According to the Pew Research Center, the middle class makes up around half of all American households. This is approximately the same as 165 million people.
Middle-class people frequently have some college experience, some spare cash, and may even be thinking about their retirement. That does not, however, indicate that they are stable financially.
In actuality, debt-laden households in the middle class frequently have credit card, mortgage, or auto loans that need to be paid off. These people are nonetheless prone to a number of common financial mistakes, or money traps, which keep them from experiencing true riches.
Here are some financial choices or actions that may be preventing you from becoming financially independent or affluent if you are in the middle class.
Trying To Keep Up With the Joneses
The hamster cycle of life is the “middle-class money trap,” according to Sebastian Jania, owner of Manitoba Property Buyers. This includes actions like purchasing vehicles that lose value over time, incurring student loan debt for a degree that has a shaky financial future, or making an exorbitantly priced real estate purchase. All of this is referred to as “keeping up with the Joneses.”
For many people, societal pressure and influence are very genuine worries that frequently result in costly purchases made to maintain appearances. This has the drawback of possibly starting a vicious cycle of debt and overspending. When this occurs, it may be more difficult to attain long-term financial objectives, make future investments, or amass money.
Spending Without Saving or Investing
According to John Bodrozic, co-founder of HomeZada, “a classic middle class money trap is spending all or more of your salary without saving anything that will allow you to make investments that produce wealth, such as a home.”
Bodrozic claims that “the money trap for middle-class homeowners is neglecting maintenance, repairs, and obvious remodeling and improvement opportunities, or mismanaging your home from a financial standpoint, which will prevent you from growing your investment and may even lower home values and your equity.”
Settling for the Status Quo
When people start earning more money, they frequently grow accustomed to their surroundings and decide to stay. This may hinder their ability to truly prosper.
According to Dr. Enoch Omololu, a personal finance expert and founder of Savvy New Canadians and Dollar Financials, “the middle class money trap occurs when an individual settles for the status quo after they start earning middle-class income.”
This is due to the fact that they now perceive their financial status as being better than many other Americans’ and at least as good as that of their neighbors. They stop feeling competitive, which stops them from accumulating more riches.
Relying on Yourself for Everything
The middle class believes that they must handle everything themselves, which the wealthy do not, added Jania. “Hiring things out or asking for help is frequently not something that the middle class wants to do. However, in order to quickly amass income and wealth, the wealthy delegate as much as they can and form alliances.
Getting a financial team together is frequently a good idea if you want to rise above the middle class and achieve actual wealth. Working with a financial advisor, financial coach, certified financial planner, or other professionals who can create a detailed strategy to assist you achieve your goals could be one way to do this.
Failing To Take Advantage of Investing
Moving out of the middle class and accumulating wealth also requires learning how to invest and actually doing it.
After what happened in 2008, investing in the stock market can seem intimidating or even frightening, according to Billpin.com founder James Allen, CPA, CFP, CFEI. “However, if you don’t invest, your money won’t be working as hard for you. Even a small amount saved each month over time might add up to a sizable sum.
Some people in the middle class avoid investing because they don’t know how to do it. Or, instead of diversifying their portfolios, they just invest in one or two things. This may severely restrict your financial options.
According to Omololu, a lack of diversity in people’s investment portfolios is another effect of poor investing understanding. For instance, they could invest their whole net worth in a larger-than-needed home rather than spreading their holdings among real estate, equities, bonds, and other assets.
The issue with investing in only a few assets is that if one of them performs poorly, it might have a significant impact on your wealth as a whole. The other assets in your portfolio, nevertheless, could be able to make up for any present or short-term shortfalls provided your portfolio is diversified.
Relying on Credit Cards or Other Expensive Debt
Another common middle-class habit is using debt as a means of sustaining their way of life. This includes high-interest credit cards, auto loans, and mortgages. Even though it could be simpler to keep up appearances in this way, any wealth you have accumulated could be lost overnight.
Angela Johnson, the founder and senior advisor of Worthen Financial Advisors, stated, “You can’t become wealthy while carrying debt and interest.” Paying off loans and credit card debt doesn’t make you rich; rather, it makes those firms rich.
Renting Instead of Buying
While renting provides advantages like freedom, it may also easily turn into a trap that hinders you from saving money or increasing your wealth.
The rent a middle-class renter pays is merely an expense and does not in any way boost their wealth. Bodrozic asserts that buying a home is a residential real estate investment with a track record of generating wealth. By failing to monitor home equity and failing to realize the impact of real estate investment and management on wealth growth, the middle class’s capacity to advance can be severely hindered.
It’s crucial to think about the potential returns on any property before buying, just like with any investment. This is so because not every real estate increases in value in the same way.
Thinking You Need a High Salary
Many people in the middle class associate their value or wealth with their income. You don’t need a high salary to become wealthy, according to Johnson. Simply spend less than you make is all that is required.
You would be much less envious of your friends’ expensive handbag or car if everyone wore their net worth on their foreheads, she added. Wealthy people are unwilling to trade the opportunity cost of saving money vs spending it on an expensive brand-name item.
Having No Long-Term Plan
No matter how much money you make, having a long-term plan and following it are essential for moving out of the middle class and into riches.
It is far easier to save for the future than it is to spend foolishly now when you have specific financial goals that you are working toward.
