Oct 24, 2024
Forest and Kathleen, both in their early 40s, earn a combined income of $286,604 a year, which is roughly three and a half times the median household income of $80,610, according to the Federal Reserve. They should be building wealth rapidly and feeling financiall secure.
However, reckless spending habits have left the couple drowning in debt.
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While analyzing their monthly budget on his podcast "I Will Teach You To Be Rich," financial expert Ramit Sethi was shocked to discover that the couple spends just over $5,000 a month on shopping and dining out and has $65,000 in credit card debt and owes $97,000 on a home equity line of credit (HELOC).
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“You have $2,000 in savings, if you lose your job you have enough to get by for about four or five days,” Sethi told them. It's worth mentioning that unlike many financially strained middle-class families, Forest and Kathleen do have around $168,000 in investments, but selling their assets during a time of an emergency would severely impact their efforts to grow their retirement savings. The financially responsible thing to do would be to have an emergency fund.
Living on the edge
Forest and Kathleen are one of many affluent American families living paycheck to paycheck. According to a report from PYMNTS, as of January 2024, 36% of U.S. consumers annually earning more than $200,000 lived paycheck to paycheck.
“... consumers earning more than $200,000 are the most likely to cite large splurges or lack of good habits as the main reason they do not save,” according to the study. “One possible explanation is that high earners may have less incentive to save for a rainy day than the average consumer. They are more confident about their job prospects and are less likely to switch jobs, factors that serve as a stabilizing influence on their financial standing”
Like many families across the country, they are woefully ill-prepared for a financial shock such as losing a job. Some 37% of Americans can’t afford an unexpected expense over $400, and almost a quarter (21%) have no emergency savings at all, according to a recent survey by Empower.
“We keep living this life where we think everything is rosy, but if one card were to tip the reality of it could smack us in the face,” Forest told Sethi. The sudden loss of Forest’s job, which brings in most of the household income, could also tip them into deep financial trouble.
Unfortunately, the only solution to their financial troubles is the one they’re most likely to resist: lifestyle changes.
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Lifestyle creep
With nearly $300,000 in annual earnings, Forest and Kathleen should be able to pay off their debt in a few years if they save enough. However, to boost savings the couple would need to make lifestyle adjustments such as cutting back on vacations, dining out, luxury gyms, frequent shopping and expensive hobbies.
Unfortunately, a prolonged period of spending on luxuries makes them feel like necessities, a phenomenon Experian describes as “lifestyle creep.”
This phenomenon was also evident when Forest was reluctant to replace his two bicycles, together worth $6,000, with a cheaper alternative.
“This is extremely fascinating to me,” Sethi said in the video. “Notice how hard it is to change your lifestyle. Forest is here trying to do little micro negotiations with me by telling me he really needs a $1,500 bike.” He described this response as self-sabotage.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
