I was reading an interesting article about the disappearance of the middle class. In my book review “The Middle Class Millionaire“, the authors found that in this last decade we have moved from into a society divided into the haves and the have nots.
First, what is middle class? The article describes it as being able to afford a home, sending kids to good schools, owning/paying for a car or two, and saving for retirement. Middle income is supposed to be between $46k and $54k. Economist Sullivan says that the middle class might become extinct. Why? Because of the current crisis it puts the middle class wealth of their homes, retirement savings in danger.
The concentration of wealth has increased from 43% to 49%. In 2006 the top 5% of income were making $297k, but the lowest 20% of income is $11k. Professor Richard Levin said the last concentration of wealth similar to now was right before the Great Depression. The average worth of someone on the Forbes 400 is $3.9 Billion. You can gauge the middle class he says by the distribution of income and wealth, which right now is favoring the rich disproportionally.
So why is this a problem? Well the true power of the economy is based on the purchasing power of the middle class. We all know it. We’re the targeted consumers. To be able to own a home, car, send the kids to college, is the basic “definition” of middle class.
So is the middle class disappearing?
Sorry, there are no polls available at the moment.
19 responses so far ↓
1 tom // Oct 15, 2008 at 1:54 pm
I think the true middle class is gone. The people that used to be middle class income-wise became so leveraged that they turned into lower middle/lower class. Those that are fiscally responsible are now considered upper middle class or even rich.
2 Stacey // Oct 15, 2008 at 4:50 pm
I had to laugh at your poll – my husband and I make $32,000 a year, but consider ourselves solidly in the middle class. It all depends on where you live.
We “own” our home in Pennsylvania (mortgage, paying off early), save for retirement, and will start a 529 plan once we have children. My parents sent me to college (with scholarhips) making $25,000.
We are by no means rich or poor for our area – we’re about smack dab in the middle. If that’s not the true definition of middle class, I don’t know what is.
Of course Tom’s got a point – even though we’re average for our area, we hope to become “rich” through responsible actions such as saving and investing. Upper middle class, here we come!
3 Meredith // Oct 15, 2008 at 6:15 pm
While my husband makes enough to qualify us in the “upper middle class” category, the increase in things such as groceries, gas, medical bills (increases in copays, insurance refusing to pay for things they use to pay for our special needs child), etc. All these numbers knock us back down to where we were before he even took his “high-paying” job.
4 fengshui // Oct 15, 2008 at 6:37 pm
I think that it is a matter of perspective. To the poster who has a combined income with her husband of $32k, AND can afford a home is just amazing to me. It would be hard to qualify for a mortgage with incomes that small unless you had a gigantic downpayment. (I probably sound really ignorant, but aren’t homes out east really expensive, like $500k??)
My hubby and I currently make about $110k together, and when I’m finished being a FT student in 8 months, it will increase to about $140k together and we still feel strapped sometimes. We bought our home 2 years ago for $175k and I can’t imagine having a mortgage payment any higher than the one we have now. I admit that we are not nearly as frugal as we should be, and if we didn’t make unnecessary purchases (football and baseball tickets/ happy hour/ going out) and clipped coupons/ meal planned/ stopped ordering out and eating out, we would have a substantial savings, but we don’t. We ARE learning. As far as our income, I “guess” that we are upper middle class (?), but we certainly do not FEEL like it. We only have one newer car, do not go on vacations, and rarely buy new clothes, only have 1 tv in our house (my husband thinks that this is just wrong)…..
5 Stacey // Oct 15, 2008 at 8:12 pm
fengshui,
Out “east,” near the coast and big cities, houses are shockingly expensive. But I live an hour from the Jersey boarder, and our home was $150k. We did put 25% down though, which made a huge difference in the payment.
Isn’t it funny how two very different incomes ($32k vs $110k) both feel middle-class-ish? I get very frustrated when people define middle class and other economic factors with numbers. It’s so hard to compare numbers across the board.
6 fengshui // Oct 15, 2008 at 8:21 pm
“Isn’t it funny how two very different incomes ($32k vs $110k) both feel middle-class-ish? I get very frustrated when people define middle class and other economic factors with numbers. It’s so hard to compare numbers across the board.”
Stacey,
Thanks for answering my question about the cost of living where you live. I live in a “moderate” cost of living area, where the “average” home is $275k, but property taxes are high. We pay almost $4k a year on a $175k home. (Actually they went up again because our house was reassessed because we did some remodeling.) We did not put any money down, so our payment is $1250 without escrow.
It just seems like the little things (and not medical costs because we have none- my health insurance is excecllent) like groceries, dog food, gas, entertainment, utilities, car insurance are keeping us from getting ahead. We also pay a lot of income taxes because we don’t have kids and no write offs. But, we are just starting out, our incomes are fairly “new”, so I think to myself that it will only get better from this point….. (I hope).
