Five Big Money Decisions, Run Through the Numbers: Ramit Sethi on Travel, Houses, Rings, Parties and Moving Out
I Will Teach You To Be Rich
Ramit Sethi, author of I Will Teach You To Be Rich, works through five real questions people sent him about major financial decisions. The questions are whether to quit a job to travel, whether to buy a house and have a baby, whether to buy an engagement ring, whether to spend on a 40th birthday party, and whether to move out of a parents' home. For each one, Sethi reviews the person's numbers, questions their assumptions, and gives his own recommendation. His opening claim is that the right answer is often counterintuitive. In several cases, the person who seems to be doing everything right is the one he thinks needs to change course.
Sethi sorts each person's money into the same categories throughout: assets, investments, savings, debt, "fixed costs" (essentials such as housing, debt payments, groceries), investing, saving, and "guilt-free spending." He refers to his own guideline that guilt-free spending should be about 20–35% of take-home pay.
Case 1: A 25-year-old with $773,000 invested who wants to travel for a year
TM is 25, lives in Sunnyvale, California, and works as a product manager earning about $200,000. They have long wanted to travel the world for an extended period, but limited paid time off has made that impossible. They have been putting money into a dedicated travel fund and say they have had "outsized returns" on their investments. They are not sure they want to return to the same career afterward. Their idea of a rich life involves more flexibility and fewer meetings. They also doubt they could keep a high income if they changed direction.
The numbers surprised Sethi:
- Investments total $773,000.
- About 63% of gross income goes to investing: $23,000 a year to a 401(k), $5,000 a year to an HSA, and roughly $8,000 a month after tax on top of that.
- Savings are $50,000, with $450 a month going to the travel fund.
- The only debt is $1,768, which Sethi guesses is a credit card bill that will be paid in full.
- Fixed costs are only 20%, which makes Sethi suspect TM lives with their parents.
- Guilt-free spending is $724 a month, about 6%.
Sethi's reading is that TM is "way over saving, way over investing." He jokes that they probably turn down invitations from friends because they need to put $8,432 toward retirement that month.
He draws on his own experience. He also earned a lot in his 20s and invested heavily. Looking back, he says the one thing he would change is to have had more fun. He would still have invested aggressively, but he would have set aside something like $200 a month, or even a week, for special occasions that can't be recovered later in life. He likes that TM seems willing to cut day-to-day spending in exchange for one big, meaningful trip.
Sethi sees TM framing the choice as career versus freedom, and argues the answer can be "yes and yes." He compares it to college application FAQs he read in high school. Those FAQs addressed whether to take an easier class and get an A or a harder class and get a B. The colleges' answer was that admitted students take the harder class and get the A. Applied to TM, the question becomes how to have both a rewarding career and a life with travel. On the complaint about meetings, Sethi notes that after the trip TM could look for a role with fewer meetings, and says such roles exist.
Then he runs projections. If TM keeps contributing about $126,000 a year for 40 years, Sethi's figures show about $38 million at 65 in inflation-adjusted terms, or around $96 million in nominal dollars. If TM stopped investing today and contributed nothing more, the figures are about $11.5 million in real terms and $34.9 million nominal. Sethi's conclusion is that someone headed for tens of millions who is still agonizing over one trip has gone too far. TM could cut contributions by $10,000, $20,000 or $50,000 a year or more and still be very wealthy. In his words, TM has already won the personal finance game at 25, and the new game is building a rich life.
Case 2: A $1.2 million house and a baby within two years
Sally is 32 and lives in the Bay Area. She is an account manager, and her husband Brett is a program manager. They want to buy a $1.2 million house in the next two years and start a family around the same time. They worry about being stretched financially. They have traveled a lot and are willing to cut back on that, but Sally still wants to feel secure, and she thinks she may need to help her parents financially someday.
Their numbers:
- Assets: $70,000. Investments: $314,000. Savings: $195,000. Debt: $18,000.
- Fixed costs: $6,916, or 44%. Housing is only 14.6% of gross income.
- Investing: $1,800 a month (11%).
- Saving: $2,400 a month (15%), of which $2,000 is earmarked for the house.
- Guilt-free spending: $4,712 (30%).
Sethi praises the low fixed costs, which give the couple a lot of margin. He notes that much of the extra money is going to guilt-free spending, near the top of his 20–35% range. He says that is fine, but it tells him where the money is going.
