Sarah, 38, and Kevin, 43, collectively earn $250,000 annually and have been married for 14 years with three kids. Sarah dreams of buying land and building a house while ensuring their children get the best education. Like all parents, they want the best for their kids, but their poor money habits have led them to a very financially vulnerable situation.
The couple recently sold their house to clear $200,000 in debt, but in six months racked up $50,000 in credit card debt. They currently have $180,000 in debt and pay $55,000 annually for their girls' education. Over the decade, they are expected to spend over $500,000 on schooling fees. They used the house sale proceeds to fund the first year of schooling but have yet to figure out how to pay for the coming years.
A considerable part of their debt was car loans. The couple makes $2,000 monthly repayments for two cars, including a $75,000 Tesla.
The couple's growing anxiety led them to seek help from millionaire author and the host of Netflix's "How To Get Rich" show, Ramit Sethi. In his YouTube podcast, Sethi was stunned to find that their fixed costs were a whopping 151% of the take-home pay, spending $1.5 for every $1 earned. It meant they would drown in further debt to maintain their lifestyles and pay for their kids' education.
Sethi Understood Sarah Cannot Build Her Dream House For A Decade
Sethi saw red flags everywhere and quickly realized Sarah had to postpone their plans of a dream house until their kids passed out of school after a decade. Sethi even estimated that if their incomes collectively increased by $100,000 yearly, Sarah's dream house wouldn't be possible for at least ten years.
When he compelled the couple to face reality, Sarah's emotional response made Sethi understand why building a house was necessary.
Sarah's grandfather was a builder, and when she was seven years old, her parents bought a piece of land to build a house, which never happened. She remembered the excitement about the new home and the disappointment of never watching it come to fruition. This setback stuck with her, and she made it life's biggest passion project.
Sethi asked Sarah if her children cared about the land and her dream house, to which she replied yes and no. Because the children understand how badly Sarah wants it, they'd support her naturally. She talks to the girls about how they'd design their rooms and all the details of a new house that every homebuyer gets excited about.
However, Sarah realized she talks differently with them about her investment choices, which helped her understand that she's teaching her children to dream but not be realistic.
Ramit Adds Thousands of Dollars To Their Monthly Income With One Move
Before delving into the details of Sarah and Kevin's monthly expenses, Sethi wanted to understand the couple's priorities. He found that their top priorities are to save money for their kids' school for the upcoming years, repay debt, and build their dream house.
She is willing to sacrifice her dream house for her children's education. However, the couple has decided to live in a specific neighbourhood with the best school for their girls.
What Sethi did next blew their minds. When digging deeper into expenses the couple can trim, Sethi found Sarah can reduce her business expenses by 90%. That single move would add $3,000 to their monthly income.
Sethi says some of us want to avoid looking into the financial structures required to fulfil dreams because we understand that reality can be scary and unavoidable. In that process, we also miss opportunities to save more money. He said that Sarah learning the truth about her passion will allow her to go through a process, starting with grieving and eventually accepting it, enabling her to focus on a more realistic tomorrow.
Sethi also suggested they use the $93,000 savings to clear the $50,000 credit card debt. Or else, at their current monthly repayments of $1,000, it would take them five years to clear it. Shockingly, they would have paid $40,000 in interest payments in that duration.
While Sethi suggested radical changes like selling the Tesla, Kevin said he wasn't emotionally ready. Most people in debt and liabilities don't know where to start their journey to becoming financially successful, but the couple's most significant learning was to find a starting point.
