Money expert shows couple how to tell if they can afford big purchases

Callie, 36, and Travis, 39, are married entrepreneurs living in Texas with two children.

Callie is a freelance photographer and Travis runs his own property management company, so their income fluctuates from month to month. They earned a total of $132,480 last year, but have no investments and their fixed costs eat up almost their entire monthly income, they recently told money expert and self-made millionaire Ramit Sethi on his podcast “I will teach you to be rich”. Their last names were not used.

The couple dreams of sailing around the world, being able to enjoy a comfortable retirement and helping their parents financially, but they don’t really know how to make it happen.

“Whatever money we make, whether it’s $2,500 or $10,000 a month, I want it to be so intentional that our lives are better because of it,” Callie said on the podcast.

Sethi was happy to hear that Callie and Travis had an intentional attitude toward money, but their spending habits revealed that they hadn’t been as strategic as they should be to feel truly independent and achieve their financial goals.

The couple’s recent big purchases include an awning and rack for their van as well as a vacation to Barbados. In both cases, they questioned whether or not they could afford the purchase on a monthly basis, Sethi explained. They weren’t thinking about the bigger picture.

“(Travis) saw some extra money in his account, he basically said, ‘Oh, OK, I want this awning. I can afford it,'” Sethi said. “It’s very common, and most people really don’t know how to decide if they can afford something.”

Like many people, Callie and Travis think about their budget on a monthly basis rather than annually. In doing so, they ended up with purchases — like the trip and the awning — that might have seemed affordable in a month when they had a little extra income. However, this may not have been the best use of that money in the long run.

“They literally see something they want, they decide to buy it and then they make up a bunch of reasons later,” Sethi said.

If they had compared their annual income with the total cost of these major purchases, they might have realized that they would struggle to make their payments during the months when they didn’t bring in as much money or where other expenses were incurred.

Callie and Travis work hard and spend their money on things they truly love. That’s really what living rich is all about, Sethi said. But there is a catch.

“In order to design your rich life, you need to know your numbers,” he said. And for people like Callie and Travis who want to pursue entrepreneurship, it’s even more important.

Although their income fluctuates, the couple could better anticipate those changes and keep their cost of living below what they could earn during the quieter months, Sethi said. “Otherwise, you might find yourself making minimum wage, working tons of hours, hustling, but never getting ahead.”

When it comes to making better spending plans, Sethi analyzed the couple’s recent vacation to Barbados. Their housing was paid for, but plane tickets, car rentals and restaurant meals led them to use a credit card with a $5,000 limit “pretty easily,” Callie said.

They didn’t want to repeat the same mistake on their next trip to Alaska. Sethi’s solution: understand their expected costs and develop a plan to pay them without taking on more debt.

“Until now, they would go on a trip, load up a bunch of stuff, and then be surprised at how much it all cost,” Sethi said.

Sethi asked the couple how much flights, accommodation and extras should cost, then pushed them to think a little bigger. When Callie suggested the hotel would cost “at least $600,” Sethi stopped her.

“I never do the minimum on a trip,” he said. “Don’t lie to yourself before you get on a plane. What happens when the hotel charges a 38% tax and the only place to eat because you’re in Alaska is at the hotel, which will it be expensive?”

People consistently underestimate how much they’re going to spend on vacation, Sethi said on a previous podcast episode. But by taking the extra time to think about where you’ll drop money along the way, you can better enjoy your travels without resorting to credit card debt.

You know you’ll be dining out on vacation, so make sure you factor tipping into your budget. If you plan to eat in an airport or grab snacks for your hotel room, add a buffer for those things, too, Sethi said.

“I would rather you add more money to the budget and come back with a little extra that you didn’t spend than be surprised by an extra $1,800 that you didn’t plan for.”

Once you’ve established the total cost, you can calculate how much you need to set aside each month to save for your trip.

Callie and Travis estimated that their trip to Alaska would cost $5,375 and that they have about four months until takeoff. Travis has an upcoming job that will pay him $2,500, which he says will all go toward the trip. From there, they must set aside an additional $720 per month.

“We planned how much it will cost. We even left a little margin,” Sethi said. “What I want is for us to systematically save each month to reach the total amount we need.”

Check out the full episode here.

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