Let’s be honest, it can be hard to get ahead as a middle class family today. Consider the costs of raising children, day care, expensive housing, taxes, school loans, commutes, cars, food, insurance etc. Not to mention some little extras to make life more enjoyable. Contrast this with the fact that middle class wages have stagnated for decades.
The situation basically boils down to a recipe for being stuck on a treadmill for decades and the inability to grow any substantial wealth. No wonder about 40% of retirees depend on social security for 90% of their income. 65% of retirees rely on social security for half of their income. Many younger folks are deciding to not have children due to debt, no sense of security and working so much.
In many cases this situation is not their fault. It is the reality of the environment we live in.
Over the last couple of decades, middle class wages have not grown much relative to inflation of big ticket items such as housing and healthcare. Major life expenses have skyrocketed. If wages are stagnant and the cost of housing, childcare, medical care, and other things have gone through the roof, what are we to do?
This is not an essay on politics or what went wrong. That is for each individual to decide based on what they believe to be the truth and the most effective functioning system.
The top 1% of people in our country now own/control more assets than the other 40% combined. That seems rather strange and I will leave it at that. So let’s look forward.
In America, most of us in the middle class still have some chance to own a piece of the expanding pie and build some wealth. We are able to buy a home, own a car, own a few assets, raise children, hopefully help them with college and perhaps leave a legacy. But in today’s environment it takes more specific strategies and actions to work.
Who is middle class?
The middle class is typically defined as approximately 49% of the population with an average income of $40,000-$120,000. These statistics vary widely depending on the cost of living in a particular area and the size of the family.
Median income peaked in America in 1999 and has been steadily going down for the middle class, therefore making wealth building efforts difficult without a steady growth in wages. The challenging piece to this is that those in the middle class are also job creators, consuming many of the goods and services produced in the economy.
This is a hard nosed look at the reality of trying to build wealth in the middle class today. This is not about looking backwards at want went wrong. That would be a waste of energy. This is what we can do now individually and collectively to create a better future for ourselves and our children (if we can afford to have any!)
What strategies can honest hard working middle class families deploy to thrive?
What traps are set for us that we must avoid?
How can we shape our own destiny in a challenging environment?
Listen, life has pretty much always been challenging for people. And in many ways we have it better than all humans that came before. But life and challenges are relative. The middle class is facing some pretty powerful challenges and the numbers do not lie:
Over 47% of Americans could not cover an emergency $400 bill.
That is about 130 million people or more!
In my opinion this is an unstable system. It is also not good for long term growth. The system needs people that can afford to pay their bills and spend a little extra to stimulate the economy.
I will start by outlining the big middle class finance traps. These are the things to avoid in order to thrive. These traps are based on a couple of things. They stem from aggressive advertising that plays on our sense of self-identity. See, we all have a social need to prove we are capable, productive members of the clan, able to survive.
So, here is what to avoid in the first place:
1. Putting money into things that depreciate
You see, the rich are different. They put money into things that appreciate over time. The middle class puts too much money into cars, RV’s, boats, furniture, clothes, electronics, and other material “baubles” that lose most of their value the minute we purchase them.
On top of that we use credit cards and pay interest on the depreciating item. Therefore, I am not even going to call these things assets, because they drain us. How many people buy a house full of furniture on a credit card? Clothes, boats, cars, etc. In other words, all lose their value instantly like an instant curse the moment they are purchased.
It is probably best to buy these types of things used for the initial discount and then use them for a long long time to make the cost worth it. Objects lose their initial shine pretty quickly.
Research also suggests it is better to spend one’s money on experiences since the memories and connections to other people lead to greater happiness.
These are some of the reasons we are enjoying the Konmari method of organizing and decluttering life.
2. Discounting the future and not saving enough
Unfortunately for us we do not have a “savings” culture. We live in a “gotta have it all” now culture. But why? What we need now is not material in nature beyond the essentials.
Most of us have material objects beyond our ancestors wildest imaginations. If we have housing, a job, food, basic clothes, etc. then what we really “need” money cannot buy: Healthy relationships, time with our kids, time in nature and some time to ourselves to recharge, pursuit of passion projects, etc. Notice the word time, the new version of wealth.
When we go out with friends, let’s encourage helping each other save money. Turn off the TV and media that is constantly flashing in big letters “BUY, BUY, BUY NOW!” like it’s a big red alert. We are programmed to discount the future and are easily manipulated by advertisers and social media masters. Therefore, at least be aware of this.