He then models the purchase. With 20% down ($240,000, which could come from savings, investments, or a smaller down payment), the loan is $960,000. At 7%, the mortgage is about $6,390 a month. Once he adds "phantom costs" such as maintenance and transaction fees spread over the life of the loan, he estimates $7,200 to $7,800 a month. For the baby, he estimates childcare at about $2,000 a month plus $500 to $1,000 for supplies and medical costs, for $2,500 to $3,000 in total. Together, housing and baby would put fixed costs at roughly $9,500 to $10,500 a month. That is over 60% of take-home pay before groceries, saving, investing or guilt-free spending.
His verdict is that right now they cannot afford both. He gives three reasons: the house is expensive, a 7% rate adds a large amount of interest every month, and even with 20% down their income can't support the house and a baby together.
He also names what he calls one of the most common financial mistakes, which is taking on several large new costs at once. The typical example is buying a house and a new car while having a baby. His alternative is to slow down and ask whether the house or the SUV has to happen now, or whether it can wait 6, 12, 18 months or longer. Spacing out new expenses gives people time to recover financially from each one.
He also pushes Sally to define what "security" means. It might mean owning a house, though he points out she won't own it outright for 30 years. It might instead mean having a large cash cushion so that if a landlord ends the lease, they can handle it. He argues Americans tend to treat homeownership as the only route to security when there are many others.
His recommendation is to stay in their current low-cost home as long as possible, since every month there saves thousands of dollars. The more important question is what they do with that money. If they really want to buy at current prices and rates within a reasonable timeframe, 15% saving isn't enough. He suggests moving $1,000 or even $2,000 a month from guilt-free spending into savings. He also wants them to question the two-year timeline and consider whether the purchase could happen in five, eight or ten years, then allocate their money to match.
Case 3: A 33-year-old in debt who wants an engagement ring
John is 33, lives in Miami and works as a product manager. He is supporting his girlfriend Jill while she completes an accelerated RN program, and he is also helping his mother, who has Alzheimer's. He wants to save for an engagement ring and build a six-month emergency fund. He asks how to get out of the hole and says, "I feel like I am drowning."
His numbers:
- Assets: $0. Investments: $95,000. Savings: $10,000. Debt: $47,300.
- Fixed costs: $7,100, or 75%. Housing is 26% of gross, which Sethi considers good.
- Debt payments total $1,370 a month: $500 to credit cards, about $650 to a debt consolidation loan at almost 8%, and $220 to student loans.
- Groceries are $800 a month, and "miscellaneous" fixed costs are $816.
- Investing is zero, saving is $705 (7%), and guilt-free spending is about $1,600–$1,683 (18%).
Sethi says John can transform his finances but will have to make very hard decisions. The feeling of drowning comes from fixed costs being too high, and the cause is the debt. Based on the types of debt, Sethi infers that John has had a poor relationship with money. He says people commonly end up with credit card debt and consolidation loans when they have an overspending problem. He says he is "almost certain" John hasn't been in control of his money, guesses he has never read a personal finance book, and says he clearly hasn't automated his finances.
He ties this directly to the ring. John cannot afford an expensive ring right now. Maybe something modest, a few hundred dollars, is possible. The real question is whether John is willing to have that conversation with his partner.
Sethi then goes line by line. Groceries at $800 may be reasonable in general but need to come down while in debt, by $100 to $200 redirected to the debt. The $816 in miscellaneous spending gets his strongest reaction; he calls it indefensible for someone in debt. He says to cut it to about $100 as a buffer for things that come up, freeing roughly $700 a month for debt payoff and savings. Guilt-free spending at 18% is "nice for me, not for you," he says. Sethi has no debt and can afford that, but John can't. Although Sethi usually recommends 20–35%, for John he would cap it at about 10–11% and send the rest to savings and debt. He says a debt payoff calculator would show John can shave years off repayment with these moves. The shift, as he frames it, is from feeling overwhelmed to "ferociously attacking" the problem, becoming debt-free within a few years and then moving on to saving and investing.
He also acknowledges John's mother's illness, expresses sympathy, and calls John's support of her laudable. Financially, he expects the cost of her care to rise over time and says large, unexpected bills are inevitable. His advice is to build a bigger buffer through a dedicated "medical unexpected expenses" savings account funded every month.
His order of priorities is savings first, then debt, then the ring. He says the ring matters, but what matters about it is the symbol, not the size or ornateness of the diamond. The symbol is whether John can talk candidly with his partner, take responsibility, explain his plan, and ask if she is willing to join him on that path.
