Courtney and Alex, 35 and 37, are a couple who say they’re struggling with the harsh reality of living in an ultra-expensive part of the country.
But that’s not their biggest money problem, according to personal finance adviser Ramit Sethi.
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Even as the pair is on the brink of financial ruin, Courtney admits she consistently downplays the situation. “We’re two months from going bankrupt, but I pretend things are fine,” she confessed on a recent episode of Sethi’s “I Will Teach You To Be Rich” podcast.
Sethi’s deep dive into their financial lives paints a grim picture, but he sees hope for them on the horizon.
Expensive events popped up
A lot has changed for the couple in a short period of time, they say.
“Four years or so ago we were doing really well,” Alex claims. “We were in a place where the rent was cheap, we didn’t have a child, we were both working and making decent money. And saving money!”
In fact, their financial situation was so good that Alex claims they’d managed to pay everything off and were living debt free. “I had more money in the bank than I ever had,” he says.
So how’d they get so far off track? Well, first the couple got married. Alex says they spent $15,000 on the whole event, including the rings and bachelor/bachelorette parties.
Then they had a baby. With the family expanding, they decided to swap their apartment for a large house. This left them paying rent that “was about $800 or $900 more than we were paying at our original place,” Alex says — adding on that they’re now also making less money than they did before.
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On the verge of bankruptcy
Getting married and starting a family are common money drains for young couples like Courtney and Alex. But not everyone ends up on the precipice of financial ruin for it.
As the conversation continued, Sethi started to identify the factors that were making life so hard for the couple.
The couple has roughly $45,000 in assets, mostly in vehicles (Alex has five motorcycles), and $130,000 in total debt. And considering over $100,000 of that debt is in student loans, Courtney treats it differently from their other debts — something Sethi warns is common but problematic since you’re still on the hook for that money plus interest.
On the income side, Alex and Courtney make $4,000 and $5,000 a month, respectively. However, their rent in Orange County, Calif., which is $4,100 a month, swallows up one of those incomes completely. “It’s high, but also worth it,” says Courtney. Sethi and Alex disagree. “I think it’s high,” Alex says. “It’s much higher than anything I’ve ever paid.”
They don’t have much to fall back on either — with just $15,000 in cash savings, which could only cover their living expenses for two months tops. “That is as red-flag as it gets for me,” says Sethi. “If I was down to two months of expenses, I would be making drastic moves.”
What’s missing and moving on
Finally, Sethi gets to the heart of their issues by asking them what they think is missing from their conversations around money.
And he then offered them his own theory: “The way that you approach money has got to radically change. Here’s what I see is missing from the way that the two of you talk about money. There’s no shared vision.”
He recommends the couple be true to themselves and face their individual fears about money matters. Better communication and adjusting expectations could lead them to have a unified vision about their financial life.
Sethi also offered some practical solutions:
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Move out of Orange County. Right now, the couple spends 45% of their gross income on rent alone. “A good guideline for housing costs is to keep it under 28% of your gross income,” he says. In expensive regions like Orange County, that metric can go up as high as 32% to 33% but Alex and Courtney are still way beyond that.
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Cut back on luxuries. Alex has five motorcycles and so needs a larger house with a garage to store them all. “It’s fine to buy really nice things but you have to factor in all the costs, the time and the money and the mental overhead — because if you don’t, these inanimate things will start to own you.”
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Face reality. Sethi claims Courtney isn’t taking her financial situation seriously enough to change things. “Even in these dire circumstances, perhaps especially in them, Courtney continues to evade and joke and distract from really taking an honest assessment.”
If the couple manage to get on the same page about both how they spend their money and the seriousness of their situation, Sethi believes they could bounce back from their dire financial situation.
And better yet, they won’t have to pretend they’re doing fine, because that will simply be their reality.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
