The Only 3 Money Metrics You Need to Know for Financial Freedom

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I wanted to share the three numbers that I believe have the most impact on your life, so I invited Brad Barrett of the Choose FI podcast joins me to give his real-time reactions. But, more importantly, the real takeaway we landed on is that every conversation purportedly about money is actually about what it means to live a good life.

This is not financial advice; please do your own due diligence.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Episodes from the Money Guy Show and Ramit Sethi

• Brad Barrett of the ChooseFI podcast

• The Money with Katie Wealth Planner

• The Money with Katie Show episode on save rates

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Katie:

I’ve seen a couple different writers and podcasters use this three numbers format a couple of different times, and I love it. I was like, I want to do that. It strikes me as potentially a super useful way to size finances for someone who is either brand new to the Money with Katie Show, or maybe you’re just a longtime listener and you might find yourselves a little lost in the sauce sometimes. I know I am frequently lost in the sauce, so maybe I’m the one that’s taking us there and getting us lost, but I’m obviously someone who really enjoys getting all up in those weeds and I have made a career out of doing so. I reserve the right to hyper-fixate on tiny things in future episodes that may go unmentioned today.

Welcome back to the Money with Katie Show, Rich People. I’m Katie Gatti Tassin. We got an email a couple of weeks ago from a listener who said that while they have been listening for years, sometimes they find themselves craving a push to just return to the basics. So that is what we are going to do today.

Now, in preparation for this episode, we listened to a couple of other videos and episodes with this same format from the Money Guys and Ramit Sethi, and I realized that while some of my numbers you should know are similar, my choices are actually slightly different. I landed in a slightly different place from some of these other folks. So all that to say there is no correct list of numbers that you actually need to know. There’s no one correct answer here. So if you’ve been using someone else’s methodology, just consider this an augmentation if the spirit moves you.

I’m also thrilled because Brad Barrett, the host of the Choose FI podcast, is joining me today to co-host. So the plan is I’m going to pitch him on my choices and then we’ll see what he thinks. Basically we’ll get his feedback in real time, and it was really hard for me to narrow down what I think the biggest needle movers are, but I like where I landed. I think I actually picked out, I’m biased, but I think I picked out the best three and I really wanted to focus on the areas where I think you’re going to get the most bang for your buck. You’re going to get 80% of the results with 20% of the knowledge.

So with that said, these are the numbers that we try to surface in your Wealth Planner, especially in the 2025 version. They’re going to have a much bigger focus in the 2025 Wealth Planner because they are, from my humble perspective, the ones that offer the most insight into the state of your financial health. For the purposes of simplicity, I really tried to think about what I would tell someone who came to me and said, I know nothing about money. I want to spend as little time on it as possible. What do I need to know? And then limit my answer to these three metrics.

Brad, welcome to the Money with Katie Show. It feels so fun to say those words. Are you ready for my pitch of the top three financial numbers that I think everyone should know?

Brad:

I am so ready and I’m so excited to be here.

Katie:

I can’t wait to hear your thoughts. Well, we’ll dive right in. So the first major number that I think everyone should know is their long-term savings rate.

And the reason that I’m identifying long-term savings rate as such a crucial component of your financial health is because it indirectly tells you your timeline to work optionality. It is this singular data point—how much are you saving for the future—that can be used to answer a ton of other questions. So if you’re saving 20% per month into an account for weddings next year, that’s fantastic, but that is also short-term savings; your long-term savings rate is what percentage of your income you’re investing for the future. Now, maybe that future is 10 years away because you are really going to retire early. Maybe it’s 40 years away, but it’s basically like your nest egg versus saving some money for imminent spending. What do you think?

Brad:

I think you’ve nailed it. I mean, to me, this is the single most important number in all of personal finance, just period, hard stop, end of story. Your savings rate rules all, in essence. And I love your distinction, Katie, so long-term savings rate, even when you just said it a minute ago, I’m like, huh, long-term savings rate. I always think of it as just savings rate, but I guess so you distinguish between, hey, look, yeah, you might have some savings, but realistically that’s consumption, which would be the short-term quote savings rate, and then there’s the long-term savings rate, which is ultimately what you’re saving for financial independence or however you conceptualize that. Is that how you think about short-term savings rate, I guess, is like, it’s consumption I need to save up for?

Katie:

Yeah, and I think it’s interesting because if we got really meta and super zoomed out, we could say, well, technically it’s all going to be consumption. All savings is eventually for consumption. So even that distinction that, I’ve made that same distinction in the past and then been like, well, I guess asking somebody if it’s for consumption is kind of a little erroneous because it all will be eventually.

But yes, I think the reason that this up is actually, it’s fun when you have a product that people use because then you can understand how people get in the weeds with their own money. So when people would reach out and they would say, well, I’m saving $3,000 a month, but $1,500 of it is for a down payment for my house, so I don’t really want that to count toward my FI number. What should I do about that? Or I’m saving a thousand dollars a month, but $250 of it is money that I’m setting aside for a vacation later this year or my car insurance bill.

And so all of a sudden things become way more complex because you’re thinking, okay, these are all happening. All of these save rates are kind of being used for different timelines. And so I started to just chunk it up of your short term savings. These are things that you’re going to be spending later this year that’s obviously staying in the high-yield savings account. You have your medium term savings, which is a couple of years away, I think that timeline can get a little bit more slippery depending on what the money is going to be used for and how flexible or inflexible the goal is. And then you have the long-term savings, which I, in my mind, just think of that as FI to me, long-term savings and FI are synonymous.

