49. “Our housing expense unexpectedly went up $2K when we bought our first home” (Part 1)

If you've recently discovered this podcast and you've wondered, how can I get Ramit to answer my specific money question? There are two ways to do it. Number one, you can apply to be on this podcast, although we are already full for the rest of the year. Number two, you can join my Money Coaching membership in this program.

We do a ton of cool stuff.

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Me where I cover some of my favorite money topics that I can't go into publicly in as much detail as and I break down our members conscious spending plans. Plus I answer your questions live. We also have tons of virtual events coming up that cover every aspect of living a rich life. For example, our new event Money for Aging Parents is coming up at the end of October that is included for all Money Coaching members.

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Eric is making $20,000 more than what he was making last year and we're still not saving at all. We are kind of just living paycheck to paycheck. We really thought at the beginning that worst case we're going to have a lifestyle change and I think we've come to realize we are in the worst case.

Right now I'm wondering if we have to sell their condo. I think I'd rather take the hit.

We'd have everybody breathing down our neck. It's embarrassing to think about that like we just made a $770,000 mistake. You really think we should try to sell this condo?

I'm not telling you you have to.

Sell, but I am telling you you're going to go broke in two years.

Meet Eric and Elena.

They're both 25 years old.

They live in Canada and together they bring in $160,000 each year. They called me because they can't seem to figure out what's going on with their money. In today's conversation, they'll spend a lot of time talking about how they love music festivals and they don't want to stop going to music festivals, but they.

Think I'm going to tell them to.

Stop going to music festivals. It turns out the real problem is something they are not even thinking of. I want to share their story because so many of you have been told that you are throwing money away on rent and that you need to buy a house because it's the best investment you can make and you're an adult if and only if you own a house. But what happens when you do everything that other people told you to do and suddenly you realize home ownership isn't everything you thought it would be? Today's episode is full of fascinating insights on money psychology. So listen closely to hear Eric and Elena's story. I'm Ramit Sethi, and this is the I Will Teach youh to Be Rich podcast.

You came on the call, Eric, saying, I want advice for someone doing well and wants to do better. But the fact is you're spending more than you make every single month. When did you realize that you had a financial problem?

The second time I had to pull out from my stocks to cover credit cards. Just day to day payments.

What happened?

We basically paid all our bills and everything, but then I started falling slightly behind on my personal credit card. So I just took some money from the stocks to try and cover that.

And then what happened?

Behavior wise, nothing else changed. So we're going to keep nothing changed in terms of our spending or our attitude towards money.

What about you, Elena? When did you realize there was a financial problem?

I think I realized there was a financial problem after we said that we would stop booking music festival trips and then we put two more that same year. I think kind of the worst part is anytime that Eric gets a raise or we get a raise, we're still somehow we're still living paycheck to paycheck. Right? Like, Eric is making $20,000 more than what he was making last year and we're still not making any changes. And I think that's the most frustrating part. And we're just kind of at a block. We don't know what to do at this point.

What are these festivals?

Have you been to a music festival?

Do I look like I've been to a music festival?

You'd be surprised. I think a lot of different types.

Of people go, but that's very kind of you. But like, what type, what type of festivals are we talking about?

Like electronic music festivals, techno music festivals, like that kind of thing.

Do you travel for these?

Yeah. So this year we're going to Seattle, Chicago, Orlando. So we're going to a few different places and it adds up, as you can imagine.

What are the typical expenses for one of these trips? Do you have a sense?

Yeah, so definitely a flight, usually to the US accommodations. The ticket itself, which is usually $300 to $500. Any food that you need. Uber rides, which end up spiking in cost. And our last trip, we spent over $600 in three days on Ubers alone. So there's a lot that similar to regular travel, except you also have the cost of the ticket and the festival food and everything.

And how much would you spend on this in a typical year?

In a typical year? We've only been dating for two years and traveling together for about a year, so I think in the past year we spent probably close to $12,000 in traveling music festivals, that kind of thing.

Okay.

There's also the local events that add up. In the end, we travel for. I'd say this year we have three different ones booked international to the US but then on a monthly basis, we'll probably go to two to four events per month locally. And that's like, I'd say between the two of us, between tickets costs like there back probably like at least like $200, two to two $50 nights every single time.

So when you came on this call, did you think that I was going to tell you to stop going to these festivals?

Yes, that is what I thought.

People are so weird.

They come talk to me expecting me to tell them to cut back on the very thing they love, which they already know they're going to ignore. Why would you do that? I actually think a lot of people like the feeling of being chastised. On one hand, they hate it, but on the other hand, they love it because it feels so familiar. And these people are usually the ones who describe themselves as feeling guilty about money. Notice that people who feel guilty about something love talking about how guilty they feel psychologically. You'll see them spending years talking about how they feel guilty. Yeah, I could do that. I probably should, but I just feel so bad, they'll use those phrases, I'm bad with money. I'm just bad with money. At a certain point, I ask them, what do you get out of this? And they might actually realize with enough introspection, wow. By saying I'm bad with money, I actually give myself an out instead of learning how to manage it. Elena expects me to berate her for going to festivals, but that would accomplish nothing.

Okay, fair enough. I can already tell you Both love it. So I'm not going to sit here and tell you stop it. That's just. That would be a quick call. We'll be done here in five minutes. You'll say, ah, screw this guy, I'm out of here. There's no point.

