How Kids Impact Financial Independence

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Everyone says the first five years of your kid’s life will be the most expensive. But do things really get easier? Well, kind of. Financial expert and mother of two, Farnoosh Torabi (@farnooshtorabi), brought some practical advice to the show this week for people who know they want to be parents, but I think it also applies more broadly to setting yourself up to get what you want out of life.

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 our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• Farnoosh Torabi’s new book, A Healthy State of Panic
• The Life-Cycle Model of Consumption & Saving

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Transcript

Every once in a while, a remarkably consistent theme will materialize as if by magic in my inbox, almost as if the readers and the listeners who have the generosity of spirit to write me an email are connected along the same telepathic frequency.

Now typically, we address money with Katie listener questions in our Rich Girl Roundup segment. Love it. But the topic that’s emerged recently felt like it deserved a much deeper dive, “Aspiring rich girl here. My family does pretty well earning, investing and spending in a tax efficient manner. We have a few different income streams. We have totally average housing in cars and we even have a friend living with us who helps out with babysitting and chores.” She writes, as an aside, a live-in friend who functions like a third co-parent. I think we’re on to something here.

“However,” she continues, “childcare is obliterating our normally well padded finances, energy and time. Two fantastic kids in part-time daycare three days a week is draining $24,000 per year from our joint income of $115,000.” Ah, a tale that’s as old as time in the United States with, I would note, the historical exception of World War II. Headline reads, “Responsible couple who did everything right still struggles with spending 21% of their pretax income on something every other rich nation recognizes is a public good.”

Then she says, “I keep hearing that things will get better after the little ones are out of daycare, but I have trouble believing that. There are deferred costs in this phase of life, like a newer car, appliances, better retirement savings and most concerningly, parents with worsening medical conditions cascading into a variety of costs.”

Another aside, the phase that she’s describing is also known as the sandwich years during which your prize behind door number two is the privilege of financially supporting the generations both above and below you.

So she concludes her message, “Is there any reliable data on family save rates before, during, and after those years? Are we left with hearsay and hope?”

Beyond the fact that this sign-off sounds like it was professionally penned for a women’s magazine advice column, dear hearsay and hope, it’s a succinct, real life depiction of the situation I imagine most young families find themselves in. Yes, even those that earn six figures and yes, even those who receive help as both of those things were true for this person.

Since I have approximately zero experience thus far in my life with, well literally anything she’s describing, I figured the least I could do was honor her request for data about families save rates.

Welcome back to the Money With Katie Show, rich caretakers and future caretakers. Today we’re talking about how having kids impacts your best financial intentions. Our guest today is none other than Farnoosh Tarabi, famed financial writer and mother of two.

Farnoosh just talked at length in the past about how having kids impacted her career and her household’s finances and she just so happens to have a great deal of financial knowledge herself. So it felt like she would add some valuable perspective to this episode.

Before we dive into the data, I wanted to plug two very exciting updates. The first is that our second podcast, all about building businesses, premieres this week it’s called Bossy and I’m co-hosting it with my friend Tara Reed, who’s the CEO of a multimillion dollar ed tech business.

The second update is that the wait list for our 2024 wealth planner is now live. If you want a discount on the wealth planner and you want the free annual review template that’s going to come with it launch weekend, the link to join the wait list is in the show notes. All right, we’re moving on. Does any data exist?

Enter Martin Browning and Thomas Crossley’s 2001 paper on the lifecycle model of consumption and saving, which I’ve actually touched on before on this show. Just peep this introductory clause which talks about life’s various blessed stages with the sociopathically detached sterility that we expect from our economists.

“The modern lifecycle framework provides a guide to thinking about modeling of many lifecycle choices such as consumption, saving, education, human capital, marriage, fertility and labor supply, while taking account of uncertainty in a rigorous way.” Houston, we have a banger! The paper that we are dissecting today uses data from the UK Family Expenditure Survey, which provides a long time series 1968, 1995 of “cross-section information on family expenditures, income and demographics”.

Now, the survey is run continuously with about 7,000 households each year, keeping two-week diaries of their expenditures on all goods. I only wish I had been alive then so I could relentlessly target the surveyors with a bulk purchase of my wealth planner. We will be right back after a message from the sponsors of today’s episode.

The lifecycle model of consumption and saving is what you’d find if you ventured all the way from the static save rate suggestion we often talk about in personal finance to the other end of the spectrum. So for example, we recently did an episode about the perfect save rate that suggests somewhere in the 35 to 40% range is where you’re going to start hitting diminishing returns and the sweet spot where you should feel comfortable taking your foot off the gas a little bit, but this paper’s interpretation of the way someone uses money throughout their life takes a different approach.

One that might feel more realistic for someone in the throes of daycare and elder care and accelerated mortgage payoff. Rather than trying to keep your expenses or saving constant over time, rational agents, yes, because in the economic world you’re a little more than a perfectly rational, overgrown spy kid, try to keep the marginal utility of money constant over time, which might mean spending radically different amounts of money at different times. Put simply, money is real value to you. Its marginal utility is different at different points in the human lifespan.

