Am I Middle Class? Financial Literacy in the U.S.
Am I Middle Class? Financial Literacy in the U.S.
Throughout news reports, advertisements, and political campaigns, we’ve all been told over and over again that the middle class is shrinking.
But when your hear the term “middle class,” do you generally know if you belong to it? Do you wonder if you're just on the cusp, or maybe how high up in the middle you are?
Knowing exactly where you fall on the socioeconomic scale can be a helpful tool in financial decision-making. The majority of Americans, however, inaccurately assess their position on the wealth spectrum. This makes it harder to foster effective public debate on issues like tax reform and entitlement programs, as the popular tendency to blend “economic aspirations” with “actual financial conditions” means that many Americans have inaccurate understandings of things like wealth inequality and social mobility. (There’s significantly less of the latter, and more of the former, than most Americans realize.)
By some estimates, as many as 90 percent of Americans self-identify as “middle class,” and among that 90 percent, household incomes range anywhere from less than $7,000, to upwards of $120,000. Part of the reason for this over-classification is that a universal definition of “middle class” does not actually exist.
Semantic satiation is the psychological phenomenon that occurs when a word is repeated so many times that it begins to lose meaning. Say the word “groceries” enough times in a row, for example, and it’ll start to sound almost eerily hollow. This is essentially what’s happened to the term “middle class” in contemporary discourse: we’ve overused it to the point of rendering it meaningless.
The lack of a single, comprehensive definition, however, doesn’t mean that there exists no useful standards by which to determine class status; it’s just that not everyone can agree on which measures to emphasize. As noted in a report from CNN Money, “Some experts define the middle class by income, [while] others define it by lifestyle.”
Starting with income, the Pew Research Center defines a middle class household income as anything ranging from two-thirds to double the national median ($55,775 as of 2015, according to the US Census Bureau). That means that nationally, a middle class income can range anywhere from (roughly) $37,000 to $111,550.
But not all middle class incomes are created equal: where you live can also have a considerable impact on how far your money goes, and how “middle class” your lifestyle actually is. For example, a household income of $35,000 would qualify someone as “middle class” in Ohio, but not in Connecticut, where the median income is significantly higher (approximately $66,000, compared to Ohio’s median income of about $51,000).
Other useful indicators in determining class status include things like the amount of debt a household has relative to the save of its savings account, or how much disposable income they have to spend on things like entertainment, clothing, food, and transportation.
And if you ask anyone on the street to tell you what makes someone “middle class,” while they may not be able to draw on averages, percentages, and income figures, they could probably give you a set of qualitative measures of a middle class lifestyle: a college education, home ownership, one or two vehicles, regular family vacations, a retirement fund or savings account, money to spend on nonessential items. Our understanding of the middle class has become, and perhaps always will be, one and the same with the typical American Dream of a house and white picket fence.
So how do we achieve that? What can we do to make sure we have enough money in the bank to allow us to rest a little bit easier every night; to ensure that our middle class aspirations eventually become our real-life financial condition?
It starts with being financially literate.
Do I know how to protect my money?
Financial literacy is essentially the ability to manage and understated your money and financial resources in order to maximize their benefit to you and your family throughout your life. Financial literacy encompasses a large body of knowledge, and a broad range of skills, that includes everything from establishing a budget and savings schedule, to investing and retirement planning, and more.
In addition to economic factors such as student debt, wage stagnation, and extreme purchasing habits, another massive contributing factor to the decline of the American middle class is that, by and large, they’re not saving enough money. According to a 2016 study conducted by Bankrate, approximately 60 percent of Americans have less than $1,000 in their savings account, while 34 percent of respondents reported savings account balances of $0. Why is this happening? One popular answer is: because we don’t know how to take care of our money.
Sure, our parents would tell us to save up all those 10s and 20s from birthday cards and holidays so that we could buy the next big thing, and as we got older they would hound us about making sure we always have some money in the bank “just in case”—but did we ever learn anything more than that? Did we really learn all about interest rates, inflation, loans, compound interest, mortgages, stocks, 401ks, and retirement?