Also, I don't think you really want to stop going.

I think you love it. Great. Let's figure out a way to help you go to those things guilt free. Elena, I'm curious why you thought I was going to tell you to stop doing it.

I feel like whenever people online, financial advisors online, they all kind of have the same Persona. And I'm not saying that you do. I honestly haven't listened to you enough to kind of get a real idea of the type of advice you would give.

Problem number one.

But I feel like. Pardon?

Nothing. Keep going.

I feel like that's kind of the obvious thing to do. It's the most expensive thing. So if we're talking about cutting out, you know, the thousands of dollars, then the festivals are the easiest thing and the quickest thing to do. So that's kind of what I thought. And I feel like that's type the type of advice like my parents would probably give too. They'd be like, well, you should just not go to a festival and you'd save like $3,000.

Yeah. And then would you actually listen to that?

I think we have listened to them.

So then why do we want to even think about that advice? If it doesn't work, then why bother, right? That's my philosophy.

Why?

Let's get real. Let's do some stuff that works. Otherwise there's no point. You're wasting my time and I'm wasting yours. Why do I want to both just bullshit each other? All right, so you want to do the festivals, fine. I don't care. You paid 600 bucks for Ubers. Whatever. You want to do it, fine. But you guys are here for a reason. So what's the problem? Elena, what do you think the problem is financially?

I think the problem financially is that we're not saving at all. We are kind of just living paycheck to paycheck.

Before coming on this call, I asked Eric and Elena to fill out a conscious spending plan using my template. Now, if you want to get your own free copy, go to iwt.com Episode 49 the Conscious Spending Plan breaks your spending down into four categories. Fixed Costs, savings, investing, and guilt free spending. Now, I'm going to go out on a limb and guess what you're thinking right? Now, Ramit, clearly this couple is just spending way too much on festivals. If they didn't spend $12,000 a year on festivals, they'd be fine. It's so simple. Well, it's actually not that simple. They love going to festivals and they're not going to give it up. Let's start there. If you were going to help Eric and Elena, they're living paycheck to paycheck, but they simply are not going to give up their spending on music festivals, what would you do? I wanted to understand more about their money psychology so I could start to come up with a plan that would actually help them.

And what's the problem with that?

Well, I would, I would love to propose to Elena. That's, you know, one of the things that is coming up. But like, I'm just not saving any sort of money, right? So like, and, and in a way I'm nervous to take out, you know, the, that money to kind of take that next life step, to sort of move forward. I think a lot of it is the moving forward, right?

I mean, we obviously want to have kids at some point and we want to purchase more properties. We would ideally like to purchase a property in Miami. We love going to Miami, we two to three. And of course prioritize their education. Our parents paid for our university. We want to make sure if we have kids, we're able to do the same. Especially if our kids went through anything that required some kind of money, we would be able to support them through that as well. So I think that's a long term goal for us.

This is what I call trying to be 40 before you're 40. Eric and Elena are not saving anything. In fact, they're losing money every month. But here they are talking about buying a property in Miami. Guys, you earn the right to do advanced things after you execute the basics flawlessly and consistently. When people come to me talking about accredited investing and private equity and crypto, but they don't even have a simple diversified portfolio. They're trying to be 40 before they're 40. And what that usually means is a lifetime of subpar returns.

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That's z o c-o c.com ramit zocdoc.com ramit there's this myth that if you rent, it means you haven't made it.

I don't really believe that I rent.

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In fact, I want more freedom right.

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I mean I think for me I hate getting stressed and like worried and I get like hives and everything. So I think I just tried to keep as calm as a perspective as I can, especially on things like finance. But I do stress about pretty frequently. But I just try to stay calm as much as I can. I don't like getting anxious over money, which might come to a fault because then I feel like I don't see it as seriously as I should.

Yeah.

It's interesting that for you, the opposite of stress is what you stress about money. So therefore you try to, what.

Calm down about money.

How do you calm down?

I don't think about it as much.

You ignore it?

Yeah.

I've always been taught and I've been raised in like, you know, don't really talk about money.

What did your family say?

Oh, we just didn't. We just didn't really talk about money. There wasn't really a conversation.

Did you grow up middle class, poor, wealthy?

Yeah, middle class. Middle class. My main conversation on money when I was being raised was my parents were divorced, but with my mom, who was the one that mainly raised me, we just never really talked about money. I never knew how much she made or anything.

What would it look like if you were not stressed about money, Elena?

I think it would look a lot more calm. When I sign in to my banking apps and look at our bank accounts, I think I wouldn't have that pit in my stomach of, okay, what are we adding our checkings after the fifth of the month and everything's been removed, what's left there? I think I would just stop thinking about stuff like that. I would open my app with no worries as to how much is in our checkings.

How often do you open your app?

Very frequently. At least once a day on one of the banking apps.

Why do you do that?

I don't even know. It's as if I think the number in there is going to change, but it's going to be the same. And I guess I just open it to make sure we're not losing any money or everything's okay on it or the purchase came through correctly, we were charged the right amount. I don't know. I think that's probably one of the ways that I stress about it is that I check it so frequently.

What do you think that's costing you?

A lot of my mental health? I guess not mental health, but just a little bit of anxiety every single day, I guess.

Have you ever wondered why you do that, what you get out of it?