The easiest way to think about this is to engage in a simple thought experiment. Would you rather be the you that you are now with a million dollars or the 95-year-old you with 10 million? You probably understand the answer intuitively. $10 million when you’re likely in the last decade of your life is practically worthless compared to a much smaller amount much earlier. Under no circumstances would you swap places with that version of you, for 10 million, a hundred million or even a billion dollars. For that same reason, it wouldn’t make sense for 40 year old you to avoid upgrading into a larger home for your family just so 90-year-old you can die with an extra 2 million in the bank.

These decisions can feel emotionally charged, of course. I’m sure you didn’t think we’d be jumping two mortality this quickly, but it’s the fact that we don’t live forever that makes these financial decisions meaningful. And maybe the fact that we can discuss them logically will help soothe that existential dread. That’s the basis of the paper, but what did they find?

In that 2001 paper, the researchers examined changes in take home pay, tax refunds and social security in the US and found a correlation between spending rising whenever income rose, which shouldn’t surprise us given what we know about human nature and lifestyle creep and evolutionarily speaking, it makes perfect sense that we expend more resources when we have more resources as the part of our brains that deal with delaying gratification and planning for the future evolved later than the animal instincts burrowed deep in our brain stems that recognize that tomorrow is not guaranteed, which is a reality that’s still true, just less true than it was when we roamed the earth alongside wooly mammoths.

The UK consumption tracked over the dataset correlated with the UK business cycle peaks too. That is to say when the economy as a whole was doing well, households spent more. Now this struck me as a chicken or egg observation, like is the economy doing well because households are spending more or vice versa? In the US it was kind of the same, same but different. Consumption growth was more correlated with real interest rates.

For whatever reason and perhaps this insight won’t surprise you, consumption in December of each year was 21% higher than the other months. That is to say, well, our income might not vary significantly between months. It’s likely that we will spend more in the last month of the year. This was definitely true for my family in which I was the only child and only grandchild on both sides and my birthday was three days before Christmas.

I used to think the entire month of December was a celebration dedicated to yours truly. I called it Katy Palooza and I’m sure my choice to pursue a job wherein I get to monopolize 45 minutes of your attention every Wednesday is making a little more sense now. Right out the gate, we can see how we’re already diverging from the static fixed approach of saving and spending and we’re entertaining something a lot more fluid.

The households studied were in lockstep with their environments year to year spending above or below baseline in response to their circumstances. I know. Mind-blowing. So how did the families that were studied smooth their consumption over time as the question that formed this episode suggests some phases of life mean higher expenses. How did that show up in the data from the UK?

Well, consumption rose bumpily from people’s late 20s all the way up until age 50, at which point it began descending. It’s roughly 20 years of increases smack in the middle of one’s life. Of course, the median age for someone to have their first child in that time period studied 1968 to 1995 was lower in the early 20s compared to the late 20s and early 30s of today.

So far assumption is, as the paper calls it, that demographic changes are to blame, IE having children. It’s possible that a data set reflective of today’s Gen Xers, millennials or Gen Zers would reveal this trend has been pushed back by about a decade with spending rising steadily from your late 30s until about age 60.

As I’m interpreting it, the data would suggest there’s a roughly 20 year period in the middle of your life when you’re going to be spending more, while the second act of life sees your consumption lower considerably. Economists are in disagreement about what specifically to blame for these changes.

Are people just reacting to their needs? Is it due to liquidity constraints in retirement like spending less because you’re earning less? Do we suddenly untether ourselves from the consumerism hamster wheel once we’ve taken a few dozen spins around the sun and we see that another vacation to the Caribbean is not likely to permanently impact our happiness? The potential explanations abound.

The other obvious concern was that this midlife period just so happened to coincide with the time of life when people were allegedly supposed to be saving the most for the future. I had a genuinely frustrating back to square one moment while trying to make sense of that inconsistency. But there’s one thing I didn’t tell you about the spending trend over time. People’s income was plotted on the graph too and at every point studied their income was higher than their consumption.

Now at some points the gap between them was smaller and did others larger, which means some years saw greater relative savings than others. But at no point during the time period studied did consumption surpass income. In other words, at the aggregate at least, these Brits were always saving something even as consumption rose.

Now, this reveals an incredibly important potential limitation of this dataset. It effectively studies one of the most economically prosperous periods in history, when the gap between wages and things like housing, healthcare, education and childcare was smaller than it is now. Now, to quantify that statement, in 1985, the average home price in the UK was 3.4 times the average wage.

By 2005 it was 6.1 times. It’s harder to get to the bottom of growth in healthcare, education and childcare expenses in the UK because these things are all fully or partially subsidized by the government and paid for by taxes which creates its own kind of smoothing effect. But in the US, well I won’t belabor the point.

It’s hard to know if this trend can be extrapolated more widely, if we can actually learn anything from it or if it’s merely a snapshot of a particular point in history when it wasn’t unusual to earn more than you spent and the cost of things you needed were relatively reasonable. Still, I think the lifecycle consumption concept is useful. There are, to me, a few meaningful takeaways from Browning and Crossley’s study.

