How to overcome the 7 biggest financial mistakes of the middle class
OCTOBER 18, 2017 AUTHOR: SHAUN
The middle class is getting squeezed, and there is a lot we can do to improve our finances. It’s important not to be passive, but to own our financial situation.
The makeup of the middle class has changed a lot over the past 20 years. While it used to symbolize a sense of stability, comfort, and financial independence, that symbol is starting to change. Without realizing it, ever so slowly, the middle class are getting “squeezed” and are falling behind financially.
The middle class are losing ground financially
By “squeezed”, I don’t mean they’re any worse off. In fact over time, with changes in technology, the standard of living has gone up. Instead, research is showing the middle class are not increasing their wealth or income as fast as the lower and upper class. Either end of the spectrum is changing for the better, while they’re being left behind.
Who’s this group getting squeezed? Ask five different people, and you’ll get five different answers. For the record though, I don’t think it matters much, and the trends remain the same.
But for those who want to be technical, the Pew Research Centre, a fact tank from the US defines it as those with two-thirds to double the median household income. That means you can call yourself a middle-class family if you roughly earn between $42,000 to $125,000 a year.
This group has done a lot of research on income and wealth and revealed a couple of alarming trends:
- Middle-income Americans are no longer the majority (after almost four decades!)
- The upper class are growing their income faster than the middle class
- The wealth gap between middle and upper-income families has increased and reached a record high
Yikes! It’s pretty easy to summarize: The middle class is losing ground!
Who’s at fault?
Before we start the blame-game, we need to look at ourselves. Sure, strands of bad luck can take their toll, and I won’t pretend that they don’t impact our lives. But it’s important not to lose sight of all the things we can control.
What have you done to improve your situation? Are you being too passive? Are you taking action to own your financial condition (for good and for bad)?
After some extended reflection, I’ve found that there are a lot of things we can do to improve our own finances. Here are some of the top financial mistakes of the middle class, and helpful ways to take action and reclaim your wealth:
1) Delaying retirement savings… or any savings at all
There are tons of excuses out there preventing us from saving. School. Kids. Debt. The problem is that with each passing year, we’ll always find another reason to delay saving for retirement.
It’s very costly to wait to invest (I’ll show you the math in this post). Even if it means starting small, work to build a habit of saving each month. Long-term wealth is created through consistency. Don’t gamble with your retirement – start saving as soon as you can!
2) Not using employer matching savings plans
Free money – who would pass that up? Sadly, it’s happening… and quite often too!
Morneau Shepell, a firm that provides HR consulting services, reported about one-third of employees lucky enough to have access to these programs don’t even bother to opt in. Between the US and Canada, workers are missing out on about $27B in employer matches. That’s big-time money! Do your research. If you have one, be sure to take your fair share, even if it means taking out a short-term loan to maximize your benefit.
3) Not having an emergency fund
Nearly 6 in 10 Americans don’t have enough savings to cover a $500 or $1,000 unplanned expense, according to a report from Bankrate. This is problematic because emergencies can and do happen – it’s often only a matter of time. Without a well-stocked emergency fund, you’ll need to take on debt to pay for these costs.
Most financial professionals recommend building an emergency fund to cover at least 3-6 months of your expenses. To be honest, though, any emergency fund is better than nothing.
4) Investing with “leftover” money
If something’s important, it should get priority attention. It should be one of the first things you look at.
Saving isn’t a priority if you only commit your leftovers to it.
If you haven’t started yet, start planning your finances around the idea paying yourself first. That means before you pay for your house, your car, or even food, make sure you set aside enough money for “Future You.”
It’s a powerful concept because it ensures you consistently focus on your savings over other things. Even if it’s a small amount, that little sum of money will grow with compound interest to a nice pot many years later!
5) Spending well beyond your income (and taking on too much debt!)
The middle class has loaded up with debt to maintain its consumer aspirations. Not usually for the sake of an investment (like school), but for the sake of our wants. We live in a society where the last years’ smartphone model won’t cut it.
Be careful how much debt you’re taking on. If you’re borrowing just to get by or financing every purchase, it’s time to look over your financial situation. The good news is that there are lots of resources, both online and through reputable professionals, to help provide support.
6) Throwing away money on assets stuff that loses their value
Spending or even borrowing for an investment (like education, or to invest wisely) is often a pretty safe bet. Spending money on something that will only lose you money over the long haul though… bad idea. Yet tons of Americans do it.
As of last year, the average car payment was $503… the first time it topped $500. That’s a ton of money that could have been put to better use.
Most people would be better off buying gently used cars, taking good care of them, and running them into the ground instead of flipping new vehicles every 2-3 years. Cars do not make good investments. And if you can’t afford it, don’t stretch yourself and buy a luxury import. No matter what the deal, you’re still stretching yourself!
7) Don’t keep track of spending, and don’t have a budget
Just about everyone can benefit from tracking their spending and creating a budget.
Now I hear you, the word budgeting can make you cringe. It belongs in the same camp as the dentist and flossing. You know you should do it, and you know all the right reasons why… however, it’s easy to avoid.
But my question to you is this– how do you plan on saving if you don’t create a plan?
It’s quite strange – just about every other goal starts with a plan… yet we treat our finances differently. If you wanted to lose weight, it’d make sense to build a workout schedule and maybe even a meal plan. Very few of us would jump into the gym head-first for the first time and succeed! Trying to save is no different. Better saving starts with better budgeting.
Think it through
- Are you feeling “financially squeezed”? How so?
- Are there any habits you could change to improve your spending and saving?
- What would need to be true for you to save an extra 10% of your income this month?
- Learn how to pay yourself first and save more money
- The one thing most people forget when budgeting
- The high cost of waiting to invest – why are you waiting
- How not to overspend and save more money
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