I feel like I might imagine that I get a sense of control, that I know exactly what's going on, but in reality I'm checking it, thinking I have control over it, but I'm Actually so un in control of the finances, which is why I'm checking it so frequently.

Okay.

You're very perceptive.

I try to be self aware.

Yeah, it's one thing to be perceptive, it's an entirely another thing to know how to change.

Logging into accounts every day is a major, major red flag. It tells me so much about someone. It tells me that someone is probably obsessed with $3 questions instead of $30,000 questions. It tells me they probably don't feel in control of their money. And it tells me they probably don't have a financial system and instead they feel the need to micromanage every single thing all the time. People who log into their accounts every day are playing defense with their money, not offense. And to live a rich life, you have to play offense.

Eric, are you stressed about money? A little bit. How does it manifest for you?

Oftentimes by more so through ignorance. I don't like to. I don't like to think about it much for them, but whenever I do think about it, I'm like, all right. And then I just try and tell myself that it'll be okay a little bit.

What do you guys want me here for? Do you want me to tell you that it's not going to be okay? Are you looking for a wake up call?

I don't think we're looking for a wake up call.

What are you looking for?

I think we're looking for some guidance. We've tried the budgeting, we've tried setting like a maximum for our credit cards, a maximum for our leisure spends, for groceries. We've tried doing all of that multiple times and it doesn't work for us and it's just not the way I guess our minds work. So I think we're just looking for something from your perspective. What do you think would work for our specific situation?

So when you say we've tried a lot of things, when was the last time you read a book on money?

I never did.

We did. We didn't read a book, but we did do two online financial courses, I guess. But it was very vague and again, that influencer type of idea.

What course did you take? Tell me.

I purchased this self help bundle a year ago and it came with a bunch of different courses that you can access. E courses.

How much did it cost?

I know you're looking at me. I think it was like $70 or something. But it came with like 20 or 30 courses. It was to support this influencer that I followed. Anyways, so we got this course and it was essentially the core of it was not a budget. It was identifying in your transactions what are regrettable, what are mandatory and what are happiness, true happiness. And I guess that's kind of what we looked at for that period in our time was we looked through our transactions, which ones gave us happiness, which ones did we could go about without. And the next month we would try to avoid the regrettable transactions. So avoid that one takeout trip that we probably don't need and focus more on spending money on things that really made us happy, which is like these events. So we tried that. Again, not that sustainable because there wasn't really a monetary percentage or numbers to justify anything behind it.

It sounds like a life coach lost their job and they decided to in one weekend write a course and then charge you $7 for this advice.

Correct? Yeah.

Oh my God. Some of you really love telling me how little you paid for something. Did you catch that? When I asked Elena if she'd read a single book about money? That's the very reason they came on this podcast and she said no, but I bought a discount course created by an influencer. I want you to think about the psychology of that. Why don't we take the important things in our lives seriously? You know, I have this concept of things called money lenses. Imagine you put on some eyeglasses. Well, the lens that most people view the world through is the money lens of cost. They agonize over how much something costs. They brag about getting it on sale. But most people don't realize there are also other money lenses. There's the money lens of experience, like sitting at the sushi counter and watching the chef work. There's the money lens of results like hiring a personal trainer. There's the money lens of speed and delight. And so many more. Just Google money lens Ramit. Most people only have a single money lens cost. That's like being able to play one note. It's incomplete. And yes, there are times to use cost. Sometimes cost can actually be the best money lens to use. Like with your investments. You want a low cost investment, but there are certain times where you should use different money lenses. Elena clearly did not use this financial guide, not despite it being cheap, but because it was cheap. It was a bundle for God's sake. When something is important to me, I don't want a bundle. I want the very best thing that's going to get me results. With rare exceptions for the important things in life. I want to urge you to to consider a different money lens besides cost. As Dan Kennedy Says, why pay less when I can pay more?

I mean, I'm glad you supported that influencer. I think for something as important as money, I probably wouldn't just buy a bundle that throws in a bunch of stuff and says, hey, here's a money thing. Good luck. Like, I take this seriously, you know? You guys take festivals seriously. I take money seriously. Do you guys both care about your money?

Yeah.

Yeah, we're making more money, you know, year on year, but it seems like we're not saving any of it.

What do you think is going on?

I think we're just not executing anything. Even this one was like, you know, I filled out the form and, you know, it's kind of like, I'm going to throw this. I'm going to almost, like, throw this Hail Mary and hope that maybe this session will help us. Maybe this will be the one that will change your attitude. But I think there's deeper things there.

That's pretty perceptive, too. The idea that I'm just gonna check out this YouTube video, you know, while I'm brushing my teeth, it doesn't take too much work. I'll throw this Hail Mary to this podcast thing. Maybe one of these things will pan out and fix it for us. Well, I guess I'll be the first to tell you, I'm not here to fix your problem. Nobody's gonna fix your problem. It's your problem. I. I don't think that the two of you actually take money that seriously. And I don't think you think there's a problem actually, like, you're living check to check. Okay, you came on the call, Eric, saying, I want advice for doing well and wants to do better, but the fact is, you're spending more than you make every single month. That's actually not doing well. Part of living a rich life is being honest. Honest with ourselves, honest with the people around us. You're losing money every month, so maybe we need to recenter. You're losing over $1,000 per month in the red. I don't think that's doing well. How long until you run out of money, Eric? A year?

