The Diary Of A CEO with Steven Bartlett - Moment 148: Guarantee Financial Freedom! The 4 Numbers You NEED To Be Tracking: Ramit Sethi

Episode Date: February 9, 2024

In this moment, personal finance expert Rami Sethi breaks down the 4 finance numbers everyone needs to know and what exactly a ‘rich life’ is. Ramit says that most people don’t have even the most basic understanding of money, compare this to other areas of life such as driving, where we need to know the rules of the road before putting a key in the ignition. However, personal finance is actually incredibly simple and Ramit says that the four numbers you need to track are: your fixed costs like rent and groceries, savings, investments, and guilt free spending. From these numbers, Ramit says that he can see what are a person’s priorities and outlook on life. But more revealing is someone’s idea of their ‘rich life’. This is what a person’s life would look like if they finally reached the level of wealth they are chasing. Ramit says too often people’s answer to what their rich life is vague, for instance, saying they want to be able to do what they want when they want, or to have freedom. These answers are so vague as people have never really thought about this question before, but Ramit say they need to think about this potential future deeply and in detail so that they can truly envision it. Listen to the full episode here - https://g2ul0.app.link/hzKpXWPk1Gb Watch the Episodes On Youtube - https://www.youtube.com/c/%20TheDiaryOfACEO/videos Ramit- https://www.instagram.com/ramit/?hl=en-gb https://www.iwillteachyoutoberich.com

Quick one, just wanted to say a big thank you to three people very quickly. First people I want to say thank you to is all of you that listen to the show. Never in my wildest dreams is all I can say. Never in my wildest dreams did I think I'd start a podcast in my kitchen and that it would expand all over the world as it has done. And we've now opened our first studio in America, thanks to my very helpful team led by Jack on the production side of things. So thank you to Jack and the team for building out the new American studio.

And thirdly to Amazon Music who, when they heard that we were expanding to the United States and I'd be recording a lot more over in the States, they put a massive billboard in Times Square for the show. So thank you so much, Amazon Music. Thank you to our team. And thank you to all of you that listened to this show. Let's continue. When you talk about the language, language of money, what do you mean? I mean understanding the nuts and bolts of money. So just the same way that we all learn how to drive. We learn the rules of the road, when to use our turn signals.

Most of us do not have even the equivalent knowledge of money. For example, the basic language of money would be, what percentage of your income are you saving and why? What percentage are you investing and why? When will you have $100,000 or $500,000 or a million dollars? And what will that money get you? Because just having a million dollars in the bank is pointless. What does it get you specifically? This is the basic language of money. You've got to know your key four, six numbers in your life. Not many, just a few. But once you understand those numbers, it's like understanding the speed limit. Understanding

the speed limit means you understand a lot. There's a rule of the road. If you go too fast, what's going to happen why do these rules exist and these rules are similar in money you can break them that's okay but you got to understand the rules first what are those numbers that i need to know there's four numbers that i really like to track i track these myself and these are the numbers i encourage the first is your fixed costs okay those would be your rent or your mortgage, any debt payments, groceries, the money that you are spending every single month that is essentially fixed. And the number I recommend for that is 50 to 60% of your take-home pay. So that would be,

if you're spending 50 to 60% of what you make, what you take home on your rent, your groceries, any debt payments, your car, you're in good shape. The next one is your savings. That would be roughly 5 to 10%. Savings would be things like an emergency fund, savings for a down payment for a car, things like that. Third is investments. This is where the real wealth is created. And for this, 5% to 10% of take home is fine. Of course, the more you put in, the more you're going to have. And then the fourth category, the one I love the most, is called guilt-free spending. This is going out for cocktails in New York.

It's buying a beautiful shirt. It's treating your friends. whatever you love, yoga. 20 to 35% of your take-home pay. So if you're watching or you're listening to this, just take 15 minutes, back of the napkin, jot down your approximate numbers. You don't even have to get them perfect. And you will be able to benchmark

how you are spending compared to those numbers i'll tell you that those numbers tell me a lot it's almost if you just show me those four numbers of your spending i can tell so much i can tell what you love spending on i can tell what you don't i can tell what your priorities are and i can also tell where you are out of alignment so i I'll give you an example. When I ask people, what is your rich life? One of the common answers they say is, I want to do what I want, when I want. I go, oh God, not this answer again. I hear it every day. I go, wow, that's so interesting. So what do you want? They go,

most people have never thought beyond a trite answer. So then the next answer I often get is freedom. I want freedom. I go, great. That sounds good. What is freedom? I want to do what I want when I want. I look at their numbers and I see a huge payment that they're making to a 30-year mortgage. I see debt payments. I see car payments. And I go, now this is interesting. You want freedom, but you have essentially anchored yourself down to not be able to travel or to pivot or to move. How can those two be? How can you reconcile those two? And that dissonance is actually a fascinating moment. I love when we experience dissonance. We all do. I say that I want to work out more, but I don't work out more. Why? And what you'll

discover is people often, they simply have never thought about it. What our rich life is, these generic phrases, freedom, flexibility, it's just words. What I really want somebody to say, I want them to go a lot deeper, is to say, I want to be able to travel for six weeks a year. I want to go to London. I want to go to New Delhi. I want to go to Thailand because I want to visit my family. That's a good start. If we get even more specific, they tell me what seat on the airline they're sitting on.

They tell me where they're eating. They tell me who they're bringing with them. But to simply say, I want freedom is so vague that when I look at your numbers, there's often a huge incongruity with how you're spending versus what you claim your rich life is. How many people from your experience of interviewing people and doing this research are clear on what their rich life looks like down to what you described there, I want to travel for a couple of months a year, and then even further down to which seat I'm going to be in,

which class I'm going to be on as I travel. Less than 1%. Less than 1% of people know that. Most people literally say, I want to do what I want when I want. That is the extent to which they've thought about a rich life. Why does it matter to be, what did that less than 1% of people that have that planned out have as an advantage or a benefit from that meticulous thought that the other 99% don't have?

Because they can craft their rich life that is uniquely theirs. Almost like getting a handmade glove. And in fact, the more you craft your rich life, the more bewildering it looks to the outside world. So I'll give you an example from my own life. I love to travel. I spend a lot of money when my wife and I, we go, we'll travel for months at a time. I love hotels.

I love the hospitality. I love love hotels. I love the hospitality. I love the details. I love it all. I don't really care about cars. Not at this phase of my life. It's just not that important to me. So when I talk about my money dials or the things that I love to spend money on,

I might spend a crazy amount on a hotel per night just because I love it. But I drive a car that's almost 20 years old. It's just not important to me. And I want that. I want to hear in your life what you spend extravagantly on, but then you cut costs mercilessly on because I want that duality which indicates you are intentional about your rich life.