It doesn’t matter how much you earn if you spend it all and more.
That’s what Aaron of Des Moine, Iowa, discovered as he and his wife succumbed to “lifestyle creep.” Although they earn a base salary of $175,000 and passive income of nearly $20,000 from rental properties, Aaron and his wife live paycheck to paycheck because they have accumulated approximately $785,000 in debt.
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“You guys are seriously broke,” said a stunned Dave Ramsey. While dissecting Aaron’s finances on an episode of “The Ramsey Show,” the financial guru discovered an easy way out of this situation that Aaron’s wife doesn’t agree with.
Here’s how many Americans find themselves in a similar situation because of psychology rather than economics.
Broke six-figure earners
The real median household income was $74,580 in 2022, according to the latest census data. Aaron’s base salary of $175,000 and passive income from rental properties places this household in the top 20% of earners in the country.
Despite this, the family faces intense financial pressure. The couple owes $450,000 in mortgage debt on their primary residence and another $192,000 on an investment property. The rest is a mix of personal loans, car loans, student loans and credit card debt.
With interest rates rising, this mountain of debt has become increasingly difficult to manage. Aaron and his wife aren’t the only high-income earners who are struggling. Nearly half (49%) of U.S. consumers with six-figure salaries say they live paycheck to paycheck, according to a 2023 LendingClub report.
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Aaron admitted that the main reason for his family’s situation is “lifestyle evolution” – a phenomenon in which consumers increase their spending as fast, or faster, than their income. “Less than a year ago my salary doubled and we went a little crazy,” he told Ramsey.
Surprisingly, Aaron already has a plan to turn the situation around, but Ramsey has detected a psychological barrier that prevents them from implementing it.
Living in denial
Aaron thinks selling the rental property would be a quick solution to his family’s problems. He estimates the house is worth $325,000 and the proceeds are enough to cover all their consumer debts and start tackling the primary mortgage.
However, he said his wife was reluctant to give up that property because it was close to their loved ones and she believed living debt-free was not possible due to her background. Meanwhile, Aaron also mentioned the 2.5% mortgage interest rate on this asset.
Ramsey sarcastically called the cheap mortgage “such a blessing.” He said, “You’re going to starve, make $200,000 and spend like you’re in Congress.” »
He thinks the problem is that Aaron and his wife have “no control over their spending.”
“I think there’s a pretty serious level of denial going on within your household here, which bothers me a lot more than you do,” he said.
Co-host Jade Warshaw suspects pride also has a role to play. She believes Aaron’s wife is unwilling to change her lifestyle or tackle debt because multiple cars and properties signal to others the family’s prosperity. Nearly 40% of Americans admit to spending too much just to impress others, according to a 2022 LendingTree report.
Ramsey believes his financial life improved after overcoming this need to impress others. “One of the benefits of going bankrupt is that when I became broke, I lost my need to make you happy,” he said.
“I don’t care what people think is a superpower,” Warshaw admitted.
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This article provides information only and should not be considered advice. It is provided without warranty of any kind.
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