Two year.

Which one is it?

I think two years.

Two years.

Okay.

And I ask because you're dipping into your savings, correct? Yeah. Okay, so you guys are two years away from running out of money. How much are you losing each month from your savings, Eric?

Probably $1,000 a month.

I think it's got to have been.

Tough for you to be watching your savings deplete every single month.

Yeah, it has. It Felt like a failure, like a repeated failure. It's like I banged my head against the wall multiple times and I didn't learn.

Elena, are you curious what's going through his mind? Yeah, I mean, he's. He's drawing out of his savings every month, and he's going in the red with his savings. Are you curious what's on his mind, what his fears are, how he's feeling?

Very curious.

Ask him.

How are you feeling about the fact that you're consistently contributing more than I am?

I don't mind contributing more. It doesn't bother me to contribute more. Like, it wouldn't bother me to put more towards our investment. It wouldn't bother me to pay more of the festival, but I don't want to contribute to, like, the. To, like, getting us out of the hole. It's almost like. It's almost like I'm contributing to, like, a. Like, a bad addiction. Like, I don't want to contribute to that. I want to contribute to, like, cool stuff and, you know, stuff that would make us grow and make us happy and all that kind of stuff.

Did you know that, Elena?

I feel like we talk about finances very loosely, and we talk about it frequently, but very loosely. And I think I can just assume or imagine that that's kind of what it feels like, because I take out of a line of credit, like, a hundred dollars every month, and I'm just like, like, why am I doing that? So I can imagine. But it's good to actually hear him say that. That's what it feels like.

I bet in your relationship, there's one person who talks about money more than the other. One person who takes the lead, who drives things. I want to give you a challenge today. Try to flip that dynamic for one day. If you're the leader, ask the other person to take the lead. If your partner is the leader, you go and start a conversation about money. As you change your roles for a single day and have conversations about money, you're going to learn all the subtle ways that both of you reinforce your roles. One of you asks more questions. One of you waits for the other person to bring money up. This will be eye opening for you, by the way. Once you do this, send me a note. You can message me on Instagram or if you're on my newsletter, you have my direct email. Send me a note and tell me what surprised you about this exercise.

So you have roughly 25,000 bucks in your savings account?

Yep.

All right. So two years away from being out of business, running out of money completely. And what's going to happen then?

Then the festivals are going to go, the events are going to go, the gym membership is going to be changed to the cheaper one. The although, like, start taking them one at a time, one after the other.

That'S not going to save you if you run out of money. Cutting back on $6,000 of festivals is not going to change anything for you. You both look very uncomfortable.

But I think it's kind of good. You're making us uncomfortable. To be honest, I feel like we haven't been this uncomfortable talking about finances in a long time. I think we're both just very passive about it. And I think we needed somebody to make us uncomfortable to ask us that question of what happens when you're going to run out. Because we never really thought about that.

No. If anything, you came on this call thinking that you were doing great.

Yeah, I really did. I'm like, wow, we're not doing that bad. There's people that are, you know, homeless, and we're not that.

But you're comparing yourself to homeless people.

I mean, I was.

Do you see the self deception?

Yes, definitely.

So you came on here going, ah, there's too much stuff for all these beginners.

But we're already quite intermediate. We need to advance stuff.

Meanwhile, you're losing over a thousand dollars a month and you're two years away from being out of money.

Sometimes you have to spell it out for people. You have to let them know what the stakes are. And now that Eric and Elena can see what's really going on here, at least they know what reality is.

So right now, the two of you make $160,000 per year? Correct. Okay, what's the breakdown? Who makes What?

I make 100.

Yeah, and I make 60.

Okay, cool. So what would it take in order for you to both be able to hit those savings and investment goals?

Reducing our expenses somewhere, Some of them, I think, for. From a knowing perspective. I think we know what we even have. We even have a savings account which is called emergency fund with $0 in it.

Well, there's 354, so it's not zero.

Oh, that's good. How much are your monthly expenses, by the way? Got real quiet in here.

Not including our fixed costs.

No, all of it.

All of it. Probably close to like $8,000.

Okay, well, you have 300 bucks. That's good. That will get you one day.

Yeah.

There's a subtle dance going on here. Eric and Elena are using a lot of techniques to avoid facing the real problem. Can you spot them? First, they ignore the problem. They've been in the red every single month for months. They are two years away from being totally out of money. Next, they focus on the wrong things that feel good but don't actually matter. For example, logging into accounts every day. Next, they self handicap. When they finally decide to get help, they buy an influencer bundle on manifesting money, happiness or whatever bullshit that thing was. Then they compare themselves to homeless people and say, well, we're not as bad off as they are. They make $160,000 a year. They're comparing themselves to homeless people. Not only is that offensive, it's just a horrible barometer to use. Finally, they use tiny incremental success to congratulate themselves instead of taking an honest look at reality. Great. You have an emergency fund. Oh, it only has enough to last you for one single day. And do you want to know a secret? They haven't even gotten to the actual problem yet. These are all subtle psychological techniques they use to avoid the reality of the problem. I suspect most of this is unconscious. They came on this podcast expecting me to tell them to cut back on festivals, maybe do some whiz bang Microsoft Excel calculations, and then they could go back to living their life. But the truth is, that won't work. I'm going to start moving us in the direction of the real problem. Remember, I've seen their conscious spending plan before they came on the call.

