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Avoiding the Middle Class Squeeze

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Avoiding the Middle Class Squeeze

Last time, we saw that a large percentage of American households feel they don’t have enough money to enjoy life. The main problem for the lower class households is they just don’t make enough income. The only way to escape from the lower class is to increase their income significantly through education or by starting a small business. Some readers pointed out that it is simply easier to maintain the same situation because there are so many problems to deal with. The problem is a little more complicated for the middle class. Many families make good income, but they still live paycheck to paycheck. They are unable to save and invest and they are very worried about retirement. Furthermore, the middle class is shrinking. Nobody wants to slide into the lower class, but that’s what happening every day. How can we stay in the middle class or move up when wage has been stagnant for years?

What is middle class, anyway?

Here are 5 ways that economists, federal agencies, and the White House measure and characterize the middle class (from CNN Money.)

Income

middle class squeeze

The middle class spans a wide swath of incomes. I haven’t done our taxes yet, but we’re firmly in the green part of this graph. Our household income was at the edge of “wealthy” for a few years before I retired. It was nice because we saved a lot of money and were able to grow our net worth substantially. Once Mrs. RB40 quits her job in 2020, our household income probably would drop into the “poor” region.

Wealth

middle class squeeze

I wouldn’t consider a net worth of $401,000 “wealthy.” Personally, I’d say $3 million is wealthy. Middle class families need to save more so they can grow their net worth. $401,000 sounds like a lot, but that’s not really enough to retire on. That’s just $16,040 per year using the 4% withdrawal rule. It looks like the whole middle class will be dependent on social security for retirement.

Consumption

middle class squeeze

This is how much the middle class spends every year. This one sounds a little low to me as well. The range is very narrow. Our spending is in the high end of this range, but I think many middle class families spend more than $50,000 annually. I suppose this is highly dependent on where you live. Some locations are more expensive than others.

Aspiration

middle class squeeze

I like this one. This is what middle class families aspire for, although retirement is going to be tough for a lot of people. The middle class just isn’t saving enough to have a comfortable retirement. College education for kids is another big problem. The cost of higher education is still increasing rapidly and most families won’t be able to help out much. The cost of healthcare is also a big issue that will only get worse.

Demographic

Do you fall within the demographics that make up the middle class? The St. Louis Federal Reserve Bank looked at 3 demographic characteristics – age, education, and race. This one sounds like baloney to me so I’ll just ignore it. You can see CNN’s flow chart if you’re interested. Basically, they are saying older, educated, whites and Asians are more likely to be better off than other demographic. This seems irrelevant to me.

Middle class squeeze

The middle class has been steadily shrinking since the 1970s. Middle-income families are falling behind even faster in the new century according to the Pew Research Center. The median income of these households decreased 4% from 2000 to 2014. Their wealth also fell 28% from 2001 to 2013. More and more of the aggregated income is going to the wealthy class, from 29% in 1970 to 49% in 2014. If the trend continues, the middle class will be squeezed smaller and smaller every year.

middle class squeeze

As the middle class shrinks, all of us will have to figure out how to avoid sliding into the lower income class. Middle class wage will continue to stagnate so you can’t continue with business as usual. If you don’t actively work to improve your finances, you will find yourself sliding downward. Like the lower class trying to move up, the key is to increase your income.

  • Get rid of debt – Those high interest debts really weigh you down. You won’t get anywhere while you’re paying interest to the credit card companies every month. If you have any consumer debt, you need to pay it off as soon as possible. It’s practically impossible to save and invest when you have to service those debts.
  • Investment income – If wages are stagnant, then we have to look elsewhere to increase our income. The wealthy have always grown their wealth through investment. The middle class need to learn to do this. We need to save more and invest as much as we can. For most middle class families, that means cutting back so they will have some money to invest. This can be painful, but life will get worse if you don’t do anything at all. This is the route we’ve chosen and we’re working to replace our earned income with investment income.
  • Increase earned income – Another way to grow your income is through additional education and training. The income gap is widening between highly skilled and unskilled labor. If you can be replaced by a young high school graduate, then you really need to learn a new skill to get a more secure job.
  • Side hustle – Side hustling is a good idea temporarily. You can earn extra money to pay off debt or start investing. However, I don’t think it’s a good long term (10+ years) plan. It’s probably better off to concentrate on increasing your income at your main gig. Driving for Uber will bring in extra money, but you will have to trade your time for that. Building a small business on the side is probably a better way to go.