Brad:

Yeah, that certainly makes sense. And yeah, I love how meta you got there in terms of, well, if you can make the argument that every dollar saved is ultimately consumption, depending on how you want to look at that, but I guess my one slight concern is just this is, again, this is meta, is complexity.

Katie:

Tell me more.

Brad:

So I always err on the side of simplicity, simplicity, simplicity. So I don’t want anybody listening to this thinking just because we’ve had seven different buckets of short-term savings. Listen, you’re doing great. If you’re saving $3,000 a month and $1,500 of it is going towards a down payment, that’s wonderful.

Katie:

Do you like how I open to this episode being like, I am going to keep this so simple, free, simple numbers within five minutes. I’m like, all right, so you have three buckets within this one thing.

Brad:

You’re like with the spreadsheet out.

Katie:

Yeah, okay. No, you’re right. Simplicity is important. I think the reason that I’m harping on long-term savings is because it can be used as that rough translation to time to financial independence.

We’ll get right back to it after a quick break.

We talked about this in our 40% savings rate episode. We’ll put it in the show notes if you haven’t heard it before, but we identified 40% savings rate as the point at which you are going to reach diminishing returns. So if you’re saving 10% of your income and you’re spending 90%, that means you’re going to work for about 40 years because it’s like all of this math is proportional.

We know that it’s going to take you 40 years of saving 10% of your money to generate enough in investment income to replace the other 90% that you need to spend. And so we kind of did that same math of, okay, take the percentage to the years to the number that it’s going to take to replace the spending. And we worked that out for 10%, 15%, 20%, 25%, all the way up to 70 something percent. And I think it’s really useful because it immediately helps us kind of wrap our heads around the decisions that I’m making today. What do those mean for the future? And do I need to turn that dial up or do I need to turn that dial down? I think my question for you, Brad, would be, do you have an ideal savings rate? Is there a number that you always tell people is the golden rule to shoot for?

Brad:

Yeah, it’s hard because I fear turning people off in terms of something seeming insurmountable. So let me give you the answer that I give my daughters.

Katie:

Okay, love it.

Brad:

Which I think is maybe the closest to my true answer, which is, alright, look, you haven’t built up any in their cases, they’re teenagers though my older one is 16, she’s gone off to college fairly soon. So what I tell them basically is probably the advice that I’ve heard JL Collins echo, which basically is if you save 50% of your income, you pretty much cannot screw up your financial life; that cures everything.

So that’s the advice that I would give to a 16-year-old, to a 18-year-old, to a 20-year-old. But realistically, for a lot of us who are adults who have maybe made some mistakes, which you shouldn’t beat yourself up about, right? We’ve all made mistakes. I’ve made catastrophic mistakes that are laughably unbelievable, and I’m still, I’ve reached FI, everything’s great. So I think when you hear 40%, 50%, you’re like, oh my God, I have a real life.

How could I do that? Alright, you’re not starting today. You’re making little decisions today and eventually that’s going to snowball into something significant.

So anyway, caveat, caveat, caveat aside, Katie, 50% is my real answer for people who have established lives. I think you try to get as close to 30%, 35%, 40% as you can and listen, you have to make changes. I think that’s the reality of this is for a lot of you, if you have a 0% savings rate right now, you quite literally by definition, cannot retire, right? Katie just said if you have a 10% savings rate, which the Suzie Ormans of the world and the mainstream personal finance people are like, oh, a 10% savings rate is great. Well it’s about 40 years to retirement.

I think you need to look at a chart or listen back to Katie’s episode and say, alright, listen, if I have a 30% savings rate according to Katie’s chart, that’s going to take me 23 years. You might be hearing this at 30. Well, all right, then 53 is when you could possibly reach FI. I can’t tell you if that sounds great. You have to. What do you think, Katie, when you hear that?

Katie:

Yeah, I like that. These are tools that enable people to identify what feels good to them, and I think that what feels good is probably going to depend a lot on how much you enjoy working. I think that that kind of is the crux of it for a lot of people is if I really enjoy maybe my specific job, but also just working in general, I genuinely believe some people’s personalities are just oriented to want to be busy and engaged and involved. And if they were to reach financial independence, these are not the people that they would not be able to stop themselves from earning money because they would be wanting to go out there and do other things. And so I think it comes down to how much you enjoy your job and how much you enjoy working more broadly as well as what type of premium you put on having a safety net and having that flexibility.

Something that I’ve learned about myself through going on this journey, which began in earnest really with listening to choose FI, is that I put an unbelievable premium on autonomy and flexibility, and that is one of the most important values that I have is, and being able to direct my time and energy the way that I want to. And so for me, even though I love my work and I actually love working, I also really never, ever, ever want to feel as though I have to work in order to make money.

And so it is a huge draw for me where 23 years sounds way too long. I’m like, what’s going to get us there in 10? That’s kind of like the upper limit for me, but not everybody feels that way.

So I do want to read off a couple more from this chart. So if you’re listening to this and you’re like, okay, I know my save rate is X, let me get a sense for how many years that will take me if I’m going from $0 today invested, right?

