Rachel Cruze: ...how emotional money is
Laura: Welcome to Nobody Told Me! I'm Laura Owens. There's probably not a single one of us who hasn't struggled at some point with managing money. After all, most of us are going into our adult lives without being taught much at all about the financial challenges we're going to have when we're on our own. Luckily, our guest on this episode, Rachel Cruze, is a financial expert who can help us learn how to get out of debt, how we can earn money quickly, and how to create a life that we're proud to share with the world. She's a New York Times bestselling author whose new book, Know Yourself, Know Your Money, helps people understand why they handle money the way they do so that they can make money faster. Who doesn't need that? Welcome to the show, Rachel.
Rachel: Laura, thank you so much. Thanks for having me on.
Laura: Talk to us about what inspired your new book, Know Yourself, Know Your Money. There are so many books that are available on managing your money, but yours is different.
Rachel: This is kind of a different way of viewing money, if you will. I realized, probably for a decade now, I've been talking to people about the how-to of money, how to budget, how to get out of debt, how to invest, how to give, how to save. As I was watching people figure out their money and trying to change their money habits, I realized that personal finance is 80% behavior, it's only 20% head knowledge. You can understand the how-to, but if your behavior is not changing, you're not doing something different with your money, you're not going to get different results. I really wanted to focus in on the behavior side of money.
With this book, I kind of go underneath that foundation, and not talk as much about the tactical side of money but the why; answering this question, "Why do we handle money the way we do?" It's everything from how we were brought up, to our money tendencies and personality, to our fears, to our dreams. There's so much that encompasses why we view and handle money the way we do. With this book, that's really what I wanted to get to, is that heart, emotion, and psychology behind money, versus just the how-to.
Laura: It seems like my friends are pretty much in the same financial situations that their parents were growing up, I found that really, really interesting. Why do you think that is? And how can they break free from that and get into the next category of wealth?
Rachel: I think it takes a level of intentionality. Like you said, a lot of people don't learn from their parents because their parents didn't teach them, there wasn't this level of intentionality there. I think people go through the motions of money, and they just do the norm. Sadly, the norm is broke. 78% of Americans live paycheck to paycheck. 40% of Americans couldn't cover a $400 emergency in cash last year. You look to say, "Okay, if this is the norm, and as a child that's how you see how your parents are and you just mirror, basically, what they do, you're going to get the same results.
In order to change, to do something different, you do have to look different than the world. You have to say, "Okay, everyone has debt. What if I actually paid off all my debt, kept my income, never went into debt, saved up, and paid for everything with cash? What if I actually had money in the bank for an emergency fund? What if I actually lived on a budget?" Those are principles that, sadly, seem like common sense, but they're not as common today.
Laura: You see the weight of debt just absolutely wearing on people. Unfortunately, it's been the cause of so many suicides and mental health issues because people just don't think that they can figure a way out. Do you think it's possible for anybody, regardless of how in debt they are, to not just be able to get out of debt, but end up being in a great financial position? And if they can, how long might that take them?
Rachel: Yes, I absolutely do. A very, very, very small percentage, maybe 1% or less than that, would actually have to do something drastic, like file for bankruptcy. A lot of people that feel like they are that bankrupt actually can make a difference and can actually turn around their financial situation. But it takes a lot of intentionality, like we said earlier, and a lot of hard work. We find that people that are getting out of debt, everything but their house, are doing it in 18 to 24 months. I teach the Debt Snowball.
Laura: Please get into the Debt Snowball.
Rachel: There's two ways of looking at paying off debt. People say the Snowball Method, or the Avalanche Method. The Avalanche Method, which I don't recommend, is highest interest rate to lowest interest rate. Now, mathematically that makes sense, I want to pay off the debt that I'm sending the most money to an interest because that seems crazy. But what you realize there is that that's just the math. If we were doing math, we wouldn't be in debt in the first place. We wouldn't have credit card debt. You have to realize, again, back to that behavior, that 80% behavior, this is such a big part of winning with money.
I like the Debt Snowball Method, which is smallest amount of debt to largest amount of debt, regardless of the interest rate, even if it's a $400 Macy's card. You're going to write out all of your debt and you're going to attack that smallest debt first. You're going to pay minimum payments on everything, I want you to stay current, but then I want you to pay off that smallest debt first. Once that's paid off, you take everything you're putting on that smallest and you roll it over to the second smallest and once that's paid off, you technically have the minimum payment of the smallest and the second smallest all wrapped into one plus extra money you're finding from working extra or cutting your lifestyle, really going crazy.