Case 4: $40,000 for a 40th birthday party abroad
Philly Crist is a 38-year-old business analyst. They describe themselves as a hardworking immigrant who grew up as an orphan in Africa. For five years they have saved and invested while also helping their family. For their 40th, they want to throw a party abroad for family and friends, with a maximum cost of $40,000. They ask whether that's crazy and whether it would set them back significantly.
Sethi calls it a "cool and provocative question" and shares his own story. When he turned 40, he realized there are few chances in life for a big party, and he wanted to make the most of them. He invited friends and family to a resort in Mexico, told them all they had to do was show up, covered everything else, and calls it a memory he will never forget. His gut reaction is that Philly Crist can afford it, but he checks the numbers.
Their numbers:
- Assets: $60,000, which is a car. Investments: $340,000. Savings: $40,000. Debt: $30,000, the car loan.
- Fixed costs: $4,967 (62%). Housing is 17% of gross. The car costs $1,050. Groceries are $400, clothes $200, family support $300, subscriptions $400, and miscellaneous $237.
- Investing: $1,000 a month (13%), on top of maxing out a 401(k) and HSA.
- Saving: $950 (12%). Guilt-free spending: $1,084 (14%).
What stands out to Sethi is that the goal is big, audacious and centered on the person's rich life. The monthly money sent to family makes their priorities clear. He also notes the goal isn't a suit or golf clubs. It is bringing loved ones together, and probably paying for some who couldn't otherwise attend. He finds that inspiring.
He says that if the party were happening today, he would probably advise against it. But there are two years left, and Philly Crist is already putting $400 a month toward it. Continuing that would give about $5,000 a year, or roughly $10,000 of the $40,000 by age 40. The bigger factor is a $50,000 bonus mentioned as a side note but not included in the spending plan, part of which could go to the party.
For Sethi, the deciding question is whether the person will have enough to retire. If not, they can't take the extravagant trip; if so, they should go ahead. His assumptions are $340,000 already invested, about $42,000 a year in contributions (the $1,000 monthly plus roughly $26,000 to the 401(k) plus the HSA), 27 years until 65, and a 7% return. The result is about $5.4 million, which he says would support over $218,000 a year in safe withdrawal income. His answer is yes, they can afford the party. He says he is confident, from how the person talks, that they will reach that outcome, and he predicts they will be grateful later that they celebrated with loved ones at 40.
Case 5: A 23-year-old with $130,000 in student loans who wants to move out
The last question comes from a 23-year-old engineer in Orange County, California. She is a recent graduate a few months into what she calls her dream job. She graduated with just over $130,000 in student loans and earns $115,000 a year with up to a 20% annual bonus. She contributes enough to get her employer's 6% 401(k) match, maxes out her Roth, puts $400 a month into an emergency fund, and pays $4,000 a month toward her private loan. She can do this because her parents let her live with them at essentially no cost, in exchange for cooking, errands, chores and helping with her younger siblings. At this rate she could be debt-free in about three years. She had thought about moving out with her partner, but seeing how $1,500 a month for rent and utilities would stretch her payoff timeline made her hesitate. She asks whether she is stupid for considering moving out in a year.
Her numbers:
- Investments: $3,000, which Sethi finds surprisingly low given her contributions. Savings: $5,000. Debt: $130,000.
- Fixed costs: $4,815 (77%). Sethi first finds this very high for someone with no living expenses, then realizes the student loan payments are inflating it.
- Investing: $610 (10%). Saving: $675 (11%).
- Guilt-free spending: $150 a month (2%).
Sethi sees himself in her. As a teenager living with his parents, he worked at a pizza place, as a soccer referee and at a tech job. He estimates his savings rate at about 93% and says he invested that money aggressively, and it has grown substantially over 30 years.
He praises her for using a rare opportunity. He says many people reflexively dismiss living at home as something "for losers," while in many countries it is normal after graduation. He credits her with the courage to do it and guesses she has a good relationship with her parents. He also highlights a principle he says many people miss: when you save money by cutting something out, what are you doing with those savings? People often talk about skipping coffee but have no plan for the money. She, by contrast, is sending it straight to her loans.
The detail that stands out most to him is the three-year payoff. He calls clearing over $100,000 of debt in three years amazing, and also "really aggressive." That is where he reframes her question. Would she accept stretching repayment to four, five or even seven years in exchange for the life she wants now? He acknowledges the financial cost is more interest. But he asks her to imagine being 60 and looking back. Would she be happier to have paid off the debt in three years? Or to have eased off slightly, paid it off in about five and a half, and in the meantime lived independently with her partner, traveled, and done the things that mattered to her?