If you’re not actively moving up, you’re slowly sliding down. You can’t depend on your employer to do right by you anymore. The CEOs are mainly interested in enriching themselves. You have to take steps to improve your own finances since staying in the middle class no longer comes with the security it once had.

So how are you doing financially? I assume most readers on this site are in the middle class. Take the poll below and tell us how you’re planning to avoid the middle class squeeze.

How are you doing financially?

View Results

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Image credit: by World Bank Photo Collection, CNN Money, and Pew Research Center

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{ 66 comments… add one }

  • Mr. Tako @ Mr. Tako Escapes February 22, 2016, 12:27 am

    Hi Joe. We’re solidly in middle-class territory. It is frightening to see how the middle class is shrinking, but I believe that’s just giving us a signal – that old strategies for middle-class success don’t work as well anymore. Time for a new strategy.

    I think your recommendation for investing and starting a small business is particularly astute. On my blog I talk about this as ‘multiple streams of income’. Job income has become more erratic over time, and it makes solid sense to fill in the gaps from other sources.

    • retirebyforty February 22, 2016, 10:21 am

      The world is changing. You can’t rest on your laurels when you’re in the middle class anymore. Middle class jobs are not secure and anyone can be laid off at the next recession. We have to prepare for it.

  • Ernie Zelinski February 22, 2016, 1:06 am

    Although I lived under the poverty line for many of my adult years, I am now definitely solidly middle class. Perhaps if the release of the print edition of my inspirational fable “Look Ma, Life’s Easy” next month results in it selling over 1 million copies, I will transition into the lower end of wealthy status.

    Here are the two primary reasons that the middle class with good to great incomes don’t build up their wealth (net worth) all that much and many don’t have anything saved for retirement:

    1. Immediate gratification takes too long.

    2. A “necessity” is any luxury that the neighbor happens to have.

    As for me, I still drive a 1995 Camry that doubles in value every time I fill it up with gas. I could go out and purchase two or three or more Mercedes or BMW’s for cash but I am too lazy to do so.

    I often recommend that people read “You’re Broke Because You Want to Be” by Larry Wingate. I loved the book even though I didn’t need the advice. Problem is, most people who need the advice from Wingate’s book will not read it. And even if they do read it, they will be in denial that they are responsible for their financial shortcomings.

    As M.W. Harrison once said, “The waste of money cures itself, for soon there is no more to waste.”

    • retirebyforty February 22, 2016, 10:22 am

      Good luck with your new book! I’m looking forward to it. I agree with your 2 points. The middle class are spending way too much money. We need to save and invest before spending on luxury. I’ll see if I can find Larry Wingate’s book. Cheers.

  • Casey W February 22, 2016, 2:49 am

    Middle class and on the move up through a small side business and increasing my investment income. Totally agree we need to take a lesson from the rich and start OWNING assets! Only way to catch up.

    Although I think a Middle Class income is more than enough to be happy on, especially once you have a Middle Class income coming in semi-passively through investments.

    I think the best way to keep the Middle Class moving up is to realize that your money and your investments only account for 20% of ‘wealth’–the rest is your psychology! Joe you have a pretty good financial situation, but I bet that is not why you feel really wealthy. I bet the wife and child you love make you feel much wealthier than the brokerage account full of dividend stocks! Shoot, we have access to clean water, healthcare, and freedom to practice our religion without persecution here is the US. Even if I lost all my money, I would be feeling pretty wealthy right now!

    It all stems from growth and challenge. The problem is people try to hard to ‘simplify’ life by paying someone to clean their house for them, or fix their car for them, or fix their garbage disposal. I say that ‘simplifying’ your life you so can be lazy is a recipe for disaster! The true key to wealth is to stay challenged and growing and learning constantly. Becoming Financially Independent just means you can go and be challenged and grow in areas of your life without having to worry about money–so that money will never be a deciding factor in anything you do now! That is the place of wealth I want to be.

    -Casey W

    • retirebyforty February 22, 2016, 10:27 am

      That’s great to hear. Owning a small side business is a great way to increase your income.
      You’re right about my feeling of wealth. I have a great family with minimal problems. Life is very good and I hope to keep it that way.
      I like the way you look at FI too. Although, I’m starting to change my mind about hiring other people. I’m still trying to do everything myself, but the wealthy hire everything out. That will free up more time to improve their situation. You have to spend the extra time productively, though.

