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.
“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.
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Read MoreLack 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.
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.
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