Trin and Lucas have big financial dreams.
The 35-year-old couple wants to build wealth and savings for their two children's futures — ideally they'd have $3 million in the bank in five years. But currently, they're in a pretty deep hole.
As a couple, they have $285,100 in debt and currently spend around 154% of their monthly income, they told self-made millionaire Ramit Sethi on his "I Will Teach You To Be Rich" podcast last month. Only their first names were used.
Lucas runs his own consulting business, which means his income can be inconsistent, ranging from around $8,000 to $12,000 a month, he tells Sethi. Trin brings in a little under $3,000 a month from her corporate job. Together, they earn around $140,000 a year.
"You are broke," Sethi told them.
Their financial problems didn't appear overnight, though. And after going through their finances and hearing about their money mindsets, Sethi identified three major mistakes Trin and Lucas made that contributed to their current predicament.
Here are their top missteps and how you can avoid them.
Lucas and Trin want to be out of debt. But their goal of having around $3 million in the bank within five years is "not feasible," Sethi says.
He warns against setting "outlandish" goals like this because it can lead people to make incredibly risky decisions in order to meet the goal.
"It's one thing to set ambitious goals," Sethi says. "It's another to be totally unrealistic."
Here's a glimpse at Trin and Lucas' finances at the time of the podcast's recording:
- Assets: $40,000
- Investments: $27,000
- Savings: $20,000
- Debt: $285,100
- Net worth: -$198,100
The bulk of the debt comes from Trin's $200,000 in student loans, she says. But the couple also has around $12,500 in credit card debt, Lucas tells Sethi.
Their debt is a huge problem. But going through their budget, Sethi says the reason they haven't been able to address it is because their monthly costs have exceeded the couple's typical monthly income.
Lucas has had good months where he makes over $10,000 and can cover the bills without spilling over onto credit cards. But although he's also had several under-performing months, the couple's costs stayed high, leading him to pull more money out of his business or charge more on their credit cards.
"You can seem fine for a long time and then suddenly, one day everything blows up," Sethi says. "You want to avoid that. It's better to live slightly more modestly or take slightly less risk in order to avoid ever getting into a super risky situation."
The first step Sethi wants Trin and Lucas to take is to go through their monthly expenses and find spending areas where they're able to cut back.
When you're financing a major purchase like a car, home or large appliance, it's reasonable to ask yourself if you can afford the monthly payment. But you shouldn't stop there.
Lucas says when the couple bought their third car earlier this year, he figured they could afford the monthly payment. The total expense of the vehicle, however, was not in the budget.
"Never make major purchase decisions based on monthly payment," Sethi says.
A low monthly payment can lure you into a number of different financial decisions that work out fine in the short-term, but can cause trouble down the line.
That can be as small as a splurge you put on a buy now pay later plan or a major decision like getting a mortgage that doesn't leave you much room for error or emergency costs. Whenever you finance a purchase, you're making a bet with yourself that you will be able to pay it off in a given time period. Life often has other plans.
When the couple was getting ready to purchase the car, Lucas's monthly income looked like it would stay high enough to handle the additional car payment and they would be able to pay off the vehicle within a couple of years.
That plan doesn't appear to be working out. As Lucas's income fell in the following months, the couple didn't make a concerted effort to bring down their routine expenses, further sending their monthly budget into the red.
Sethi describes Lucas as a "believer." He has experimented with a variety of different methods to try to build wealth and improve his financial situation, including investing in real estate, adding authorized users to his credit card account to build up his credit score and over-funding a life insurance policy.
But none of these strategies paid off.
That's because none of them were particularly low-risk or guaranteed to work, Sethi says. "Lucas seems to be deep in the 'get rich quick' world."
The strategies Lucas had been using to try to get ahead are touted by plenty of financial influencers and educators as keys to unlocking wealth efficiently. But Sethi says they're over-complicated and especially risky for someone like Lucas whose income fluctuates from month to month.
Advice like Sethi's, however, can feel boring, or like it will take too long.
"How is someone like me saying, 'Hey, actually 7% returns on a low-cost index fund are pretty good and you can build serious wealth given enough time,' going to compete with some guy screaming in front of his $150,000 car saying 'Overfund your whole life insurance policy so you can operate your money like the banks and cut out the middleman!'" Sethi asks.
But the boring strategies work. While there are certainly situations where it feels like you need to make a lot of money in a short amount of time, there aren't fool-proof ways to do that. Trying to make quick cash can be over-complicated and extra risky.
"Your finances should be quite simple," Sethi says.
Check out the full podcast episode here.
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