      • Casey W February 24, 2016, 12:46 am

        100% agree with you that you should be able to hire help as long as you are spending that time challenging yourself and growing. Hiring someone to clean your house so you can watch another hour of TV isn’t a good use of time or money. I think raising a child, growing a blog, and maintaining a healthy exercise routine counts as challenging yourself! So you are in the clear to hire away if you can afford it 🙂

  • Pennypincher February 22, 2016, 4:17 am

    The lower class, or “little guy” has always gotten the rotten end of the deal, short end of the stick-always. Has never been any different.
    Children must be taught young to save early, invest-make it fun! Many middle/upper class kids are into stocks by middle/high school-a good thing.
    You’re right about the CEO’s in it for the payout. Doesn’t everyone know someone at work making a ton of money, and we ask….”What do they do, or did they do all day anyway?”

    • retirebyforty February 22, 2016, 10:30 am

      Financial education is in dire straits. If the parents aren’t very good with their finance, there is practically no hope for the kids. I’ll teach my kid about investing soon. 🙂

  • MrFireStation February 22, 2016, 5:42 am

    There has been research on happiness levels maxing out at ~$75K HH income. Interesting that that amount is firmly in the range of middle class that you show. The fact is, when we compare ourselves with the world, we all have more than we NEED, many of us have more than we EXPECTED (compared to our parents), and so any discussion of money should be focused on what it really is … our WANTS. We all want more, but do we want to work until we can’t to get it? We gave formal notice 2 weeks ago of our early retirement – we have all that we want! Great post & data!

    • retirebyforty February 22, 2016, 10:32 am

      Congratulation! I’m sure you will enjoy early retirement. I agree about the spending. If you’re in debt, you need to cut back drastically to get yourself out of the situation first. I guess people just don’t see the trouble they’re in until the pot is boiling.

  • Mike Drak February 22, 2016, 6:05 am

    I don’t want to sound negative but I really don’t believe the numbers. By their definition I’m upper middle class but it sure doesn’t feel that way. Things are going backwards fast and I could argue that the middle class disappeared long ago but they are keeping it a secret! One of my biggest regrets is not being aware of the concept of financial freedom when I first started working. I would have given me more focus and I would have achieved FF at a much earlier age . I’m trying to teach my kids the concept and am also encouraging them to create their own businesses and become self sufficient which I believe is the way to go today. Breaking the back of ff at an early age is a game changer but if you are unaware of it lifestyle inflation will get in the way. I also get my kids the story of the ‘Mexican fisherman’ which I first read in Ernie’s book “How to Retire Happy Wild and Free”. Being a former banker it really resonated with me and there is a lesson there for everyone on how to appreciate what one already has. Based on the old car that Ernie drives it looks like he’s living the story.

    • retirebyforty February 22, 2016, 10:38 am

      It’s probably dependent on where you live. If you live in the mid west, you’d definitely be in the upper bracket.
      Great job passing on your knowledge to your kids. Wealth is generational and we have to give whatever advantage we could to our children. I’m trying to the same.

  • Kate @ Cashville Skyline February 22, 2016, 6:06 am

    It’s tough for the middle class! Between stagnating wages and skyrocketing costs of living in major cities, it seems really tough to get ahead. But I really like your tips! I’ve never been a high earner, so side hustling makes a huge difference for me. I plan to do it at least for my 30s while I still have the energy to do it!

    • retirebyforty February 22, 2016, 10:39 am

      Side hustling is great for a while, but building a small business is even better. The potential benefit is much more when you own the business. Good luck!

  • Sam @ Financial Samurai February 22, 2016, 7:04 am

    Great to see CNN Money believes the middle class has wealth of up to $401,000! If that is the case, the middle class probably has even more wealth than that, since wealth is often highly understated. Another bullish indicator!

    I think middle class is the best class. Happy to be a part of it.

    Sam

    • retirebyforty February 22, 2016, 10:41 am

      I think you’re the wealthy class in disguise. 🙂 I guess there are a lot of people in the middle class with practically no saving. That would drag the median down quite a bit.

      • Nick February 23, 2016, 11:39 am

        Shhh, Sam is practicing Stealth Wealth 🙂

  • SavvyFinancialLatina February 22, 2016, 7:23 am

    There are a lot of reasons why the middle class is shrinking. The spend more than you make syndrome is definitely a contributor. But overall, while company profits are increasing, life for people doesn’t follow. You are right, CEOs are worried about their compensation not yours.

