It doesn’t matter how much you earn if you spend it all and more.
That’s what Aaron, of Des Moine, Iowa, discovered when he and his wife succumbed to the “scary lifestyle.” Despite earning 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 debts of about $785,000.
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“You guys are seriously broke,” said a stunned Dave Ramsey. When dissecting Aaron’s finances in an episode of “The Ramsey Show,” the financial guru has discovered an easy way out of this situation that Aaron’s wife doesn’t agree with.
Look 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 most recent Census data. Aaron’s base salary of $175,000 and passive income from rental properties place this family 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, car loans, student loans and credit card debt.
As interest rates rise, this mountain of debt has become increasingly difficult to resolve. Aaron and his wife aren’t the only high-income workers facing hardship. Nearly half (49%) of U.S. consumers with six-figure salaries say they live paycheck to paycheck, according to a study 2023 LendingClub Report.
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Aaron admitted that the main reason for his family’s situation is “lifestyle” – a phenomenon in which consumers increase expenses as quickly 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 believes 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 consumer debt and start paying off the primary mortgage.
However, he said his wife is reluctant to give up this property because it is close to her relatives and she believes that living debt-free is not possible due to her background. Meanwhile, Aaron also mentioned the 2.5% mortgage interest rate on this asset.
Ramsey sarcastically called this cheap mortgage “a huge blessing.” He said, “You’ll be starving making $200,000 and spending it like you’re in Congress.”
He believes the problem is that Aaron and his wife have “zero control over spending.”
“I think you have a very serious level of denial going on inside your house here, which makes me much more upset than you,” 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 pay off 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 2021 study LendingTree Report.
Ramsey believes his financial life improved after he overcame the need to impress others. “One of the benefits of going bankrupt is that when I went bankrupt, I lost the need to make you happy,” he said.
“I don’t care what people think a superpower is,” agreed Warshaw.
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