May 15, 2024
It doesn’t matter how much you make if you spend it all and then some.
That’s what Aaron from Des Moine, Iowa discovered as he and his wife succumbed to “lifestyle creep.” Despite earning a base salary of $175,000 and passive income from rental properties of nearly $20,000, Aaron and his wife are living paycheck-to-paycheck because they’ve accumulated around $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 uncovered an easy way out of this situation that Aaron’s wife is not on board with.
Here’s how many Americans find themselves in a similar situation because of psychology rather than the economy.
Broke six-figure earners
Real median household income was $74,580 in 2022, according to the latest Census data. Aaron’s base salary of $175,000 and the passive income from rental properties puts this household in the top 20% of income 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, auto loans, student loans, and credit card debt.
With rising interest rates, this mountain of debt has become increasingly difficult to tackle. Aaron and his wife are not the only high-income earners struggling. Nearly half (49%) of U.S. consumers with six-figure salaries claim to be living paycheck-to-paycheck, according to a 2023 LendingClub report.
Aaron admitted the primary reason for his family’s situation is “lifestyle creep” - a phenomenon where consumers ramp up expenses as fast or faster than income. “Less than a year ago my salary doubled and we just kinda went crazy,” he told Ramsey.
Surprisingly, Aaron already has a plan to turn the situation around but Ramsey detected a psychological barrier holding them back from implementing it.
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Living in denial
Aaron believes selling the rental property would be a quick fix to his family’s problems. He estimates the house is worth $325,000 and the proceeds are enough to cover all their consumer debt and start tackling the primary mortgage.
However, he said his wife is reluctant to let go of this property because it's near their relatives and she believes living debt-free isn’t possible because of her background. Meanwhile, Aaron also mentioned the 2.5% mortgage interest rate on this asset.
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Ramsey sarcastically called this cheap mortgage “such a blessing.” He said, “You’ll are freaking starving to death making $200,000 and spending like you’re in Congress.”
He believes the problem is Aaron and his wife have “zero control of spending.”
“I think you have a pretty serious level of denial going on inside your household here that I’m a lot more upset about than you are,” he said.
Co-host Jade Warshaw suspects pride has a role to play too. She believes Aaron’s wife is unwilling to change their lifestyle or tackle the debt because multiple cars and properties signal the family’s prosperity to others. Nearly 40% of Americans admit to overspending just to impress others, according to a 2022 LendingTree report.
Ramsey believes his financial life improved after he overcame this need to impress others. “One of the benefits of going broke is, when I went broke I lost my need to make you people happy,” he said.
“Not caring what people think is a superpower,” Warshaw concurred.
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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.
