Recent economic research has shown that more than half of the American population fall into the middle-class income bracket and earn anywhere between $43 000 to $128 000 per annum. The middle-class includes professional people like plumbers, electricians, engineers, firefighters, teachers, construction bosses, and even culinary people like chefs. Due to rising costs, inflation and the lack of income growth the middle class have found themselves squeezed pretty tightly.
Many issues aside from inflation and lack of income increasing in proportion to inflation such as skyrocketing medical fees have contributed to the current state of our financial situation. Most middle-class Americans are finding it harder and harder to save for our retirement or even our kids’ college funds.
Many of us would like to blame their current financial issues on the economy, however, we forget to look at our own relationship with money and assume responsibility thereof for our own predicaments. If you want to build a financially sound future it’s really up to you to make the best decisions possible for every single dollar you have.
We as the middle class not only provides the bulk of the services that keep our nation going, but we also are the largest consumers. Ultimately we keep our society afloat by driving our own economic growth and investments every time we make a purchase. Here are a few mistakes that we have all made as middle-class people when it comes to our money and what we do with it.
The debt trap
The Federal Reserve Bank of Boston recently released an in-depth study of credit card users and found that just over 65% of card users have money owing on their credit cards and only service the interest. This means that we carry this debt with us month after month and never get out of it as all we are doing is paying the interest off. So what we owe remains the same and only the interest we are being charged is what we are paying.
For most of us middle-class Americans who are just trying to get ahead from a financial perspective, this is a really costly mistake we make the month in and month out. The average interest we are paying on our credit card debt is over 15%. What we should be doing to keep more of our money in our pockets is to set up an automatic full payment of our credit cards every month. This reduces the amount of interest we pay.
All consumers irrespective of which income level you are sitting at would ultimately be better off if we can avoid credit debt altogether. Debt keeps us in debt and costs a fortune in interest rates.
Yes, you have that feeling of being financially flush when you are giving a credit limit and you quickly blow it. All you are left with are months and months of debt at high interest rates. Think about it for a moment and see if you can name a single benefit you have gained from having that credit card? All it does is adding monthly costs onto you, you are now in debt to the banks and your stress levels have increased.
No emergency funds available
As much as forty-six percent (46%) of us would really battle if we suddenly needed about $500 cash for an emergency. These findings were based on research done by the Federal Reserve report which was recently released. The statistics may be a bit skewed as 81% of Americans making more than $100 000 or more annual could cover this cost in an emergency and then 34% of the middle class making less than $50 000 could not.
One of the biggest issues with Americans, in general, is our lack of savings and this is a really serious problem. When an emergency arises and we need money we either use our credit cards or take out a loan to cover the emergency. But this only lands us back in debt and again on the hamster wheel of paying more than 15% interest on that debt.
The best advice that can be given here is to try to build an emergency fund that you could access when you needed it. The best amount for your emergency fund would be to have enough cash to cover all your monthly expenses for at least six months. We know this is hard, but just start saving what you can on a weekly basis and build up those savings.
Initially, the process of saving will be a bit hard as we have gotten so used to living in debt. Even if you are only able to start with a dollar or 5 a day, just start. If you bought one less coffee in a day and stashed those dollars you will see your savings grow. Once you get into saving and see the amount grow weekly you will start enjoying it.
We forget to increase our retirement fund annually
Saving and preparing for our retirement takes time and patience and is not something we can really ignore. We need to be saving and preparing for this for almost forty years. We need to ensure that our money grows steadily for 4 decades. Remember once you stop working there is no longer that same annual income you have gotten used to. You now have to rely on what you have in your retirement fund and savings stash to keep you going for the rest of your life.
Growing your retirement fund needs to be planned and executed with diligence. As your annual income grows with your annual increases gained along the way, so too should your retirement fund grow with the same amount of annual increases. If it does not, it’s going to take much longer for you to accrue your nest egg. You want to have peace of mind that you are going to be able to provide for yourself in your older years.
For example, if you currently save about $550 per month into your retirement fund or emergency savings stash and you get a 5% wage increase then you should increase your monthly savings by 5% as well. It’s all about keeping it proportional to your income.
If for example you currently contribute to a company sponsored 401k scheme it’s fairly easy to set up the increased monthly saving automatically and directly with your companies administration or finance department. So you get a 5% wage increase, then your savings amount should increase by 5% as well. This should be done on both your retirement fund as well as your emergency savings stash. Only you can provide for your golden years so be smart and savvy about it.
We rely entirely on our 401k
The sad reality for most of us is that we did not have a “saving” culture in our youth. Yes, when we were kids our parents gave us a piggy bank and we saved our pocket or birthday money to buy ourselves that special gift that we wanted. In many cases, as we reached our teens we forgot about saving. Our parents or grandparents did not grow up in a society that was filled with loans and dept. It was a simpler society. Once where you paid cash for what you wanted or you simply did not buy it.
