Yahoo Finance Dave Ramsey Shares How You Can Earn $200,000 and Still Be Broke
When Aaron from Des Moines, Iowa, called into “The Ramsey Show,” Dave Ramsey gave him the hard truth: “You guys are seriously broke.”
Aaron and his wife earn around $200,000 annually, but they were buried in $785,000 of debt.
Check Out: Dave Ramsey on Why You Shouldn’t Pay Off Your Mortgage Early Even If You Can
Learn More: How To Get $340 Per Year in Cash Back on Gas and Other Things You Already Buy
How can this happen? Ramsey summed it up as more of a denial problem than a financial problem. Here’s how households like Aaron’s can still struggle with debt despite high salaries — and what you can do to avoid it.
Wealthy people know the best money secrets. Learn how to copy them.
The Problem: High Income, High Debt
On “The Ramsey Show,” Aaron explained that his salary was $175,000, and he and his wife also earned money from a rental property, totaling around $200,000. However, the couple was struggling to make ends meet and was sinking further into debt.
Aaron’s situation is more common than you might think: 69% of Americans in urban areas live from paycheck to paycheck, and the percentage of high-income Americans living from paycheck to paycheck is rising faster than that of low-income Americans. In other words, wealthy, urban households are going broke.
Find Out: Can You Realistically Follow Dave Ramsey’s 8% Retirement Rule?
Lifestyle Creep
When asked how his situation got so bad, Aaron acknowledged that he and his wife succumbed to “lifestyle creep.”
Lifestyle creep is a phenomenon that affects people after their income grows. When you suddenly have access to more money than you’re used to, you may be inclined to spend more — and more and more and more. Whether it’s food delivery, home decor or subscription services, those costs will eventually creep up on you.
Aaron reported that after his income suddenly doubled, he and his wife began spending “like crazy.” They assumed their new income was disposable and wound up more broke than before.
Denial
Lifestyle creep may have gotten Aaron’s family into debt, but Ramsey cited another problem keeping them poor: denial.
Aaron explained that selling their rental property could earn them enough to cover their consumer debt, leaving only their primary mortgage, which they should have been able to pay with his salary. However, his wife didn’t want to sell the property.
Ramsey explained that denial of their financial situation was keeping the couple from controlling their spending and selling the assets — including their rental home — that were keeping them in debt.
How To Use Your Wealth Wisely
Whether you earn $20,000 or $200,000, you need to implement smart financial habits to keep your head above water. Lifestyle creep and denial can easily catch up to even the wealthiest consumers.
To avoid falling into the paycheck-to-paycheck cycle, consider these tips.
Control Your Spending
There’s a simple solution to lifestyle creep: budgeting. Make a monthly and annual budget to help keep your spending in check.
As a general rule, no more than 30% of your income should go toward discretionary spending — vacations, meals out, shopping and the like. Half of your income should cover living expenses and essentials, and 20% should go toward paying off debt and saving. This rule applies regardless of how much you earn.
Sell What You Don’t Need
Take a look at your household’s assets. That includes the big things like your property and cars and smaller things like furniture, collectibles or appliances. Ask yourself:
Does this asset bring in more income?
Do the benefits of owning this outweigh the costs?
Does this item matter to my life?
Any items that don’t meaningfully benefit your life or budget, like Aaron’s expensive rental property, need to go. Don’t hold onto assets just because you think you should have them.
Don’t Worry About Your Image
Why was Aaron’s wife reluctant to sell their rental property? Ramsey’s co-host explained that it was a pride issue. Owning multiple properties and cars wasn’t just fun for them — it showed off their apparent wealth to other people.
Keeping up with impressions is a dangerous game. Just because you earn a certain income doesn’t mean you need to act wealthy. In fact, you’ll gain more wealth by sticking to a humble lifestyle, budgeting carefully and spending money only on the things you truly care about.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Dave Ramsey Shares How You Can Earn $200,000 and Still Be Broke
