Can They Actually Afford This?

Life gets a lot easier when you learn from other people's mistakes instead of making your own dumb mistakes. And that's what I'm going to try to help you with today. I got a lot of questions from people every single week about major money questions. Most people ask, can I afford this? Or am I making a big mistake? But I actually think that deep down there's a much deeper, more fascinating question that's coming up. Am I doing the right thing? It's about the numbers, yes. And today I'm going to tackle those numbers. But it's also about who are you? What is your identity around money? Are you even allowed to do this? And so today, watch me break down the numbers and give some very direct answers. Hopefully you can learn from it and make even better decisions with your own money. Let's get into it. Can I afford a $40,000 watch? I know, I'm sorry, a lot of you getting mad, but this is a real question somebody asked me. Let's take a look. Frank is 40, a single parent living in New York. He works as a solutions architect. And the problem is that he's built serious wealth, but he barely spends on himself. He asks, I just hit 40 and I've never really bought myself anything expensive beyond a home and a car. And I wanna know when it's okay to splurge on a big ticket item like a $40,000 to $50,000 watch. It's expensive, but I plan to hand it down to my son. Okay. Why do you guys need to defend a luxury purchase? If you wanna get a watch, just get the watch. Let's take a look at the numbers, then we can decide, all jokes aside. Gross income, $261,312. That's a nice income. Investments, $1.1 million. Good. Savings, $53,000. Debt, $629,000. Total net worth, $1.6 million. All right. He takes home $14,900, almost $15,000 a month. Let's see where that money is going. Wow. This tells the story. Fixed costs, $7,000 or 49%. Very low. That's impressive. Investments, $6,000 a month. 43%. Very aggressive. Savings, $500 or 5%. I think that's because he's already filled up a whole bunch of savings. Guilt-free spending. What the f— Oh, what? Frank! I guess he didn't buy a Ferrari. Frank picked up an old clunker from the dump. That's the car that he bought. Guilt-free spending is $705 a month or 3%. All right. I kind of know the answer to this, but let's just break it down. On your income and net worth, A $40,000 to $50,000 watch is actually okay. You have a $1.6 million net worth. You have over $1.1 million invested and you are on track. Can anyone guess how much Frank is on track for in retirement? More than $11 million. I just want to point something out. If you end up with $11 million in retirement and you never bought that watch that you had your eye on, you're not going to buy it. You're going to die never having bought that watch. So I actually think it's really important. You know, we started off this segment By kind of joking around like, who wants to buy a $40,000 watch? But actually, if you love it, if it is meaningful to you, and if we look at your numbers, you're going to have $11 million in retirement. That's hundreds of thousands of dollars in safe withdrawal income every single year. Probably be more meaningful to get that watch now than to wait 25 years and you're still not going to get it then. So in my opinion, it's not a question of whether you deserve the watch or you can afford it. The issue is timing. And structure. Let's take a look at the numbers. Right now you're investing 43% of your take-home pay. That is a very high rate. For comparison, I typically suggest people invest 5 to 10%, or maybe 10 to 20% is like pretty high for net pay. 43% is really high. At the same time, you have about $50,000 in cash, you're a single parent, and you live in a high-cost city. So if you bought that watch today, most of your savings would be gone, and that's a big no-no. That's little margin for error, especially with kids. So we know we don't want to go into savings, draw all that money out to go buy a luxury purchase. So the simple fix here, you can rebalance things. And good news is it's pretty easy to solve. If this is really important to you, you can invest less for a while. So for example, reducing your monthly investing from $6,500 a month to $3,500 a month, you would free up $3,000 a month. Next, I want to point out your first priority, which is to finish your emergency fund. Given your situation, I would personally put 12 months of fixed costs in cash. That's roughly $88,000. So you're short by about $35,000. Again, if I'm thinking of buying a major luxury purchase like a $50,000 watch, I want everything else to be dialed in and bulletproof first. So if you took that $3,000 a month that you stopped investing for just a little while, you would close that gap in about a year. Next priority, I would fund the watch purchase deliberately. I would keep the same approach and I would now redirect that cash that you filled up the emergency fund with. I would take that $3,000 a month and I would put it towards a watch. In fact, I would create a sub-savings account called Rolex Watch or whatever watch you're going to get. At $40,000, that watch would take you about 13 months. A $50,000 watch would take you about 17 months. And you would pay for that watch in cash. You would not have to withdraw from your investments or your emergency fund. Now, I want to tell you something because I have saved up for major purchases