00:50:18] I would love that to be like four times as much, though.

Ramit Sethi:  [00:50:21] Oh, okay. Money dial, I love that. I suggest moving that down to guilt-free spending because you’re spending it, you’re not just saving it, you’re just spending it. Move that down. That will adjust your numbers for you. And I love that. Beautiful. What are you going to spend more on? Be specific. What would you pay for? What would you buy?

Michelle:  [00:50:39] I would love to bring our family on more trips.

Ramit Sethi:  [00:50:43] Okay, what else?

Michelle:  [00:50:46] Just surprise them with things. Our mothers like fresh flowers. Just get them a flower subscription so every two weeks, they have fresh flowers sitting on their table.

Ramit Sethi:  [00:50:58] Love it. We had a student of ours in last night’s rich life system coaching that I did. And we talk a lot about this conscious spending plan in detail. And I talk about money psychology there. And one of the students said that, because of what we covered the last coaching call, she bought flowers for her mom for the first time ever. And I said, “Wow, how much did it cost?” 50 bucks. And she was just about the next day to see what her mom’s reaction was. 

So we had this beautiful conversation about okay, how did it feel? She goes, it felt great. It felt good. I said, what could you do to extend it? And everyone in the coaching program said these amazing ideas. She said, you could buy nicer flowers, you could set it up on an auto subscription, you could this– was my favorite, you could go to a flower arranging class with your mom, turn it into an experience, you could send a note to your mom or to 10 other people. And it could be free, but it’s just sending a note telling them why you appreciate them. So there’s so many creative ways. It could be more expensive, less expensive, more meaningful, there’s so many different ways. I love that you have some vision around gifts, and it gets you excited, that’s beautiful.

[Narration]

Ramit Sethi:  [00:52:17] Michelle is using money as an excuse to not spend money. And her feelings are real, but that doesn’t mean that they are right. My view is it’s okay to feel paralyzed. But if this is something that’s important to you, it’s not okay to stay paralyzed. In a way, that’s why I’m so glad that they both came on this call. They are clearly taking action by showing up, doing a CSP together and talking about this. They are on the path toward changing their behavior, which is ultimately what matters most.

[Interview]

Ramit Sethi:  [00:52:57] This is just my own opinion. If I were in your position, I would sit down and I would say, okay, first of all, I’ll finish this book so I understand the basics of finance. Then how much do we need for an emergency fund? Well, I’m pretty conservative, I want to say six months of full expenses. That’s very conservative, fine. And I want an extra x thousand because our water heater might break or something like that. Okay, fine. All right, what are we going to do with the rest of this money? Well, we need to be investing, and I want to reward ourselves for saving. So I want to do something special– that could be a trip, or whatever. And I remember Ramit showing us that the real investment gains happen from consistently investing every single month. That’s how I’d be thinking about if I were Michelle.

Now, if I were Dan, I would be thinking to myself, okay, I’m probably going to get laid off in the next two years. Here’s what I’m going to do to prevent that. Number one, I’m going to start putting extra money aside right now. Also, the next and most important thing I would do is start looking for a job right now before I get laid off. Boom, you do those two things, you’re set. Dan, do you agree with that?

Dan:  [00:54:02] I do. I think we can. I keep looking at that $200,000 and I’d like to, like what you said, Ramit, break that into chunks. I can almost see at least 50,000 of that go into investments, maybe 50,000 goes in another account just for vacations for the next five years. That’s a rich life for the next five years. That’s something that’s jumping out at me.

Ramit Sethi:  [00:54:34] All right. Why don’t you just play that out? Talk about the numbers.

Michelle:  [00:54:39] So yeah, 50,000 goes right into investing as our lumpsum.

Ramit Sethi:  [00:54:49] What about the rest?

Michelle:  [00:54:51] Another 50,000 can stay– at least 75 to stay in there as our emergency fund. That would at least be one of our, like, if I still had my job, and Dan lost his that would cover most of his salary for a whole year.

Ramit Sethi:  [00:55:07] I don’t mind if you want to keep 75k in an emergency fund, that’s totally cool with me. It’s more conservative than many people. But basically, here’s what we know, your savings are too high and your investments are too low. You probably need to rebalance that for the long term, but you’ve got enough cash that you can start traveling, taking these trips having the amazing life. How does that feel to you?

Michelle:  [00:55:31] Good. I feel like this is the validation that we were looking for that like okay, we’re not that far off, but if we tweak a few key things, we are on a good track.

 [Narration]

Ramit Sethi:  [00:55:46] I really enjoyed speaking with Dan and Michelle, what a great couple! I received follow-up letters from them after we spoke. You can read the full letters in the Episode 56 cheat sheet at iwt.com/episode 56. But let me give you a quick excerpt. This is from Michelle, “I’m happy to say that I finished reading your book. While still a work in progress, I am leaning into the discomfort and working through any confusion so that we can move from this safe deliberation phase of just dreaming to a deliberate phase of taking action and setting up our system and actually living a rich life. We’ve decided how we’re going to allocate our current savings account. We’ve updated our CSP to reflect this. And most importantly, we feel pretty good about it. Perhaps it was just good timing as the next day we saw an opportunity for a seat sail to Hawaii and booked our tickets for an adventure later this year.”

Love it. I’m absolutely thrilled to hear that they’ve started taking action and they are going on a trip together. Now to read the full letters and to get all the other bonuses I mentioned in this episode, go to iwt.com/episode56 for the cheat sheet. Thanks for listening to I Will Teach You to Be Rich. I’m Ramit Sethi. Please follow the show on Apple, Spotify, or wherever you listen to podcasts. If you haven’t read, I Will Teach You to Be Rich, my book, pick up a copy. You can get it at any bookstore or any library, and it will show you the specific tactics for how to build the I Will Teach You to Be Rich system into your personal finances.