If I were to ask if you live comfortably, what would you say? Well, recent studies show that 62% of Americans definitely do not feel as if their lives are as comfortable as they would like them to be and you know what all these people have in common? You guessed it, they’re in the middle class. Right now, the middle class is facing a major economic hurdle known as the middle class squeeze where millions of people are slowly falling into financial despair. As such, let me share with you why that is and five mistakes you must avoid to ensure you don’t end up amidst this unfortunate group!
First off, what is the middle class? Typically, we think that as long as we have a roof over our heads and food on the table that we are well beyond the lower class and this is most often true. However, when we look outside our window and there’s no expensive sports car in the driveway, it reminds us that we also do not fall within the group of the financial elite. So, to clear up what it means to be middle class today, if you earn anywhere between $42,000 and $126,000 then you are in fact in the middle class. Now, of course this is a vast range of incomes and there’s no refuting the fact that your lifestyle will be different if you make $40,000 a year versus $100,000 but as a whole this group faces many challenges and I want to now dive into the ones that are acting as the biggest thorn in the sides of this unfortunate group.
The primary reason that the middle class are in such a bind financially these days comes down to what I call the “income-cost” paradox. Before we get into the cost side of this major financial issue, I think it’s prudent to discuss the income issues that most middle class individuals struggle with on a day to day basis. The main issue revolves around the middle class’ reliance on a 9–5 salary as their primary means of making money. Now, you may be thinking “well lots of people earn large salaries so what’s the issue?”. The truth is that making $200,000 or more through a job is rare which leaves most people facing the issue I want to talk more about now.
If you’ve received a raise at work in the past couple of years then chances are you were not exactly calling a Brinks truck to help you get it to the bank. These days, the annual salary raise averages between 3–5% and on a median salary of $60,000, that’s only an extra $3,000 at best which you know won’t get you that far these days. Unfortunately, these jobs have not only become very poor contributors to your wealth but many people, especially during the pandemic, have seen their working hours rise which limits their ability to make money outside their career as well.
Moving on, there are also counterforces working against these minor raises in income you end up facing. As you’re probably aware, inflation has become a major concern in the economy due to its impacts on mortgage rates and investment returns; however these rises in costs are especially pernicious in essential items that the middle class relies on with the first being homes. We all know that owning your own home is a staple in a middle class person’s life. However, becoming a homeowner will soon become a thing of the past for this unfortunate group. As we saw during the pandemic, home prices are becoming more and more out of reach for the middle class with 2021 prices having gone up a record 13.2%, which I will remind you, is significantly more than that raise your boss gave you this past year.
Another key cost that is sinking the middle class are childcare costs. Most families in the United States require some form of child care as their incomes do not allow them the luxury to have one family member stay home. In fact, a recent study found that middle class child care users are now spending upwards of 25% of their incomes on this necessary expense, up from just 18% in 2018.
Not to mention, 38% of these same individuals state that they need to work a side gig just to keep up with the thousands of dollars of child care costs they incur every month. Therefore, as you’re starting to see, the middle class is literally drowning financially. Fortunately, there are certain mistakes you can avoid to ensure you give yourself the best chance of avoiding this life of financial despair which we will get into now!
Mistake #1: Assuming Too Much Debt
There are many four letter words that evoke positive emotions within us like “love” and “hope” but debt is definitely not one of them — nor should it be! One of the biggest mistakes that most people who end up in the middle class fall into is a constant battle with debt. If you’ve ever had debt before, you’ll know just how challenging it can be to get ahead when you are handing over hundreds of dollars a month in repayments and interest charges — which if you ask me is the least fun way to spend your money.
So, why are so many people struggling with this ugly four-letter word? Well the first reason is due to the exorbitant rise in tuition costs. If you come from a middle class family, I’d be willing to bet that you were told that going to college is the only viable path to a prosperous future and this of course comes with subjecting yourself to mounds of student fees. In fact, in 2021, students had the highest record of student debt at an average of just under $40,000 a student. Therefore, when you take this common life path, you are already starting your adult life with large monthly repayments that most 9–5 incomes won’t be able to support.
However, the problem only gets worse as credit card spending sets in. To ease the emotional pain that comes with being in mounds of debt, what do we do? We buy more stuff. As of 2021, the average American had $5,525 in credit card debt. At the average interest rate of 18%, making minimum payments, which is all many people can afford, it would take you 3 years to pay it off, incurring more than $1,500 in interest fees alone. But why are people racking up this credit card debt in the first place you may be wondering? Well, let’s get into that more in mistake #2!