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So let's talk about where your money is going. You were both renting and we rented for a year. And what was life like that year that you rented?

It was Covid, so not much to do. But between us, it was great. We were actually saving some money.

And then what happened? You decided to buy a condo. Walk me through that discussion.

So my best friend's parents are real estate agents. They're very big proponents of purchasing a place.

No, no, no, no.

And I agreed with them. I think I still agree with them. And we basically were talking and we're like, you know, it seems like the time could be now and this could be a great opportunity and you're going to love this one. We thought it would be a forced Way to save money. Because we thought, you know, we're going to take this and then we're going to save because of this.

There were a few factors towards purchasing a condo, and I don't know if you're familiar with the Toronto real estate market, but it's nearly impossible for young couples to purchase a place. And we essentially had 90 days from that pre approval to purchase a place, otherwise we would have to reapply under a higher rate, which means we would get 60,000 less in our mortgage. And we had the down payment. Our parents very happily helped us with it. So we just felt like it was kind of now or never. Condo prices were going up and we found this one condo we were absolutely in love with for the right price. And we didn't want to keep paying rent, paying somebody else's mortgage. We figured if we had the down payment, the mortgage itself wouldn't be that much different from our rent. I think we just didn't look in depth enough about all these additional costs, like the tax, that's $300 a month, the maintenance fee, that's another $600 a month, all of these other fees that go along with it. So where our rent was 23 and our mortgage is 26, all these extra costs make it that we're paying close to like $3,500 a month on non negotiable things. So that's kind of why we purchased a condo when we did.

And so you bought this place and how much more expensive is it per month than you thought it would be?

$1,500.

$1,500.

Okay.

And if we factor in some repairs and we amortize that out, it's probably more like $2,000 a month. Yes. Okay, that's 24,000 a year out of 160,000 gross.

That's like five music festivals we can go to comfortably.

Let me see if I have this right. Hold on, I need to take a deep breath just to gather myself. So you two were renting, you were making good money, you had good money, you were living life, and then you decided, I don't want to pay somebody's mortgage. And a house is good for savings, and realtors are telling me that it's a good idea to buy. Do I have this right so far?

Yes.

I'm not done yet. Just, do I have it right so far?

So far?

Yes.

Yeah. Okay. So then you went out and you got the stress test, and then they said you have 90 days. So you again went back to that old chestnut. I Don't want to pay somebody's mortgage, and so you went out and bought it at quote the right price. Okay. And you just neglected a couple of calculations, and now you're paying over almost $1,500 more per month than you were renting. Did I get that right?

Yes, 100% correct.

I want to be clear and honest on the down payment part. It was all our parents.

Yeah.

Okay.

We put like $1,000.

How much did they put down?

30,000 from Elena's parents, 25,000 from my parents.

Okay, so you guys could not afford any down payment?

No, not for. Not for a condo.

Did that concern you?

I.

Not at the moment.

You know what? I love honest answers like that. No, actually, it did not concern us at the moment. Okay, fair enough. That's honest.

I'm not gonna lie to you.

I appreciate that.

Listen closely, cause I'm about to walk.

You through some math here.

When you buy a house, it takes years to start building any meaningful amount of equity. Now you can see this. If you go to a mortgage calculator and open up the amortization table, don't bother asking your neighborhood TikTok financial expert what amortization means. Cause they've never even heard that word. So let me walk you through an example. Let's say you have a $500,000 mortgage. You have a 5.5% interest rate and a 30 year loan. Your mortgage payment would be roughly 2,800 bucks a month. Again, $500,000 mortgage, 30 years, 5.5% interest rate. Your monthly payment is around $2,800 a month. Of that payment, $550 goes to the principal and $2,200 goes to interest. Do you know how long it takes until you start paying more towards your mortgage versus paying more interest? October 2039, 17 years from now. Do you understand that in the first year you're paying 75% of your money to interest? And some of you guys are so brainwashed you're worried about paying someone else's mortgage. But you never stop to run a single calculation which would tell you you're paying the bank's interest. You want to know how much. By the time you're finished paying that loan, you will have paid $500,000 for the house and $522,000 in interest. Now you understand why I get so mad when people run around town saying all these dumb little phrases. I don't want to pay my landlord's mortgage. I want to build equity. Learn to run one simple calculation before you make the biggest purchase of your life.

Okay.

Okay.

And has anything broken in your condo yet?

No.

Okay.

No.

Okay. When it does, how are you going to pay for that?

Still got some savings.

Okay.

All right.

This is another thing, Maintenance. A good guideline is to put aside 1% of your total purchase price for maintenance. You might not have maintenance the first year, you might not even have it the second year. But the third year, you might have something. Big break. Eventually you're going to need to pay for a roof repair. Or if you're in a condo, you might have your fees go up. This is money that should be set aside in advance. Now, let's go back to this concept of paying someone's mortgage.

I just have a question for you, Elena. When was the last time you ate at a restaurant?

Yesterday.

Okay, don't look guilty. I don't mind that you ate at a restaurant. What restaurant? Was it like, what type of food?

It was like an all you can eat sushi.

Okay. And was it good?

It was, actually. I was telling Eric today some of the best I've ever had.

Oh, fantastic.