    • retirebyforty February 22, 2016, 10:44 am

      I think the CEO tries to do right by the share holders and the employees, but self interest inevitably comes first when the chips are down. It’s just human nature. That’s why I think there should be more oversight on CEO compensation.

  • Cheryl Celebi February 22, 2016, 7:37 am

    OK, so I was born 1 month prior to 1971, so this is even more interesting to me, since it completely captures my life from childhood to now. Disclaimer – both my husband and I are engineers. We both have saved intensely, but our age and the stock market booms/busts work well with our ages, which I also think impacts the right side of the bar graph. Fortunately, we are able to transition to a single income family in about 6 weeks. And as a mom of 4 girls 8 and under, it does change my perspective of middle income and being wealthy 🙂

    So… let’s look at this graph a different way: in 44 years, we’ve added 4% (from 25% to 29%) to the lowest/lower middle class. That’s not great. We do a terrible job as a nation educating our young on personal finance. CATV and a high bandwidth cell phone data plan are not entitlements!! BUT – we’ve added 7% (from 14% to 21%) to the upper middle/highest class. That means 7% of American adults have either gotten really lucky (tech company options, stock market) or simply have personified the American work ethic with good old-fashioned hard work and savings. Yes, the middle class has shrunk with the difference, but I personally feel that we’ve enabled this. Enter politics. And this conversation goes much better in person than as a response on a blog 🙂

    • retirebyforty February 22, 2016, 10:48 am

      It’s definitely a lot more difficult for the millennials. You did all the right things, though.
      You’re right about the upward movement. That’s good overall, but the lower income households are really struggling. Ideally, we should be able to shrink the lower class.

  • Aaugh February 22, 2016, 7:56 am

    I think what most people are not thinking about and are unprepared for are care home expenses for your parents or yourself. When your loved one is diagnosed with dementia, Parkinsons, Alzheimers or similar diseases and cannot take care of themselves anymore, but arent sick enough to require skilled nursing, what is the plan ? Expect a monthly cost of at least 2500-3000 and more for a residential care facility. Then you can’t pay your own debts or save. But you have peace of mind, that they’re taken care of. Here’s an idea for a small business, open a small 6 resident care home. That’s 18k a month in income before expenses.

    • retirebyforty February 22, 2016, 10:49 am

      You’re right about that one. It’s just so depressing and I don’t even want to think about it. That’s a good small business idea. I’ll keep that in mind. I imagine there would be a lot of regulations on a residential home like that, though.

  • Tom February 22, 2016, 8:17 am

    I retired from engineering at 33 when I realised that living in a city with a mortgage and 2 children just doesn’t make sense anymore. The urban cost of living has skyrocketed in recent decades. How much you earn misses the trick. What is most important is the difference between what you make and what you spend. People often think only in terms of what a job or career pays but never look at what the cost of living is. You cannot make a good decision without considering both sides of financial equation.
    Moving to the countryside, my cost of living fell to a far greater degree than my earnings did. I’ve also the space and time to do most jobs myself instead of relying on others and continuously learn new skills. I used to be a specialist engineer working for a Fortune 500 company, today I am a jack of all trades working for a couple of small organisations part-time and hobby farming. I’ll never earn 60 or 70 thousand again, but, I don’t need to now that I only spend about 20,000 a year. I consider myself rich in so many ways yet the government probably would not classify me as so.
    Plus, on a low cash income, I don’t have to pay much tax : )

    • retirebyforty February 22, 2016, 10:51 am

      That’s a great story. The cost of living is tough to overcome even with a great income. We’re controlling our cost, but it’s still quite expensive. Eventually, I plan to move, but we’re not sure where to go just yet. I wouldn’t mind being a nomad for a few years.

    • Jared I. March 14, 2016, 2:36 pm

      I appreciate you bringing up “geographical arbitrage” in your comment. It seems that a lot of those complaining don’t seem to understand this concept. You are not locked-in by contract to have a given cost of living. It is a conscious choice that can be changed given a little research and effort.

  • Mike H. February 22, 2016, 10:34 am

    I agree that it’s getting harder to be middle class, mostly because to maintain the income/lifestyle of a middle class family, people are being asked to become something that they are not.

    Previously, you could be middle class without a higher education (via well-paying manufacturing jobs). Today, you need a college degree to even get those jobs. And there are fewer of them.

    Previously, you could spend your paycheck. Today, you need to save, budget, and plan.

    Previously, your retirement security was handled and invested by your employer. Today, you need to be a retirement and investment professional.