The answer is no.
Shining a light on Millennials, a study produced by Bank of America in conjunction with USA Today revealed that Millennials felt confident in their ability to manage money but, “feel less experienced in their actual knowledge of finances (17%) as opposed to their expertise in things like social media (34%) and food (33%).”
Entering young adulthood around the time of the 2008 economic crisis, Millennials saw the struggles their parents went through, and as they enter prime spending years, it’s clear to see that their spending and saving habits differ vastly than that of Generation X or the Baby Boom.
Millennials tend to prioritize saving their money for much more immediate ends like trips and vacations, as well as saving to pay off debt from credit cards and student loans.
Being financially illiterate can have devastating effects, no matter what financial class you're in or how big your paycheck is every week. As the Chicago Tribune aptly put it recently, “saving is a requirement; just like paying rent or utilities. When you save only what's left over” meaning after bills and food are taken care of, “those leftovers never appear, even if your income is high.” Saving money is difficult, but it is imperative. It’s a common suggestion among financial planners and advisers that millennials should be saving about 10 percent of their income a year for retirement, because if they don’t start early, they could end up like the Baby Boomers. As the Tribune goes on to site a Center for Retirement Research report, it states that about 43 percent of Baby Boomers will not have enough money to retire. 43 percent of an entire generation can not afford to retire. That lack of knowledge on how to save and the urgency to start saving immediately is a future too many of us could be facing.
A Federal Reserve Economic Survey asked people if they had enough money in the bank to pay for a $400 emergency like a health problem or a car repair. The survey revealed that 47% of the people asked said that they could not afford the $400 without having to sell something or borrow the money. Unfortunately, living paycheck to paycheck is becoming the norm. Many Americans don’t understand the intricacies and complexities of investing and saving money, so when unexpected costs hit it can truly put them into a deep hole.
CNBC, citing financial advisors, suggests having "three to six months of living expenses in an emergency fund to pay for unexpected costs."
From there, it’s recommended that households have other savings accounts for things like a wedding, vacation, new home, or just your typical rainy day fund, so that they're never blindsided by large costs.
But are those suggestions truly attainable in our economic climate? Well, it depends. Maybe you can’t have an account with three months’ living expenses, but knowing to start an account to use solely for emergencies or unexpected expenses is a step in the right direction, because with roughly half of the nation being financially unstable, it’s a problem that needs a solution sooner rather than later.
The middle class is a cornerstone of the American economy. Household consumption itself comprises more than two-thirds of GDP, and with less people in the middle class, comes less spending power which in turn could seriously damage the economic growth of the United States. It’s a problem that impacts not just the country, but the world.
What has to change?
The middle class is emblematic of the everyday American and we can’t afford to just let it continue shrinking.
For households, the biggest thing they can do when it comes to becoming financially stable, is seek information. Learning good habits and receiving solid advice will go a long way to helping people save money and protect their future. Some employers even have a financial adviser on-site or bring one in to have seminars on financial literacy. Of course, seeking the counsel of a financial adviser or planner is always a good first step. From there, you can speak to someone one-on-one about your personal needs and create a plan going forward.
For future generations, we need to start pushing knowledge of finances much earlier. A recent Wall Street Journal article notes that "The most scalable solution to this problem would be to teach financial literacy in school." Now that may be unlikely, but the truth in the statement stands, everyone needs to understand money, and how they should be using it.
In the local communities, if chambers of commerce were looking to become advocates for not just business owners, but people in their communities as well, offering financial literacy crash courses or providing helpful tips from financial advisors within the chamber would be a good start. The more people are able to have a handle on their wealth, the better off they’ll be both in the future and in the present, and the greater benefit that will be to the local economic climate.
Because when you’re talking about an issue that impacts everyone, not just the middle class, the more knowledge you have, the better.