It sounds like you are smart about money and make good choices and don’t spend money that you don’t have, so with that mind set and discipline, you will do well.
7 LAL // Oct 15, 2008 at 9:22 pm
Definitely it matters where you live. Average homes where I live start at $600k+. I can’t buy one, I have a townhouse. Truth is most people cannot buy a Single Family home first time out where I live. And most I know have to settle for condos/townhouses until their middle 30s.
We lived in San Diego CA, making $40k/year and we bought a 1 bedroom, 570 sq ft condo for $160k. Not fun even with a down payment and well we weren’t married so our taxes were more, plus we paid nonresident taxes for my DH.
Anyway though, the reality is that at $150k that’s the downpayment where I live. Sadly.
8 fengshui // Oct 15, 2008 at 9:49 pm
“Anyway though, the reality is that at $150k that’s the downpayment where I live. Sadly.”
Even with our incomes, it would take us 10 years to save that much. We would have to live with our parents (gasp)…. to make that happen in a decent timeframe, and considering that we’re 32, that would feel like taking the biggest step backwards…. How frustrating…. what happened…. geesh.
9 LAL // Oct 15, 2008 at 10:49 pm
That’s why people buy condos/townhouses, live there for 10 years, build equity and then buy a single family home.
The reality is you can’t live in a rental forever, although some of my friends do. But most buy something and live there a LONG time, but it’s not an easy situation.
10 C // Oct 16, 2008 at 5:22 am
fengshui- i suggest that you start tracking expenses. it’s amazing how quickly the little things can add up. it seems a little out of whack for a $140k couple to feel cash strapped if they’re living below their means and in an area with an average house price of $275k. if you were living in a $600k area, i could maybe sympathize.
the average house price in my area is about $250k. i make about a third of that. if i stay on track, i’ll manage to save $150k over 6-7 years. i’m frugal with most things, but i also buy organic whenever i can, and i travel fairly often. i probably also spend too much on clothing. my point is, it’s amazing to me that you feel like you can’t save more without moving in with your parents, when it’s actually incredibly do-able considering the numbers.
i think the state of our society as a whole has an inflated view of what it means to live comfortably. that’s what’s contributing to the 0% savings rate. just to give an example, my roommate buys starbucks every single day, and she practically lives paycheck to paycheck. expensive coffee is considered a necessity, among other frivolous things.
sorry for the critical post, but i just don’t get other people sometimes when it comes to personal finance…
11 Kristy // Oct 16, 2008 at 6:28 am
Middle class is definitely a matter of perspective. I live on the east coast, about 15 minutes from the ocean and the average price for a home here is around $350,000.
Honestly, I think its about time, we as Americans have to sacrifice to buy a home. People our parents generation had multiple kids and lived in a 3 bedroom house, after saving for many years to buy a home. Now everyone thinks they are “entitled” to a home directly out of college. What is wrong with spending 5-10 years living frugally and saving money for a downpayment?
DH and I bought a 2 bedroom condo and lived there for 2 years. Due to the appreciation in the real estate market, we were able to upgrade, however, it would not have bothered either one of us to start having children there and save money for a downpayment. That was what we were doing to begin with. Our country is full of people who think the deserve to have everything handed to them. This crisis is going to cause many people to cut back and finally start saving for the things that they want to buy.
12 fengshui // Oct 16, 2008 at 10:04 am
“fengshui- i suggest that you start tracking expenses. it’s amazing how quickly the little things can add up. it seems a little out of whack for a $140k couple to feel cash strapped if they’re living below their means and in an area with an average house price of $275k”
We don’t feel “strapped” per say, we buy everything we need without having to budget, but we don’t have 2 new cars and vacation every year like I would think we could. (just examples) We don’t make $140k yet, until May when I start working FT again (when I’m done w/ school), we make $110k currently, pre tax, pre 457 contribution.
13 fengshui // Oct 16, 2008 at 10:20 am
Also, just to add, I’m aggressively paying off the last of my “college” credit card debt (about $6k). I’ve managed to pay off about $30k in cc debt over the past 7 years. I used cc’s a lot while in college, for school related expenses like books, supplies, computer, clothes, rent (sometimes), personal care items, and also for unecessary items like bar tabs (so bad, I know), and travel. I also had a nasty emotional shopping habit, which I feel that I have overcome.
I paid the price for it….. I also have learned a WEALTH of information lately from smart people like LAL and others that are on these blogs.
My hubby and I have only been making this much for about 2 years, so between paying off my old cc bills and being new homeowners (we have remodeled and paid cash for everything) we have felt “not rich”, if that makes sense. Now that things are settling down, our plans are to save more aggressively, to make up for “lost time”.
