Personal Finance

We owe $150k on car loans - should we just sell our house and use the equity to wipe out our debt?

Rich Duprey

Published: December 4, 2024 5:17 pm

Many people equate wealth with income. People earning $300,000 or more are thought to be rich. To a certain extent they’re not wrong. The U.S. Census Bureau says the median household income in the U.S. is $80,610, so that would put that high wage earner in the top 5% of the national average.

Yet just because you make a lot of money doesn’t make you rich. In the book The Millionaire Mind, author Thomas Stanley discusses four types of people: low income, low net worth; low income, high net worth; high income, low net worth; and high income, high net worth.

Although most people assume high-income people also have a high net worth, in reality, quite a few fall into the second category of high-income and low net worth.

That’s because they live a conspicuous consumption lifestyle and they are spending their money on material things and don’t buy assets that appreciate in value.

This was brought to mind by a caller on Dave Ramsey’s The Ramsey Show podcast. He and his wife earn $300,000 a year, but because they are trying to live the rich lifestyle, they are deep in debt and are very cash-poor.

The caller owns a $700,000 home with about $315,000 in equity built up, but he has $280,000 in student loan debt and $150,000 in car notes. He has about $30,000 in cash available and he was wondering whether he should sell his home, which he thinks he could get $800,000 for, and just pay all of his debt off.

24/7 Wall St. Key Points:

• Simply making a lot of money doesn’t make you rich, especially if you buy assets that depreciate in value.
• Get rid of flashy cars and stop living a conspicuous consumption lifestyle.
• If you find yourself in the high income, low net worth category, take extreme measures to live below your means and you can quickly climb out of the deep debt hole you find yourself in.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

Rethink your lifestyle choices

As one of the podcast co-hosts noted, the caller is one of the richest broke callers he has talked to in a while. He makes fabulous money but has nothing really to show for it. Worse, because the caller doesn’t have the proper mindset, if he sold his house and emerged debt-free, it wouldn’t be long before he was back in the same situation.

He needs to change how he thinks about finances if he wants to truly be wealthy. Selling the house means he is getting rid of his one appreciating asset while holding onto the material things that continuously decline in value.

Instead of selling the home, he needs to sell his cars, buy something more modest, and then begin living below their means. As Rachel Ramsey, Dave Ramsey’s daughter, told him, he needs to try living on $75,000 a year, which is still a terrific amount of spending, and within a year he could just about have his debt problem resolved.

Unfortunately, most people wouldn’t take that advice. They would prefer the easy way out while still holding onto the trappings of their “rich” lifestyle. And sadly, they will quickly find themselves in the same situation again

Avoid taking on crushing debt

While their education likely afforded them the opportunity to earn the wages they do, at what cost? People need to rethink the value they are getting from college and realize it is not worth it.

Perhaps they might not earn $300,000 salaries from going to a community college, learning a trade, or taking on an apprenticeship, but they also won’t be saddled with soul-crushing debt.

Instead, they can earn a very decent income and can save money for retirement. They will actually have a more fulfilling life than just turning over their wages to a bank.

More people should probably aspire to the low-income, high-net-worth strata of wealth rather than always pursuing status symbols to flaunt their high incomes, but have little to show for it in the end.

Key takeaway

No matter what your income level is, the steps for becoming truly wealthy remain the same: live below your means and put away at least 15% of your income towards your retirement. Buy assets that appreciate in value and avoid those, like high-end cars, that depreciate over time.

By finding meaning and value in non-material things, you can have a much more fulfilling life.