This is like you are at the starting line, saving 15% generally is going to translate to a 34 year working timeline. That’s a very important jump, right? Because if you’re talking 10% takes you 40, just bumping up to 15% is going to shave six years off. That’s 40 years to 34. 20% savings rate is around 30 years, 25% is around 26 years. Once you get up to 30%, you’re at 23 years, 35% is 21, 40% is 18. We’ve now dropped below 20.

45% is 16 and 50% is around 14. So as you go up, I think if you are a prodigiously high earner and you are saving 70% of your income, we’re talking about eight years to financial independence. So you’re basically compressing an entire career into a quarter of the time. So that brings up another thing for me that I want to ask you about, Brad, which is calculating the long-term savings rate, or maybe we’ll just call it savings rate if we fear that we’re adding too much complexity by chunking up into these buckets.

In order to calculate the savings rate, I like to think about post-tax income. So I basically look at annual contributions to retirement and long-term brokerage accounts, divide that by post-tax income. And I know some people like to use gross income. My point of view is that as long as you are being tax efficient with your tax-advantaged investing, your gross income is kind of irrelevant because the money you spend on taxes is not an option. You have to spend that money on taxes. So I’m a big fan of net income for the calculations. I’m really curious, I’m sure you guys have gotten this question before. In fact, I almost have a memory of hearing y’all talk about this, but what do you think? What is your approach to this?

Brad:

Yeah, I think it definitely needs to be after your tax expense for sure. So that’s the denominator for the calculation, right? Yeah. If you make $150,000 household income, and let’s say your tax is 20% of that, so 30 grand, yeah, $120,000 is really the after tax money in this hypothetical that you’d have to spend, and I think that’s where your savings rate should apply.

So I think also then Katie, we could dive into the actual numbers then of saying, okay, look, if you have a, in that case, a 50% savings rate on $120k, I don’t think most people understand what their actual spending is, and this might be a little foreshadowing for one of your future numbers, but in intent, but in that case, their gross income is $150,000, but in this case we’re saying the net after tax is $120k. If they’re saving 50%, spending 50%, it’s actually $60,000 and $60,000. So it’s $60,000 on $150k, which is 40%. So you can look at these numbers obviously a little bit differently. So right, in that case, $60,000, we can maybe even tie into like, okay, look, we can calculate a fine number off that as well, which is another interesting number of maybe I feel like I might be stealing your thunder here…

Katie:

Brad said, oh, do I have a segue for you?

Brad:

Yeah.

Katie:

It does all tie together. And that’s why I love the elegance and the simplicity of the math because for as complex as I can sit here and make it with my enthusiasm, I do think that that was what really hooked me about this philosophy to money because it just made sense. It was just simple. I could understand how my spending and my saving and all these things related to one another.

So thank you for that gorgeous transition. Number two is what does your life cost? What do you spend in a month, in a year? What’s your burn rate? That’s kind of the startup-y way to put it, but I think that knowing this information, it’s important for a lot of reasons, but typically we talk about, you kind of just alluded to it, it provides the ability to calculate your financial independence number, which we know is the linchpin on which we structure the rest of our financial life.

But I also think it’s important to actually be tracking what your life costs because that will alert you to the fact if your FI number is changing, and this is something that I think a lot of us run into, it has happened to me a lot where my FI number, honestly, change has changed every year because my life has changed so much in the last couple years. So if I had just had a number in my head and yeah, my FI number is $2 million, okay, great, and then never tracked again what my life costs, I would’ve been checking in now to be like, oh goodness, what has happened? Something has really changed. My FI number has gone up because my spending has gone up. So I don’t think that that is to say that once you know what your life costs that is, now you’re locked and loaded.

You can never adapt it again. Absolutely not. But if you have a really solid grasp of, alright, this year we spent $X, our target for next year is $Y, and we’ll check in again to know how we landed, that is going to enable the fine number itself to continue to size and stay accurate.

So I’m kind of curious, Brad, for you, and as you have progressed on your FI journey, you are FI now. Have you noticed any changes in your spending habits from the beginning? Tell me about how you have progressed with the philosophy and how it has taken shape in your life.

Brad:

Yeah, it’s a great question, Katie. And I think first, just one step back on what you were just talking about is I think one of the most important aspects for everyone listening to this is to not get bogged down in the tiny little minutiae and just think about directional accuracy. That’s how I think about the world. It’s so easy. Katie, you and I are both numbers people, and I was good naturally poking fun at you before about the short term versus the long term. And let’s get—

Katie:

Yeah, I’m like, who do you think taught me how to get in the weeds? Brad, who do you think handed me the first weed-whacker?

Brad:

You are very welcome. You’re very welcome. But I think for most people it’s like, all right, look, just get a sense. Because most people stick their head in the sand when it comes to their personal finances and they’re scared. They don’t want to know. And really being honest with yourself is the most important part here. You need to know what’s going on. And I think one of the easiest ways in terms of this, what does your life cost? You have to write it down. Just get a sketch of what does my life cost every month? And you also have to understand, hey look, there are things that might hit only once a year, but that’s really important. And if you were just tracking a month and you miss the $5,000 payment that you have every November, you’re going to miss something that’s material. So you really need to just get a true sense of what is my annual life cost? And again, you don’t have to tick and tie every number, but you need to get somewhat close-ish.

Katie:

And we’ll be right back after a message from the sponsors of today’s episode.