I feel like a broken record, but I spent the bulk of my 20’s in college, so I wasn’t out in the work force earning cash and putting away for retirment all through my 20’s like most people. My hubby played semi-pro football and traveled for several years and didn’t earn much money, so he is starting out late too. He is in school as well, but only PT. Better late than never
14 fengshui // Oct 16, 2008 at 10:35 am
“i think the state of our society as a whole has an inflated view of what it means to live comfortably. that’s what’s contributing to the 0% savings rate. just to give an example, my roommate buys starbucks every single day, and she practically lives paycheck to paycheck. expensive coffee is considered a necessity, among other frivolous things.”
You are not being critical, you are totally right. I agree with you 100%. While I don’t buy starbucks, I do buy things that other people would consider unecessary, like toys for my pets, candles, anti-wrinkle creams, etc. And I don’t go overboard, but I bet most of you wouldn’t spend $80 on a jar of face cream or $30 for a bottle of foundation. I will allow myself little luxuries, but I don’t go overboard. Compared to many of my friends, who will think nothing of spending $400 on a pair of heels, or $500 for a purse. I’d like to think that I’m making smarter choices about money as I get older and smarter, but I have a way to go yet…..
Like I said before, hubby and I spend way too much on “going out”. If I added it up over the last month, between the two of us (especially during football season), I shudder to think what we’ve spent, probably $500 in the last month. We’ve gone to a few football games, out to the bars, out to eat several times, etc. We are having FUN, which is important, but we could be saving so much more. We’ll settle down when we have a baby
15 Meg // Oct 16, 2008 at 11:46 am
If the definition of middle class is based on purchasing power – i.e. being able to afford food, clothing, shelter, transportation, decent school, and still manage to save – then the majority of Americans (even those “in poverty”) can be considered middle class.
Of course that depends on where you live. But most people have the option of moving, too…where I’m from in Alabama most people/couples make well below “median” household incomes of $50K. But stuff is cheap in Alabama (including taxes and especially housing), and most people live comfortably, save for retirement, travel, own cars, and do all the other things listed above.
So they make much less but live much better than the average “middle class” person. Sounds good to me. Income only matters to the extent that it can buy you what you need/want. I’d rather be making $50K in suburban Alabama than $200K in New York City.
16 LivingAlmostLarge // Oct 16, 2008 at 2:00 pm
Personally having lived my 20s in a HCOLA i’d rather be living in a LCOLA making less! But it is what it is. I think moving will be in the cards in the future.
And Kristy, I’m with you about being in the boat of having to have lived and bought condos/townhouses and wishing desperately for a home. I would love to have bought a house for $350k.I would DIE!
Not going to happen, but it’s fine. I don’t “need” it but I do “Want” it. And after sacrificing now, it’ll come.
By the way fengshui, I think many people have their 20s being stupid, not just in finances but in love too boot. And being stupid in love can make you stupid in finances.
I believe in a few days I’ll have a story about me, money, and my stupidity. A very big stupidity. Ah well. Youth!
17 Blackbeards' Wyfe // Oct 16, 2008 at 10:50 pm
Interesting comments here!!
I think the meaning of middle class has evolved from solid financial security to almost financial security. Your “middle – class” income bracket is definitely dependent on where you live. 32K used to be a livable income in our area. Now you need double that to get a mortgage to afford 1000 square feet of house.
The reality is that our government will do everything in it’s power to maintain the middle class. It’s where the bulk of the money is and a large part of our country’s political stability.
18 C // Oct 16, 2008 at 11:20 pm
fengshui- it is great that you are doing all you can to learn. better late than never is definitely true. one of my biggest regrets is not saving when i started a part time job when i was 16. i spent carelessly in college as well. (it didn’t help that my roommate for two years and one of my best friends comes from one of the wealthiest families in the world.) i never saved until i started working full-time, and while i saved a good chunk of my salary for the first couple years (20-25%), i knew i was still being extravagant especially in the area of clothing. at minimum, i think i was spending about $6-8k/year. (i’m ashamed of it really.) now that i’ve started tracking expenses just a few months ago, i don’t even want to shop anymore. it’s become something like a game, trying to hit all my budget numbers. it’s definitely harder to control spending when your friends do not. i like nice things too, and i’ll admit to spending $50 on sunscreen and $500 on a jacket, but i think the most important part is to budget. it’s not necessarily “wrong” to spend that much on things. you just have to make sure it fits in your budget. spend more in some areas that are more important to you, spend less in others that are not so important. anyway, best of luck with your personal finance journey.
19 LivingAlmostLarge // Oct 21, 2008 at 4:14 pm
I think that spending is still a personal choice. And it shouldn’t be looked down on. Because the measure of happiness can’t be measured between people!
I love, love, love my Dogs. $2k for medical bills on them is outrageous to some and they would say put the dog down. My take is as long as the dog isn’t suffering I’m not going to put them down for monetary reasons.
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