Sethi says that to him the answer is obvious. When someone is paying off debt very aggressively, easing back just a little can open up a whole new part of their rich life, one she has already said she wants. He adds a cultural point: some 23-year-olds would do anything to move out, while many people from other countries, including India, find it normal to live with parents at 23, 25 or 28. His own parents would have been happy if he had lived with them until he married. In the end, he says, the choice is hers, and the good news is she has options.
The pattern across the cases
Sethi does not apply one rule to all five people. The two he thinks are over-saving, TM and the young engineer, are told to ease off. The couple with low fixed costs is told they can't afford their plan yet and should slow down and rethink what security means. The person drowning in debt is told to cut spending hard and put the ring after savings and debt. The person planning an expensive party is told to go ahead, because the retirement projection supports it.
In each case, his method is to lay out the full numbers, identify the one factor that actually decides the question, and weigh the choice against what the person says they value. He closes by noting that it's easy to judge other people when watching examples like these, but every one of these decisions made sense to the person asking.
A 25-year-old making $200,000 a year wants to quit his job and travel the world. He already has $800,000 invested. Sounds great, right? But he might be making a very expensive mistake.
Today I'm breaking down real money decisions. Huge financial decisions like this one. Or can we afford to have a baby? Or is it time to move out on my own? I'm going to break down their numbers. I'm going to challenge some of their assumptions, and I will try to figure out what's really going on beneath the surface, because sometimes the answer is not obvious. It's actually very counterintuitive. I'll show you what they're missing and what I would do instead, because one of these decisions could dramatically change the outcome of this person's financial life. Let's find out what's going on.
Can I quit my job and travel for a year? First one. Here's what I know about this person. TM is 25, lives in Sunnyvale, California, and works as a product manager.
He says, "One of my dreams has always been to travel the world for an extended period of time. However, due to constraints of PTO, I don't get many opportunities to do this. While working for my employer, I've been saving a portion of my income towards a dedicated savings bucket to go on a one-year trip, and I've been fortunate with outsized returns on my investments, so I feel like I'm in a good position to do this. To be honest, I'm not even sure I want to return to the same career once I'm back. My rich life would include a lot more flexibility, a lot fewer meetings compared to my current packed schedule. On the other hand, I'm doubtful I would be able to maintain my high income if I were to pivot in another direction."
First of all, I can already tell this person is smart and they overthink everything. I love it. Let's take a look at the numbers. Salary is about $200,000. Assets, zero. Typical for somebody who's young and probably rents. Investment total at $773,000. Very impressive at that age. 63% of gross income. Holy. $23,000 a year to a 401(k), $5K a year to an HSA, and $8,000 a month post-tax. Does this person live with their parents? This is very impressive.
Savings total $50,000, with $450 a month to a travel fund. Debt, $1,768. Probably their credit card bill for the month that they're going to pay off. Fixed costs are 20%. Okay, they live with their parents, probably. Guilt-free spending, what, $724?
Okay, now I understand, without even knowing anything more, this person is way oversaving, way overinvesting. They probably haven't gone out to a restaurant in three months, and if they have any friends, when their friends invite them out, they might be like, "I don't know if I can do it because I need to contribute $8,432 this month to my retirement."
I love an aggressive, young high earner. I love it. I was in a similar position, earning a lot of money in my 20s and putting away a huge amount. But when I look back, one thing that I could have done differently was actually to have more fun. Yes, continue investing aggressively. Yes, continue saving. But taking out, let's say, $200 a month, even a week, for special occasions that you will never get back later in life probably would have been really meaningful.
So while this person is way underspending on guilt-free at 6%, when in your 20s, you have the opportunity to do things you can never do later. I think it's really cool that they're thinking, "Hey, maybe day to day, not as important to me, but I do want to take this big, awesome trip." I notice this tension between working at this job and staying in this career versus freedom, and I would like to propose the answer might be yes and yes.
I remember when I was in high school and I was applying to colleges, and the colleges had these FAQs on the application. It was like, "Should I take the easier class and get an A, or take the harder class and get a B?" And the college said one of the most straight-up OG things I've ever heard. They were like, "We always encourage our applicants to take the more challenging class, but in our experience, students who get admitted take the more challenging class and also get the A." In other words, yes and yes.
Should you pursue this career because it's incredible and perhaps it's rewarding financially and spiritually? Yes, if that's what you want. Should you also pursue a lifestyle that allows you to travel or do the things you want? Yes. How can you do both? That is the question I want you to answer.