For starters, it’s probably not realistic to assume your spending will revert to anything resembling your pre-children spending after your kids’ age out of daycare. As another reader said, “I’m in the process of hopefully planning for a family and one big gap I noticed in much of the personal finance content is how to incorporate this change in lifestyle and expenses into financial planning. I’m hoping to work until I’m ideally in my mid 50s, so I don’t need a fire number per se, I’m more focused on tracking savings to provide validation that I’m on track to have the lifestyle my parents provided and that I’m accustomed to as expenses grow and my income starts to support multiple dependents. Is there any way to add that to your recent equation for optimal savings rate?

Of course there are always unexpected costs in life, but for the ones we know to expect, how can we build that in? For example, I know I want to send my kids to sleep-away camp. I know that’s when they’re 10 and right now, they’re not even conceived. But this is a big expense, about $10,000 per kid per summer that I really want to provide and ideally plan for. Also naturally diapers and music classes and eventually college and all the other stuff that costs money, but I’m not familiar with yet.

Doing equations with my current income and current spending doesn’t really feel like it tells the full picture because I know my spending will be changing really drastically for the next 20 years until it’s just me and my husband again. Beyond saving as much as we comfortably can per year, I’m curious about your advice and mathematical approach to this situation.”

All right, so a couple of things. This person inadvertently nailed the time period estimate about 20 years give or take, and our question which effectively boils down to, “I would like to see you try to square this chaos with your neat and tidy little save rate, your spreadsheet winch.” It’s well taken and I think the answer is it doesn’t.

Unless you manage to increase your income proportionally, there is no way to maintain a 40% save rate over those higher spending years. But what the lifecycle model of consumption smoothing would tell us is that’s theoretically okay, with the noted exception that it seems to work a lot more comfortably if you’re always living beneath your means.

Other examples of this lifecycle hypothesis seem to be more grounded in the late capitalist reality that I referenced earlier as they show a true upside down you of savings where the save rate during youth, which isn’t mapped onto ages but is characterized as the phase that precedes middle age, so you #DoTheMath, is actually negative using debt to spend more than people are earning.

Middle age is the period at which income is presumed to rise such that the same lifestyle can be maintained but without going into debt. And actually is also high enough to pay down the debt and save for retirement, which again works in theory if your income is actually rising and the cycle ends in old age with again, a net negative save rate where you’re drawing down your assets and you have no income. You are out-consuming your earnings.

As an aside, being able to see this intra-year cycle for your own income and spending habits, a fancy line chart that maps take home pay and expenses on top of one another so you can easily visualize the gap and how you’re spending changes with income is an enhancement that we’ve added to the 2024 wealth planner’s new end of year dashboard tab. It’s a year-end review tab.

Like I said, if you want to get on the list for a discount for when that product drops, we will stick that in the show notes. We’ll be right back after a quick break.

To get to the math using what we know now, to be fair, I’m not sure that there is a single simple equation someone could use to determine how these future changes would impact their save rate over time.

Well, I guess if we’re being intellectually honest, there probably is one but I barely squeaked by in calculus and I’m not sure what it is. That said, here’s how I am thinking about this. There’s probably a period of roughly 20 years when your expenses will be higher and rising, which means your save rate, all else held equal, will be lower.

On the fortunate flip side, you don’t have to be able to support that higher spending in perpetuity because theoretically, the things that necessitate the higher spending will come to an end. Your home will eventually be paid off, your kids will be out of college, will be on their own, et cetera. Really we’re trying to solve for how those 20 years will impact your net worth goal that’s based on the spending you can expect when you leave work. Even though our ability to save might be diminished over those decades as we are consumption smoothing according to the economist language, it’s not hurting us in the same way that general lifestyle creep does because the spending is theoretically temporary and doesn’t need to be sustained by our assets in perpetuity, just for the middle period of roughly 20 years.

To see if I could map out the example that we opened with today, I wanted to manually manipulate the financial independence tab in my wealth planner. I’m using 115K in pre-tax income. I’m estimating 5K per month in baseline expenses, which is about average for a couple. And our reader self-described her expenses as totally average. I’m estimating 30K per year in kid additive expenses inclusive of things like the 24K in daycare costs. So overall call it an additional 2,500 per month for 20 years.

Though I’m not going to increase this for inflation, I’m just going to increase the baseline spending with inflation. Now, if they were to continue as is without those heightened family expenses and you assume they’ve gotten nothing invested today, so they’ve followed the lifecycle model, they have funded their lifestyles to this point using income and debt and they have not saved anything, they would reach financial independence in 20 years with $2.7 million.

Now, that assumes annualized 9% average returns and inflation increases and expenses of 3% per year with income rising by 4% per year as well as a 17% effective tax rate per smart asset. What happens when we add in our family expenses? We’re going to increase the monthly spending by that 2,500 per month and we’re going to remove it from our savings every month for the first 20 years, to represent our consumption peak.

Well, it does slow us down, which is to be expected. Now, we’re projected to hit FI at the end of year 27, not 20 with $3.2 million. Our monthly spending drops back down to the inflation adjusted equivalent of 5K per month in year 21. And the increased annual savings coupled with compounding returns allowed us to reach the finish line after seven additional years.

