September 5, 2012
The middle class in America is changing. At one time, being middle class was an accomplishment—you weren't rich, but “comfortable.” But in the last decade, the middle class has watched their wealth and comfort level decline.
According to a recent report from the Pew Research Center, since 2000, the middle class has shrunk in size and fallen backward in income and wealth. Eighty five percent of self-described middle class adults polled say it is more difficult now than it was a decade ago for middle class Americans to maintain their standard of living.
The middle tier now takes in 45 percent of the income pie, down from 62 percent four decades ago. Median income fell 5 percent in the last decade and median wealth (assets minus debt), declined by 28 percent to $93,150 from $129,582, primarily because of the housing crisis. About 42 percent of middle-class adults say their household's financial situation is worse now than it was before the recession; about half of them say it will take at least five years to recover; and 8 percent say they will never recover, according to Pew.
Income Inequality Is Hobbling the Middle Class
With such dreary numbers, there's all but been a funeral for the middle class. But at the same time, plenty of middle class Americans are continuing to hang on. The Great Recession may have shaken them up, but it also forced them to finally get their finances together. Aggregate consumer debt fell by $53 billion in the second quarter, continuing the deleveraging trend in outstanding household debt since its peak in 2008. Couponing has become a national obsession.
Here’s how three middle class Americans have coped:
1. The Young Parents
“When I got pregnant in 2010, we wanted to be sure we were prepared for any financial disaster that struck. In two years we've saved $8,000-$10,000 and been slowly paying off debt,” says Rebecca Desfosse. She runs a frugal living blog, Doggone Thrifty, and lives with her husband and two year old son in Brick, New Jersey.
Desfosse and her husband have cut back on spending and are building an emergency fund to keep them going for at least nine months. She's turned to do-it-yourself alternatives for many cleaning and beauty products. She shops for fresh produce, instead of more expensive pre-packaged foods, scrubs pots with baking soda, makes homemade laundry detergent, window cleaner, and her own deodorant. They shop local farmers’ markets and thrift stores. She creates a weekly meal plan to make sure she buys only what's needed. Little changes add up. “Monthly we're saving $300-$500.”
2. The Health Benefit
Ron Williams and his wife switched to a vegan lifestyle and he quit smoking. “Our monthly food bill with restaurants and groceries was around $680-$750 and I spent $160 a month on cigarettes. After going vegan, our food bill is about $200-$250 and with no cigarettes, we're saving about $660 a month,” says Williams who lives in Portland, Oregon. Much of that savings is being socked away, but the Williams are putting $60 a month toward a gym they joined and $80 toward fitness supplements, which nets them around $500 extra a month.
3. The Relocator
Others made drastic changes. Anne Nicolai left her suburb of Minneapolis, MN and moved to San Miguel de Allende in Mexico. “My cost of living is about one-fifth of what it was. My partner and I pay the equivalent of $120 a month to rent a two bedroom house. Dinner at a high-end steakhouse for the two is about $45, including wine. Two huge bags filled with fruit and vegetables from the market are $6. We have no heating bills,” says Nicolai. She shares her secret, “I no longer use credit cards and magically, I spend less. I don't go to the mall unless I'm looking for something specific. When I visit the U.S., I don't shop at Nordstrom and Bloomingdale's anymore, but Marshall's and Target. It's not important to live in the same kind of home as I did in the U.S. – four bedrooms, huge lawn, two-car garage, heated pool. In fact, I'm quite comfortable living more simply and with less stress. The sunshine and flowers, the mariachi music in the town square, the salsa dancing four nights a week – don't cost a thing.”
The Beginning of the End of American Prosperity?
Despite a decade of financial disappointments and setbacks, if you're willing to make adjustments, here are some tips from the experts on how to get yourself back on track.
Stay invested. The rollercoaster stock market has soured many, but historically the long term total return from the stock market is nearly 10 percent. Valuations of most assets, including stocks, are dramatically lower than they were in 2000 before the dot-com bust or in 2007, before the financial meltdown, says Daniel Wildermuth, author of Wise Money and CEO of investment brokerage firm Kalos Capital. His advice: “Add international equities, including emerging markets that are growing at much higher rates than the developed world. Invest in indirectly held assets with less liquidity such as real estate, private equity debt, private equity, managed futures and various types of commodities such as oil and gas.”
Downsize. Create a realistic spending plan and learn to live within it. Bank the excess to build an emergency fund. “You can regain ground quickly by not making the mistakes most of the middle class made the first time around – living larger than their incomes could afford. This means not buying too much house, too much car, or other items that simply aren't affordable,” says Ted Jenkin, CEO of Oxygen Financial.
Set realistic expectations for your kids. “You aren't likely going to be able to fund 100 percent of their education and to save for your retirement, so don't live in fantasy land and think you can do it all. Be clear with your kids about what you can and cannot do.”
Stop using credit unless you can pay your balance monthly. Make reducing and eliminating debt a priority.
Increase your skills. The quickest way to gain ground is to figure out how to increase your income, whether at your company or another. The number one investment you can make is to increase your competencies and skills that will boost your income.
Be entrepreneurial. “Millionaires are the largest buyers of personal services. Start a lawn care, maid, or handyman business,” says Steve Siebold, author of How Rich People Think. “Come up with solutions to problems. Money flows like water to great ideas; turn on the faucet.”
Incorporate changes into your everyday life. “The economic conditions and circumstances of the past 50 years are not likely to be repeated in the decades that lie ahead,” says Villanova School of Business Finance Professor Robert LeClair. “Those forces, which boosted so many individuals and families into economic prosperity, are likely to remain flat, or even decline in the decades ahead.” That's no reason for despair though. While you can't control the economy, focus on what you can control – the choices you make every day that determine your financial future.