Do you want to plug them? I don't mind.

No, I don't know how to pronounce the name, to be honest. I don't want to offend anyone.

Okay, fair enough. Fair enough. So how much did this sushi meal cost you?

It cost me $60 after tip.

I wish you could have seen Elena's face right here. She correctly knew that I was setting a trap, but she thought I was going to judge her for eating out at a restaurant. I don't care how much she paid for sushi. That's just another example of how Eric and Elena are focused on the wrong thing. They're so focused on thinking small that they are ignoring the humongous problem that's right in front of them. Listen in as they talk about this.

You think that I'm going to come down on you for paying 60 bucks for sushi, don't you, Elena?

Yes.

I'm not. I don't care how much you spend on your sushi. Okay, but I just have one question for you.

Didn't you feel terrible that you were paying the sushi owner's mortgage? Whoa.

Wow.

I want to describe what's happening right now. Elena is literally rotating, looking left and right. She looks completely in disbelief. Eric has his hand over his mouth and he's looking up at the sky like, I literally. And now he's rubbing his forehead like, holy shit. The two of you look completely bewildered right now.

Elena, talk to Me, I never thought about it like that at all. That's. That's crazy. It's true. It's true. How are they paying for the rent for the restaurant if it's not me coming with my five girlfriends to pay $60 each for the sushi? I never thought about it like that.

Don't you feel guilty?

Don't you feel horrible that you paid their mortgage?

No.

For them? No.

No. Why is that so?

Why would I feel guilty when renting and paying someone else's mortgage if I'm more than willing to go to a sushi restaurant?

So interesting.

Eric, what about you?

I'm thinking about the gym owner gym that I go to. We're helping him. 200 bucks a month for his rent.

Got to feel terrible about that, right? Why would you pay a gym owner's mortgage?

This phrase, don't pay your landlord's mortgage is one of the most common phrases when people talk about renting versus buying. But let's break it down. I think it's actually designed to make you feel resentful, angry, and indignant. Why should I pay someone else's mortgage? She's getting rich off of me. Why shouldn't I get rich? I think I'll just buy my own place. The problem is that logic is very stupid. Why don't you feel guilty about paying your local restaurant owner's mortgage or the car wash down the street? Why is this argument only applied to real estate? The answer is that this phrase has been engineered so that you feel resentful about your rent, and then you go buy a house with all its transaction fees. Guess who profits? The very people who spread that phrase. The mortgage industry, the banking industry, even your NIMBY parents who want you to buy houses so that demand goes up, their house value goes up, and then they can turn into NIMBYs and restrict supply. That's for another conversation. When you go to a restaurant, you're paying for food and service. When you pay rent, you're paying for a roof over your head. It is a simple trade of money for services. Do not let the real estate industry fool you.

The two of you have been bamboozled. You got taken advantage of. You got ripped off. You got propaganda. And you know who did it.

Who did it?

Think back now.

Who told you that you were failing.

At life by renting?

Who told you?

Real estate agents.

Honestly, a lot of people. I mean, our parents. My parents were not excited that we were renting, paying someone else's mortgage.

Eric's parents feel free to name full names we'll find them. We'll put their bios. No, don't do that. Who else? There were other people in your life?

My best friend.

Yes.

What did they say?

It's impossible to pay someone's mortgage. It's ridiculous.

It's ridiculous. Outrageous.

Who else?

We had friends that recently purchased a pre construction. They said if you had the money for a down payment, you might as well purchase something instead of paying rent.

You might as well, because you're gonna build equity. And how about. How about walking around Toronto? Were there any signs perhaps that said something about property?

Go ahead, tell me what they said.

We lived in downtown Toronto. We lived in a place which is a bunch of young, young adults trying to pay rent. And there's always signs there of new builds coming in this area. Purchase now. Low 500s, low 8 hundreds. It kind of gets to you.

What is the implication when you see it? What do you think?

We think we can afford it. We see it. It's so easy to, like, look at the sign. If we're, you know, if we're the demographic that this sign is meant for, then why would we not look into the opportunity?

The implication is if you rent, you're a loser. I recently posted a billboard that I saw at LAX which said, bosses don't rent. I posted to Instagram and I showed people the kind of propaganda that is so present in our culture, it's actually become an invisible cultural script. By the way, I'm a multimillionaire boss who actually does rent. Now I'm going to press Eric and Elena on their logic a little more so they start to understand what's really going on here. Their financial problems are not caused by her eating out at all. You can eat sushi.

So, you know, perhaps this house may have turned out to be a great investment. So how do you get the money?

That's a fantastic question.

How come none of the realtors told you that? How come they only talked about what a great investment is? They never actually told you how to get the money.

Well, eventually you'll be able to take some equity out and then rent it out to someone and then you can buy another one. Oh, right, right.

We're already in debt, we're losing money, and so let's buy another one. Yeah, that's good. That could work. But it's a different mindset and philosophy than your primary residence. How much taxes will you have to pay when you sell? And fees, transaction fees, all that.

So when we purchased, we had like 18,000 in fees that we had to Pay. And then we're of course aware that when we sell, we have to pay the realtors and the seller. And it's about like 25% of. I don't know how much is it. 25%. I don't even know how much it is. Which shows. Like, we shouldn't have really gone into this.