But these people, they sacrifice so much, Laura. I love hearing their stories because they get extra jobs, they make extra income, they don't go on vacation, they don't go out to eat, they cut everything out to get radical about attacking debt. Again, people are doing it in 18 to 24 months on average. It's a beautiful thing because your income is your largest wealth building tool.
Laura: Once we pay off that small amount, should we close the card, or should we keep it open for an emergency? I think that it's dangerous to have a card open because there's a temptation to add to it. But at the same time, isn't it a good idea to actually have it for an emergency?
Rachel: You're exactly right, it is a huge temptation. I actually say, "Cut it up and close the account.” I want you to have a $1,000 emergency fund in the bank before you start doing the Debt Snowball, so you have $1,000. Here's the deal, if something big happens, if there is a job loss, if there is a medical emergency, pause everything and just save up cash. There are times you actually will pause your Debt Snowball if life happens, to build up that emergency fund more to actually put your head above water. It's hard to dig out of a hole when you're digging out the bottom. I say, "No debt at all." What that forces you to do is it forces you to have other options and decisions.
When you think, "Okay, debt's going to be my fallback.” Then all of a sudden, it becomes your number one fallback because it's the easiest. If you find a leak in your roof, "It's easy. Let's just charge the credit card and get it fixed." But if you say, "No. No matter what, we're not going in debt." What's that going to force you to do? It's actually going to force you to get probably three different bids. It's going to force you to probably have a little water bucket out for two weeks. But you're like, "You know what? We're going to just get some cash going, we're going to actually ask for them to go on a payment plan and say, “Hey, can I give you a little bit of money on the front end, and once the job's done in a week, I'll pay you the rest.”” It makes you get creative because there is a way to live debt-free. I do not like the credit card being your safety net. I want cash in the bank to be your safety net.
Laura: I've heard you talk about how to make $1,000 to have as a backup. I know, initially, a lot of people would think, “Oh, my gosh, I can't do that. I'm barely paying off my bills." But the example you gave was so amazing. I heard this in your last podcast, that if your kid was sick, you would find a way to make that money if you needed to. How do you do that though?
Rachel: Yes, there's that emotional pull. I use that as an example. I have three kids, and that's probably every parent's worst nightmare, is your child going through something. But if I knew I had to get $1,000 for my child, you better believe… I would sell stuff, I would go get an extra job, I would do anything. I would turn over my world to get that $1,000. That's the same visceral reaction I want people to feel. That $1,000 before you start your Debt Snowball, it's your first step to say, “I'm going to do something different with my money instead of just living paycheck to paycheck, continuing to do exactly what I'm doing. The result of that is leaving me stressed out, freaked out, losing sleep." You hate it, that means you have to change, but that change is so difficult.
Getting $1,000, that's going to be hard. But honestly, changing your mindset and your behavior can be even harder because change is uncomfortable. It's not fun. We all like normalcy, we all like predictability. It feels safe to do what we've always been doing. To change it, it's going to be uncomfortable. You're going to mess it up sometimes, you're not going to be perfect at it, but that change is crucial to get a different result.
The thing is, you have to have hope that what you're changing to is better than your present. If I'm telling you, “Yes, sell everything. Never go out to eat. Don't go on vacation," just because. You'd be a fool to take that advice. No one wants to live like that. But the result of that is that you have no debt. When your income comes in, you actually get to invest it. You actually get to spend it on something you want. You actually get to save it, or to help someone and give it away. It is yours. That change that you're doing, that sacrifice you're making, it's so, so worth it in the end.
Laura: What argument would you have for people who are working extremely hard? You see single moms who are working multiple jobs, they're some of the hardest working people ever, but they can't seem to get their head above water? What are they doing wrong even though they're working harder than a lot of people who are making millions and millions?
Rachel: This is hard because there is a math equation. Money flows two ways; money flows in and money flows out. You have to look at both of those options. Are you working hard at a job and you're making $32,000? Where maybe if you switched industries, or you did something different, maybe it's not something that you absolutely love in the moment, but you switch and you make $45,000 to $50,000. Maybe you make that switch, you sacrifice, maybe, the thing that you absolutely love for a short period of time, for maybe two or three years and actually get some income coming in and get some credentials under you. Do whatever you have to do.