    It’s all adding up to put a lot more pressure on people. If you fail at education, budgeting, or investment, you could lose your middle class status (or fail to achieve it in the first place). A lot of people aren’t cut out for that kind of pressure. Also, a lot of people – older people in positions of power – either resist change completely or mis-identify which changes need to be made.

    • retirebyforty February 22, 2016, 1:36 pm

      That’s an interesting theory. The world is getting more and more complicated every year. You have to know a lot more to get ahead these days. You can’t just work and expect to stay in the middle class anymore. Perhaps the rise of the robo adviser will help the middle class a bit.

  • Justin February 22, 2016, 11:15 am

    I voted middle class but moving upward. Our net worth is clearly outside the middle class territory that caps out at $401,000, but otherwise our incomes have always been within the middle class territory.

    Right now we’re spending just a little less than the lower end of middle class consumption, but we don’t have a house payment. With the mortgage we would be squarely middle class in terms of consumption.

    We feel pretty wealthy and fortunate, though we don’t spend tons of money. Then I look around at our lifestyle and realize we do a lot of frugal stuff that might knock us out of the stereotypical middle class lifestyle (driving a 16 year old car, DIY repairs, mowing our own lawn, not having a maid, cooking at home all the time). I mean we enjoy all that stuff, but it’s atypical of many middle class folks who spend more freely (and probably have $0 in investments and lots of debt).

    • retirebyforty February 22, 2016, 1:38 pm

      Actually, we feel pretty wealthy and fortunate as well. Our expense is a bit too high, but it will come down slowly. We won’t have to pay for preschool starting this September. Yay!

  • Tawcan February 22, 2016, 11:26 am

    We’re in the middle class definition when it comes to income but net worth wise we’re above the range. Would be interesting to see how these numbers break out based on ages.

    • retirebyforty February 22, 2016, 1:40 pm

      I’ve seen that the peak net worth is around retirement age – 65. That makes sense because you’d draw down after retirement.

  • Stockbeard February 22, 2016, 11:43 am

    It seems I have moved up significantly over the past 10 years.
    10 years ago, I was in the “poor” category from an income perspective, making approximately $48’000 a year.

    I then married and with our combined salaries we moved up to the middle of the middle class.

    Then I switched companies, got a higher salary, but my wife quit her job to raise our first kid. We stayed middle of the middle class.

    Last year I moved to the US. We’re now upper middle class because engineer salaries in the US are insanely good compared to France and Japan. Getting to the “wealthy” category now if my side gig keeps going well, and before we trigger the FIRE plan.

    • retirebyforty February 22, 2016, 1:42 pm

      It sounds like you were in the middle class 10 years ago. I’m sure inflation increased the number a bit. Great job and good luck on your journey.

    • Cheryl Celebi February 23, 2016, 5:26 am

      Hope you get FIRE’d soon 😉

  • Tyler February 22, 2016, 12:59 pm

    I have been poor or middle class my whole life and am strongly working towards reaching wealthy

    • retirebyforty February 22, 2016, 1:42 pm

      Keep at it. I’m sure you’ll break through someday. You need to be persistence.

  • freebird February 22, 2016, 1:26 pm

    I think the idea that “CEOs are mainly interested in enriching themselves” is the same as it ever was. What kept your “employer to do right by you” decades ago was that was exactly how CEOs enriched themselves at that time– they padded their paychecks by increasing the size and scale of the operations (empires?) under their control. I don’t think CEOs of past generations were saints compared to today’s!

    What I believe did change was the idea that the workers who occupy the middle class are scarce and valuable resources who need to be kept happy in order for their employers to survive much less thrive. I can think of at least two major forces that drove this paradigm shift– one was the rapid growth in international trade, and the other was the ascent of technology. The former has pretty much wiped out on-shore middle-wage salaries in manufacturing, and the latter is now in the process of eating into our lower-skilled tiers of services. We all know how Google’s self-driving cars will likely soon decimate the ranks of cabbies and truck drivers, but it may be only a few short years before higher skilled services like brain surgery get performed by their robots.

    I guess my point is that I don’t believe “fixing greed” gets us there, instead it may be time to start the dialog about setting up a universal wage floor so that a person’s ability to live decently does not depend upon the diminishing market value of what he or she produces. The linkage we inherited from antiquity only makes sense when our aggregate needs require large-scale participation in the labor force.

    • retirebyforty February 23, 2016, 10:19 am

      You’re probably right, but it just seems CEOs in the past had a little more moral. Some of them tried to take care of their employees. Now it’s strictly business. Small companies do better in this regard, but that might be to the detriment of business.

