Yahoo Finance 5 Financial Disadvantages of Being Stuck in the Middle Class
According to the most recent data from the Pew Research Center, roughly 50% of Americans fall into the middle class. That percentage has been falling for the past five decades, with more Americans reaching the upper class. Pew data shows that while the middle class has shrunk from 61% to 50% of Americans since 1971, the upper class has correspondingly grown to 21% from 14%.
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While there’s nothing inherently “wrong” with being in the middle class, it’s empirically true that there are some financial disadvantages to being in the middle class. Here are some of the biggest.
Can’t Take as Many Tax Breaks
When it comes to the tax code, the middle class is stuck between a rock and a hard place. Lower-income individuals can take advantage of various tax breaks and credits that don’t apply to the middle class, while upper-class Americans have the means to avoid taxes through various exemptions and deductions.
For example, those with lower income can avail of benefits like the Child Tax Credit and the Earned Income Tax Credit, both of which have income limits that fall below middle-class standards. The upper class benefits more from investment credits — like depreciation, 1031 real estate exchanges, capital gains tax rates and business exemptions and deductions — than the middle class, many of whom live paycheck to paycheck.
Billionaires vs. the Middle Class: Who Pays More in Taxes?
Don’t Have Enough Discretionary Income To Generate More Wealth
The expression “it takes money to make money” is often used derisively, but it does have a level of truth to it. While anyone can theoretically take advantage of tax breaks from things like real estate investments and 401(k) contributions, if you’re living paycheck to paycheck, you by definition don’t have much extra income to invest.
While many middle-class Americans contribute to their 401(k) plans, for example, few have the flexibility in their budgets to sock away 2023’s maximum contribution limit of $22,500. Similarly, few middle-income Americans can buy rental properties with cash, which can provide an instant cash-flow return.
While it’s true that consistently investing even relatively small amounts can build wealth over the long run, the upper class can do so much more efficiently, quickly and to a larger magnitude.
Can’t Sustainably Spend on Whatever You Want
The line between middle and upper class has many definitions. Colloquially, one way of defining the difference is that the upper class generally has the freedom to spend on what they want, whenever they want it — within reason. But the middle class has no such luxury. If you spend on anything you want while earning a mid-level income, you’ll likely find yourself in a debt spiral that may be hard to get out of.
While many upper-income Americans are actually quite frugal, they have the freedom to spend if they so choose. Middle class Americans, on the other hand, are “stuck” at an income level that limits their freedom to spend on a sustainable basis.
Typically Have Some Type of Debt Overhang
While the upper class typically has enough liquid wealth to pay off all non-productive debt, the same is not true of the middle class. While many middle class households have “good debt” in the form of a home mortgage, many also have personal loans or credit card debt. This type of debt typically arises from an inability to keep expenses under control or from outspending income.
According to Primerica, 56.9% of Americans in the 40% to 59% income percentile carry credit card debt, with an average balance of $5,950. That’s the highest percentage of any income percentile and could be indicative of the middle class outliving its means.
Usually Have To Build Wealth Through Hours, Not Ownership
One of the ways the upper class continues to build wealth is through ownership. If you own a rental property, for example, you’re passively generating a check every month, often without exerting much effort as all. Similarly, if you own a portfolio of stocks, you can generate capital gains and/or income without even having to pay attention to it.
But the middle class generally has to build wealth through working more hours, rather than through ownership. While many middle class Americans do own stocks and real estate, their primary source of income is generally their paycheck.
The Bottom Line
The American middle class isn’t really “stuck.” Even though they can’t take advantage of various tax credits that lower-income Americans can, for example, it’s not likely that many would prefer to change places. However, it is true that the upper class has access to tax and financial benefits that aren’t as accessible to the middle class.
If you’re looking for more financial freedom, start with basic steps like spending less than you earn, eliminating your debt and socking away as much as you can into retirement accounts. Sooner than you know it, you might find yourself moving towards the upper class.
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This article originally appeared on GOBankingRates.com: 5 Financial Disadvantages of Being Stuck in the Middle Class
