Moment 148: Guarantee Financial Freedom! The 4 Numbers You NEED To Be Tracking: Ramit Sethi

Steven Bartlett (0:03)

When you talk about the language of money, what do you mean?

Ramit Sethi (0:07)

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 gonna happen? Why do these rules exist? And these rules are similar in money. You can break them. That's okay, but you gotta understand the rules first.

Steven Bartlett (1:13)

What are those numbers that I need to know?

Ramit Sethi (1:14)

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. Those would be your rent or your mortgage, your 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. So, 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'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.