Most Americans consider themselves middle class. Although, there is no government approved definition of middle class, the closest definition was provided by the US Census Bureau in 2009: the median household income $49,777, with family households making a bit more — $61,265. These income figures conclude that middle class income sits somewhere between $40,000 and $60,000, if you define middle class as the country’s average level earners.
I consider myself middle class and most of my friends would say they are middle class as well. When I was growing up in the 70’s my definition of middle class was that we had an average home, two basic cars, a driving family vacation, went out to eat once or twice a week and entertainment consisted of going to the movies or once in a while a baseball or football game. Today, there appears to be a much different view of a middle class lifestyle. Everything from being able to meet basic necessities with a little left over to having your kids in private school and driving a luxury car. Regardless, the overall buying power has significantly outpaced income levels. According to the US Inflation Calculator that uses the latest US government CPI data released on March 16, 2012, an item purchased in 1976 for $20 now costs $64.67, an annual rate of inflation change of 223.4.%. The median income in the US was $36,155 in 1976 and only rose to $43,318 by 2003 a 16.4% based on the US Census Bureau 2004.
Many families are much worse off because of layoffs, divorce or job changes that result in much lower salaries or disposable income. People started buying houses and goods and services that they couldn’t really afford. I remember my dad teaching me to change the oil, which he did on a regular basis, and for my first few cars did as well. I have not changed the oil myself in years; we have become dependent on paying for services. Most major corporations have moved their manufacturing offshore and now much of the IT work is offshore including highly technical professional positions. Even big accounting firms have reduced their staff and senior level resources, which they use to maintain customer relationships, sell new business and review the output of tax returns and analysis performed overseas. Benefits, including most importantly health care and co-funded retirement programs are being reduced more and more.
So what are the financial traps for the middle class?
- You are not as well off as you think and your purchasing power is drastically lower
- Jobs will continue to go overseas
- Consumer spending will continue to stagnate with limited growth
- Most Americans will have no heath care or the cost will be a significant burden
- Retirement will be out of reach for most people with little relief from Social Security
Minimizing the risks of falling into the financial trap
There are many personal finance recommendations that you are probably already aware of such as taking advantage of 401k company matching, building an emergency fund, tax deferred saving, minimize debt, creating a budget, etc… Many of these recommendations are life lessons or passed down from family, mentors and colleagues.
- Research companies that have a good reputation and benefits
- Be willing to start lower in a great company that has opportunities to grow
- Although you may have many jobs, develop a career plan that sets goals and objectives with timing milestones, skill growth, expanding personal and professional network, and experience
- Focus on jobs in the medical field, high-end sales, highly specialized skill that is growing, positions that require you to be in front of a customer or have a direct contribution to revenue
- Be relevant – relevance in your job is a constantly changing landscape, know and communicate how you contribute to the companies bottom line, maintain and grow skills, take on extra projects, be your boss’s go to person
- Diversify your income stream so that if you lose your job you have some other cash flow, teach a college class, rent out property, establish an annuity, part-time job, blogging, sell on e-Bay, invest in a small business
- Consider being an entrepreneur, not everyone can build a .com or phone app but there are many trades that pay well and continue to be in demand. The key is to be the owner and have a well defined business plan including what differentiates you from the competition especially in a commodity business
- Track what you spend, it will help you understand where you have opportunities to reduce unnecessary spending
- You never have enough money learn to make trade-offs, if you really want a snazzy car then you may need to defer on a nice vacation or season tickets. Before you buy it, save for it first.
- Reward good behavior – set short term goals and as you achieve your financial goals reward yourself, this can be savings goals or even reducing the number of lunches you buy every week.
- Minimize the large loss – pay for health insurance, home and car insurance, general liability coverage, especially if you have kids, don’t insure things that you can avoid to lose, replacing an appliance and life-time warranties
- If you are going to go into risky venture think about what is the worst thing that can happen, how much I could lose, could I get sued, burn a bridge with a friend or family member.
- Don’t let people know how much you make or are flashy with money, colleagues, friends and family will be resentful and you will end up picking up more than your fair share of checks.
- Retirement may seem far off but you need to start early, measure results and hold yourself accountable if you don’t want to have to work until age 70 or beyond
You may not retire with millions but a well thought out financial plan, make good decisions, be thankful for what you have, don’t worry about the Jones’s, a little bit of luck and having a great deal of discipline will go a long way to help you be successful and achieve your goals.