  • nicoleandmaggie February 22, 2016, 2:11 pm

    According to that, I’m wealthy. According to other stuff, we’re upper-middle-class.

    In terms of the “it depends on where you live” argument, I would argue that living in Manhattan or San Francisco is itself a luxury that only the wealthy or those willing to sacrifice get to have.

    • retirebyforty February 23, 2016, 10:20 am

      I often wonder how service sector people live in SF. I guess most of them have to commute. It sounds tough to live in such a high cost of living location.

      • nicoleandmaggie February 23, 2016, 2:29 pm

        They live with a lot of people in each room. I read an article about it a few months ago.

  • Dave in Sunny FL February 22, 2016, 6:19 pm

    I’ve got eight years of college, but I disagree with you about “education” as the ticket to advancement. Continuing on in college courses in order to “hide out” from the real world strains your finances. Ultimately, it makes you LESS employable, by making lower-paying jobs unsuitable in light of student loans and the other obligations that arise and increase as we become adults. People who want to advance as employees just need to get their foot in the door; and demonstrate the skills and abilities necessary for the Peter Principle to take effect. But, financial independence is not available as an employee (C-suite executives excluded). One way to reach FI is to create your own job, using a hobby or interest of your own. You can’t get fired; and you’re more likely to love the work. Reaching FI as an employee is all about what you do OUTSIDE of the office. You can save, learn, invest, and side hustle; or you can choose beer and TV, with the recliner leaned all the way back.

    • retirebyforty February 23, 2016, 10:22 am

      I meant education in a field that’s in demand. Lower wage employees need to learn new skills. Whether though apprenticeship, learning on the job, or going back to school. Creating your own job is a great way to go. You have to hustle hard and be willing to fail repeatedly.

  • Thuy February 22, 2016, 7:58 pm

    I come from a lower class background but through education and studying a higher desirable field in grad school (healthcare), I earned enough income to become middle class with my professional degree. I also made some lucky investments, buying a house during the low point of the recession and it has appreciated considerably.

    My husband is from a middle class background but studied computer engineering and earns enough to be in the upper class. When we were both working, we made enough to be in the top 1% in WA state (just barely though). Our net worth was slowly increasing individually but has really picked up after we got married. Luckily, we married partners that thought alike in financial matters. Technically, we are in the upper class due to his high salary. It doesn’t feel like it because we live in a high cost of living area (Seattle Metro) and we save a large percentage. We aren’t living large by any means. Though we wouldn’t if we made less either. We just aren’t big spenders.

    We were lucky that our families emphasized education and picking majors that would lead to solid careers. We plan to keep building investment income, avoid debt and retire early. Hopefully, we will be able to teach our daughter how to be financially savvy.

    • retirebyforty February 23, 2016, 10:24 am

      That’s a great story. Having 2 income makes a huge difference. We were able to save a large portion of our income when we both worked full time. Seattle is getting very expensive. Do you plan to stay there or move at some point? Picking the right major is the way to go for lower and middle class kids. Rich kids can pick whatever they want. 🙂

      • Thuy February 23, 2016, 3:02 pm

        We like the Seattle area so will probably stay. We are in a great school district and close to downtown Bellevue and Seattle. The balance of the mortgage should be paid off when we retire which will drop our COL.

        I think the increased cost of education is really hurting the lower classes ability to become middle class and the middle classes ability to stay middle class. There are ways around the increased cost but too many people are unaware of the options especially if they are the first in their family to attend college.

  • Joel February 23, 2016, 11:47 am

    I started out lower class. My wife and I got married in 1995 with a combined total of $400 between us, fresh out of college, with student loan debt. Fast forward to today, after 20 years of hard work – according to the graphs above, we live middle class in our expenses but are upper middle in earnings, which explains why we feel like our life is nice but not extravagant… We just bought our third rental home yesterday – that’s where all the extra is going at the moment. The new house will require about half as a mortgage (we are otherwise fully debt free), so it does make a difference. C’mon passive income… In the mean time, software and sales are great places to be. If I can do it, so can you!

  • Nick February 23, 2016, 12:23 pm

    Great post with great data. Seeing the Middle Class being squeezed is another way of seeing inequality rising.
    I think the best way to look at this is to understand that the wealthy get their wealth from assets, ie stocks, bonds, real-estate, … not from labor. We all know that compounding interest is one of the best things to build wealth, but this is also what will keep the rich getting richer and keep inequality growing.
    In my view, the surest way to not drop below middle class or to even get into the wealthy class is to be as educated as possible, save enough money to buy income producing assets (starting with a 401k) and be consistent long enough for compounding interest to do their magic.
    The other way would be for politics to change, but that isn’t really under our control.