Look at the income side of what you're doing and then look at your outgo. Majority of Americans do not live on a budget, they don't live on a strict, "Every single dollar of my income, here is exactly where it's going." They do end up saying, "These are my bills, I'm going to just pay them." But if you say, "You know what? What if we cut the cable? What if I moved to a different part of the city?” Maybe you're in an expensive part. Your housing should be no more than 25% of your take-home pay. If it's 50% of your take-home pay, you have too much house. It's parts of that equation, the outgo that you have to look at. Again, you may have to make sacrifices for that short period of time to get ahead of the game. But those sacrifices, I believe, are so, so worth it.
I would echo exactly what you're saying. Single moms out there, single parents, I don't know how they do it. God bless them. Your journey might look different than someone else's. Maybe it doesn't take you 18 months, maybe it does take you three years, and that's okay. But I think a big problem too, Laura, is that on the emotional side of money, which is what I talk about a lot in this book, that emotional side is so real. Our money is the one part of our lives that we get a number assigned to us. When you're a mom, no one knows what a good mom is, we don't have a number for that, or a good wife, or a good friend, no one has a number. But your money, there's a number. There is what you own minus what you owe is your net worth. Sadly, that net worth number has become our self-worth today.
Laura: We want to look good on social media. We want to look good to our friends especially since we can't see them most of the time in-person anymore. It becomes all about how can we portray ourselves to our friends that we're not able to see to show, “Hey, we're still successful even during the pandemic.” Then you get into even more trouble. But it's so easy to get there because you're seeing all of these ads upon ads for little random things on Facebook and Instagram that you don't necessarily need but you think to yourself, “Maybe I could use that. Maybe I could wear this once in an Instagram photo and it would make me still look like I'm looking good and I'm able to buy things.” This cycle is crazy and it's gotten so much worse during COVID.
Rachel: It's unbelievable. It's not as much too, I'm finding the social media motivator is still definitely there. But it also just feels good to spend.
Laura: It does.
Rachel: I went through this. And COVID, I would be on Amazon. I'm like, "That's a cute necklace, it's $8.99. Why not?”
Laura: It'll come today.
Rachel: And you just buy it. When you hit that button, there is literal dopamine in your body that shoots to your brain. There's a medicator that happens and it feels good. When you're stressed, when you're bored, when you're fearful, you go and justify that $9, $16 purchase off Amazon, whatever it is, it feels good. You have to ask those questions. That's one thing I've had to learn because I'm a natural spender. I am better at spending than I am saving. That's why I have to do this every day of my life is talk about money because I'm like, "Yes, Rachel, remember."
Laura: Hold yourself accountable.
Rachel: That's right, that's right. The two questions I ask to your point, I ask, number one, before I make a purchase if nobody sees this, will I still want it?
Laura: Okay, so if you don't post it on social media, would I still want it?
Rachel: Or no one sees you out and about or whatever.
Laura: Nobody sees it.
Rachel: Or the car you're about to buy. If nobody sees the car, do you still want it? That's a convicting question for a lot of us. If the answer is yes, your motives are probably not in a good spot, I would say hold off. Number 2, am I making this purchase because I want to feel better and there is that medicator side that you have to ask. Honestly asking those two questions, I think we could all probably cut our purchases in half.
Laura: Oh, for sure.
Rachel: Just by filtering that. You do have to be careful, for sure, when you're spending because again, it's that emotional tie of money that we have to be on alert for.
Laura: Is there a way to block all of these ads? Or should we just not allow ourselves to go on Amazon, which is obviously easier said than done. Or any ways to hold ourselves accountable for that?
Rachel: I think there's a couple of things. Number one, again, the budget like we talked about. Honestly, your budget is going to be your best friend because your budget’s going to be able to tell you, “Yes, you can buy it, you have the money for it. If you really want it, buy it.” Or your budget’s going to say, “No, no, no, man.” The miscellaneous category, or the clothing category, whatever it is in your budget that you have that you spend out of a lot, it's getting down, down, down, and you said, “Nope. At the beginning of the month, I said I was only going to spend X amount of dollars in this budget, and I'm going to say, "No" to myself.” There really is a big thing there.
I love what Charles Duhigg says, he wrote the book, The Power of Habit. He talks about having a reward at the end. If you say, "No" to that Amazon purchase, you're like, "No," you need to reward. Whether that's you text your best friend like, "I said, "No."" And have her give you all the emojis back and you're like, "Good." Maybe it's going and just having a glass of wine with your spouse. I don't care what it is, but give yourself that reward. What ends up happening is that becomes a habit. When you start to say, "Yes, I can say 'no' to myself, and I actually survived it, like I can breathe and I'm living." You can make that a pattern in your life where you start to have that self-discipline is what that is. That's one thing is the budget.