Brad:

So with my own spending, I’ve loosened up a little bit, and I think this is part of the evolution of FI generally. I think I’ve been living this in real life on my podcast and in real time in terms of, I read a book like Die with Zero, which was almost three years ago. I read it. I actually look back at newsletters that I wrote, and I’ve really internalized that in terms of, alright, look, there’s a reasonable chance that because the significant savings that I did and I still learned some money from my businesses, I’m not even drawing out of any of my net worth. I’m going to have a decent bit of money. I mean, this is going to continue to compound. I need to think about spending this, I need to think about what can I add to my life. And I think I’ve just become a lot looser with just things in general.

I took both my daughters, we took this amazing dad and daughter trip to Europe this summer. We went to Barcelona and London, we, Katie, I know you love this. We saw Taylor Swift in London, which is incredible. And I’m like, we just had an amazing trip. And that’s something I will never think about. What did that cost? I didn’t even add it up, what it cost me, because I genuinely don’t care because I would do that every single year without batting an eyelash every single time they’ll go with me. So that’s no-brainer as far as I’m concerned.

Things for my health and fitness, I spend very freely. I have a personal trainer who, he’s actually not here in Richmond, Virginia with me, but he is online and it has been the best money that I’ve ever spent on my health, and I would do that indefinitely because it matters.

Even just random things. I went on another trip recently and hiked one of those fourteener, which one? It was quandary. So it was kind of like one of the beginner, but it was still for me, coming from sea level and not having the right gear, I’m like, it was really hard.

But Katie, it was awesome. It was the coolest thing ever. And I’m like, okay, I really want to do more of this. I’m not going to be caught unaware again with bad gear. So I went and bought some really nice stuff, and it’s still the old me in a very good way, is still looking for a deal. So Patagonia has their Worn Wear where you can basically buy used clothing. And I did that. I was able to get it for half price. So I still spent more than I would have in the old days, but I felt good because I was getting this amazing value, and I think that’s what I look for.

Katie:

And value is such a loaded word because to your point, doing the Patagonia Worn Wear, getting lightly used clothing, that’s an amazing example of you are just being incrementally smarter about something. And if you’re taking that just slightly more strategic attitude at scale to your whole life, that is going to compound that just orientation to decision-making is going to make a big difference.

And it does not mean that, okay, I got to go for that 50% save rate or okay, I know my life costs $80,000 a year, so I can’t spend a penny over $80k. I love the phrase directional accuracy. And the beautiful thing about the way numbers one and two connect is that in the process of figuring out the first number for yourself, you are by definition going to figure out the second, you will find out what your life costs when you go to calculate what you’re saving. Because money can only go to one of a couple of places, like if it’s not getting sent to Uncle Sam or being used to pay down debt, it’s either getting saved or it’s getting spent.

And I think that your point about the annual basis is crucial for everybody. Maybe you’re just more of a high level thinker. You’re not someone that enjoys sitting down with a Wealth Planner at the end of every month and recording every single thing at the end of every year. Being able to look back at, okay, I think pretty much every checking account product will do this for you. Now you can see, okay, these are the total deposits we’ve received.

Or when you’re doing your taxes, you can look at, okay, this is all the income that we’ve received. We know it’s on these pieces of paper called W-2s or 1099s. We know exactly how much money came into this household last year, and we also can sit there and look at the annual totals for the credit card bills or for the debits in the checking account, so we know what went out.

But I just find that process to be so weirdly grounding and so reassuring. And I think that that’s the paradox of when you’re accustomed to bearing your head in the sand, which I definitely used to, that was my pre-financial awakening. I think you kind of feel like the information is something that it will make things worse if I know it’s just going to make me feel worse and I’m going to feel bad and I’m going to find things I don’t want to see. And so it’s easier just not to know.

But almost always, I think the opposite happens. This was my experience, this is when I hear from other people. This is almost always what people say. It’s like, oh, once I actually sat down and got my arms around all of it, I was shocked at how relieved I felt just from the standpoint of knowing, just understanding where I stood, even though I wasn’t happy with the results or I was like, all right, I got some work to do. I still felt better.

Brad:

I have seen that over and over again. “Just being honest.” That’s the phrase that always comes to my mind. This is that moment where you’re trying to make your life better. And when you’re starting with the understanding that you cannot beat yourself up about past mistakes, they are in the past, I promise you, there’s nothing you can do today if you’re starting on day one to change those mistakes. They happened, we’ve all made them and we move on. But just be honest with yourself where you are today.

It’s as simple as, again, we’re talking numbers, right Katie? So you just write down, Hey, what do I owe? What do I own? That’s how I think about a net worth statement. It’s like, Hey, these are all my assets. These are what I own. And then the liability is this is what I owe. And then you just subtract and that gets you your net worth. And it might be negative, okay? It might be, and that’s fine.

And then you look at the income statement side. So you’d say, like Katie said, you pretty much know what income’s coming in. It comes in on these government forms. That’s actually pretty easy. And like we said, you need to write down what is your life cost, what’s going out? And then you figure out, alright, look, here’s where I am today. Again, it might be negative. You might be in the red every single month. You might be in a negative number. Alright, well listen, you’re going to make changes to make your life better, and that’s wonderful. So don’t beat yourself up, but get to that point.

