One of the things that has made our country strong is a healthy and thriving middle class. When a society harnesses the minds and potential of millions of people, creates the right economic environment, etc., extraordinary things happen.
In my opinion, if we lose that, we would lose our collective soul as a country. Although the middle class has had some external challenges the last decade, we can also be our own worst enemies. We will walk through 6 of the biggest financial mistakes to avoid in order to build wealth.
What Makes A Middle Class?
There are many different views on what constitutes middle class and what kind of system creates a strong middle class. Part of the formula seems to be the rule of law, strong and reasonably ethical institutions, a free market system, private property rights, investments in education and infrastructure, etc. or “the great American experiment.”
In America, most of us in the middle class have a 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.
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. In fact, income and wealth inequality in America is at its highest disparity since before the Great Depression, we seem to be living through another guilded age or “A Tale of Two Cities”.
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. So, here are some financial mistakes we should avoid to help ensure we stay in the middle class and perhaps grow even higher:
1. Putting money into things that depreciate
We put too much money into cars, RV’s, boats, furniture, clothes, electronics, and other material luxuries 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. 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. 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.
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.
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.
5. No Emergency Fund
The good times have been roaring now for a while as stocks and real estate have skyrocketed the last few years. But we all know in America 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. The average American would have a hard time coming up with $400 in an emergency. This puts people in a debt cycle when something bad happens.
6. Not Fighting For Our Rights
The middle class is comprised of the people that make America great! The middle class does the bulk of the consuming that keeps the economy humming. The middle class pays taxes and keeps government functions going. The middle class is juggling many things and raising the next generation. We should ensure our voice is heard at the polling booth and at all times, this is our country and we should have a voice and a seat at the table.
No need to dwell on past mistakes if we have fallen into all these traps. Most of us have or else we would not have gone through so much pain during the last great recession. We have today and forever on to move forward and make better decisions. It is important for our great country to have a strong middle class, it uplifts all our lives as we buy each others goods/services and creates healthy communities, etc.
We may not have much control over the larger economy or market, but there are those decisions within our control we can make to give us a better chance at building a solid middle class life.
This article is not intended as individual financial advice for any particular person, please consult a professional if you have questions about your particular financial situation.6