Of course, there are a ton of assumptions at play here, that our household income is rising consistently by 4% per year. That inflation holds steady at an average of 3%. That our peak consumption expenses raise spending by 30K per year for 20 years and more. And perhaps most importantly, that we’re getting annualized 9% returns on our investments in the market. You change any of these assumptions and the entire picture looks very different. For example, if we just merely swap inflation and income increases such that inflation consistently rises faster than income, that means we reach financial independence in 49 years, not 27.

Still, it’s an encouraging outcome for this example, given all of our assumptions. Seven extra years after spending an additional 30K for 20 years, it’s not that bad. But I was curious how saving and investing ahead of this period of higher expenses, for example, trying to front load much of the effort that’s going to get sidetracked by what the data suggests happens to your consumption would change the picture.

I was surprised to find that investing 100K before adding the 30K per year in expenses only helped us reach FI three years faster. After 24 years, not 27. However, investing 250K before consumption starts ratcheting up, which is for the record another arbitrary number, number that I completely pulled out of my ass for testing purposes meant that in year 20, when expenses drop back down, you are already at financial independence.

Let me repeat that. If this couple were to get $250,000 invested prior to their expenses jumping by 30K per year for 20 years, by the time their expenses dropped back down in year 21, they would already be at FI. Now, this highlights how one potential planning mechanism you might consider, assuming all of this stuff is still ahead of you, is playing around with a copy of your wealth planner’s financial independence tab as a testing ground for yourself to determine what number you would need to invest upfront to basically negate the 20 years of additional spending entirely.

To land the plane here, the most intuitively reasonable solution that also seems to pass the Google sheets check is working hard to save and invest as much as you can before your consumption starts ramping up.

For demographic reasons, which as many of us know about pregnancy and earning potential, it’s not always totally up to you. What happens if one income goes away? Because this is where reality and the spreadsheet kind of butt heads. We are assuming the incomes we begin with not only stick around over time, but that they continue to rise by 4% per year.

In real life, it’s common for one parent to leave the workforce for a period of time, which takes one income off the table. If the other income does not rise commensurately, you might find yourself with higher expenses and less income. This sounds really gnarly except for one saving grace. Theoretically, there would be a bit of a canceling out that might happen. You probably do not need $24,000 per year in daycare if one parent is staying home with your kids.

Still, some incremental expenses are bound to enter the picture. In this case, it appears from some back of the napkin trial and error that whether or not this is a safe and reasonable choice will depend almost entirely on what the couple has saved or invested before jacking up expenses at the exact moment they’re going down to one income.

Having a few hundred thousand in investments first is a way to erase a lot of spending hikes, especially if it’s just going to sit there and compound for 20 or 30 years. But having at least one member of the household who is consciously focusing on raising their income relatively early in the timeline would also enable them to catch up relatively quickly. Like I said, manually testing different scenarios in a copy of the FI tab is one of the easiest ways to experiment with your own numbers.

You’ll also hear some unique advice from Farnoosh about the best time to focus on work after having kids. Please enjoy this illuminating conversation with someone who has actually done this before, unlike moi.

Farnoosh, one of the reasons I wanted to talk to you about this topic is because you check a few relevant boxes for me. You are a mom of two children, you’re a personal finance expert, you are the breadwinner in your family. You’re basically the perfect person with whom to discuss how having a family influences one’s journey to financial independence.

Farnoosh:

I love this topic. It’s so meaty and the current blueprint is broken for working parents, especially working mothers in terms of the financial blueprint and the time balance blueprint is just a mess.

Katie:

One thing I uncovered while I was researching for this episode and doing some of that back of the napkin math is that there are basically two obvious ways to navigate the way children impact your finances to either save and invest a lot before you have them and/or focus on increasing your income after you do.

Both of which, I would say, easier said than done. Can you set the stage for us and discuss how your family approached this shift from dinks to parents? What was that like for you?

Farnoosh:

Well, first I just want to say I appreciate that your back of the napkin math does not include just quitting your job to make it work. I think a lot of parents default to that. One person says, “Well, I’m just going to not work because childcare, daycare is so much.”

That math is not wrong in terms of the fact that childcare sometimes exceeds or is at least the same amount as some people’s salaries, especially if you’re a teacher or you work part-time. But I think that that calculus is not fair and you should look at sort of the bigger math.

Katie:

For our listeners, when you say bigger math, I assume you’re referring to the way in which that time out of the workforce impacts your earning potential in the long term, how you might feel like staying in the game right now is a wash, but in the long-term, it’s an investment in your future earning potential. Okay, so sorry. Let’s talk about your story.

Farnoosh:

For us, the story starts with me in my 20s, not even dating yet. But knowing that I wanted to be a parent. That’s an important thing to recognize in yourself. How badly do you want to be a parent, to be a caregiver to another human? You will pursue trade-offs that are hard to make this happen, which may mean moving to somewhere less desirable, which may mean having your child on your own and not waiting to get married to do it.

I think for me, the desire to be a parent superseded a lot of other things. Not my career though. I was in my early 20s, mid 20s working in the media in New York City and I was making a low salary. But I would see women who are further along who are in their 30s. By the way, the average, according to my gynecologist, the average age for a woman having her first child in New York City is 37 years old.

