I hope all of you are recovering from the realization that you didn't win the powerball today like I am! While most of us watched all of our epic dreams bounce away in the form of lottery balls, a lot of us in this country are also starting to realize that we may no longer be in the middle class!
I've got a great guest post about this phenomenon today by Dr. Penny Pincher (awesome name, especially when you start emails to him with “Hey Dr. Penny Pincher,”). Enjoy! ~ M$M
The other day I learned that I am no longer middle class.
I was listening to a report on news while driving home from work. The story was about the shrinking middle class in America. Now, less than 50% of Americans are considered middle class due to the growing numbers of people in the upper class and lower class. A worrisome question crossed my mind: “Am I still middle class?”
My mind flashed to the 10 year old car I was driving, the 15 year old coat I was wearing, and my $30 tennis shoes that are extensively repaired with duct tape. Have I really slipped out of the familiar middle class status I have enjoyed my entire life?
The news story continued on the radio. The reporter threw out some income numbers to provide a definition of middle class. To my shock, I realized that I am no longer middle class.
When I got home, I broke the news to my son that we are not middle class. “Are we poor then?” he asked. He was stunned when I told him we are considered upper class.
Before learning the official definition on middle class, I would have guessed that my family is squarely in the middle of middle class, or maybe slightly below the middle. We are working hard to avoid unnecessary spending as we try to pay down debts and build a retirement fund.
Most people I know seem to have more money and nicer stuff than my family. However, I think this is an illusion due to three facts:
1) Class definitions are based only on household income. Net worth and debt load are not considered.
Even though my income is high and I am therefore considered “upper class,” I have a lot of bills to pay including some big student loan payments. Student loans are the main reason my income is so high, but they are also one of the reasons I have almost no money left after paying the bills. And I have plenty of other debt payments in addition to the student loans. The result is that I do not feel upper class at all.
2) Many people use borrowing instead of income to boost their spending ability.
When I see that my friends and neighbors have newer cars, nicer clothes, and fancier riding lawn mowers than I do, it is easy to conclude that they must also have more income. This may not be true. Lots of people max out credit cards and take out home equity loans to live above their means, or at least impress the neighbors.
3) The grass is always greener on the other side of the fence. It’s just human nature.
I am sure many people would be quite envious of my unique house, my woodsy yard, and my well-equipped workshop. Heck, some people would be envious of my riding lawn mower even though it is a less expensive red brand instead of the more expensive green brand that is popular in my neighborhood. Plus I have a very nice Ph.D. on my wall. OK, I’d better stop now. I can see that people really are getting envious…
So, what lessons have I learned in my surprising transformation from middle class to upper class?
It doesn’t matter what economic class you are in. If you have a lot of debt- you’ll feel poor.
Having disposable income makes you feel rich. Putting disposable income into investments that grow in value is what actually makes you rich.
Student loans can be a really good financial move.
I would have little hope to be financially independent without my education and the earning potential that it provides. The investment to receive a good education is small compared to the potential return. If you have a career plan you want to pursue that requires taking on student loans, I would not hesitate to take out a student loan.
Boost income AND cut expenses
During the 3 years since I started my blog Penny Pincher Journal, I have focused mostly on finding ways to cut expenses and spend less money. This year, I plan to continue pinching pennies and also try to focus on increasing my income to accelerate paying off debt and building my investment accounts. Boosting income has a lot more upside potential than cutting expenses. You can only cut expenses so much, but there is almost no limit to how much income you could make from the right opportunity. Revenue from my blog is growing and am looking forward to a great year.
In the end, it does not matter if you are classified as lower-income, middle-income, or upper-income. The only thing that really matters is that your income stays higher than your expenses. Use the difference to pay off debt and build investments, and you will feel rich.
About Dr. Penny Pincher
Dr. Penny Pincher really is a doctor with a Ph.D. in engineering. In 2013 he busted his budget with an impulse buy at the pet shop (a designer puppy!) and realized he needed to find creative ways to cut expenses to get back on track. He founded his blog Penny Pincher Journal in 2013 and is a staff writer at Wise Bread.