in my life. I started saving for my wedding before I even met my wife. I saved for my honeymoon when I was in my 20s. I saved for all these things. And I have to tell you, it actually felt even better to go on these trips, to go experience these things, because I knew how much work went into it. I think that if you just slow down a little bit, create this powerful vision of the watch you want, and save for roughly a year or 2, you're going to appreciate that watch even more. Frank, when you get that watch, send me a picture of it. I want to take a look at it. Amazing work and congratulations on all of your success. You know, this is actually a good example of what financial planning is supposed to look like. Not, can I buy this? But rather, how do I set my finances up so I can spend confidently without putting myself in a financially risky position? And as your money gets more complex, these decisions can get harder to make on your own. That's where having expert guidance can make a massive difference. And it's where our partners at Facet can help. Facet offers dynamic financial planning that evolves with you, including monthly check-ins to help you stay on track with your financial and retirement goals. All Facet planners are CFP professionals and fiduciaries supported by a team of specialists. The best part is that unlike traditional advisors who charge a percentage of your assets, which can easily cost tens of thousands or even hundreds of thousands of dollars over your lifetime, Facet charges an affordable flat membership fee for financial planning. I've worked with them to help many couples on my podcast, especially those who are getting close to retirement so they can understand all of the options in front of them. If you've ever wished you had a smart team to help guide your biggest financial decisions, check them out to see if financial planning is a fit for you. Head to facet.com/ramit or click the link in the description below to learn more. That's facet.com/ramit. We're in $50,000 of debt. Can we afford private school? Conrad's 45, Isabel's 39. They're married with kids living in Atlanta, Georgia. The problem is they earn a high income and have a 7-figure net worth, but years of overspending have left them with significant credit card debt. Now they're trying to fix the debt problem while juggling competing priorities. They realized they were overspending by $5,000 a month, which led to $50,000 in credit card debt. And they stopped using the cards, cut their spending aggressively, bringing their fixed costs down from 91% to 76%. The question is, quote, should we save for private school or pay off low-interest credit card debt? Should we also be putting our kids' 529 and vacation money towards the debt? Hold on, I need to control my emotions here. Part of what I do here is to actually pause and go deeper because sometimes people ask very peculiar questions and you're just like, What the fuck? But then you understand why, and suddenly people's peculiar decisions start to make a lot more sense. So first, I want to say to this couple, you should be proud of the progress that you have made so far. Most couples don't really catch these problems until it's worse. So while you were spending $5,000 more than you thought per month, which sounds astronomical, I can understand how it happens. When you have a high income, you loosen up on how carefully you're tracking. What I especially appreciate is you stopped using the cards. You moved the debt to a lower APR card. You made significant cuts. But now I need to be honest that you are not where you need to be yet. Let's take a look at their numbers. Gross income, $333,000. Assets, $1.2 million. Investments, $472,000. Savings, $30,000. Debt, $658,000 for a total net worth of $1,044,000. They take home $14,500 per month. Let's take a look at where that money is going. Fixed costs, $11,000 or 76%. That's too high. Investments, $500 or 3%. That's too low. Savings at $1,000 or 7%. Not bad. Guilt-free spending, $2,000 or 14%. Hmm. Okay, let's dig into the fixed costs because 76% is too high. Housing is $4,600 or 17% of gross income. Great. Don't move. That's great. But the rest of the spending doesn't really work when you have $50,000 of credit card debt. So they're paying $1,941 a month towards debt, but they are spending heavily on $984 in car payments, groceries and meal services, $900, pool, lawn, and house cleaner, $580, subscriptions at $205, and miscellaneous at $1,435. Can we just pause right here? Because remember that vacation you all were talking about taking? Looks like the vacation is for your kid to get on that lawnmower and mow that lawn once a week. Get to work. That's what I did when I was a kid. Look at me. Turned out fine. Let's look at your savings. What the fuck? $500 a month into a 529? Another $500 towards vacations? Haha. No, no, not in my world. For now, your new vacation is holding hands with your family and walking around your backyard. Ah, look at this beautiful patch of grass. Yes, we've seen it 5,000 times. We're going to see it another 10,000 times. This is how you live when you are in this much debt. Here's what I think you should do. First, I don't think you should do private school next year. It would be extremely risky. You're basically adding on a huge expense onto an already strained financial picture. Instead, you need to rebuild your healthy