And like you said, Katie, you do feel better because I think that unknown, that fear that, oh, I can’t do this. I just don’t want it. I can feel the anxiety in my own chest, and I know how that translates to people because it is frightening when there’s just something you don’t want to tackle, but when you actually do, you’re like, oh, that really was nowhere near as bad as I feared. And regardless of what the number looks like, it might be pretty frightening frankly, but at least you know.

Katie:

Yeah, it’s how I feel about medical bills when I have a lot of appointments and then the different statements start coming in and they’re all formatted differently. They’re all coming from different providers, they’re all in various stages with insurance. I’m getting EOBs and I’m getting, you just feel like you’re getting snowed with paperwork. And my inclination with those types of things, despite my comfort with money more broadly, I’m like, oh, I just don’t want to worry about it. I kind of procrastinate it. But I think it’s the same thing. And the approach that always helps me is I think this is key, is knowing when you are in psychologically the right frame of mind to sit down and actually spend time with it.

Let me tell you the worst time to do this. I made this mistake this morning. I was trying to get a handle on my day and I was already on customer service phone line with Nespresso. They sent me the wrong order. So I’m trying to get, I’m like, you kind of get the vibe. It’s like I’m multitasking, I’m kind of cleaning up the kitchen. I’m on hold with a customer service rep. I’m trying to plan the day. And then I remember in the back of my head, oh yeah, I haven’t paid that UC Davis Bill, lemme just log in and see where the insurance stands on that. Oh, I see. It’s denied. Immediately start spiraling. My attention is already fractured. I’m already kind of heightened and anxious about other things. And then it was like my brain being like, yeah, you know what? Lemme give you one more thing to be anxious about. Why don’t you get into that portal and let’s see what’s going on there. It’s like what I should have done and what I will do. I caught myself.

I was like, you know what? This is not a problem for right now, Katie, I’m going to come back to, this is typically my Saturday mornings can be pretty slow, pretty nice, wake up early and it’s like, let me just block off some time on a Saturday morning to sit down and play a little medical secretary with myself and not have anything else going on, not have anything else hanging over my head and just give myself the permission to like, all right, I’m going to have three hours blocked for that. That’s the only thing that I’m going to care about and work on.

It matters how you enter into that moment, I think, because if you’re already anxious and stressed and half concerned about other things, it’s going to feel stressful. And so I would just pop that out there for anyone who might feel as though this is something that they’ve been procrastinating or sweeping under the rug.

It’s like that doesn’t mean that right this second, you have to pause this episode, drop everything else you’re doing and just start excavating. You can pick a day, pick a few hours and be intentional with the mindset you’re going in with. And I promise that’s going to make all the difference.

The other thing that I wanted to mention is that we are currently in dev for the 2025 Wealth Planner. I’ve made a couple references to that already, but after you fill out your spending plan in this new version, we made the tiniest tweak to the Dashboard tab. So if you’re a 2024 user, you’ll know what I’m talking about. But what we’re doing this year, and something that I’m excited about is we’re going ahead and just annualizing funds for you. So when you tell us, okay, this is my monthly spending plan, this is monthly debt payoff plan, monthly savings plan, we’re having you put those numbers in at that level that you can kind of get your arms around it.

Most people have a general sense at a monthly level how their money is working, and it’s going to annualize all of that for you right at the outset and tell you, alright, this is your goal. Outgoing funds for the year, these are your goal savings for the year. This is how much money you’re going to be paying off in debt this year based on the plan that you’re making right now. And I really like just putting those things front and center right at the outset. The other thing that I want to make sure I note before we move on to our third number is another major reason that I think understanding how much your life costs jumps out at me is because it immediately allows you to understand how flexible or inflexible your personal financial system is. It’s going to allow you to know, alright, do I really have wiggle room?

I’m in this job that pays well, but I’d really like to make a change. And that change is probably going to entail a pay cut. This is going to give you the information you need right away to be like, am I even capable of making a change right now? Or do other things need to change first? If you’re already saving 30% to 40% of your income, you can take a pay cut and you can improve your life in a way that might actually mean less money, but better work-life balance or a better lifestyle in general, or more time with your family. And I think that understanding the amount that you’re spending now and how, again, I’m resisting the complexity, it’s tugging me forward and I’m like, no.

Brad:

It’s okay, Katie. It’s okay.

Katie:

But the fact that that spending, you’ll also probably have a sense for what’s fixed and what’s discretionary too. A budget that is primarily made up of a bunch of fixed costs that there isn’t much wiggle room, that is a lot harder to change than a budget where your fixed costs are under 40% or 50% and the rest is just fun spending that you can dial up or down appropriately. That is really beneficial and really useful in giving you a sense that you are in the driver’s seat. You are in control of where you are taking your life.

Brad:

Yeah, I agree. I think it’s interesting looking at both the small and the large expense items. So one metric that I know both you and I love is for every a hundred dollars per month that you cut out of your budget, it’s $30,000 less you need in your entire net worth to reach FI. So your FI number reduces by $30,000 for every $100 you can remove out of your monthly budget, which is massive. That’s an incredible thing for something that a lot of us can find $100 a month or even $200 a month. And then that’s not even taking into account that extra $100 or $200 a month is then being invested for all that time. So it’s not just like, hey, this is $30,000 less I need in my FI number. Hey, I just took that $100 and saved it for 30 years. I think that’s $150,000 is what that will be worth 30 years from now at an 8% annualized return, which is extraordinary. So I mean, you’re talking $180,000 swing for literally that $100 savings. When you think about it like that, Katie, it’s hugely impactful. It’s crazy, right?