Number two, one thing I did, Laura, a few years ago, I actually need to go back and do it as I'm thinking about it. I have my personal email address that I use for all the stores I shop at, or travel, or whatever, I use my personal email, not my work email, and you get flooded with ads. That's where I end up spending. I'll get a J.Crew email, and it's 60% off, I'm like, "Ooh, okay, I'll see what they have." And suddenly, I need new jewelry from J.Crew. I would never have known if I didn't have that email. Going and unsubscribing from all your emails, that's a helpful way. It is for me because you don't get that reminder constantly.
The other thing I would say, which again is kind of annoying, but it does help, is to put friction between you and your purchases. A lot of our purchases today are online, they're through apps, or they're on our phones. A lot of our accounts, everything is preset already, like with our debit card number. Or we've made accounts with these stores, and you log in and they have all your information, so it takes a one-click purchase. That means there's no friction between you and that purchase. Go and checkout as a guest whenever you checkout because it makes you fill out your name, fill out your address and start going down. Even in that 20 seconds, you can start to think, "Okay, do I really, really need this? Oh, do I need this?" It just gives you that friction point, which I think is important.
Laura: I've even found that if it's a decision between clicking purchase or not, the deciding factor will be whether or not I want to get up to go get my purse. That's actually a great thing, it's fantastic. I actually lost all of my passwords last year and it was one of the better things that's happened for me was just to not have the temptation of, "They already know my login information. It's super easy for me to just click a button and check out."
Something that's been really helpful for me has been to add the item to my cart, and like you said, you wait 24 hours. You can add more and more items to your cart, you can add as many as you want and get that little release, which I found has helped me a lot when I've been stressed with work. Just click, click, click. You don't even have to ever go back to it. But you can press it even more times, get yourself a total of $100,000 worth of things in your account, but then just never even go back to it.
Rachel: That's a great point. I did that actually a couple times. It's so funny you say that. I would be like, "That's cute. That's cute." I'd click, click, click. Then I get to the checkout and I'm like, "Wait, those weren't the 50% off I thought. Oh." I'm like, "But I'll just keep it there because it kind of felt good, but I'm actually not going to buy it." But, yes, though.
Laura: Then you just forget about it, you totally do.
Rachel: So true.
Laura: What would you say to people who had this idea of creating a budget and making 2021 their best year yet because 2020 was so bad. At this point they're home all the time, they're mad at their kids, and the idea of budget just goes out the window. It's the question we get all the time, how do you keep up with that resolution?
Rachel: There's a couple of things to get your budget to work, one of those is time. Give yourself three months to get it to work. The majority of people that end up not budgeting, it's because the first one was just a disaster and they're like, "This isn't going to work for me. I'm a freelancer or commission-base, I never really can figure out my income." And they just sweep it aside. But you have to give yourself that time. So number one, give yourself three months. Number two, do a zero-based budget. This means your income for the month, minus all of your expenses, that's going to include giving and some saving, should equal zero. Every dollar coming in is assigned to a category. That zero-based budget is really important. Number three, if you are married, you need to do it with your spouse. This could be a whole other podcast, Laura, talking about love, money, and all of this.
Laura: Joint checking accounts, all that.
Rachel: That’s right. Amen, sister. Amen. Talking to your spouse about it because when you work as a team, when you can decide where your money's going, you're deciding more on just your money, you're really deciding your dreams in life, your goals, your fears. There's so much in those money conversations. To agree with your spouse, and work as a team, is a game changer.
If you're not married, having a friend, a mentor, someone at church, a parent, I don't care who it is, but someone else to be able to walk with you, and for you to be comfortable enough to say, "Here are my numbers, here's my budget." And to bounce large purchases off of; have that conversation with someone who's good with money. That key element of having that other person in your life is really important.
Lastly, I would say, tactically, you want to be able to track your transactions. I use an app called EveryDollar. I love it because it syncs to my bank. Every morning, I seriously go in that little app, I refresh it, and a little bubble pops up. It's like, "You have six new transactions." You can drag and drop each transaction to groceries, out to eat, my Amazon's usually clothes, my clothing line item. To be able to track your expenses so that you can say, "I have X amount left in this category. That's how I'm going to live." All of those things together, it sounds, I know, like a lot. Honestly, this is the biggest mistake people make, is that they're not intentional with where their money goes. They're going to look up April 15 and say as they're doing their taxes, "We made how much last year? Where is it? I have nothing to show for the work that I've done." Being intentional with your money is one of the biggest things to do long-term.