habits first. Eliminate the meal services, reduce that category by $100 a month. Cut the pool, lawn, and house cleaning services. That's another $580 freed up. Cut your miscellaneous expenses down dramatically to $300. Usually in a healthy financial situation, I assign 15% fixed costs for miscellaneous things that people do not count. These would be things like, uh, auto repair that they didn't plan for, or some late fee, whatever, all kinds of stuff. The fact is when you're in debt, you can't afford that. So you need to be dialed in and diligent. on those expenses. Next, take those subscriptions, cut them in half. Get the fuck out of here. Subscriptions gone. Those changes, just the ones I mentioned, get you an extra $1,915 a month, which brings your fixed costs down to 63%. Second priority, redirect extra money to credit card debt. You know that $500 you're putting into 529? Not anymore. It's going straight towards credit card debt. Why are so many parents Putting money aside for their kids when they themselves are this close to a financial calamity. Listen, you all know airport, put the mask on, blah, blah. Do it. Do it with yourself. Your kids have a lot more time. You have far less. $500 for vacations. You already know what I said about that. That goes to the credit card debt as well. Next, reduce your guilt-free spending from 14% to 10%. With those changes, whoa, your monthly credit card payment increases to over $5,300 and the debt is gone in 10 months. That's incredible. Once this debt is paid and you've rebuilt these disciplined habits, then you can revisit things like vacations, private school, and college savings. But for now, that healthy foundation comes first. Can she afford to work part-time when we have kids? Julia's 29, Andrew's 31. They're married DINKs. That's dual income, no kids, living in Morristown, New Jersey. The problem? They want financial flexibility to start a family. They want to focus on their health and fitness, including personal trainers and Pilates, and they want to decorate their home. Julia makes $40,000 more, but she wants the option to go part-time. The problem is that their high fixed costs are holding them back. So the question, can she afford to work part-time when we have kids? Let's take a look at their numbers. Gross income, $187,000. Assets, $799,000. Investments, $284,000. Savings, $66,000. Debt, $416,000, which is the mortgage and car loans. Total net worth, $734,000. Their take-home pay every month is $9,757. Let's take a look at the breakdown. Fixed costs are $6,800 or 70%. That's higher than I want to see. Investments at $1,000 or 10%. Savings at $800 or 8%. Guilt-free spending at $1,000 or 10%. Okay, we gotta dig deeper into the fixed costs. Housing at $2,840 or 18% of gross income. That's excellent. Again, we typically like to see that number below 28%, but in expensive cities, in fact, in a lot of cities these days, it's almost impossible to hit that number. So 18% is great. Car payments and transportation are $1,245. They've got 2 car loans at 8%. Remaining balance, $56,000. Damn. All right. Debt payments, $521. Groceries, $500. That's reasonable. Subscriptions, $229. Miscellaneous, $888. The main question here is about Julia going part-time, and that's important, especially because she earns significantly more. So let's talk about that. If Julia goes part-time, you will likely stop adding money to your emergency fund. Now you have more than 6 months of expenses built up. So you're probably going to be ready to stop contributing there by the time you have kids. Guilt-free spending is already relatively low, but you could probably bring it down by a couple hundred dollars. Also, if we look at how much you're on track to retire with, $4.7 million, which is great. If you reduce your investment contributions to offset Julia's income loss temporarily, you can always pick them back up later. And I got to say, having an extra $400 to $700 a month for a couple of years would be very helpful with young children. Now, you tell me that you care about Pilates and trainers and decorating your home, but I actually do not see any evidence of that in your spending. What I do see is almost $1,300 a month going to car payments. Now, if we fix that, it would dramatically change things. So I see a couple of options. Option 1, which I personally recommend, can you sell one or even both cars? Replacing them is not really going to change much because these days, you know, used cars are pretty expensive. But could you just get by on one car? I want you to ask yourself these tough questions. You know, we talk about health, we talk about fitness, we talk about going part-time. Right now, the evidence shows that we are spending a ton of money for our cars. Is there a mismatch in what we say our rich life is and where we are actually spending our money? If so, seems to me car is one big opportunity. Option 2, make small cuts to pay off the car loan 2 years and 4 months earlier. At your current rate, paying $1,245 a month, it will take you about 4 years, 7 months to pay off the loans. But there are places you can cut to redirect money towards debt. For example, you could reduce your emergency fund contributions from $800 to $500, and you could redirect that $300. You could dial in your miscellaneous costs from $888 a month to $200 a month. You actually free up $688. It's a lot of money. And you could cut