Katie:

Wow!

Farnoosh:

Which is prime earning years for a lot of women. That’s an important thing to keep in mind. I would see these women who were in their 30s, some of them in their early forties, going through fertility treatments, which were really expensive, planning to leave work to have their babies and hopefully get some time off paid, recognizing, realizing that actually they don’t have a lot of paid time off and this is going to really trip up their plan for when the baby’s here and how they’re going to stitch together their income. They have to revisit. It was a scramble. They’re in tears. And I just sort of saw that if I want to be that person 10 years from now with a child also having a career, I got to get working on some things. You have to start saving. You have to start caring a lot about how much you make.

I always encourage women to… And Cheryl Sandberg talked about this a little bit in lean in. A lot of times women, they’re like, “I just need a job to get to a point where then I can have a child and it’ll be easy and I can work and it’ll be easy and I can have a kid and work and it’ll be easy.” There’s no such thing. Don’t opt out of the workforce before you’ve even had the kid. For me, that was in my early 30s.

I’m going to just work my tail off until then. Not just because I need to make more money, but because, and this is really important, I want to have seniority and I want to be able to call some shots when I have a child. When I did see women have leverage in the workplace with their family demands and their work demands and being able to create more balance, it’s when they had seniority, when they had more of a voice and people listened to them in the workplace. When they had or they brought a lot of value to the job.

Katie:

It sounds like the practical approach you’re describing here is in an ideal world, putting in the time and effort before your priorities become expanded by other obligations such that you’re operating from a professional vantage point that you have a little more leverage and control. Okay, you were in your 20s, what was going through your mind?

Farnoosh:

In my mind, I needed to work really hard over the next 10 years and I did. I jumped around, switched jobs, which is a great way to earn more. Before that too, you have to get really clear on what are the options for you once your child comes out of the womb in terms of managing your family responsibility, like who’s going to watch the kid?

I didn’t want my husband to be a stay-at-home dad, even though I think he would’ve entertained the idea. I just firmly believe, and this is just me and this is a consideration, I think all families in household units who are dual income currently need to make is like, do we want to be a family where the economic dynamic is such that only one person is making money? I didn’t want that vulnerability in our household. We had to get really clear on what were the family dynamics and the non-negotiables at home that we wanted to live up to.

And then from there, build a new blueprint for ourselves, a financial blueprint, a career blueprint. One of those was that we both want to continue working. We both want to continue thriving in our careers. It doesn’t make it easier of course, but you know what you’re working with now. And so what does that mean for us? I’ve worked so hard, we have savings. I want to invest in a full-time caregiver nanny who comes to our home. That way also since I’m working from home, I can feel a little bit like I am accessible to my child, which was something that was very important to me.

I wondered in my 20s, would there be a day, could it be possible for me to kind of straddle, stay-at-home parenting and working? And for me the solution was own your own business. Make it remote.

And so when your kids come into the picture, of course you can’t be at their beck and call all day during the business day, but you could bring in part-time or full-time help and still be there for feedings, still be there to go take a walk. And those moments really matter to me a lot. It was a privilege to be able to afford what we did when our first son was born.

But I also will give credit to the fact that if you are someone who can plan, these are the considerations to make. We lived in Brooklyn at the time. We knew that these first five years because in New York City at the time, there wasn’t really free preschool. If you wanted to send your kid to school before age four, it’s on you. So you’ve got to afford preschool on your own. All those activities are out of pocket. Obviously childcare is out of pocket. I say the first five years are the most expensive given all those extras.

Katie:

Given the circumstances and I would say kind of societal paradigm we exist within wherein those supports are not really there for parents otherwise. That’s an important thing to mention, that when we cover this topic, we so often will walk down that path of, gee, it seems like childcare, caring for young children is something that affects everybody.

And that even if you yourself don’t have children, if you have coworkers who have children, their schedules are probably going to affect you. And so hey, it’s in everyone’s best interest for this to be something that we solve for at the collective level. But obviously that’s not the case right now in our country. You kind of highlighted earlier in your answer that when you realize that that is the case, you do have to take it upon yourself to make those decisions.

I appreciate that you’re talking about this in such a realistic way when you’re saying life is all about trade-offs and it’s asking yourself, “Do I value this more than this? Am I willing to sacrifice this in order to have that?” And in a perfect world, those sacrifices wouldn’t be required. But I also wanted to dig in a little bit more on the fact that you hired a nanny and that you had live in care-taking and the ability to work from home and that you had intentionally structured your career in such a way that that would be possible to where A, you physically are able to be at your home doing your work, but B, that you have the level of income required to hire that.

I’d love to dig a little bit more into this theme of outsourcing because OG listeners of the Money With Katie Show will remember you’ve been a guest on our show before. We were talking specifically about the economics of outsourcing. So something that seems obvious to me is that this shift in one’s life is not just about higher expenses but also lower amounts of free time. What is your delegation strategy? We’ve already gotten a bit of a taste of it. We know the first five years are the most expensive.

Farnoosh:

You first have to really know what are the hours of the day that you really need to pay attention to certain things. So if for me, I don’t really need the mornings to do work. My work really starts to pick up between the hours of 11 and five. And so in the mornings, I can be more present with my child and maybe we don’t need childcare until later in the morning. Look, this is going to evolve as your kids grow and as your careers evolve.