Katie:

Oh my God. Well, and I’m glad that you said that because again, you’ve provided me with just a flawless segue to my third number, which is what percentage of income you’re spending on things that make your life better. So the reason that I wanted to take us in that direction for this, and you have already told me a little bit about the things that you like to spend money on, travel with your daughters and your health and fitness and these things. And I think that because our first two metrics are all about save rates and burn rates, and to me, they carry the tenor of like, okay, I am focusing on discipline and accountability and I’m keeping things right and tight. I feel like the type of people that really gravitate to those things and do a really good job with, okay, I can be responsible. I can save money.

I talk to so many people that if, particularly listeners of this show who are extraordinary at saving and investing, but they struggle a lot with spending, spending money for them is very hard because unlike I would say the general population who I believe right now, the general population savings rate in the United States is 4%. The economic precarity in this country is really, it cannot be overstated.

But I think that for the purposes of a show like this one with an audience like this one, it’s also really important to say, to take that page out of Ramit Sethi’s playbook and say, we need to make sure that we have a metric devoted to a minimum spending amount for fun stuff to ensure that you are using money for what it is for which is to make your life better, to live life.

And I really sat with this one for a couple days. I knew I wanted to pick something like this, but I couldn’t decide what is the minimum spend threshold that we should be aspiring for here? I consulted Ramit’s work to get a sense, and his framework is like 25% or so. And he says, if you’re only spending 5% of your money on your rich life, you are failing. Which puts it in terms that as a competitive overage, she even anal type A person, I really like that. No, you’re actually failing. This isn’t like a pat on the back. It’s like, oh, look how little I can spend. It’s like, no, this means that you’ve missed the point, right? You’re losing the plot.

I feel like 10% is something that I feel good about. Okay, at least 10% per month I want to be spending on things that are really meaningful to me. But I’m curious if you’ve ever thought about that. Have you ever tried to quantify this in that way?

Brad:

I have not, but I’m interested. The more I hear you talk about this, I think it’s important because I have not even come close to quantifying this, not even remotely close.

Katie:

And isn’t that telling?

Brad:

Yeah.

Katie:

We are both so on it. We’ve just spent 40 minutes talking about two numbers and we’re like, oh, but spending money, interesting. What a concept.

Brad:

What a concept indeed. And the funny thing is, I think both of us would think of ourselves as reformed, frugal to some degree, but yet we have no idea. I have no idea if my percentage is 1%, 2%, 7%.

Katie:

I don’t know either.

Brad:

No clue whatsoever.

Katie:

I know, I tried to go into my Wealth Planner to section out the categories of like, all right, what would I consider the fun guilt-free spending categories? And even that was kind of hard. I was like, well, I don’t really have an intentional approach here. And I think that the key is that these things are meaningful, that they’re actually making your life better. And it’s not like, all right, well, I got my 10% this month, so I’m going to buy my Stanley cup a fanny pack on Amazon I saw on Instagram. It’s not just frittering away money on mindless consumption.

I think it’s really about figuring out where the ROI is the highest for you. And I had an insight about myself that I want to share. It might be useful. I realized that I tend to preserve my spending at least psychologically on, we’ll call it unnecessary spending. Not like rent, not groceries, but the money that I am choosing to spend that I could just not, I tend to save it for things that code as splurgy or luxury or convenience.

So it’s things that kind of carry this air of frivolity to it. But I’ve noticed in myself that I have not really invested in my own recreational activities in the same way. I haven’t really invested any time and money into hobbies. And so your example about the fourteener was interesting. I realized that the other weekend about myself, and I was like, well, I really like hiking and I’ve been doing it a lot more, and I just wear my tennis shoes on these mountain sides and I will twist an ankle or my feet will hurt at the end of the hike. I don’t have the right gear. And so I finally was like, I’m just going to buy some hiking boots.

I don’t know why that felt so why did I feel resistance to that? Or why did I feel like I shouldn’t be spending money on this thing? Because I already have tennis shoes to wear. It feels good to have a recreational activity that I’m taking a little bit more seriously. And in my world, taking something more seriously usually means devoting time and money to it. So I was like, so why wouldn’t I do that for this thing that feels like it’s actually going to bring me some continued leisure and recreation activity? It’s something that you can use actually to change the way that you are spending your time and get more out of the things that you’re spending your time doing.

Brad:

Yeah, I like that a lot. So a couple of thoughts just generally on what you said. So I think the psychology of this is critical, right? So like you said, we spent the first 40 minutes talking about these two numbers, and it’s easy to say, okay, that’s the most critical, but I fear that a lot of people might take it too far.

I think the key to success when it comes to personal finance and certainly phi in my summation, is thinking long-term. And what that means to me is that when you make decisions as if this were a short-term thing, like a financial diet, and I don’t want to harp on the diet part, but we can all picture like, oh, I’m just trying to reach a goal. I’m trying to just quickly get to this goal and then I can all hell’s going to break loose and I’m just going to go back. That’s not the game we’re playing here.

We’re trying to make small decisions that get us to a point where we can reach financial independence. And when you start making 1, 2, 10, 20, 50, a hundred, 200 of those small decisions, it turns into something really meaningful. But if you think like, okay, I’m just going to deprive myself for the next three years or five years and then my life’s going to be better, I promise you it’s not any period of deprivation. It just doesn’t work.