As society changed so did our reliance on loans and credit. We stopped saving and for many middle-class Americans, we now rely solely on our 401k to provide for us in our retirement. This is not going to be enough for us to retire with ease and we will constantly worry about running out of money.
Also, remember that if you only have your 401k you will still have to pay tax on that amount when you take your retirement. So a portion of what you have been putting away over the years will go to the IRA, leaving you short on your monthly income through your retirement plan.
Many of us rely solely on our 401k’s as we keep saying to ourselves we will get around to saving more for the future. Reality is that we don’t. So in addition to our 401’s we should also be putting money away monthly into a Roth IRA. This way when we retire we are able to access these funds – in many cases, these schemes/funds will give us “tax-free” amounts in our retirement and help reduce our future tax payments to the IRA.
Health Savings Accounts (HSAs)
For many of us, we see a medial plan with a savings portion of it as a real grudge monthly payment. We really need it but we are so loathed to pay it out every month. But this monthly payment, in the long run, will have great benefit to you. Having an HDHP – high deductible health plan allows you to have a medical savings account (HAS – Health Savings Account).
These HSA’s give us the opportunity to have tax-free savings that we can utilize to pay for either our current or future medical expenses. Currently, the government allows us to “save” up to $3 500 individually or around $6800 per family if you have an HDHP (high deductible health plan). These saving deposits are deducted from your annual income on your tax returns, which in turn reduces the amount we owe to the IRA. These savings grow on an annual basis at a tax-free rate and are there if you need it.
There are often medical issues that will pop up and our medical plans may not always cover these expenses. So by having a medical savings stash, you are able to access those funds to cover the bills on care that your HDHP does not cover. If you don’t access your savings during the year to cover medical bills then your savings continue to grow.
Remember that things like visits to the chiropractor or cosmetic dentistry or even eye-wear are not covered by your medial plan and you will have to pay for those out of your own pocket. It’s important to have medical savings. You don’t have to use it but you won’t have to go into debt to get them either.
Procrastination over retirement savings
We are all guilty of this one. We keep saying that we are going to start saving and investing in our retirement but we rarely do as we keep finding that other financial obligations (in many cases servicing debt and credit card payments) that keep us from diligently saving for our retirement on a monthly basis. The earlier we start saving the brighter or retirement years are going to be.
We often say things like, I want to pay my student loan off first or I want to buy and house and pay it off and then I can start saving for my retirement. Whilst these are admirable goals to want to achieve you are selling your retirement in the future short.
Retirement funds need time to grow. Imagine if you planted a seed on a Monday, do you really believe that by Friday it will be a tree? The earlier you start saving for your retirement the better. We have the opportunity now to change the way we do things in our homes. Imagine if your parents had instilled in you a saving culture and you saved a dollar a week for every week you have been alive. Imagine how much money you would have in your retirement savings now.
It’s never too late to start saving. If you have left it to later in your life to start saving for your retirement you are going to have to supplement your 401K with other investment accounts to ensure you are adequately providing for your financial well-being in your retirement years. Get yourself debt free as soon as possible and start putting money away for your future. Remember you are the one providing for yourself.
We forget to update
We take out life insurance policies in our lives or when we start working we designate our parents as our beneficiaries on our parents our 401K’s. All great gestures but things change in our lives; we may get married or even divorced and we have forgotten to change the beneficiaries of our policies or our 401K’s.
Remember you have filled in and signed a legal document in terms of your beneficiaries and even if you have it written in your will the payout of the money will go to whom you have designated as your beneficiary. This legal document overrides any will you may have left behind.
We all live our lives saying this will never happen to us, but the reality is that it does. You will be well advised to review these documents on an annual basis. In many instances, your life circumstances will have changed. You may now have children and a spouse yet you forgot to update your beneficiary form on your life insurance.
Pick a date annually for you to check all your legal documents and beneficiaries. Its sound tedious but will realistically take less than an hour of your time yearly to make sure all these documents are up to date with your current living status. If you have a financial advisor that you work with they will also remember to check these details for you and ensure that your beneficiary documents and your will are up to date. I’m sure you don’t want to be leaving your savings to an ex even though you may have remarried, but forgotten to change your beneficiary forms at with your insurance company.
We spend money on things that lose money
When we buy a car we have monthly payments on the vehicle for a few years. Yes, you have a vehicle but every time the wheels turn on it your “asset” become worth less than the day before. You may have a transport “asset” but in the long run, all you have is something you have paid a whack of money for that realistically, has little value now.
The same thing goes for a swimming pool. Yes, you have a stunning puddle of water that you can splash around in. It costs you money every month to maintain and fill and you think you have an “asset” but realistically, all you have a large hole that you pour money into every month.
