According to the Pew Research Center, approximately half of all American households are considered to be part of the middle class. This equates to roughly 165 million people.
Typically, people in the middle class have some kind of college education, some disposable income, and may even be planning for retirement. But that doesn’t mean they’re financially stable.
In fact, middle class households usually have some kind of debt — like a mortgage, auto loan or credit cards — that they need to pay off. Along with this, these individuals are also still subject to many common financial pitfalls, or money traps, that keep them from achieving true wealth.
If you’re in the middle class and want to become financially independent or wealthy, here are some financial decisions or behaviors that might be keeping you from achieving this goal.
Trying To Keep Up With the Joneses
The “middle-class money trap is being on the hamster wheel of life,” said Sebastian Jania, owner of Manitoba Property Buyers. “This is doing things such as buying cars that depreciate over time, taking on student debt for a degree that doesn’t have a solid financial future, or buying a property that one simply shouldn’t be buying because it’s too expensive. This is all commonly referred to ‘keeping up with the Joneses.’”
Societal influence and pressure are very real concerns for many people, ones that often lead to extravagant purchases just to keep up appearances. The problem with this is that it can lead to a cycle of debt and overspending. When this happens, it can be harder to achieve long-term financial goals, invest in the future or build wealth.
Spending Without Saving or Investing
“A common middle class money trap is spending all or more than your income without saving anything that will allow you to make investments that generate wealth, such as a home,” said John Bodrozic, co-founder of HomeZada.
“For the middle class who are homeowners,” Bodrozic added, “the money trap is neglecting maintenance, repairs, and obvious remodeling and improvement opportunities, or mismanaging your home from a financial perspective, that will prevent you from growing your investment and may even lower home values and your equity.”
Settling for the Status Quo
When people start making more money, they often become comfortable and settle where they are. This can keep them from achieving true wealth.
“The middle class money trap occurs when an individual settles for the status quo after they start earning middle-class income,” said Dr. Enoch Omololu, a personal finance expert and founder of Savvy New Canadians and Dollar Financials. “This is because they now see themselves as being, at the very least, as financially secure as their neighbors and better off than many other Americans. They lose their competitive spirit, which limits their ability to grow their net worth even further.”
Relying on Yourself for Everything
“Another thing the middle class does that the rich do not is that they think that they need to do everything themselves,” said Jania. “For the middle class, it is often not desired to hire things out or ask for help. However, the rich delegate as much as possible and work in partnerships to rapidly accumulate income and wealth.”
To break out of the middle class and gain true wealth, it’s often a good idea to get a financial team together. This could mean working with a financial advisor, financial coach, certified financial planner or other experts who can make a comprehensive plan to help achieve your goals.
Failing To Take Advantage of Investing
Learning how to invest and actually doing it are also key to moving up from the middle class and building wealth.
“The idea of putting money into the stock market can seem intimidating or even scary after what happened in 2008,” said James Allen, CPA, CFP, CFEI, founder of Billpin.com. “But not investing means your money isn’t working as hard for you. Even putting away a little each month can compound into something significant over time.”
Some middle class individuals don’t invest because they don’t know how to go about it. Or they invest only in one or two things rather than diversifying their portfolios. This can be extremely limiting financially.
“Poor investment knowledge also results in people having limited diversification for their investment portfolios,” said Omololu. “For example, they may have all their net worth invested in a larger-than-necessary home instead of spreading their holding across real estate, stocks, bonds and other assets.”
The issue with only investing in a couple of assets is that if one investment drops, it could significantly impact your overall wealth. But if you have a diversified portfolio, the other assets can help make up for any temporary or current deficits.
Relying on Credit Cards or Other Expensive Debt
Another common middle class behavior is to rely on debt to afford their lifestyle. This includes high-interest credit cards, auto loans and mortgage loans. While this can make it easier to keep up appearances, it can also very quickly erode any wealth you’ve created.
“You can’t become wealthy when saddled with debt and interest,” said Angela Johnson, founder and senior advisor at Worthen Financial Advisors. “When you are paying back loans and credit card debt, you’re making those companies wealthy instead of making yourself wealthy.”
Renting Instead of Buying
While renting has its merits, such as flexibility, it can also quickly become a trap that keeps you spending rather than building wealth.
“If someone in the middle class is renting, the rent they pay is entirely an expense and contributes nothing to personal wealth. Buying a home is an investment in residential real estate that has a long track record of generating wealth,” said Bodrozic. “Not recognizing the impact of real estate investment and management on wealth creation, and failing to monitor your home equity, can be major obstacles to the middle class moving up.”
As with any investment, it’s important to consider the possible returns on any property before purchase. This is because not all real estate appreciates equally.
Thinking You Need a High Salary
Many people in the middle class tie their wealth or worth to their salary. “You don’t need to have a high salary to become wealthy,” said Johnson. “You just have to spend less than you make.”
She continued, “If everyone walked around with their net worth on their foreheads, you’d be a lot less impressed with your friends’ expensive handbag or car. Wealthy people don’t care about brand names and aren’t willing to trade the opportunity cost of saving that money versus spending it on an expensive brand name item.”
Having No Long-Term Plan
Regardless of how much you’re making, having a long-term plan — and sticking with it — is essential to getting out of the middle class and becoming wealthy.
“It’s much easier to save for the future instead of spend frivolously now when you have defined financial goals you are working towards,” said Johnson.
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