I fall prey sometimes, but I like to know it and be alert to the fact. The longer I live, the more I realize the future sneaks up on us fast, so develop your own savings mindset, your future self who will someday be a real person who will thank you. In fact, imagine meeting yourself in 10 or 15 years. I know this sounds crazy, but imagine that older self saying thank you to your younger self for putting some resources aside.
3. Buying a house to impress other people
The middle class is bombarded with commercial after commercial with images of the latest home renovation trends and styles. Big glossy magazines are everywhere that present us an ideal picture of a house, but these are just page after page of an advertising and brainwashing campaign to separate you from your money.
Nice and beautiful homes are great, but so what if you have old cabinets or an “outdated” kitchen or bathroom for a while. Build up your wealth first and then budget for some kind of renovation if that is really important to your self image.
But remember it is just a space to live. A house needs to be clean, functional and safe. Does anyone really care if it is the fanciest house they have ever seen? Does a solid gold toilet do the job better then a plain old porcelain? Love what you have and take good care of it, plus a few outdated items give the place character.
4. Keeping up with the “Social Media” lifestyle
It used to be called “keeping up with the Joneses”, “keeping up with Don and Betty Draper” or unfortunately we could now say “keeping up with the Kardashians.” Meaning folks in a neighborhood were in a kind of materialistic competition with each other and would feel jealous when their neighbors, “The Joneses” bought a shiny new thing. Everyone would go “ohh and ahh” at the new shiny object (car, clothes, jewelry, etc.) and then go try to figure out how to buy the same thing for themselves.
Marketers and advertisers have capitalized on this human weakness in order to keep selling the middle class a bunch of stuff it probably never needed. But this scenario is on steroids now with social media where we are bombarded every day with exotic images of our friends’ vacations, cars and fabulous lifestyles. There is nothing inherently wrong with any of this, but keep in check any feelings of having to go chase all this stuff.
First it might not be the lifestyle you seek. You may have “things” they do not have, we all are blessed with different gifts at different times. Or just be happy for them without feeling the desire to go out and spend a bunch of money keeping up. Plus, nothing against nice stuff and fancy vacations, but you may not see the behind the scenes financial stress a certain lifestyle is costing someone.
What can we do?
1. Reduce expenses as much as possible
I know this sounds logical and basic. But in order to manage a harsh reality, we all must hone our skills of cost cutting at every opportunity. We must become super thrifty ninjas. This is because our resources can commonly fall prey to death by a thousand cuts.
2. Asset/Liability Paradigm
One of the single most important lessons I learned from the Rich Dad, Poor Dad series of books was to always place your spending into one of two categories: Are you spending money on a liability or an asset.
Assets tend to go up in value over time and can immediately or eventually put money back in your pocket. Liabilities are the opposite and basically are a black hole that sucks money out of your accounts.
3. Have an Emergency Fund
The good times have been roaring now for a while as stocks and real estate have skyrocketed the last 10 years. Things are starting to change for various asset classes.
But we all know that the good times do not roll on forever. Something always happens, housing crash, dot com bubble, international conflict and disruptions, recession, etc. In addition to these outside factors, in our personal lives we run into a broken car, a major house or medical bill that can derail us.
Emergency funds are the walls and moats around your assets and wealth. You need protective barriers to weather a storm or attack.
4. Develop our skills
From what I am reading and researching, automation is coming for many jobs. This will only exacerbate income inequality. This is because those with the capital (money) will also own and operate the robots.
On the other side, hopefully some of this automation will result in deep discounts in goods and services, but who knows. Without the right legal framework in place, we could be in trouble.
A practical approach is to develop your soft skills and technical skills. Developing soft skills are things like communication, teamwork, time management, organization, emotional intelligence. These skills are more important than people imagine and harder to replicate by machines.
We can also continue to develop our technical expertise in our chosen field. Whatever field you work in, the mantra is to never stop learning. And the exciting thing in my view is that information is quite abundant now. We do not necessarily need to go to some expensive institution to learn things now.
5. Pay your family first
Think of your family unit as a business. Before paying all the bills, are you taking some profit and putting it in investments?
Most people pay all the bills and everyone else first. Then never get around to paying themselves.
This is best done when automated. Have a certain percentage of each paycheck automatically deposited into your low expense investment fund. In other words, pay your company first, then everyone else. And please do not forget to harness the power of Investing Trifecta to triple net worth.
These are some of major tried and true ways the middle class can thrive in a harsh environment. It will not be easy or perfect, but there is always hope.