But I can give an example of how we explored this in the early days when my son was first born and I have two now. I have a son and a daughter, but my son was born. I was working from home mostly. My husband was working out of the house and our caregiver would come every day at I think 8:00 AM and leave at four because that was a full eight-hour day for her.

But truly, we didn’t really need her there as early as eight o’clock because I didn’t have much going on with work. When she left at 4:00, we were in shambles because I have a lot of work. My husband’s still… Four o’clock is not the end of the business day. So I met with my husband and I said, “Listen, you work at a company that seems to be pretty cool.” He was at a startup. I said, “What if you asked them if you could start earlier in the day and leave earlier in the day? Shift your eight hours to 8:00-4:00. And that way our nanny can come at 9:30, 9:00 and leave at 5:00. And it just helps us be more productive and be present in the things that matter when they matter and leverage the help and fill in those gaps that make more sense for us.”

I think it’s important to have these negotiations with your partner ongoing to talk about what are some different ways we can design our day together? How can we work better together to make more of an impact in our family and what’s important to us? And that your partner who’s making less can play a really vital role in giving you back time and giving the family more breathing room if there is a chance for that person to adjust their work schedule because then it would mean the person making more can be more optimized during the day for work. This was a trial and error. We didn’t know, we were first time parents, but we quickly realized it wasn’t working and we quickly had to pivot.

Katie:

Are there any other things that you have chosen to outsource in the intervening years?

Farnoosh:

Wow. For a while, more recently we out were outsourcing meal preps and we did that for a while and then we got tired of it. But I think it’s important too, and of course house cleaning, we hear that all the time, but someone to clean your homes, I think universally appreciated and we have that. I’ve had that when I was even a single woman.

I really need a clean space. I need an organized clean space. That for me is worth every penny because it creates calm. It means that you can have more calm conversations. It means you can find things more quickly. It means that you enjoy being in your home.

Katie:

It strikes me too that a lot of these things are interrelated, but I can just imagine someone listening to this who maybe is not in a place in their career or life yet where they are earning enough to outsource yet and they’re kind of feeling like, “Man, I’m on this hamster wheel of, I have all these things that I don’t really have help with and I’m trying to earn more but I’m just so spread thin in doing so-and-so. How can I get ahead if I’m always spread thin and et cetera?”

Obviously if that’s how you feel prior to having children, you have more flexibility to make changes, whereas I think once you introduce kids to the picture, things get a little more complicated. I guess I say all of that, couching it in the fact that people have figured this out for centuries. People have made it work in not ideal situations, but I’m curious if that resonates with you at all or if there’s someone listening that might be like, “Do I make enough to afford to outsource these things?” How should someone be thinking about these equations and cost benefit analysis if it doesn’t feel so straightforward to them? Maybe they’re not sure if they really should be doing that.

Farnoosh:

There’s a calculation. You take your income, so let’s say you make $50,000 a year. You take off the last three zeros, you divide it by two, that’s your hourly rate, that’s your personal hourly rate, $25 an hour. Is it worth it to you to clean your house for $25 an hour? Or if it costs someone $20 an hour to clean your home, then it’s worth it, financially speaking, because you’re paying less to invest in somebody else to do that work for you.

I think that’s a good back in the napkin math, but I think it’s also important, something that is not so straightforward but is very real and very costly is the toll on your mental health. When you think that you can’t afford to ask for help and pay for help and that now you are doing everything on your own, that is not sustainable.

You will burnout and that cost of burnout, I guarantee you, will be much higher than whatever hourly rate you pay today to have someone help you open up the hours in your day so that you can focus more on the things that matter to you and your pursuit of whatever it is, your career, starting a family, raising your family, taking naps.

Look, I used to have a little bit of guilt, I will be honest, when I would outsource all these domestic things and I would go and meet up with a friend during that hour. But I think that is just the woman in me who is programmed to feel like the only way she is being productive is by being busy and doing the things that are expected of her, and that is a narrative that I have to work on and that I have worked on.

I think that if you see that in yourself, then just know that you can change that and you have every permission to have free time. The marker of success these days for me is a clear calendar.

Katie:

There is a school of thought that basically says, “If you are currently making $50,000 per year, the best thing that you can do with that money isn’t to save the small portion of it that you can, but rather to invest in yourself in ways that are going to enable you to earn more money.”

It is going to be a constant uphill battle if you are fighting, rowing against the stream being like, “Oh, but I can get $200 stocked away this month.” That’s something as opposed to, “I can spend $200 to get back six hours if my time that I can spend on things that are going to enable me to earn more.” Or, “I can invest that $200 in a course that’s going to enable me to level up and demand a higher market rate,” whatever the case may be. Now, that is obviously all contingent upon you actually using that time in a productive way.

But I thought that that was an interesting reframe that we inadvertently landed on there, which is even if it feels maybe a little bit indulgent, that the long-term best use of your time economically is not in service of saving a few dollars at the margins, but of thinking a little bit more long-term about what you’re doing.

