A recent study by Pew Research Center revealed that the percentage of American households considered “middle class” has decreased from 61% in the 1970s to just 50% today. This decrease has led to a wider income gap between households, with the percentage of upper-income and lower-income households on the rise. So, what factors contribute to this shift in income classes?
First, middle-class individuals typically have some disposable income and have obtained a college education. They also tend to achieve a certain level of financial stability, with many preparing for retirement and having emergency savings or investments. However, middle-class households often carry consumer debt, such as mortgages or high-interest credit cards, and are susceptible to money traps and financial pitfalls.
One of the biggest money traps that affects middle-class Americans is the belief that homeownership equals true wealth. While owning a home has long been seen as the American dream, research suggests that residential real estate is not the most effective way to accumulate long-term wealth for retirement.
Another trap is consistently living above one’s means. Many Americans strive to “keep up with the Joneses,” leading to more debt and financial complications. This can make it difficult to prepare for retirement, pay off existing debt, or build wealth. Lifestyle creep is a related trap that occurs when nonessential spending increases alongside income. It’s crucial to be aware of spending habits to achieve long-term financial goals.
Pursuing higher education without a clear plan can also be a money trap. While obtaining a degree can lead to higher-paying jobs, it is not always a guarantee. Many individuals with student loan debt struggle to pay it off, especially when they lack a clear career trajectory or financial plan.
Lastly, middle-class Americans often fund their lifestyles with credit card debt. The U.S. has one of the highest amounts of credit card debt in the world. Relying on high-interest credit cards can quickly diminish financial gains and lead to financial instability.
It is important for middle-class individuals to be aware of these money traps and take steps to avoid them. By making informed financial decisions and planning for the future, middle-class Americans can strive for financial stability and security.
Sources: Pew Research Center, Robert R. Johnson, PhD, CFA, CAIA, professor of finance at Creighton University, Jaspreet Singh, Steve Sexton, CEO of Sexton Advisory Group, Scott Lieberman, founder of Touchdown Money.