‘A pretty scary situation’: Indiana woman has accumulated $77,000 in bad debt and earns only $50,000. Dave Ramsey tries to solve her dilemma
Sometimes, a series of unfortunate events can land a person in a deep financial hole. Throw in some additional bad money advice, and it can be hard to see a way out of debt.
That’s what happened to Megan from Indianapolis, Indiana, and what she described as her “pretty scary situation.”
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On a recent episode of The Ramsey Show, the 29-year-old explained how she earns $50,000 a year, but has managed to accumulate roughly $77,000 in bad debt from different sources.
“You’re so broke, you can’t breathe,” Dave Ramsey told her.
Here’s what the personal finance guru had to say about the situation.
Bad decisions and bad financial advice
Credit cards make up a significant chunk of Megan’s outstanding debt.
She told Ramsey she owes $15,000 in credit card debt. But she’s not alone: younger Americans have been accumulating credit card debt faster than previous generations, according to a recent report by Credit Karma.
However, the average Gen Z consumer has a manageable $3,413 in credit card debt. Megan is clearly an outlier.
Nearly half of Megan’s debt comes from student loans. She said she owes $32,000 in student loans alone, which is just slightly lower than the average national balance of $38,787, according to a recent consumer debt report by Experian.
However, unlike the typical student loan borrower, Megan doesn’t seem to need her degree. She is the co-owner of a wedding venue, which is her family's business, and is considered self-employed. Since it’s a seasonal business, she explained, her hours can vary. But over the past year she’s earned roughly $50,000.
That’s not enough to meet the minimum payments on all her debt. “The payment amount on everything is the majority of my income,” she said.
To make matters worse, her financial advisor told her she couldn’t be on her own company’s payroll. This put her behind on her tax filings and she now owes $6,000 to the Internal Revenue Service (IRS), adding to her debt burden.
However, the IRS has clarified that business owners can pay themselves in multiple ways — including “reasonable compensation” as an employee of their own business. In fact, Ramsey said he’s been on his own company’s payroll for decades.
The financial advisory industry faces a talent shortage, according to a study by Cerulli Associates, while research from Stanford University and the University of Oregon, have found instances of bad financial advice and misconduct within the industry. Simply put, finding a good financial adviser isn’t as easy as it sounds.
To be fair, Megan has sole responsibility over some of her financial errors, such as upgrading to a new car after her old one was totaled. This decision added $14,000 in auto loans to her debt collection.
"You can't keep digging a hole and then gripe about the hole," Ramsey told her.
He suggested that Megan quickly make “radical” changes to improve her financial situation.
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Radical changes
Megan’s current income only allows her to meet the minimum payments on her enormous debt burden — which means she’s making no progress.
During the episode, it was suggested that Megan prioritize reducing debt and boosting income in order to break the logjam of her current financial situation.
The first step, according to co-host George Kamel, is to sell the new car and replace it with a cheaper, used option. Reducing the auto loan would instantly eliminate 18.2% of her debt burden.
Getting rid of multiple credit cards is also essential. Megan said she hasn’t used a credit card in three months, but Ramsey wants her to go further and destroy them altogether. “I want you to get scissors out tonight,” he joked.
The next step is to earn more through multiple jobs. This should allow Megan to pay off her back taxes and start making progress on her other forms of debt.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