But this is why I constantly tell you to run the numbers. Buying a house can make financial sense. You can even buy a house for non financial reasons. But you absolutely must understand the numbers behind the biggest purchase of your life. I hear so many people saying, my grandma bought a house in 1970 for a hundred thousand dollars. She just sold it for $900,000. She made $800,000. Listen closely, because I'm not going to tell Granny this because it would destroy her and she only has a few years left on this earth. But the fact of the matter is, that house probably was not really a great investment. First of all, she did not actually make $800,000 because Granny forgot to factor in all the expenses she incurred over those 30, 40, 50 years, including closing costs, interest, taxes, and maintenance. And as you heard earlier today, interest alone can more than double the price of the house. Next, even if you factor in leverage and the cost of rent she would have paid elsewhere, it's likely that she still made less than you could make with a simple index fund. Oh, and how about this one? How is she supposed to get the money from it? You're telling me Granny wants to sell her house in the town she's lived in for 50 years and suddenly move to a worse part of the country where she knows no one else? And she's going to downsize, even though housing is now even more expensive. What kind of fucking investment is this? And finally, Granny still thinks she made a great investment. She literally believes she made $800,000. I have seen more sophisticated math with a bunch of rats in New York City dividing up a piece of pizza. Don't ever come to me with this horrible example.

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A little embarrassed.

Tell me more.

It's a little embarrassing for me because I've been following you for a while and I know your stance on homeownership. And I remember looking up, should you own a home? Does it make sense to own a home? Is it better if you just rent instead and invest your money and all those other things and rent forever and all those things? And I kind of just looked at those things and ignore them in the moment. I know. I looked at them and I was like, well, I guess my situation's okay and we can go ahead and purchase this home and we'll Just make our wealth and live a rich life by owning a condo first and then go from there.

Okay. By the way, what is my advice about buying versus renting to rent? That's not my advice.

It's buy. If it is something you truly, truly want and are able to have it less than 55% of your after tax income, that's closer.

My advice is to run the numbers.

Yeah.

And that advice, had you followed, it would be let's calculate how much our HOA and our taxes and transaction fees and Realtor, all that stuff will be and make sure that it fits within our conscious spending plan. What are you hearing as you hear this, Eric?

That we ran the numbers ended so in the, like wrongly like we, we did it wrong. Okay.

How did you run the numbers?

We, we sat down together on my laptop and we put some numbers in Excel. And I like, well, yeah, we can. At the current income level, we can basically make a paycheck to paycheck. We just won't be saving money for. We just won't be saving money for a while. But that's okay because we'll build equity and we'll, and you know, eventually I'll get a promotion and then we'll have more money and. Can I ask a question?

When you sat down for that conversation to run the numbers, were you trying.

To prove that you could buy the house?

Were you trying to convince each other?

Yes.

Yeah. That's not running the numbers. That's just using Excel to tell you what you want it to tell you.

Yeah.

When you run the numbers, here are some good guidelines. Your total housing costs ideally should not exceed 28% of your gross monthly income. Total means you include taxes, interest, insurance, furniture maintenance, even for the roof that might break 12 years from now. Yep. A simple guideline for that. Maintenance is 1% of your purchase price every year. Again, that total housing cost should be less than 28% of your gross and total housing costs plus total debt load should be lower than 36%. That's the 2836 rule. When you factor those in, you should also be able to save 5 to 10% of your take home pay and invest roughly 10% of your take home pay. All of this can sound overwhelming, so I have a template to make this easy for you. Go to iwt.comepisode4.9 to get the conscious spending plan. And remember, you can tweak these numbers if you want, especially if you live in a high cost of living area. But these are guidelines, they're conservative and they will prevent you from. From getting in situations like Eric and Elena. We're losing money every single month. And one more thing. I have a program called the Rich Life System which helps you take all the stuff you're spending money on and put it into a system. This will help you make sure that you are saving enough every month, that you are investing enough every month. It will help you focus on spending money, getting guilt free. So if you've always wondered, why can't I seem to take a vacation? How come I can't seem to get ahead? Rich Life System will help you do that. Go to iwt.com rich so you can start using this system with your money today.

Can I tell you something, Elena? It's interesting that in our conversation today and in the pre interview that you did with my colleague, you spent a lot of time talking about festivals. A lot. Oh my gosh, I love our festivals and I don't want to stop my festivals. And even when we started talking about.

Sushi, you had this embarrassed look like.

You were so nervous about me talking about sushi.

But do you know that those are.

Not actually the real problem here?

I'm starting to learn that it's not.

Sushi and it's not even the festivals.

You've been. You've been playing small and you've been.

Focusing on the wrong thing. Like you can stop going to sushi for the rest of the year. It's not going to change your finances. And you can even cut back on 50% of your festivals, which I doubt either of you are going to actually do.

And it would not change your financial life.

Let me just give you some context. In my conscious spending plan, you both filled it out and for fixed costs I recommend 50 to 60% of take home pay. Do you know how much you're spending on your fixed costs right now? Like over 80, 88%.

It is way too high.

It is crystal clear why you can't afford to save, to invest or even to go on some of the stuff that you want to go on.

This is the actual problem.

Their housing costs.