your subscriptions down by $100. If you do all of that, you free up an extra $1,088 to put towards debt, bringing your payments to $2,333 a month instead of $1,245. Now guess what? That pays off the loans in 2 years and 3 months, which is 2 years and 4 months faster than your current timeline. Now that's not going to replace all of Julia's income if she goes part-time. Part-time, but it will create a meaningful buffer. If you combine that with pausing your emergency fund contributions and temporarily reduce your investments, suddenly the idea of her going part-time becomes a little bit more realistic and flexible. So is it possible? Yes. What you would need to do is you would need to carefully run the numbers on how much her income would reduce by and decide How realistic is it for us to cut back on these expenses? That's the decision you've got to make. I find that people who have started on their personal finance journey sometimes do not know when they have done enough. Like they'll constantly ask, what did I miss? Uh, I need to read 10 more subreddits. What about this one obscure thing that might happen? And it doesn't feel good to constantly worry that you got something wrong. That is exactly why we created Road to $100K. For most people, reaching your first $100,000 invested is a massive financial milestone. It's often the point where you stop feeling like you are guessing because you can finally see that the decisions you've made are really starting to add up. Inside Road to $100K, you will get a personalized path based on your actual numbers, not generic advice. You'll see exactly where you stand today, what's holding you back and what to focus on next. You will also get access to live coaching and a community of people working towards the same goal. If you are ready to start making real progress towards $100,000 invested, scan the QR code on screen or click the link below to learn about Road to $100K. Can I afford a new car? Uchenna is a 32-year-old software engineer living in Seattle. The problem? I want to buy a car ASAP and I'm not sure how much to spend on a car, whether I should finance a new one or buy old. I just started working about 5 months ago. I have other things like stock that I get from my company, approximately $63,000 a year pretax. I plan to use my bonuses, which are estimated about $10,000 to $15,000 on travel, mostly back to my home country. The question: can I afford a new car? Let's look at the numbers. Gross income, $148,500. Investments, $0. Savings, $40K. Debt, $0. Net worth, $40,000. They take home $8,800 a month. Let's take a look at where the money's going. Fixed costs are $3,498 or 40%. Okay, excellent. That's well below the recommended 50% to 60%. Investments, $3,300 a month or 38%. Okay, I'm assuming this person is just starting to invest because their current investments are $0. Okay, 38% is great. Savings $1,000 or 11%. Nice. Guilt-free spending $1,000 or 11%. Okay. My initial thoughts are your investments are great. At this pace, you're on track to hit $5 million by age 65, which translates into about $16,800 a month of passive income using the simplified 4% rule. Savings at $40,000 is strong, especially after only 5 months of working, that's basically 12 months of emergency savings. So in my opinion, you can stop saving for emergency fund and you can shift that money over to other areas. And actually, you've done a great job with heavy investment contributions. Guilt-free spending is at 11%. If anything, I'd push you to spend a little bit more intentionally on the things you love. So my short answer, Uchenna, is if you want to buy a new car, you can easily afford to. You know, in my experience, people will often spend months or years on a question that can be answered in 60 seconds. Like, for example, if you add $900 a month to your car costs under fixed costs, those fixed costs are still only 49%. If you pay $1,500 for a car— remember, your car includes gas and registration and parking and all that— you're still under 60%. You could theoretically lease a car, but in general, I don't recommend it. So here's what I do want you to remember: the amount you spend is the total amount on your car, including gas, maintenance, License, registration, parking tickets. If the total amount in your CSP is $900, your car payment should probably be more like $400 or $500. So the real question to ask, Uchenna, is a new car part of your rich life? Maybe you want to spend $2,500 or $5,000 a year on travel or meals or clothes. That's also fine. The good news is you have flexibility, so it's up to you. Great job. And whatever you decide, send me a picture of it. I'd love to see it. On this channel, I break down real money decisions with real numbers all the time, so make sure you hit subscribe so you see all of my new videos. Can I afford a $3,500 apartment in Southern California? Grace is a 46-year-old senior business development manager in the nonprofit sector. She lives in Southern California with her 2 kids. The problem, she says, I'm a single parent of 2 children living in a high-rent area. Bringing down fixed costs by living with family is not an option. I constantly feel tightness in my chest due to the stress of how tight finances are. I'm trying to move to the private sector so I can make more money. What changes should I make so that I can afford a 2-bedroom apartment which runs about $3,500 a