Now, this role you mentioned, "Hey, I don't really love as many meetings." Okay, if you take this trip and you come back, you may want to look for a role that has fewer meetings. You could do that. They exist. And I think it's really cool to be able to spend money on the things you love now and later.
Now, if you want to see something funny, we need to actually factor in the math here. Let's assume that this person continues doing exactly what they've been doing for the next 40 years. They make this income, they contribute this much money, which is $126,000 a year, to investments. By the time they are 65, they will have $38 million. That's $38 million post-inflation, or real return. The amount they will have in their bank account will be $96 million. What are we even talking about?
But instead, if this person stopped investing today, just stopped, guess how much they would have at age 65? They would have $11.5 million. That's a real return. How much would they have in the bank? A nominal return, $34.9 million.
And when I look at these numbers, it actually tells me that you have probably gone too far. The fact that you're going to end up at 65 with tens of millions of dollars, and you are agonizing over this trip, tells me it's time to build some balance into your life. You can afford to cut your contributions down by $10,000 a year, $20,000, $50,000 a year or more, and you will still be incredibly wealthy. In other words, you won at the age of 25 at the game of personal finance. Now you have a new game. Turn that page and focus on building a rich life.
We want a $1.2 million house and a baby. Can we afford both? Sally is 32 years old. She lives in the Bay Area with her husband, Brett, a program manager. She works as an account manager.
Sally says, "We'd love to buy a $1.2 million house in the next two years. We also want to start a family around the same time, but we're nervous that we'll be financially stretched. We've been lucky to travel a lot and we are okay pulling back on that. I still want a feeling of security. I also feel like I may need to step in and help my parents financially someday." Sally's question: "Can we really afford a $1.2 million house in the next two years, and also start a family without feeling financially stretched?"
Here are the numbers. Their assets, $70,000. Investment totals, $314,000. Savings, $195,000. Debt, $18,000. Fixed costs, $6,916 or 44%. Wow, that's quite low. That gives them a lot of margin. Their housing is only 14.6% of gross. Wow, that's really good. Investing, $1,800 or 11%. Savings, $2,400 or 15%, and that includes $2,000 a month for their house. And finally, guilt-free spending at $4,712 or 30%. That's quite interesting.
Before I even go on, just some things I notice about this. You see, their fixed costs are super low, including their housing costs at only 14.6%. So the first thing that goes through my mind is amazing. By keeping your fixed costs low, you've built up this buffer or this margin. What are you doing with the rest of the money? I can see that they like to spend money. They spend money on guilt-free spending. 30% is at that higher end of the 20 to 35% recommendation that I make. Of course, they're investing a nominal amount and they're saving quite aggressively at 15%. That's nice. But overall, I can see that the money has flowed down to their guilt-free spending, which is totally fine.
Let's play out the numbers on their house at a $1.2 million purchase price. If they were to put 20% down, that would be $240,000. They could use their savings and they could tap into their investments, or they could put down less than 20%. I typically like to model out 20%. Their loan would be $960,000, and their mortgage at a 7% rate would be $6,390. If we add in phantom costs like maintenance, also transaction fees that need to be spread out over the cost of that mortgage, that number might go to something like $7,200 to $7,800 per month. Personally, I think higher.
Childcare at $2,000 a month and baby supplies, medical, etc., we can add on another $500 to $1,000 a month for that. That's about $2,500 to $3,000 a month. If we are looking at the house costs and the baby costs, that would mean fixed costs of around $9,500 a month to $10,500 a month. That right there, just those two categories are over 60% of your take-home pay before groceries, before savings, before investing or guilt-free spending. That tells you it's too much.
Right now, you cannot afford both. This is primarily because the house is expensive at a million two. The interest rate is high at 7%. That's adding on a huge amount of interest every month to that mortgage. And finally, even by putting 20% down, your income does not allow for the house plus the baby at the same time.
One of the biggest mistakes that people make with their finances is to take on massive new costs all at once. The most common example is that people will buy a house and get a new car, all at the same time as having a new baby. One, two, three. That is way too much stuff to take on. Let's not do that. A better approach is to slow down. Do we really need the SUV or the house right now? Can we wait six to 12 to 18 months or even more? That allows you to spread these costs out and actually recover financially from these brand-new expenses.
If you want security, you got to really probe into what that means. Does it mean owning a house? Because you're not going to own that house for 30 years. Does it mean knowing that even if your landlord says you got to go, that you have a fat cash cushion so you can weather any storm? There are lots of routes to get to financial security in America. We tend to think that buying a house is the only one, but there are so many more than that.