The economic theory that we talked about in this episode, it basically says that life cycles spending follows this somewhat predictable pattern wherein expenses spike at the same time in your life when your income is also likely to be spiking, statistically speaking. And that it can answer some questions that we might have about how are we expected to manage these higher expenses throughout life.

It’s like, well, theoretically if they’re both moving up at the same time, that’s potentially okay. You did mention that it gets better after the first five years. The first five years do tend to be the most expensive. You’ve been a mom now for I would assume closer to 10. I would love for you to just expand a little bit on that experience of feeling like okay, maybe things are getting a little bit financially easier now and what that experience was really like.

Farnoosh:

I should caveat that it depends, right? Because you, depending on the choices that you make and the definition of fulfillment for you and your family, we would be spending more had we not moved out of New York City would probably be working a lot longer and harder to make those things possible.

We intentionally moved to the suburbs when our children were grade school age. You have to know your children and what their needs are, which you may not learn right away when they’re born. Our son has ADHD and at his private school, they were very clear that they would not be able to provide, at least not without our additional financial input to support him, which was a bummer.

Katie:

What a diplomatic way to put that. Our additional financial input…

Farnoosh:

Yeah, I remember it. It was yesterday. He was in kindergarten and it was like January of 2020 and he had been diagnosed. They were like, “Look, he can finish the school year, but we think he should have another teacher in the classroom which we’re happy to refer you to some that will come in.”

Yeah. I’m like, “Okay, let me understand this. I’m paying you a lot of money for tuition and now you want me to hire another teacher?” Which was a very big expense, and I just said to myself, “We’re going to move. That’s just how it is. We just have to go to a public school district which does support kids who are neurodivergent and has resources and have our tax dollars take care of it.”

That’s when we moved to Montclair, New Jersey shortly after the pandemic, so the wheels were already in motion to move. The pandemic just got us further along faster and our taxes are essentially the equivalent of one private school education in Brooklyn, but we have two kids, so we were like, “Okay, we’re saving there.” We no longer have childcare because we send our kids to free aftercare funded through the school. It’s subsidized. What’s really made a difference is that I’ve felt less pressure to try to go out there and make more money. I’m going to make less this year than I ever have, but that’s okay.

I used to be chasing the income. I used to be like, “Take the job. Do the thing, get the gig.” I’m grateful that I was able to accomplish what I did financially while raising kids, but I’m good with not having to go back to that pace. When my kids arrived, I got smarter and I wrote about this. I created more boundaries. I raised my prices. I invested in an assistant to help me take care of those executive functioning tasks so that I could build things that would later have ROI like building workshops and building programs and writing another book and doing the podcast.

Katie:

I was just going to say I will highlight that as she just described how leisurely her pace of work is. Now she has on her bookshelf behind her the book she just wrote, and before we hopped on this interview, she’s telling me about how she’s going to be on the Today Show soon.

You highlighted two things that I think stick out to me, one of which is this move to New Jersey, which I think the way that you’re describing, oh, look how much better this worked out for us. We got to move. We have more space now for our family. The tax differential ended up helping and after care that’s free. These things came together to create a bit of a better situation for you wherein you don’t feel as though you need to go out and chase this income now because you’re not having to expend so much every month to kind of keep the wheels on.

But those things didn’t just happen, right? Like you identified issues and made changes accordingly and I’m sure that at the time, that might’ve been a little bit scary, particularly if you’re really in love with where you live, that that can feel like a bit of a jump. That highlights something really important to me, which is just that it’s not necessarily going to look the way you think it’s going to look but that there are options. You do have options.

Farnoosh:

One of the best pieces of advice I had gotten from a parent who was further along, I would think I was pregnant actually with my first, and she had two kids who were kindergarten and somewhere in second or third grade and she actually said, I think I read this in the Wall Street Journal, but she said that in case you’re worried that you’re going to be a bad parent because you’re working so hard when your kids are babies and you’re getting help and you have a daycare or nanny or babysitter and you’re like, “Oh, I’m not spending enough time with my kids.”

Here’s the thing, when a lot of us are having kids planned, let’s say in our 30s, we are in a stage in our careers where it really matters to hold on. It really matters to show up and go the extra mile because it can hopefully mean much bigger paydays soon on the other side of it and more seniority.

And she said, when your kids are little, you of course want to be with them and trust me, we’re spending more time with our kids now than our parents did with us, and a lot of us had stay-at-home parents, so let’s just put that out there. But she said, when your kids really, really need you, really is when they’re like tween and teen and they have a lot of questions and they need a lot of guidance and you’re there when they come off that bus or they’re home from a game and you can talk about things that she recognized that investing in her career when they’re little will mean having more flexibility and time potentially when they’re older and they need her more because she has earned that power to lean back a little bit in her career and be there more for her kids or say, “You know what? I am going to take this week off, or I can’t go to that retreat for work. I’ve got to be home by 4:00 every day.” And that’s just how it is.

Katie:

It reminds me a little bit of one of the topics that we’re talking about in this episode, which is the marginal utility of money and how the same dollar is worth different value to you at different phases of your life. This seems very similar in the sense that it’s the marginal utility of your time with your children.