Laura: We've seen how a lot of small businesses have had to fold whereas you see other ones in the exact same industry that seem to have been thriving, why is it? What are the ones that are successful doing that the businesses that are struggling to stay afloat aren't doing?
Rachel: It depends industry-wise. Obviously, if you work at a hand sanitizing factory, you're probably working over-time.
Laura: You're doing great right now.
Rachel: You're doing fine. But I think too, sadly, I think it's state by state, county by county as well. We were in a restaurant last weekend with friends, and it was packed. I know people don't like that, but in Nashville, one county. Then we went up to Nashville Proper two weekends ago, and we were literally the only ones in the restaurant, Laura, the only ones. I was like, "Man."
Regulation, I think that there's a lot that plays into that, sadly, that not everyone can control, not all small businesses. Also the way the business is run, if there was not reserves, then it eats into that really quickly. It's really sad. There's obviously the health scare of COVID-19, which is really sad. Then there is that business side and for people economically.
I would say to people, "Control with what you can control." Whether you are a small business owner, whether you are working and you're making an income, maybe you've had to completely shift industries and you're working for a completely different place than you were this time the year before, focus on what you can control. I do think we can wring our hands and be looking up to DC or, gosh, what's the next thing that's going to happen? There are things that we just can't control.
What you can control is the money in your home and what you're doing with it. You can control your work ethic. You can control the people you hang out with. Focusing on those is going to get you so much further than worrying and putting all of your eggs in someone else's basket if you were thinking that they're going to solve your problems. Really taking that ownership is big.
Laura: There are so many opportunities available now with everything being remote, that even if you're in a bad financial situation, and you're thinking, “God, I don't have the time to leave my family and go and commute to another job." At least you can go and have a lot of options in jobs that would pay really well that you can just do in the comfort of your own home. From that standpoint, it's good that the pandemic happened in the time we're living in with computers and the internet and everything.
Rachel: You're exactly right. That's a great point, too. There's so many options that have opened up in a new way. People are doing business completely differently than they were this time last year. Looking to see where you can get in on because the skill set that you have, has the ability to make money. Figuring that out is huge.
Laura: Rachel, as the last question on the show, we always ask our guests, "What is your nobody told me lesson?" What did nobody tell you about personal finance, although I'm guessing with your dad being Dave Ramsey, you probably learned everything. But let's say you didn't, what did nobody tell you about personal finance that you wish that they had because it would have saved you from getting into some bad financial situations yourself?
Rachel: We touched on it earlier, but it's true. Nobody told me how emotional money is. It's a very vulnerable topic, whether you're doing it with your spouse. Even last week, I can tell you, my husband and I, we've been married 11 years and I bought new clothes. I brought them in, they were technically in the budget, all of this. In my head, I made up this whole story that he was judging me because I have so many clothes. I love clothes. Finally, I was like, "I bought some new clothes, it's there. It's going to be in the checking out, you're going to see it. Are you good with that? He looked at me, he was like, "Yeah, babe, I'm fine. Are you okay?" I was like, "In my head, I just had this whole story made up that you were judging my purchases, all of this." We were married 11 years, doing the money stuff, and I still will have those moments of flare up for whatever it is. There's a level of emotion with money that is so much greater than I probably gave it credit for.
Laura: Tell us how people can learn more about everything you're up to and how they can learn about the new book and where to get it.
Rachel: Know Yourself, Know Your Money is sold anywhere books are sold, Barnes and Noble, Amazon, Walmart, Target, anywhere, it will be there. And rachelcruze.com as well. My podcast and YouTube show is called The Rachel Cruze Show. We just dive into money and talk about how to control it and create a life that I hope everyone loves.
Laura: Rachel, thank you so much for joining us today, it's been such a pleasure. There are so many other things I would love to get into with you about money and so many things I could learn, and I'm sure our listeners could too. I'm thinking of it selfishly.
Rachel: Thank you, Laura. Thanks for having me on. It was an honor.
Laura: Absolutely. Thank you. Our thanks to Rachel Cruze. Again, her new book is, Know Yourself, Know Your Money.
I'm Laura Owens and you've been listening to Nobody Told Me!