Think twice about buying a new car. Are you doing it because you really need a new car as the one you have it literally falling apart or is it because you just want a new car? The best vehicle to have is a paid-up vehicle. Keep your cars for as long as possible and instead of paying those monthly installments, use the money you were paying on an installment and add it to your savings stash or directly into your Roth IRA.
Remember when you purchase a vehicle the vehicle price, is say, $80 000 dollars, but now add in the finance charges, the monthly interest over a period of a few years. You land up paying almost double for the vehicle. Imagine you just kept your old paid up car and invested what you would have paid monthly for a new vehicle into your savings account – how much money would you have right now?
We don’t want to learn about money
In many cultures and families its taboo to talk about money and in the not talking about it we grow up with a false sense of what money really is and how it works. As kids, our parents somehow made a plan to afford us the things we needed and wanted, but they never discussed it with us. They never told us that they had to take out loans and these loans had crippling interest rates piled on top of it.
We take a family vacation on “borrowed” money and long after our tan lines have faded we are still paying off that debt. We have to stop doing this. Just like we talk about the changes our bodies will go through when we hit puberty we need to talk about money. What is money, how do you get it, how do you grow it, what is credit, what is debt, what is interest.
These are just some of the issues we need to be covering. If you grew up like most of us did and never spoke about money how on earth you are going to know how to manage and grow it. Start the conversation today with your kids and work together as a family to see how you can save money and grow it for all your futures.
Thanks to the internet we are all able to go online and find out about money, how it works and how you can grow it. You can turn this learning into something fun for the whole family. It’s never too late to start to learn. Don’t be embarrassed to say you know nothing about money other than how to spend it. Chances are the person you are saying it to knows as little as you do.
A home to impress
By far one of the biggest financial commitments you will ever make in your life is the purchasing of a home. Too often we want to impress our friends with our stunning new home. We buy beyond our financial means and every month we struggle to meet that payment.
We buy homes that are too big for our small family in the beginning because we want to impress people with the large home we are able to buy. Larger homes cost more. Larger homes cost more to run and larger homes have higher monthly utility bills and tax bills.
It is always better to buy a smaller home in a good area than a big home in not such a great area. Property is a great appreciating asset if purchased correctly. You can always buy a larger home if you need it or when your family expands. But starting off smaller and then scaling is the best way to go. Again, most of us know very little about property. We often rush into an emotional home purchase as it appeals to our heart and it’s so cute and special. We get so caught up in this that we forget to do our homework.
What have other properties in the area been sold for? Is there growth potential in our investment and will it increase year on year? Again, most of us know very little about property. Take your time and do your homework. Remember you are going to be carrying that monthly mortgage payment for a very long period of time. It is also important to remember to save for property maintenance that is going to be needed in the future.
We don’t budget
Very few people work to a strict budget and plan. We get money in. We pay the bare minimum on our credit cards or loan payments and if there’s anything left after that we just spend it. Again learning to budget goes hand in hand with understanding how money works. We have been brought up and told that it’s rude to ask about money or talk about it in public. But this is the big mistake we all make.
If you have never been shown how to budget or save how on earth you are going to do it and take care of yourself financially when you are old. Again you can either work with a financial planner to help you set up a monthly budget or go online as there is a whack of budgeting tools available online to help you start this process.
In a nutshell, budgets should work something like this; 50% of your income should cover your essential expenses – housing, transport, utilities, groceries and your basic needs. 20% goes into your savings account or investment account. The final 30% is your lifestyle choices i.e. going out to restaurants, gifts or those things you would like to have.
If you want to go on holiday you need to save every month to be able to afford it. Give this some thought – every day on your way to or from the office you may buy yourself a cup of coffee. What does it cost? Now add that up and see what you are spending on coffee in a month. Imagine if you made the coffee at home and put it into a travel mug and drank it on the way to work – how much could you save?
A few other things we don’t do along the way
Take a look at what your interest rates you are paying on your mortgage, car finance or even credit cards. Can you review it with your lender and get a better rate? Dipping into your savings – often we save a bit and then feel it is okay to take some of that money out to pay for things like a trip or new furniture. But you should not do this. Have two lots of savings – one you don’t touch until you retire and a second for emergencies. Remember that a new jacket or that to die for a lamp is not an emergency.
Collecting your change – Too often we just throw all our change into a jar and it fills then we start another one and eventually we have jars of coins all over the place. It’s a great way to save. Throw your coins into a jar and then once a month take it to the bank and deposit it into your savings account. This is a great way to save without really feeling it in your pocket.
Think before you spend – Impulse and emotional spending is a fast way to deplete your money in your wallet. Take a moment to think about it. Do you really need that extra coffee and muffin or even that new shirt that is on sale? In most cases, if you take a moment to breathe you will soon realize that you don’t really need it you just want it.
One of the biggest financial mistakes we make is that of spending without thinking about it. We also learn to manipulate ourselves by justifying why we need something and that we will start saving next month. Too often next month never happens.