So that’s the one end, Katie, but then you also just described a minute ago, the other end of, okay, well Katie and Brad said I need to hit 10% of luxury spending, so I’m going to just, it’s the 29th of the month, I’ve got to spend another 800 bucks. I’m just going to blow it on nothing. We’re not saying that.

And I think, Katie, what you’re getting at also with the hiking, and I found this myself, is these are generally one-off expenses. So it’s going to be hard to hit that 10% every single month. That again, is not the directional accuracy that we’re going towards. We’re going towards like, hey, I spent somewhere probably with the sunglasses that I bought and the Patagonia wear, I probably spent $500 bucks. But that felt luxurious to me. And the great thing about hiking is now I can use that gear that was $500 that now I can use for years to come potentially. So that feels both luxurious, but it also, it’s clearly not going to help me necessarily get to that 10% every month. And that’s okay. I think I checked the box again for directional accuracy.

Katie:

Man, something that we were just marveling at. We went to Tahoe the other day and we paid $10 for parking and that was it, and had the most just breathtaking day in Lake Tahoe is just one of the most beautiful places in America. And we just were marveling while we were driving home. I can’t believe that that entire nine hour experience we just had was like $10 bucks. And so I think that that’s the other thing of, so often when we have these conversations about money, I think the reason that I love this field so much is because really what we’re talking about is your life and what kind of life do you want to live and how do you want to spend your time?

And so sometimes I think that the things that you can almost learn about yourself as you become more financially aware and as you explore new things and as you experiment with spending money on some things, and maybe you try it and you’re like, actually, that didn’t really feel that good.

I thought that’s what I wanted to do, but I’m actually not really enjoying that. So let me experiment. As you play around with that, what you’re really doing is figuring out what kind of life do I want to live and how do I want to spend my day? And I think that that is such a fun, it’s just such a fun and meaningful approach to life. And I think the great byproduct or the, oh, look, and also what do you know you’re going to become financially free, whether we’re talking literally financially independent or just look at all this optionality I’ve now introduced in my life and look how much freer I feel because I’m no longer stressing about the money in the checking account. Money is now no longer the number one concern or the number one priority in the decisions that I’m making.

And I think that that is, when you get to that place for the first time, it’s hard to articulate just how much it feels like the world opens up around you. And it’s almost hard to comprehend or even notice when money is the most important and critical thing because you are resource scarce or because your life is so expensive or because you are spending so much of what you’re making every month, that low level financial anxiety, it is incredibly damaging. And so when you feel what it’s like to live without that, it’s like, oh my God, I feel like a completely different person now. And I think that that’s kind of the feeling that feels worth fighting for and working toward.

Brad:

Yes, wholeheartedly agreed, and that financial anxiety. So there’s the real financial anxiety, which we are never, ever, ever going to downplay the importance of that and just how ever present that stress can be for people who are truly living in a place of financial scarcity, right?

But Katie, there’s also self-imposed financial scarcity that you and I probably maybe fit into that category for a very long time. And that to me, while I’m obviously very thrilled with where I ended up financially, I think there was an unhealthy nature to it for a period of time. And I think you asked me, hey, what changed over the last couple of years potentially both maybe reading Die With Zero, following Ramit a little bit.

And to me, often it’s just at the margins, but it can make a big difference. And it’s that spirit of these little adventures or just little things like I used to, I can picture myself not buying a T-shirt because it was, I thought in my bizarre mind that it was too expensive at $25 or something, just some arbitrary thing. And now I recently just, I’ve gotten back following the English Premier League soccer, and this is one of my lifetime loves, and I stopped following for a while, and I just bought two T-shirts that I didn’t even frankly care what they cost. I know this sounds stupid, like a silly little anecdote, but they were $35 each. And I know for a fact that Brad circa 12 years ago would not have bought this. He would’ve been annoyed that they were $35 each.

And I think just looking for these little areas that can improve your life and getting beyond the financial scarcity, but also, frankly, we’re both at a fairly advanced point in our financial independence journey. And I’m not discounting the people that at the beginning of your FI journey, frugality is important.

Katie:

But—

Brad:

I want to say, and I really want everyone to hear this, you can’t let the scarcity mindset that you cannot let that rule you because then you can get very easily to an unhealthy place. So I really wanted to make sure that everybody heard that getting, because it’s just so important.

Katie:

Yeah, thank you for that. I definitely feel as though I harp on that a lot because I have made those mistakes, and I don’t want other people to feel as though that’s a necessary component of this, because it really isn’t. I used to assume that there was a certain amount of money that you would get that then suddenly a switch would flip and you would no longer care. And that is just not true.

There’s that trope online, particularly in the personal finance world of like, oh, well, real multi, multi multimillionaires, they drive Camrys and they don’t spend of their money and they only wear used clothes, and there’s this caricature of very frugal wealth that then gets held up as like, see, this is the real way that you should be existing and spending your money. But I think that there actually is something to that of people who actually just never learn how to spend, and they do actually become super rich, but they aren’t allowing themselves to use any of the money.

And so I think that that process of experimentation and learning and even play and just kind of be like, I’m going to just give it a shot and we’ll just see how it feels and how it goes. And if I hate it, I’ll just never do it again. No problem. But I think it’s very important.