When I look at this couple, the first thing that occurs to me is your fixed costs are amazingly low. Stay in that house for as long as you possibly can, because every month you stay there, you are saving thousands and thousands of dollars. Now, what do you do with that money? That is a very important question.
If you want to be able to buy a house, you probably need to be saving a little bit more aggressively. Right now at 15%, that's nice. But if you really want to buy a house in some reasonable amount of time at the expensive rates that you have to, you're going to need to put more aside. You could probably take some of that money from your guilt-free spending, like $1,000 a month, perhaps even $2,000 a month, and you could save it.
What does security mean to me? Explore all that. Do I need to buy a house? If so, when? Does it need to be in the next two years? Could it be in five years, eight years, ten years? And then start to allocate your money accordingly.
Can I afford an engagement ring? Let's see what's next. Here's what I know. John is 33, lives in Miami, Florida, and works as a product manager. He's been supporting his girlfriend, Jill, who is pursuing an accelerated RN program, and has also been financially assisting his mother with Alzheimer's.
"How can I get out of this hole and move towards wealth? I am also trying to save for an engagement ring and hit a six-month emergency fund. I feel like I am drowning."
Let's take a look. Assets, $0. Investment totals, $95K. Savings totals, $10K. And debt is $47,300. Fixed costs are $7,100 or 75%. That's a lot. Housing is 26% of gross. Quite good, actually, but debt payments are $1,370 a month. That's drowning him. Credit cards at $500, debt consolidation loan at almost 8%, or $650 a month. Student loans, $220. Groceries at $800 and miscellaneous at $816 per month. Investing is at zero, savings at $705, 7%. That's good. And finally, guilt-free spending at $1,600 or 18%. Wow.
I think, John, that you have an opportunity here to totally transform your financial life, but you will have to make very, very difficult decisions. Your fixed costs are too high. That is why you feel like you are drowning. And if we drill down into what part of your fixed costs are high, it's your debt. $1,370 a month at your income is very, very difficult.
I can tell from your types of debt that you have had a poor relationship with money. Very commonly people get into credit card debt and they do debt consolidation when they have an overspending problem. So I'm almost certain that you have not been in control of your money. I would also be willing to bet you probably have not read a book about personal finance. You certainly have not set up automation for things to flow correctly. So I want to encourage you. It is now the time to take control of your money and to not be spending on the things that you cannot afford.
This directly correlates with you asking about spending on an engagement ring. This is the first decision that you will have to choose. Can I get engaged to the partner of my dreams? But right now I cannot afford a ring. You might be able to afford something modest, maybe a few hundred dollars, but you simply cannot afford a more expensive ring. Would you be willing to have that conversation with your partner?
A couple of other things I notice on your fixed costs. Your groceries are at $800 a month. I think that can be a reasonable amount, but if you're in debt, that number needs to come down. You need to find a way to economize. I would try to find an extra $200 a month on that, maybe $100. Redirect that towards your debt.
And finally, miscellaneous at $816. No fucking way. In what universe can you be in debt and have $816 in miscellaneous fixed costs every single month? No way. Fix that. You can take it down to $100 because sometimes things come up, but that's $700 a month that can go towards accelerating your debt payoff and building up some of your savings.
Let's go down to guilt-free spending at $1,683 a month at 18%. That's really nice. That's nice for me, not for you. I don't have debt, so I can spend $1,683 or more. You cannot. When you have debt, that number needs to come way down. You know how I talk about 20 to 35% for guilt-free spending? You're nowhere near that. If it were my recommendation, I would say something like 10, 11% max. The rest of that money, you know where it goes. It goes to saving and debt payoff.
This is how you go from feeling overwhelmed to feeling like you are ferociously attacking this problem. That debt is going to start getting paid off faster and faster. In fact, if you go to a debt payoff calculator, you will see you can shave off years of payments by making these aggressive moves. That is my challenge to you because it is easy to go the other route. You can make tough decisions right now, make a plan, attack aggressively, and within a few years you're debt-free. You've continued building up your savings, even investing, and you are set to be moving forward in your rich life. That's what I would do.
John, one other thing that you mentioned in your question, which I really want to take a second to acknowledge, is that you are taking care of your mother, who has Alzheimer's. And first of all, I just want to say how sorry I am that you are going through that and that she is going through that. I can't imagine how difficult that is. So I appreciate you bringing that up.
