A married couple in their early 40s, living in the Bronx, New York, has found themselves in a financial bind despite earning a combined annual income of nearly $175,000. The couple, who have a 9-year-old daughter and a puppy, struggle to make ends meet with no assets and a paltry $200 in savings. Despite a relatively modest rent of $3,007, which amounts to 22% of their take-home pay, their monthly fixed costs devour a staggering 83% of their income, leaving little room for savings or financial growth.
Struggling with High Fixed Costs
According to the most recent Consumer Expenditure survey from the US Bureau of Labor Statistics, the average US household spent over 77% of its income on living expenses in 2022, driven primarily by fixed costs such as housing, healthcare, and high-interest loans. The couple's financial woes are further exacerbated by rising inflation and subsequent rate hikes by the US Federal Reserve, which have increased borrowing costs and insurance premiums.
In their quest for a solution, the couple turned to Ramit Sethi, the host of Netflix's "How To Get Rich," enrolling in his conscious spending plan program. Sethi quickly identified that the couple's spending was dangerously high, with their expenses nearing the entirety of their monthly take-home pay of $8,700. Their fixed costs amounted to $7,263, including $1,200 on groceries, $496 on their puppy, $683 on utilities and insurance, and $781 in debt payments on an outstanding balance of over $25,000. The remaining funds were allocated to childcare, medical copays, subscriptions, phone bills, and transportation costs.
Can They Afford $500 on Their Pet? Sethi Weighs In
Sethi acknowledged the couple's relatively low rent for New York City and their affordable childcare costs of $160 per month. He also commended their diligence in tracking pet expenses. However, he expressed concern about their ability to sustain these costs while striving to save and grow their wealth. With debt payments of $781, $1,200 spent on groceries, and $500 on pet care, the couple's finances are stretched thin. Sethi suggested that a conscious spending plan could help them "spend extravagantly on the things you love," such as their dog, while significantly reducing expenses on "the things you don't." For this couple, making some tough financial decisions is crucial.
Turning Things Around at 43: Is It Possible?
The couple has recently started contributing $100 per month to an emergency fund and has set aside $88 for vacations. While Sethi commended these efforts, he warned that they are only one step away from financial disaster. With their expenses nearly matching their income, the couple risks being unprepared for unforeseen life events such as job loss or medical emergencies. Additionally, their spending habits have prevented them from setting aside money for savings and investments. Outside of their 401(k) accounts, which contribute to their net worth of $95,000, the couple has no other investments.
Despite these challenges, Sethi believes the couple still has time to turn their financial situation around, citing their high incomes as a significant advantage. He recommended aggressively paying off their debts and cutting back on groceries and online subscriptions to free up cash for savings and investments. Sethi emphasized the importance of allocating 20% of their income toward savings and investments to regain control over their strained budget. He also highlighted the need to prioritize clearing high-interest loans, such as credit cards, to avoid losing money to exorbitant interest rates.