Mistake #2: Trying To Live Richer Than You Are
I don’t know if everyone is trying to emulate the lives of the celebrities and influencers they see online but one thing that’s becoming clearer by the day is that most people would rather look rich than actually be rich.
The sad truth is that given the income and costs issues I talked about earlier, most people will never be able to get to a point financially where they will be able to enjoy the finer things in life. As such, to get a small piece of the luxury pie, they spend outside their means to look the part. I’m sure you know people who drive more expensive cars than they can afford or buy the biggest home their financing will allow and each of these overreaching decisions drive the nail a little bit further into their middle class coffin.
The obvious answer in solving this problem is simple: stop spending more than you can reasonably afford. However, I know that most people simply can’t help themselves and as such, their only other option is to raise their income to a point where acquiring the material goods they want falls within their budget. Well, this is in fact entirely doable, that is unless you make the following mistake!
Mistake #3: Relying Solely On A 9–5 Job
If I’ve learned anything in my career to date, it’s that your job will give you praise, tell you “you’re a family” and even let you leave work a few minutes early with the hope that these things will make up for what you really want, which is more money.
I’ve already laboured on the point around how embarrassingly low raises are these days which is why you need to find other ways to make an income if you want a shot at getting ahead financially. To do this, there are three paths. The first is to create a side hustle outside your 9–5 job. If you work normal hours then I can’t stress enough the benefits you’ll receive by creating alternate streams of income over time.
Option 2 is to start your own business. When you control the business, you control how much you get paid and while that amount may be meagre at the beginning, it can have you enjoying more returns than your job could ever give you if you stick with it.
Finally, there’s investing. If you are able to stash away some money and acquire cash-producing assets like real estate or dividend stocks, this can help supplement your income and over time push you up and out of the middle class.
However, some people conflate investing with gambling which is what we need to talk about next.
Mistake #4: Trying To Get Rich Quick
Why get rich slow, when you can get rich quick, am I right? Well, this is the attitude that many middle class people have these days as they come to realize just how financially screwed they truly are. Now, you would think that many lower class people would also succumb to trying to get rich quick but it’s actually those in this middle tier that fall for it the most and it’s for two reasons.
First, when you’re in the middle class, especially when your income eclipses the six-figure mark, the upper class seems just an arm’s length away. As such, many middle class individuals will try and catapult themselves into this upper echelon by making risky financial moves. Second, unlike the lower-class, these individuals often have some disposable income to use to make these moves whereas the lower class often have nothing to spare and as such can’t even fund their own get rich quick ideas.
As you can imagine, there are a ton of ways people try to get rich quick but the most prevalent instance of this shortcut to wealth revolves around the world of cryptocurrency. The more I look into how this new asset class works, the more I can envision it making up a significant part of the future world of finance. However many people are using it as a one-way ticket to financial freedom by investing money they simply can’t afford to lose into projects that likely won’t pan out in the way they hope.
This is obviously why the investing magnates that have come before us preach patience and consistency over urgency and high risk but at least these individuals are “investing” right, which is not something all people in the middle class can say as you’ll now come to see.
Mistake #5: Failing To Invest
Chances are you don’t like your job and the sad part of this statement is that it is entirely possible to make money without working but many people forgo this reality by never investing their money. As of 2021, only 56% of Americans own stock and it doesn’t take a genius to figure out that most of that stock ownership falls within the upper middle class. Now, you can see why the lower class wouldn’t invest — they don’t have the means to.
However, the middle class shouldn’t be using this excuse as a reason not to invest. If you have some financial management skills and are making a reasonable salary then you should have some extra money left over at the end of every month.
Unfortunately, this money rarely moves in the direction of investing and I believe this is the case for two particular reasons. First, as I said earlier, many people in the middle class are trying to look richer than they are so they spend that disposable income on material goods that will give them no lasting financial benefits down the road.
Second, middle class individuals likely aren’t making enough to feel comfortable investing. If you only have $500 a month left over, are you really going to want to invest it and risk losing it if the market goes belly up? As such, many people in this position save that cash and feel good doing so even though that money is eroding to inflation more by the day.
The reality is that for the middle class, raising their income and investing consistently is the only way out. Therefore, avoid these five mistakes and when you do, over time, these middle class issues will no longer hold you back!