Not the sushi, not the festivals, not even the $722 a month that they're paying for their transportation cost. It is their housing cost. What's worse, they're not putting anything aside for what happens when something in their condo inevitably breaks. That is a disastrous scenario. There's something I want to highlight for you. Eric and Elena have an especially interesting situation. Remember how I gave you that guideline of spending less than 28% of your gross income on total housing costs, they actually hit that number. Exactly. They're at 28.6%. The problem is they also have other high expenses, including eating out, festivals and a car payment. But here's the reality. They are not going to change those things. No matter what I tell them they are not going to cut back on festivals. It doesn't matter that I showed them they're going to run out of money in two years. It doesn't matter that they're saving nothing. They are not going to stop going to those festivals because they love them. That's reality. And that's fine with me. I'll deal with reality. Reality says it's easier to make one big change, like rethinking their condo ownership than lots of medium sized changes, such as cutting back on lattes and eating out and getting a cheaper car. Realistically, do you think they would actually do that?

No.

They even told me that. So my only chance at helping them is to focus on the condo.

So you mentioned that you bought this condo because you believed it would be forced savings for you. In reality, what's happened?

We're getting fucked.

Okay, you know what I started a while ago? I was like, we got to be honest in our rich life. Honest with ourselves. Now we're being honest. All right, look, we can laugh, all right? It doesn't all have to be dreary. Yeah, there's some shit. We got to figure this out.

But at least we're being honest about.

What'S going on here. So where do you both want to go from here?

I think we really thought at the beginning that worst case we're going to have a lifestyle change. And I think we've come to realize we are in the worst case right now. So we need some kind of change to happen. Either remove where we can remove the personal training, remove the gym memberships. We need to do something. And I think we both thought we weren't in a spot where we had to action something urgently. But I think you're making at least me realize that we have to get our shit together and be adults.

Notice that Elena is still thinking small. She thinks making incremental changes will fix this. But the fact is, if that would have helped, they would have done it already. Deep down, Elena is still hiding from the reality of what actually needs to be done. Try to think about her psychology. What do you think is causing her to focus on tiny things like gym memberships? And while you think about that, let's hear from Eric.

I'm wondering if we have to sell Their condo. Like, I'm wondering if we need to take this as like a lesson, as a lesson learned as we got taken by the wave and take it as like, you know, it happened and get out of it and then, then restart. But like restart at least from a decent position, not restart from a, in the red position.

Why don't you two talk to each other? I'll just listen.

I don't think we're going to sell the condo as much as you don't want to hear. We honestly, we both went into this call being like, we support our condo decision. This was the right thing for us. And I think we've definitely realized some things, but I don't think the solution is necessarily to sell the condo. You really think we should try to sell this condo?

I mean, you heard what he said before, right? It's like, you can stop going to sushi. You can cut out 50% of your music festivals, which I doubt that we will. I just don't know if us cutting out all of our expense, like all of these expenses and I, and I, and I, and I hate, you know, I think I'd rather take the hit and take the embarrassment of running with this and being taken by the wave that we can buy this condo. Maybe it's worth it to us to have the shorter term, harsh pain of like, you know, I will have to.

Face.

The parents and our friend's parents and kind of admit that we've made the mistake and, you know, there'll be consequences and whatnot for this. But I almost feel like that would be a much quicker, even not less painful, but quicker solution to get to a restart.

I mean, I'm a little speechless. I feel like this was something we were so confident about and it was a huge step we took together, you know, for our future. It's a little hard to hear, you know, I love this place. We just did so much for it. So I don't know, I see where you're coming from. I completely see it. It's logical. Like, my heart just doesn't want to let go of it. No. And then I also think, like, eventually we will need to buy something, right? Like we're gonna have kids or whatever it is. And I fear that the prices are just gonna keep going up. And that's honestly my worry is, are we even gonna be able to afford something later if our condo, if our two bedroom condo has already gone up to 100,000, what we purchased at. I don't even want to imagine what it would be like to Purchase in like, three years or four years or five years, whenever it is.

Elena.

So it worries me a little bit.

Elena, you can't afford this condo right now. Yeah, I understand everything you said. And I think beyond the math and the logic, the. The thing is, the two of you did it together. You built this together. You went through the process. You had that meeting where you. And you talked to your parents. It's almost like tearing something down that the two of you built together. That's hard. I'm not going to tell you. You have to do it. It's your money. You two have to make a decision for yourself.

Again, I'm not telling you you have.

To sell, but I am telling you you're going to go broke in two years.

Isn't this fascinating? First, Eric and Elena came to me confident we can't find advice for people like us, people who are doing well and want to do better. Then we quickly discovered that they're making $160,000 a year and they're living paycheck to paycheck. And what's worse, they're actually losing money every single month. They're two years away from being broken. Then we spent a lot of time talking about sushi and all these tiny expenses that are not really the main problem. They spend a lot on festivals, but they are not going to change it.

Fine.

And finally, we started talking about their condo. And you can almost hear the floodgates open. The condo represents more than. Than just a roof. The condo represents almost a religious belief on what success should be for the two of them. The problem is they can't afford it. So what are they going to do? In part two of this episode, you will hear them confront the reality of what they are actually facing, and Eric and Elena will finally get real. If you want to download your own copy of the conscious spending plan that they use, go to iwt.com episode49 and I look forward to seeing you next week for part two of my conversation with Eric and Elena. Thanks for listening to I Will Teach youh 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 youh 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 youh to Be Rich system into your personal finances.