The Real Reason the Middle Class Has So Much Debt

middle class

Do you ever feel like even though you earn an above average income you barely have enough to pay the bills, let alone save for retirement, college, vacation, emergency savings etc.?  There could be a good reason for feeling that way.  The cost of living is now outpacing income growth and household income is actually below where it was in 1999!

Screen Shot 2017-05-03 at 15.26.10

Growth in nominal income vs cost of living. Source: Nerd Wallet

 

US_Real_Household_Median_Income_thru_2014

Median household income. Source: Wikipedia

There are so many stories in the news about average incomes, average debt, and average size of mortgages, that I thought I would do a roundup to see how an average person might be able to live.  What I found was pretty shocking.

In it up to our ears

We thought we learned our lesson from the Great Recession, but both government and household debt is back on the rise and nearly reaching the same levels as in 2008. Based on the data regarding average income, expenditure and debt, it becomes apparent why most middle class families are feeling the squeeze.

Most of the info I used came from the Consumer Expenditure Survey 2015 which takes into account expenditures such as Food, Apparel, Housing, and Transportation as well as some smaller items like reading. The respondents had an average household income of $69,627 before taxes (Median household income is $55,775) and the average amount spent on all of these items totalled $55,978.

That means you’ve got about $14,000 leftover to spend!  Nice try.  Remember that amount is income before taxes, so let’s take about $9k for Uncle Sam.  There were also a few larger numbers missing such as credit card debt (Average is $16,748). Of course you could pay the minimum and never pay off the card, but let’s assume you actually want to get out of debt, so we’ll make payments over 5 years at a monthly rate of $376 (average APR of 12.51%)

Another number missing was Student Loans which carry an average monthly payment of $351. This is one of the fastest growing types of debt and is outpacing both consumer price inflation and wage growth.

Take all of those extra expenses into account and you’re left with a little over $600  per month for retirement, emergencies, vacations, college for the kids etc.  That’s why the average family is actually increasing debt year after year and it’s becoming tougher to live.

Is There Hope?

There’s always hope! There are a few things  you can do to get out of this trap by focusing on decreasing debt and increasing income. The good news is that you’re in control.  So take a deep breath and realise that things do not have to be the way they are and that you can make changes to yourself and to your life.

Decreasing Debt

Though there’s no quick fix to reducing debt, you need to realise that it’s not impossible and you’re closer than you think.  As a matter of fact, you probably underestimate how much you can accomplish in the next year. Below are some ideas how you can free yourself from the debt trap.

Get visibility – The first way to begin to decrease your debt is to understand your income, expenses and debt a little better.  There are several great tools which help you visualise your spending and create a budget as well as spending and savings goals such as Mint, Personal Capital and Wally.me. Whichever tool you choose, the point is that you become more aware of how you are spending and saving.

Find a guru – Once you have better control over your budget it’s time to start paying down your debt.  There are numerous personal finance personalities out there, including household names like Suze Orman, David Bach and Dave Ramsey, and each of them have their own methodologies.  It’s not a one size fits all solution so you should check out a few of them, but the important thing is to commit to something and get started today!

One method I’ve found useful is the debt snowball.  This is where you pay off your smallest balances first and then, as you pay off those balances, you can shift those payments to the larger debts.  It’s a great way to see some progress being made and feel a sense of accomplishment. Remember to celebrate when a new balance is paid off!

Live smaller – Another idea is to simply live smaller. Do you need 2 brand new cars or a that large house with high heating / cooling costs? By lowering your fixed monthly costs you can get out of debt more quickly. This doesn’t mean a lower standard of living. Actually you’ll find that less stuff and less debt brings less stress! For some great ideas on living smaller, check out the Minimalists or Mr. Money Mustache.

Increasing Income

Now that we’re paying down our debt it’s time to generate more income. This is a tricky one because we all want to earn more and the fact is that Median Income is actually below where it was in 1999.  Add to this the fact that Artificial Intelligence is set to replace millions of jobs in the coming decades and things can feel like the cards are stacked against you.  The good news is that this is a great time to take control of your life and to create more income for yourself due to the advances in technology! Below are a few ideas on how you can earn more money.

Ask for a raise – your skills are valuable and unemployment is at near historic lows.  If you can demonstrate the value you are adding to your company, then why not ask for more money. You can often find good salary comparison info on sites like Glassdoor , Comparably , and Linkedin Premium.

Change careers – Once you’ve checked comparable salaries and discovered you are worth more, then it’s time to pop your head out of the sand and start to look around. One thing you could consider is to gain new skills that are in high demand.  There are numerous stories of accountants becoming programmers or HR professionals entering digital marketing. There are plenty of inexpensive options for learning new skills including Codeacademy, Udemy, and even Linkedin Premium. This is your chance to find something that challenges you and combines your skills and passions.

Get a side gig – We live in an amazing point in time when we can easily earn a little money on the side due to new technology platforms and marketplaces.  You can use Airbnb to rent an unused room, drive for Uber, or sell your expertise on sites like Fiverr and Guru. Whatever your skills, people are willing to pay for them.  It’s just about finding a match and taking the first step.

Invest – It’s not just your day job that can provide an income.  Investing can generate a passive income. If you think you don’t have enough money to start investing then think again. Companies such as Acorns links to your account and can round up your purchases and invest those small amounts into a diversified set of low cost index funds. If you want to go it alone, then educate yourself with books like Unshakeable.

Choose your path

Right now it may seem like the cards are stacked against the “99%”, but the fact is that now is a fantastic time in human history full of opportunity for a few reasons:

  • All of human knowledge is one google search away
  • You can easily connect with partners, employers and customers all over the world
  • Even a “niche” idea can make millions when it can be shared with billions of people around the globe
  • People, by our very nature, want to help you succeed and since you can easily connect with people around the world your possible network is limitless

Take control of your situation, search for answers, find a network of people who can help you and start your journey to a better financial future today.  Remember, you can’t afford to settle for average.

 

 

 

Leave a Reply