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