And let's talk about the financial aspects of it. Right now, the fact that you are supporting her, very laudable. It will probably become more expensive over time. And that is an important thing to factor into your planning. The way that that can show up in your spending and your expenses is to set an even bigger savings buffer, because it is inevitable. At some point, you are going to get hit with large, unexpected bills.
That is why if I were in your situation, I would be redirecting more money towards savings. I would call it medical unexpected expenses savings account, and I would be putting money there every single month. First priority: build up your savings account.
Next up, debt. And finally, the engagement ring. It's important, but it's not the ring that is important. It is actually the symbol that it represents. And that symbol is not about how big the diamond is or how ornate it is. It's actually about: can you communicate with your partner and be candid enough to accept responsibility and talk about your plan, and ask your partner if they are willing to come on that journey with you?
You're seeing what happens when people make big decisions without a system. They're guessing, they're reacting. They're just going with what feels right. But I want to show you how to make better money decisions so you can build serious wealth. And inside my Money Coaching program, you're going to learn the specifics of how to know your numbers, how to make decisions about buying a car, moving into an apartment or a house, having children, investing more, and even spending on the things you love right now.
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Can I spend $40,000 for my 40th birthday party? This is a juicy question. Here's what I know about this person. Philly Crist is a 38-year-old business analyst, and they say, "I'm a hardworking immigrant who grew up as an orphan in Africa. Over the last five years, I've saved and invested, at the same time helping my family. I'll be 40, and I wanted to throw a party abroad and invite family and friends. The max cost is $40K. Am I crazy to want that? And will it set me back big financially?"
Before we go on, I just want to say this is a very cool and provocative question. When I turned 40, I threw a big party and I realized we don't get a lot of opportunities to have a big party. And now I've realized whenever I have an opportunity, I want to do something awesome. So I did something very similar. I invited a bunch of friends and family to Mexico. We stayed at this beautiful resort, and I told them, "All you need to do is show up." And everything was taken care of, and that was a memory I will never, ever forget. And that is what money can be used for.
Off the cuff, this person can afford it, but I want to dive into the numbers a little more closely to double-check my intuition. Assets: $60K, which is a car. Investments: $340,000. Savings: $40K. Debt is $30K, the car loan. Fixed costs are at 62%, $4,967. Housing is 17% of gross. That's good. Car is $1,050. Groceries, $400. Clothes, $200. Family support, $300. Subscriptions, $400, and miscellaneous, $237. This person is investing $1,000, or 13%. They're also maxing out a 401(k) and HSA. That's impressive. Saving 12%, or $950. Finally, guilt-free spending at 14%, or $1,084.
The thing that stands out to me most about this is it is a big, audacious goal that is centered around this person's rich life. You can tell they grew up an orphan in Africa. They are sending back money every single month to support their family. It's very clear what is important to them. And when someone sets a goal of spending money like this meaningfully, I'm in to try to help you find a way to do it.
I noticed that for his 40th birthday, he is not simply talking about buying a beautiful suit or golf clubs. That's obviously not important to him. What is important to him is throwing a party and bringing the people he loves together, and presumably some of the people he would invite would not be able to afford it. So I think it's incredibly inspirational that he would take his money as a high earner and be able to help other people be able to experience this celebration for him.
If he were to do it today, I would probably caution against it. What I notice is that he's got two years until that time, and he is putting money aside, $400 a month aside for it. That's all very good. Here's how I might think about it. I might take that $400 and keep doing it. So if we do that, it's roughly $5,000 a year. That would be $10,000 he would have of the $40,000 by the time he turns 40. But the obvious thing going on here is this bonus that is not included in his CSP. He just included it as a side note. Of that $50K, he could take some of it and fund it towards his party.
Now, the only question that we have to ask is: will he have enough to retire? Because that is the determining factor. If he doesn't, then he can't take this extravagant trip. If he does, go ahead. So let's run a quick calculation here. Here are the assumptions that I'm working with. He's got $340,000 already invested. He is contributing approximately $42,000 a year to his investments. That is $1,000 a month, plus maxing out his 401(k) at roughly $26K, plus his HSA. Again, roughly $42,000. He's got 27 years before he turns 65, and we will assume a 7% return rate.
How much is he going to have? $5.4 million. That is quite good. And just to give you a sense of how much that will be worth, that's over $218,000 of safe withdrawal income for the rest of his life. This question is answered: yes, you can afford the party. Have a great time. Send me some photos, I love it. I'm very confident from the way he talks. He's going to hit it. He's going to end up with more money than he even knows what to do with. And I think looking back, he will be so thankful that he took this special opportunity at age 40 to invite his loved ones out to celebrate with him. Great question. I can't wait to see the photos from your party.