  • Mysticaltyger February 27, 2016, 1:42 pm

    I think there are some old fashioned things that need to come back into vogue which would help the middle class. There needs to be a heavy focus on avoiding out of wedlock births and divorce like the plague.

    I bet if we had the same out of wedlock birth rate as we did in 1981 instead of the 40% we have today, the middle class would be the same size or even larger than it was back then. It’s not a cure-all, but it’s often overlooked or thought of as some kind of impossible achievement by many.

  • Linda February 27, 2016, 3:34 pm

    I work for a company where the previous owner cared about his employees. He was a very generous man. He died last year and his son took over. Now it seems all the son cares about is profit, couldn’t care less what happens to the employees. There have been cost cutting measures put in place all over the company. Don’t get me wrong, cost cutting measures are good, except when the new measure is complete crap and the employees hate it.
    I voted middle class. We are firmly in the middle. I am very lucky because we are able to save over half of our income, unlike the majority of the middle class. It might take some time, but I think we are slowly, very slowly, moving up.

  • Asher March 1, 2016, 6:54 pm

    Perhaps they mention race because of the historical inequities that made it difficult for African-Americans to obtain high paying jobs, get college educations, and accumulate wealth. Consider that redlining wasn’t even illegal until the late 70s. Therefore, if you are looking at the group of 62+, then you are probably looking at a group most affected by policies and practices of segregation.

    I guess I’m not sure how demographics could be irrelevant.

    • retirebyforty March 1, 2016, 8:00 pm

      Yes, race is still a big issue here in the US. The fact is minorities still have a harder time getting ahead. However, I think you just have to ignore it if you’re the minority. Yes, it’s harder, but you still need to keep trying to get ahead. You can’t dwell on it.

      • Rich v March 2, 2016, 2:16 pm

        I want to challenge that statement a bit. Not all minorities struggle equally. Asian Americans do better than white Americans in school, on IQ tests, on credit scores, and on other positive measures. In fact, according to recent data from the Federal Reserve, Asians are about to surpass whites as the wealthiest group of Americans.

        Blacks I would agree do struggle, but race is perhaps more of a minor factor. Think about this: the poverty rate for two-parent black families is 7%. The poverty rate for single-parent white families is 22%. Having two parents is a much bigger factor than race in a child’s economic outlook. I would also mention that many scholarships are specifically allocated for minority races.

        Some of this is taken from Dennis Prager:
        http://www.nationalreview.com/article/431393/white-privilege-myth-reality?target=author&tid=900932

        • retirebyforty March 2, 2016, 9:10 pm

          Some Asian American subgroups are still struggling. It’s not good to lump everyone into such big groups. That’s why I don’t think anyone should dwell on it much. Just keep working to get ahead.
          I didn’t know that having 2 parents is such a big factor. It makes sense.

          • Rich v March 3, 2016, 8:06 am

            Oh, of course. Everyone’s circumstances are different. I was only pointing out that statistically, Asians are one of the minorities that tend to do well. Have you ever read The Millionaire Next Door? I should go back and find the breakdown of millionaires by ethnic background. I remember it was interesting. I recall Russians and Scots were up there, and Asians as well.

  • Bobsyouruncle March 3, 2016, 8:28 am

    That chart from the Pew Research Center shows that middle class is shrinking and the lowest class is increasing in size, but it also shows that the percentage of those in the upper and upper middle classes are increasing in number. You can definitely still get ahead in this country, but I think a lot of people have bad information on how to get ahead. Growing up, it seemed like the golden ticket was going to college. Supposedly, if you go to college, you secure your spot in the middle class and have a chance to make a run at a higher position. However, you can definitely do college wrong and set yourself back. Thinking mission accomplished when you are accepted into college is premature thinking. Living beyond your means is another big contributor to the lower classes increasing. I don’t think the system is as rigged as many people say.

