Defining “Middle Class” and How to Get There!

Let me get this out of the way first: If you choose to define middle class by income level, most guidelines returned by Uncle Google will indicate that I moved out of this category about half a decade ago (and the addition of my wife’s income three years ago moved the needle much further).

Defining a class of people by this single metric misses the big picture.  How much money is coming in the door certainly matters a great deal – but so does how much of that money goes out and what for.

“Lower” class

For contrast purposes, let’s first agree on what “lower” class is (use of this term is not meant to be demeaning in any way).  “The working poor” is another term I’ve heard for this portion of the population in recent years.  Folks in the lower class are, quite simply, impoverished.  Their income is so low as compared to basic living expenses in their home city that while their basic human needs are met, they’re left with little to no discretionary income.  In addition, people in this class are often weighed down by debt that has no payoff date in sight.

Those in the lower class need two things to make the move to middle class:

1. A boost in income (some potential options here: new job, work overtime if available, rent a room, take on an additional part-time job (perhaps driving for Uber or Lyft).
2. Use your new found discretionary income wisely.

This second point is critical.  If you’re making $35K/year and just managing to make ends meet then manage to get a new job making 25%/$8750 more, you’re on your way to a better life for you and your family… unless you blow it all on the latest iPad, Apple Watch and new shoes.

This is where you begin to see that income alone is not sufficient to define class status.  Being lower class with fancy gadgets is still lower class.  Use that extra income for an emergency fund (so if your car breaks down you don’t end up out of a job!), to pay off debt (freeing up more income) and to save for retirement.  Now you aren’t living paycheck-to-paycheck.  Now you’re middle class.

“Upper” class

I’ll skip to upper class next (use of this term is not meant to be complementary in any way).  You might also refer to this class as rich.  Folks in the upper class have sizable amounts of discretionary income – and they use it.  Interestingly, a high percentage of these “well-to-do” folks are also weighed down by debt that has no end date in sight and they may also be living paycheck-to-paycheck… they are just fortune enough to be doing it in luxury (certainly there is a portion of the population that has no debt and assets that support their spending – I’d call these the super-rich (and Mark Zuckerberg won’t be reading this blog)).

The upper class has grown into their incomes.  Their paycheck will allow for them to pay the monthly nut on a $70,000 car and a $1MM 30-year, interest-only mortgage, so that’s what they’ve and have become accustomed to (and convinced themselves they deserve).

The trouble with growing accustom to a level of luxury that requires a high income coming in and going out every month is that you will need this high income perpetually.  If 98% of your income is going out the door every month, how do you ever save enough to provide that same income in retirement?  You can’t.  You will work until you’re dead – but, you’ll live in luxury until then!  Unless you lose your job (“but that can’t happen” ..said all of Enron’s employees, cab drivers everywhere before Uber & Lyft, Microsoft Exchange Admins before Office365 and Gmail, etc).  Or become disabled (“but that won’t happen” said everyone, everywhere before the accident).

If you are upper class and need to get to middle class, it’s much easier than clawing your way up from lower class You’ve already got the income addressed; your offense is awesome.  You just spend too much; your defense is the worst in the league!  Here’s the plan:

1. Downsize!  If you’re in a $1MM house, sell it, make sure your new house costs less than 2X your gross income.  Sell your luxury car(s) and buy used according to your needs.  Don’t be afraid to take a some losses on this process, you’ll be more financially healthy at the end of the day.  Sell your toys (boat, jet-ski, jumbo jet).  This will be uncomfortable, but that’s okay… you can do it.
2. Stop buying stuff you don’t need.  NO, you don’t need this year’s iPad, a new pair of $100 jeans or a replica of Frodo’s elvish sword (Sting).
3. Eat at home by default.  Eating out should be a treat that you enjoy and get excited about, not simply your usual way of getting overpriced calories into your body.
4. Invest in things that make you and your family happy.  In this case, “invest” does not always refer to money.  For us, we invest time in things like going to the park with the kids – this is fun for all, healthy and FREE.  If it’s pricey won’t add happiness to your life… why bother?

Middle Class.  My Class.  The Sweet Spot.

Middle class is that sweet spot between these two extremes.  Those in the middle class have discretionary income and they use it wisely!

What do folks in the middle class look like?

• Their income is sufficient that their basic human needs are met (reasonable housing (and all that goes with it), transportation, food, etc.) with some amount of money left over.  It’s difficult to put dollar figures to this as circumstances vary greatly (location obviously plays a big part in cost-of-living, but so does personal circumstance (for example, my mother-in-law lives with me and is unemployed)).
• They do not live paycheck-to-paycheck either because of insufficient income or extravagant living.
  • Includes not being “house poor” (general rule here, your house should not be worth more than 2X your annual household gross income – ours is less than 1X currently – you just don’t need that much house, yard or fanciness).
  • Includes buying the most inexpensive car that will meet your daily needs.  Forget your wants (no one needs leather, heated seats).  Forget the two weekends a year you have a large group and it would be nice to have third-row seating – take two cars or rent a Tahoe for the weekend.
  • Includes every other extravagant purchase you want but don’t need and isn’t financially sound.  Don’t buy a boat, jet-ski, four-wheeler.  Don’t buy an expensive, fancy snowboard when you live in Florida.
• They do not have soul-crushing, marriage-ruining, ulcer-inducing debt.
• They do actively manage their finances.
• They save for retirement.  20% of gross-income (or more, if you can, especially early) is ideal, 10% should be considered minimum – work towards it if you need to.
• They save for purchases (cars should be purchased with real money, not by signing up for an endless cycle of debt).
• They invest their windfalls (bonuses, salary increases, paying off a debt giving you additional discretionary income) rather than seeing them as consumer opportunities.
• Their children respect the value of money, hard work, saving and paying their own way.  Oh yeah – and they go to Public School.

Being middle class is about choices.

Choose to be responsible (perhaps even frugal!).  Choose to save for the future.  Choose to set an example for your children.  Choose to be middle class – especially when your income rises!