So I have a couple honorable mentions for us. I’ll be curious if you’d have any to add. So the first is credit score. And I say that this is an honorable mention because 98% of the time it’s completely irrelevant, but in the 2% of the time that it matters, it’s going to determine how much it costs you to borrow money. And that can have huge financial implications.

So I don’t want anyone who, yeah, maybe you did receive this from somebody that was like, hey, this is a good episode. If you’re just getting started, you should know what your credit score is. But I do feel like this is an area of finance that because it’s so easy to track, and it’s just one number that Credit Karma will tell you. Some people get really hyper-fixated on their credit score and obsessed with watching it and making it go up. And I think that that’s just a waste of time and effort. As long as you’re doing the right thing financially, and you’re paying your bills on time, you’re not missing payments, you’re not accruing interest, it’s going to go up on its own. Watching it like a hawk and stressing over every little swing is not necessary. So that’s why that’s my first honorable mention.

My second is asset allocation. So I think it’s good to have a general sense for your asset allocation. You got to know, am I 90% stocks or am I 60% cash? That is a major, major difference. That is going to make a huge difference long term. When it plays out over many years, you are going to end up in a very different place. But I do think that sometimes we get a little bit too caught up in, maybe I’ll call it unnecessary precision. You get a little hyper-fixated on making sure that the asset allocation is always within 1% of the target. Again, it’s like that to me is just, you really don’t have to be watching it that closely, checking in once a year to make sure that everything is looking directionally accurate. This phrase that I love, and that you’re not, I’ve seen many people make this totally understandable mistake where you open an investment account, you fund it with cash, but then you don’t do anything with it. That sort of asset allocation check of just like, okay, where is the money invested? It would allow you to catch something like that, but you’re not logging in every single day and watching the tickers and tracking it like a hawk.

So Brad, any additions that you would put on your own honorable mention list? Is there anything that you think we missed today?

Brad:

Yeah, I have two quick ones. So one is really ties directly to what we talked about in our three, which is just your FI number generally. We didn’t explicitly state this, but basically what does my life cost on an annual basis? And you multiply by 25, and that gets you your rough financial independence number. Okay? So we can talk, and people of good faith can argue around these more advanced strategies like safe withdrawal rates and what should it be? Should it be 4% or 3.25%? That’s way beyond the scope of this. I think as a North Star number, what is my life cost on an annual basis? Multiply by 25, that gets you your FI number and you can dive into the minutia from there. But that for most people is going to really give you something to shoot for. So that one is critical.

I guess kind of tying into your asset allocation, I’ll say expense ratios or fees that you might be paying, because I think this is one of those things that people don’t realize the enormity of it. So I would, and I’m sure Katie would echo this, so low cost ETFs, specifically mutual funds, mutual funds and ETFs. Vanguard, we never give financial advice, but Vanguard’s VTI is something that I personally invest in. That’s generally where most of my money goes. So the expense ratio on that, just the amount of fees basically is minuscule. It’s like four one-hundredths of 1%. It might even be three one hundredths at this point, but it’s somewhere right around that essentially almost zero. But when you start talking about actively managed mutual funds, that can be 30, 40 times that it can be 1%, which again, sounds fairly small.

Oh, it’s just 1%. It’s no big deal. You might even have a financial advisor who charges you AUM, so assets under management and oh, it’s only 1%. Look at all these amazing things they do for you, blah, blah, blah, blah, blah. So you talk, you have a 1% assets under management fee, and then this person to prove their genius is not going to put you in VTI or the S&P 500. They’re going to put you an actively managed fund. So that’s another 1%. Well, Katie, you and I both know that when you take 2%, that’s essentially 2% of your return annually.

I know I ran a number on this a long time ago on an article on my original personal finance site, and I won’t go into the whole scenario, but essentially it was like a 40 year period where you put $1,000 in a month and got a 9% gross return. So 9% market return. If you had that in, let’s say Vanguard’s VTSAX or VTI, you would have about $7.1 million after 40 years, which is amazing. But if you put it in a 1% expense ratio fund with a 1% expense, AUM for that financial advisor, so now instead of getting a close to 9% return, you’re getting a 7% return. In this hypothetical, I probably wouldn’t use these percentages anymore, but nevertheless, you would’ve lost Katie $3.3 million to fees. $3.3 million. So instead of having $7.1 million, you’d have $3.9 million just for doing something that you thought was smart investing.

Katie:

Yeah.

Brad:

With a financial advisor. So I think that’s why a lot of us in the financial independence movement really believe in low cost index funds and ETS and specifically DIY investing, because frankly, there’s no financial advisor on earth certainly, that you’re going to get lucky enough to find in the one in a billion, essentially, that’s going to beat the market. And when you look at this, could cost you almost 50% of your net worth. So to me, that clearly makes the honorable mention list.

Katie:

Love it. So we have our four kind of “one and dones.” You’ve got credit score, asset allocation, the fees that you’re paying, and just your FI number overall. I love it. Brad, thank you so much for joining me today. This is really fun.

Brad:

I had a blast. Thank you again for inviting me.

Katie:

That is all for this week. We’ll see you next week, same time, same place on the Money with Katie Show to learn about the linchpin that may have the power to reverse the wage stagnation trend and know it’s not more negotiation tips.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer, and additional fact checking comes from Scott Wilson.