  • Daniel March 3, 2016, 8:43 am

    Well…. I live in a high cost of living area (Washington DC region) so the income thing is a toss (let’s just say that we cannot contribute to a Roth IRA anymore). I definitely blow the spending (though that is related to the first item… 2 kids in daycare blows that out of the water (30-35k total per year)) and the savings (really, 400k is the top of the line? People seriously need to save more).
    So while I don’t truly conform to the description (I would define us as upper-middle class) of middle class I will stick with that label

  • Kurt March 3, 2016, 9:19 am

    The middle class is largely extinct in the USA, sad to say. Society there is zooming toward economic bipolarism: the wealthy, and those who serve them.

  • GrOW March 4, 2016, 6:04 pm

    The last chart shows the middle class shrinking by 11%. That group shifted by 4% to the lower class – bad – and 7% to the upper class – good. Not a bad change at the big picture level.

  • Raz @ Millennial Struggles March 14, 2016, 2:46 pm

    I think millennials especially are having a hard time being part of the middle class by all measures. A recent study by American Progress showed how real wages haven’t increased but at the same time millennials have to take on so much debt in order to get the education needed to get those “high paying” jobs so we start out with negative wealth straight off the bat. Then combine paying back your student loans with ridiculously high rent costs (especially in the NYC area) and with the price of healthcare no wonder why it’s so hard to join the middle class and that we see it shrinking.

    • retirebyforty March 15, 2016, 3:25 pm

      Millennials are having a tough time. Hopefully, things will improve and they’ll do better as they get older. Cost of living is outpacing wage.

  • Lisa April 8, 2016, 5:37 am

    Thank you for the post — the loss of the middle class is very dangerous – not in terms of poverty, but in terms of social stability. When people believe that they have a bridge to the middle class, then they have hope. And they have investment in the system. And they don’t commit as many drive-by shootings. (That’s hyperbole, but you see my point?) Because they have a stake in the game. A polarized society is dangerous, — no middle class? That’s what spawns a revolution, crime, unrest.

    I am at the lower end of middle class income wise — but almost wealthy in terms of investments. Over $400K in net worth, thanks to blogs like this one and its community, earlyretirement.org, the original GetRichSlowly blog, the Millionaire Next Door professors and writers/thinkers like Joe Dominguez, I was able to financially survive the death of a spouse who left no life insurance while I raised my 11 year old.

    Part of what I learned was the “how” to do it. And I’m still learning, thank you Investopedia. But more importantly — I learned that others around me, at least in the blogosphere, don’t have fancy cars, and THAT’s OKAY. They are proud of how much they’ve saved. They don’t shame me for using coupons when I go out to eat. The list goes on.

    The reason a lot of people spend too much is emotional and it is systemic. When you go against it — you are shamed at best and practically end up being viewed as a counter-cultural revolutionary at worst. “What? You don’t want to go to lunch today because it will cost $12.00? Please!!” “You don’t want to join the tennis club where you will meet all your new clients? Really? That’s dumb.” “Here’s a friend of mine who can be your real estate agent. Yea, she charges a little extra — but she’s a friend of the boss! Wink wink…”

    It’s our own evaluation of others based on how much they “have” versus their character that gets us in trouble. And we fuel this with marketing messages that we receive. I worked in marketing for a decade — the game that we conducted to grab money out of your pocket is shameful. THOUSANDS of messages a day. Try avoiding a marketing message and see how quiet your life becomes.

    And we studied how to manipulate people — it was how we “won.” Didn’t matter the industry – from concert promotion to healthcare. Yes, healthcare is filled with marketing messages that can be outright puffery, leading people to make decisions that are unhealthy and downright life and death — and no one is regulating it or cares. I cared enough to quit so I couldn’t be part of the problem anymore.

    So, while I do make money from stock investments that grow — my investments may not be supporting the best values for our children’s future. Many of those companies are making profits right now because they are laying people off. M&As are at the highest level in 2015 than any other time in corporate America’s history. I’m selling stocks of companies that are gleefully announcing “we got rid of 2000 jobs!!!” Really? How stupid is that when you need to rehire workers and it costs $2k per turn over before they even get started? I’m out.

    This concerns me enough to turn my focus to less consumerism. Less waste. I don’t want to be a frugal natzi — but I do believe the less I buy, the less I buy-into and support a very dangerous turn in our society’s history toward “More, More, More, never have enough… Greed” squashing the beautiful free country that we are blessed to live in.

    • retirebyforty April 8, 2016, 10:10 am

      Wow, thank you for sharing. It must have been very difficult to raise a kid as a single parent. I think your philosophy on being frugal is just about perfect. Less personal consumption is the way to go because other people are so focused on consumerism. Buying less doesn’t mean you’re deprived. We still have a very good standard of living even with spending less.

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