month in my area and also be within the reference range for fixed costs? Good question. Let's take a look at the numbers. Gross income, $111,000. Assets, $20,000. Investments, $236,000. Savings, $9,000. Debt, zero. Total net worth, $266,000. Okay. She takes home $5,940 per month. Let's take a look at where that money is going. Whoa. Fixed costs, $5,294 or 89%. That's the ballgame right there, folks. When she talks about feeling tightness in her chest, this is the exact reason why. When you are spending 89% of your take-home pay on fixed costs, that's it. You are effectively spending more than you make every single month. That's a really tough place to be. Next up, investments, $847 or 14%. Okay, how is this possible? Because we're already over 100%. Savings, $812 or 14%. Oh, guilt-free spending, negative $1,013. Oh, so we could just make everything negative when you Put your numbers into the CSP. It obviously shows you, hey, you are spending more than you make every single month. In this case, she's spending $1,000 more per month than she makes. That's a problem. If you're at 89%, the only direction I want to see that number going is down. What? Okay. Housing is currently $2,865, but she's asking me, can I afford a $3,500 Apartment. No, you already can't afford your fixed costs, and then you went into your fixed costs, you picked the biggest line item, which is housing, and then you want to spend more there. No, this is not the way to go. Let's keep looking at fixed costs. Transportation, $497. Car is going to be paid off in November 2026. Groceries, $800. Miscellaneous, $691. This is a really challenging situation, to be honest. You know, being a single parent, not easy. Being a single parent Working at a nonprofit, not easy. Being a single parent working at a nonprofit in Southern California with its outrageous housing prices is extremely difficult. And I want to acknowledge that the fact you've built a net worth of $266,000 with no debt is very impressive. But I have some serious questions about what your next moves with money will be. So while the percentage of your investments at 14% is good, the absolute dollar amount, $847 a month, concerns me. You're on track to have about $836,000 by age 65. That's going to generate around $2,800 a month using the 4% rule. That's not enough. Of course, we want to add in things like Social Security, etc., but I don't want you to have to cut things that close. And while your savings rate is high, we are working off of an income of $111,000 at age 46 in one of the most expensive areas in the country. That means you currently have 2 months of an emergency fund. That is not enough. I would like to see that number at 6 months at least. Next, we have guilt-free spending at -17%. This means you are spending more than you make every single month, and that's a huge red flag. Grace, I'm going to be very direct. Right now, you cannot afford a $3,500 apartment. I know. Your fixed costs are already at 89% of take-home pay. Increasing that rent to $3,500 would push that to 104%, and I'm not even talking about what it would cost to move and first month's rent down and all kinds of other unexpected expenses. This is not sustainable. It would put you into debt almost immediately. So here's the trade-off: you want more space, but your financial system does not yet supported. So something else has to change. Well, you have a few paths forward. Number 1, increase your income. To afford a $3,500 apartment and keep your fixed costs at 60%, your net monthly income would need to be $5,834, which means your gross income would need to be approximately $150,000. That's in Southern California. We're assuming 40% taxes, your net would be about $90K a year. That's a big jump from $111K to $150K. You mentioned that you're a senior manager in business development, a private sector job paying $130K to $150K. That's within reach. Now, in my opinion, this is the highest leverage change that you could make. Number 2, get tighter on spending. Your fixed costs include $690 for miscellaneous. That's too high. You need to cut that to $100 and be highly diligent about those expenses. That one change alone frees up $590 per month. I want you to go through the last 90 days of spending, and I want you to identify where that money is actually going down to the line item. Number 3, delay your move. Right now, your finances are very fragile. Taking on a more expensive apartment would simply drown you. Do not do this. Instead, use the next 6 to 12 months to increase your income, control your spending, and build a 6-month emergency fund that gives you the stability to eventually be able to make a move without putting your entire financial life at risk. This is a major pivotal moment for you. It is possible that in the future you will be able to afford a $3,500 apartment. Right now you can't, and if you stretch too soon, it's going to backfire. So focus on your income, control the costs. Then when you have a solid foundation Then you can consider making your move. Good luck. Thanks for asking the question. Everybody in this video had reasons for why their decision made sense. And you can see how easy it is to build a financial life that starts to feel stressful and fragile and way harder than it needs to be. If you want to understand the patterns that keep smart, high-earning people stuck so you can get unstuck, watch this video next.