Dec 13, 2024
Financial guru Dave Ramsey frequently uses the term “broke people” on his show. But in an interview earlier this year, co-host George Kamel pushed him to clearly define what he meant by it.
Ramsey explained that his definition was simple: negative net worth. “The bottom line is your income doesn’t determine wealth,” he said. “Because if you make $200,000 a year and you owe $300,000 on your cars, and your student loans and your other stuff and you can barely pay your bills, you’re broke. You just make a lot of money and you’re a broke person.”
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Ramsey went on to talk about the benefits of not being broke. “When you’re not broke, you have that income coming in and there’s more and more and more of that income available to you to do future investing, to do generosity, to think longer term than just ‘Oh god, I gotta pay a bill.’” Ramsey told Kamel. “‘Oh god, I gotta pay a bill’ happens at $500,000 a year, $200,000 a year, $100,000 a year, $40,000 a year. And ‘I live on less than I make’ happens at all those same numbers too.”
Nearly 28% of Americans earning between $100,000 and $200,000 said they had too much debt and 14.6% of those making over $200,000 said the same, according to PYMNTS Intelligence.
“These people walking around look like they’re rich, most of them aren’t,” said Ramsey.
Overleveraged households
At the end of the third quarter of 2024, total U.S. household debt was a record $17.94 trillion, according to the New York Federal Reserve.
A 2022 report from the Aspen Institute says the share of U.S. households with negative net worth held steady between 7% and 8% from 1989 - 2007 but this share began rising after the Great Recession (2007-2009) and peaked in 2013 at 11.6%. By 2019, 10.4% of households (about 13 million) had negative net worth.
The report added that while mortgage debt jump-started the rise of negative net worth, student loan debt sustained it and appears to be the primary driver of negative net worth for households today. Americans owe about $1.6 trillion in student loans as of June 2024 – 42% more than what they owed a decade earlier, according to the Pew Research Center.
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Escaping the debt trap
The key to escaping the “broke” trap, according to Ramsey, is to create a wide margin between your net income and your expenses. In other words, maximize earnings but also minimize debt and expenses every month.
For instance, moving to a cheaper part of the country could help you lower your cost of housing, while avoiding unnecessary consumption could keep a lid on credit card bills. A conscious decision to create a tight budget, minimize debt, and avoid frivolous expenses can put you in a powerful financial position for the long term. Consider whether the avalanche or snowball method of paying down debt would be a better fit for you.
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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.
