Dec 2, 2024
Deciding to have a child is a monumental financial commitment, rivaled only, perhaps, by the choice to marry.
Jason, 40, and Megan, 34, were just seven weeks away from the birth of their first child, but still hadn't figured out how this milestone will impact their financial future. On a recent episode of Ramit Sethi’s podcast “Money for Couples,” Megan said Jason frequently talks about the “cost” of raising a child while he feels he’s still in the dark about her post-birth career.
Advertisement
“I learned about her plan through overhearing her explain her plan to her friends,” Jason told Sethi.
The couple’s financial planning process is so dysfunctional that they’re relying on credit cards to make ends meet despite having assets worth over $3 million. Sethi’s analysis of the situation reveals common issues that many couples face when approaching a major lifestyle change.
Asset-rich, cash-poor
Although Jason is technically a multimillionaire, much of his wealth is tied up in illiquid assets. Roughly $1.4 million is in real estate, his private business is valued at $1 million and the resale value of his eight-car collection is $290,000.
None of these assets can be easily tapped into for spending and involve maintenance costs that are often overlooked. The situation can best be described as asset-rich, cash-poor.
“People who have a lot of assets should have a lot of liquid money to be able to maintain those assets,” Sethi said.
Many Americans are in similarly illiquid situations. While most don’t own their own business or have vast car collections, they do have too much of their net worth trapped in real estate. According to a recent LendingTree report, nearly 18.4 million Americans, or 21.9% of all homeowners, can be considered “house-poor” which means their income is barely enough to match the holding costs of their home.
Asset-poor or house-poor individuals may want to consult with a financial advisor, reduce expenses, boost income or consider selling some assets to shore up cash, according to Experian. Unfortunately, even though Jason and Megan seem to be making an effort, the changes they’ve made so far haven’t been enough to establish financial confidence.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Childcare, cutting costs and communication
Instead of boosting income, Jason recently took a huge pay cut when he left his job and joined a startup. Because of this, he’s made some adjustments to his lifestyle to save money, like giving up luxuries such as a $17,000 season pass for hockey games.
Jason and Megan have decided to keep their finances separate, which is why Megan started relying on credit cards to make ends meet while cutting back on hours in anticipation of maternity leave. She told Sethi she has $13,000 in total credit card debt and admittedly has gone back and forth on how long she wants her maternity leave to be.
Advertisement
A lack of clear communication and planning has left the couple struggling with debt and unprepared for the costs involved with raising a child. The average American family is expected to spend an average of $237,482 to raise a child until the age of 18, according to a 2023 LendingTree report.
On average, families spend about 27% of their income on their child and three out of four parents say money causes them stress, according to a Babycenter survey.
Sethi believes Jason and Megan need to take the time to talk more openly about how they want to approach the lifestyle change before they try and budget for something they’ve never experienced before.
“You might have to slow down in a way that feels so unproductive to you,” Sethi said.
“Understandably, no first-time parent knows exactly what having a baby is going to look like, but importantly you have to be able to make at least some assumptions which you can always change later,” he told the couple.
Finally getting clear on Megan’s maternity leave is a good first step.
“Am I going to stay home for one month or two years? We need to be able to put something down on paper and then we can change it if needed,” said Sethi. “That is how you make a plan.”
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
