Nov 17, 2024
You can’t manage what you don’t measure — which is why, when Henry from Tampa, Florida, started analyzing his personal finances after watching The Ramsey Show, he was shocked to discover the true extent of his hefty debt burden.
“After listening to you guys I [realized] I owe a million dollars — what in the world!?” he told co-hosts Rachel Cruze and Ken Coleman during a recent episode.
Advertisement
Much of that debt comes in the form of a mortgage worth $690,000, but Henry also has student loans, credit card debt, and an auto lease for a luxury Mercedes GLE 350 that costs a whopping $1,500 per month.
“Henry, you’ve been living the life, haven’t you?” Cruze said. Fortunately, Henry and his wife make a combined income of $350,000 which gives them breathing room to tackle this debt burden — although Henry’s wife is reluctant to make the necessary lifestyle adjustments.
Here’s why so many higher-income families stumble into debt, live paycheck to paycheck, and ultimately struggle to make the essential sacrifices in order to turn things around.
Lifestyle creep
Lifestyle creep, or lifestyle inflation, is one of the most common pitfalls for many people who experience a rapid growth in their earnings.
When your paycheck gets bigger, it’s easy to lose some financial discipline and steadily accumulate a debt burden that’s unsustainable.
Henry’s combined family income of $350,000 puts him comfortably in the top 5% of American households, based on income data published by SmartAsset.
However, the family also has roughly 10x the average American household’s debt burden of $101,915, according to Debt.org.
Advertisement
“You guys have plenty of money, you just got to get it under control,” Coleman told Henry.
This lack of control could be the reason why just over one-in-three consumers who annually earn $250,000 (or more) currently live paycheck to paycheck, according to a study by PYMNTS. Unfortunately, many of these families lack the skills needed to turn things around.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Lack of financial literacy
Henry admitted he didn’t track his household earnings or family debts until he started tuning in to The Ramsey Show recently.
His lack of financial literacy isn’t uncommon. Only an estimated 57% of Americans are financially literate, according to MarketWatch Guides.
In addition, 40% of Americans are unfamiliar with Roth IRAs, money market accounts, and high-yield savings accounts, and even the ones who are familiar with these options aren’t using these accounts to improve their financial situation.
Advertisement
In that same survey, out of respondents who said they were familiar with 401(k)s, a whopping 70% said they don’t even use them.
In 2023, the average American without basic financial literacy lost an estimated $1,506 because of it, according to the Financial Educators Council.
However, Henry’s situation demonstrates that the costs of not having financial literacy are much higher when the family's lifestyle is inflated.
For instance, he claimed his car lease is underwater by roughly $13,000. By comparison, the average auto loan was upside-down by $6,458 in the third quarter of 2024, according to data from Edmunds.
Fortunately, Henry’s income is so high that a few lifestyle adjustments could create dramatic changes.
Assuming Henry is correct in saying he and his wife have $1 million in debt, if the family traded the car in for a cheaper model and focused on saving even just 10% of their annual gross income, they could pay off the roughly $250,000 in non-mortgage debt in just over seven years.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
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.