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And a 23-year-old engineer living in Orange County, California. She says, "I'm a recent graduate who landed my dream job, and I've been working for only a few months. I graduated with just over $130,000 in student loans. I make $115K a year with up to a 20% annual bonus. I hit my employer's 6% 401(k) match. I contribute to max out my Roth. I put away $400 a month for an emergency fund, and I pay $4,000 a month towards my private loan. This is possible thanks to my parents' generosity and our agreement that I live essentially no cost with them in exchange for helping with cooking, errands, chores, younger siblings."
The question is, "Am I stupid for considering moving out with my partner in a year? At my current rate, I could be debt-free in about three years. I considered moving out in fall/winter until I saw how spending $1,500 a month on rent, utilities, etc. would affect the timeline of my loan." She writes, "I'm six figures in debt. Can I move out of my parents' house next year?"
Let's take a look at the numbers. Assets: zero. Investment totals: $3,000. How can that be right? She already told me she's investing all this stuff. We'll find out. Savings: $5,000. Debt is $130,000. Let's go deeper. Fixed costs: $4,815. It's 77%, which I was like, that's really high, considering you pay no expenses. But that's because she's paying $4,000 a month towards her student loans. It artificially inflates the fixed cost. Investing at $610, or 10%. Saving $675, or 11%. And finally, guilt-free spending at $150 a month, or 2%.
That's not a lot of money, but I appreciate it. Probably also living at home, it's like, what am I really trying to do here? I go to work, I come home, I help with the dinner. It's a good way to save money. It reminds me of me being a teenager and living with my parents. You think I was spending a bunch of money? No, I was banking that. My savings rate was probably 93%. I worked at a pizza place, I worked as a soccer referee, and I had a tech job. I was taking that money and investing that aggressively. That money has turned into a lot of money now, 30 years later. So if you can do it, fantastic.
Now, as to the question, can she afford to move out? The thing that stands out to me is this person is in a very fortunate position that they can actually live at home, and to their credit, they are taking advantage of it. I think that's awesome. When you have a lot of debt and you have this rare opportunity to live at home, a lot of people reflexively go, "Oh, I don't want to live at home. That's for losers." In many countries around the world, living at home with your parents after you've graduated is totally normal. I think this person not only has a lot of courage to do that, I think that's awesome. They probably have a good relationship with their parents, but also they are aggressively paying the debt off.
This is so important. The principle here is: if you are saving money on something, what are you doing with the savings? Too often people go, "Oh, I shouldn't buy coffee. Oh, I shouldn't do this." And I'm like, "Okay, what are you doing with the money?" And they're just like... You need to take your savings and do something with it. And she is single-mindedly paying off her student loans, $4,000 a month. That is incredible.
Looking at this question, I noticed one thing that stands out to me above all else. She writes, "I could be debt-free in about three years." Now, that is incredible. To be out of over $100,000 of debt in three years is absolutely amazing. I want to give you a round of applause for that, but it's really aggressive. So what if you could have a lifestyle that you prefer by moving out, and you might extend that payoff to four years, or five years or even seven years? Would that be a trade-off you would be willing to make?
There are financial aspects to this answer. You'd be paying more in interest, of course, but there's also just the non-financial aspects. If I fast-forward until I'm 60 and I look back on my life, what would I be happier to have done? Would it be to have paid off my debt super aggressively in three years? Or would I have preferred taking my foot slightly off the gas, paying off six figures of debt in five and a half years, and being able to build some independence and live on my own with a partner and be able to go out and travel and do these kinds of things that were important to me? That is a question you will have to ask.
To me, the answer is obvious. If you're going super aggressively on paying off debt, dialing back just a little, just a little, allows you to open up an entire new part of your rich life, one that you have told me you want anyway. So why would you not?
At 23 years old, some people look at this question. They go, "I would do anything to move out from living with my parents." On the other hand, there are a lot of people, particularly people from other countries, including people from India, who find it totally normal to live with your parents at 23, 25, 28. My parents would have loved it if I lived with them until I got married. So there's a cultural aspect here as well that we should acknowledge. With that said, it's up to this person as to what they want to do, and the good news is they have options.
When you watch these, it is easy to look at other people and judge them. But every single one of these decisions made sense to the person asking. Now, if you want to see the exact decisions that can move your finances forward, watch this video next.
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