‘Your income doesn’t determine wealth’: Dave Ramsey shares his definition of being ‘broke’ in America — and it’s a common scenario. Would you be failing financially in his eyes?

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.