Consisting of everyone from teachers, nurses, electricians, and plumbers to chefs, delivery workers, taxi drivers, and more – middle-class workers are really the driving force of the economy. In fact, half the citizens in the United States of America identify as middle-income households.
While these essential workers do a lot for the country and economy, individually, their financial situations can be less than ideal. For one, wages have remained stagnant for such employees since the early eighties! Inflation, recessions, unemployment… these do not help their plight either.
However, not everything is to be blamed on the economy. Societal pressure and living above your means are some of the things that impact the bottom line of a middle-income household. There are plenty of ways you can fix your money management yourself to ensure a safe and secure future for you and your family.
First, you need to identify the mistakes that you have been making in order to correct them. Here are some of the most common money mistakes made by middle-class people.
1. Too Much Credit Card Debt
Research conducted by the Federal Reserve Bank in 2015 found that 65% of people who used a credit card had some debt. This is an appalling statistic. While it is certain that some people with credit card debt don’t really have a choice, a lot of others simply aren’t careful with it. In other words, they spend without concern just because they don’t have to pay for it in full – yet.
It should go without saying that being debt-free should be one of the first financial goals you should set, and this includes credit card debt. It doesn’t help that the average interest rate for credit card debt has been steadily increasing over the past few years. In short, stop spending more than you can afford – even if it is going on the card!
2. Not Having a Rainy-Day Fund
Another study conducted in America found that 46% of the population would have trouble covering a mere $400 in case of an emergency. Even among those who earn more than $100,000 per year, 20% wouldn’t be able to cover that easily. The situation worsens with those who earn less than $40,000 per annum – almost 66% would be at a loss to find $400 in an emergency!
Having a sound emergency fund is another very important financial goal to set for yourself. If you don’t have one already, start saving now – it’s never too late until it’s already too late! It’s best to have a rainy-day fund that can help sustain the family for at least 6 months, but even a small amount you can set aside every month should help.
3. Not Saving (Enough) for Retirement
It’s natural to look forward to the days when you can finally stop working and start enjoying the fruits of your many years of labor. Unfortunately, a lot of people tend to fail to save enough for retirement – which either pushes their retirement age further or doesn’t allow them to have the lifestyle they hoped for.
You may think that since you have a 401k, your job is done. However, you can’t just ignore it forever and hope there’ll be enough money when it comes time for retirement. Automating the process is a good idea, but you should stay up-to-date, especially increasing savings when you get a raise or add to your income in some other way.
4. Spending Money on Things That Lose Money
A lot of the time, middle-class households can tend to spend money on things for appearance sakes. And a lot of the time, these things tend to be money-losers instead of money-earners. Simply put, they decrease in value over time. In order to increase your wealth, you should focus on investing in appreciating assets, or those assets that increase in value over time.
For instance, a brand-new car or a swimming pool sounds amazing but these will only go down in value over time. That’s not all, as you’ll have to keep pumping money into them for things like servicing, cleaning, filling, etc. Of course, a car is a necessity but its best to get one that is fully paid up. You can buy a used car and put the rest of the money away from investing in things like stocks, real estate, business, etc.
5. Not Budgeting
A lot of middle-income households live paycheck to paycheck, and this is largely because they do not budget. Most people don’t keep track of their income and expenses and before they know it, all the money seems to have disappeared! Not only does this leave them scrambling at the end of every month while waiting for the calendar to turn a page, but they are completely vulnerable in the case of emergency as they often have nothing saved up.
Budgeting is a pretty basic requirement for financial management, and it’s the first step towards a secure future and even increased wealth. There are several kinds of budget you can go with. One of the most popular ones is the 50/30/20 rule, popularized by former presidential hopeful Democratic senator Elizabeth Warren. It stipulates that 50% of your income should go towards covering your monthly needs (rent, groceries, bills, fees), 30% to wants (non-essential expenses like subscription services and dining out), and 20% should be allocated to savings and investment.
6. Not Properly Utilizing Your Health Savings Account (HSA)
Most of us have a medical plan which comes with a Health Savings Plan or HSA. While it might seem cumbersome to pay an extra amount for health savings along with the medical insurance premium, HSAs can be really helpful in the long run. Not only do they ensure that you will not be left facing a massive hospital bill that you cannot pay for in case something comes up that isn’t covered by your medical plan – but they are also tax-deductible!
The government allows every individual to save around $3400 per year or around $6750 for a family plan if you have a high deductible health plan (HDHP). In other words, you are getting to save a good portion of your income without having to pay taxes on it, and these payments keep accumulating over the years for whenever you may need it so you don’t have to worry about them going unused.
Remember that even things like chiropractor visits, cosmetic dentistry, or even eyewear expenses aren’t covered by health insurance so HSAs really are useful!