I think you just made a really incredible bull case for staying in the race when it maybe feels like, “Oh my gosh, is this the right decision?” And almost earning that ROI later or the same way that you think about compounding in a portfolio, putting in the time early. When I hear from people that are having these very real tensions and concerns and dealing with these decisions in their own lives, it feels like all of the messages kind of like fear is very pervasive. There is this very palpable sense of anxiety and apprehension about what is the best thing to do, or I see this in the horizon and I don’t know how to plan for it, so I’m going to bury my head in the sand.

You obviously just published a book called A Healthy State of Panic, and I’m staring at it behind you right now. How do you think about financial fear? How do you think about, “Hey, it’s totally natural to feel this way. This is entirely human, but it doesn’t have to be a negative thing. We can channel that anxiety and anticipation positively.”

Farnoosh:

Well, you’re in the book, so you know this intimately and I take a page out of your own life lessons, Katie, about just how when you’re afraid of whatever it is in your financial life, whether it is facing your debt, asking for more money at work, starting the business, shutting down the business, I think that fear is often, especially with the fear of money, it’s often there to remind us of what we need to protect.

It is personal, so what you want to protect is not the same as what your friend or your parents want to protect, but it is very, very personal. I think that when the fear of money shows up, it is an opportunity to ask yourself and the fear some questions that can help you get closer to your values, what security means to you and from there devise a rational plan to execute on that.

I credit fear so much in my own financial life for giving me the catalyst to save, to invest, to ask for more money.

Katie:

There’s something powerful even in the reframing of fear as an indicator that there’s something there that you want to protect or something that is important to you. Even just allowing it to inform your priorities.

Like, “Okay, I’m feeling this anxiety and this apprehension about this.” Maybe that means I need to be giving a little bit more attention to that area of my life. Or maybe that’s something that I could alleviate some of that fear and anxiety by taking action. I don’t remember the exact quote but I’ve definitely heard and lived that experience before of action being the best antidote to anxiety.

Farnoosh:

It’s easy with the fear of money to live in the abstract. “I’m afraid of a recession, I’m afraid of investing. I’m afraid of climate change, which will mean… Natural disasters, which will mean I’m going to be displaced from my home.”

I don’t think these are wrong fears. I mean I’m terrified of all those things, but to be able to do something with that fear, you’ve got to go a little bit further and bring that fear to your doorstep and actually bring urgency to that fear. It’s not just a someday what if because you’ll just run in circles with it and not feel like you have an action step.

But if you say, “Okay, I’m afraid of a recession.” Totally get that. But what happens in recessions? People typically lose their jobs. So let’s go further. Let’s go to that dark place. Let’s say, okay, I lose my job tomorrow, or my partner loses their job tomorrow, what would you do?

Katie:

What would we do? Yeah.

Farnoosh:

What would we do? And this could prompt so many great action steps which can serve you before any of this happens, which is firstly just to get educated. What is the severance typically at your company? What do you have in savings? Could you stretch that for a minimum four to six months? What would you do immediately if you had to start making more money? What are the expenses that you could totally do without that are not necessary in the event of a job loss? Maybe you could start making those cuts today to buffer the savings so that if and when a job loss happens, you are not scrambling, you’re not as fearful.

Katie:

I remember when the pandemic started, I immediately had made this kind of bare bones budget because I was like, “All right, I don’t know what’s going to happen.” I worked for an airline, this is a pandemic that’s going to last years. So I was like, “What can be stripped away?”

And even just the act of seeing, “Oh yeah. I could live on this. I’m good. It won’t be comfortable and flashy, but I can make that work. How much is this going to delay my progress? Okay, it might take two years. Okay, all right.” But it’s like once you start facing facts, it’s like, okay, well that’s really the worst case scenario isn’t really that bad.” It’s still going to be okay.

Farnoosh:

100%. That is the power of the fear of money and so many other fears I cover in the book. The book goes through nine different visceral universal fears starting chronologically. I think I start with loneliness and rejection, those fears because we tend to experience them early on in life and those fears, we go way back with those fears. And then it’s like as you’re adulting and getting through the bigger moments in life, the bigger milestones, then it’s like, “Okay, fear of failure, fear of money, fear of uncertainty.” And then the final chapter is the fear of losing your freedom.

I think we all have had a brush with this, and it’s not a little thing, which is why I save it for the end, but it is the most powerful of all the fears in the sense that it can truly get you so close to what is important to you to fight for what matters. In my case, in my family’s case, the fear of losing our freedom.

I’m the daughter of immigrants, my parents are from Iran, they moved here during a revolution. Fear has been a legacy in my family and that fear is what helped my family settle here. It has been the through line in so much of our lives and it’s the framework from where we begin to make decisions. It hasn’t held us back interestingly enough.

Katie:

Well, A Healthy State of Panic out as of yesterday, I believe, October 3rd, right?

Farnoosh:

Yes, yes.

Katie:

Amazing. Well, we will link the book in the show notes so that you can check it out, and thank you for being willing to be here for lending your perspective. You definitely bring something to the show that I cannot, so we appreciate you spending the hour with us.

That is all for this week. I’ll see you next week, same time, same place on the Money With Katie Show. 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 Kate Brandt.