Yahoo Finance Stop Budgeting Like the Middle Class and Do What the Rich Do Instead
A lot of people believe all they need to do to become wealthy is to earn more money or to save what they do have. This isn’t all that surprising, considering how many people subscribe to the idea that their income directly corresponds to their wealth.
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But what many people who are considered “middle class” don’t realize is that earnings are just one part of the bigger picture. The people who achieve true wealth are those who know how to spend and invest the money they earn in ways that will benefit them in the long run.
If you’ve been living with a middle class mindset and want to make a change, you might need to take a moment to consider the behaviors or actions that keep you from becoming rich. Here are some of the most common things people in the middle class tend to do that the rich do not — and things the rich consistently do to maintain their wealth.
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The Rich Invest While the Middle Class Do Not
The middle class tend to save their money, while the wealthy invest theirs.
Robert R. Johnson, Ph.D., CFA and professor of finance at Heider College of Business at Creighton University, gave a historical look at the stock market.
“From 1926 through 2022,” he said, “the stock market provided returns that far exceeded treasury bills or treasury bonds. According to data compiled by Ibbotson Associates, large capitalization stocks — think S&P 500 — returned 10.1% compounded annually. Over that same time period, long-term government bonds returned 5.2% annually and T-bills returned 3.2% annually.
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“To put it in perspective,” he added, “a dollar invested in the S&P 500 at the start of 1926 would have grown to $11,535 (with all dividends reinvested) by the end of 2022. That same dollar invested in T-bills would only have grown to $22.05. That same dollar invested in long-term government bonds would have only grown to $130.89. It pays to invest and not simply save. And it’s not a close call.”
Justin Albertynas, CEO of RatePunk, added, “Wealthy individuals also prioritize long-term investing strategies. They are more likely to hold onto their investments, benefiting from compound growth over time. According to a study by Spectrem Group, 75% of millionaires in the US attribute their wealth to long-term investing.”
Middle Class Individuals Rarely Have Multiple Income Streams
You’ve heard it before, but it bears repeating: Having multiple income streams is essential to building wealth. And not just building it, but maintaining it. After all, if one source of income fails, you still have the others to fall back on.
“There are a number of key financial behaviors that the rich do that the other [economic classes] of people do not,” said Sebastian Jania, owner of Manitoba Property Buyers. “They are always focused on how they can create additional income streams. They do this because the economic landscape is always changing and it does not take much for a new company or machine to completely disrupt one of the industries that the rich have a business in.”
Albertynas added, “I invest in assets such as stocks, real estate, businesses and other ventures to create multiple streams of income and make sure that if one fails, the other streams are still there, up and running.”
The Rich Invest in Their Education
Another habit the rich do that keeps them wealthy is they invest in their own education. A common middle class behavior is to learn only up to a certain point and then stop.
“The rich continue to invest in themselves even after they have achieved what others would define as success,” Jania said. “It is this habit that plays the biggest role in differentiating the rich from everyone else. For those in other classes, they typically will finish high school or post-secondary education and that is where [their] learning will stop for life; however, for the rich they learn for the rest of their life through coaching, mentorship and courses.”
Middle Class People Often Lack Financial Discipline
Having a budget isn’t a bad thing, nor does it keep the middle class from becoming rich. After all, a budget lets you track your investments, expenses and spending habits. But one area where the rich excel is that they have a lot of financial discipline that helps them maintain their wealth.
“The middle class often spends too much of their income on discretionary expenses, such as dining out, entertainment and material possessions, which can hinder their ability to save and invest for the long term,” Albertynas said. “Tracking these expenses is key for accumulating any long-term wealth.”
The middle class “tend to make emotional decisions with money, underestimate their potential by setting safe, easily obtainable goals, and believe in hard work without leveraging resources,” added James Allen, CPA, CFP and founder of Billpin.com.
The rich, meanwhile, “make logical decisions with money, set ambitious goals that seem impossible and believe in leverage, putting existing resources to better use.”
The Rich Understand Tax Implications
Taxes are a part of life, no matter who you are or how much you earn. But a lot of middle class individuals don’t fully understand how taxes work — something that can keep them from moving up in the world.
“A big part of financial education is knowing how taxes work,” Albertynas said. “Knowing and working your way around them can launch you from being middle class to being wealthy. High-net-worth individuals engage in strategic tax planning to optimize their tax liability and retain more of their income. This includes taking advantage of tax-efficient investment vehicles and legal tax deductions.”
Middle Class Individuals Try to Keep Up With the Joneses
The term “keeping up with the Joneses” essentially refers to the idea of trying to look rich when, in reality, you’re not. It’s something a lot of people in the middle class do.
“The middle class focus on showing off to their friends by looking rich,” Jania said. “The rich, on the other hand, focus on being frugal and then reinvesting their savings so that the passive income from their investments can pay for whatever they want. The middle class have this completely backwards.”
But in trying to keep up with the Joneses, people in the middle class tend to overspend and rely on consumer debt — like credit cards, mortgage loans or auto loans — to maintain their lifestyles. This isn’t building wealth.
“The middle class often live above their means, purchasing depreciating liabilities like new cars and high-dollar homes,” Allen said. “The wealthy live below their means, investing in appreciating assets rather than spending on depreciating liabilities.”
The Rich Strive To Be the Best
“Typically, the middle class will get a comfortable job, a comfortable paycheck, and they perform at comfortable levels rather than demanding the highest performance of themselves,” Jania said. “The rich demand the highest performance of themselves because they typically are working on commissions or a more performance-based approach.”
At the same time, people in the middle class often rely on others to help them succeed. This could be hoping a boss gives them a raise at work. Or it could mean using government programs or high-interest debt to try to get ahead. But the issue with relying on others for your own success is that they don’t always come through and you’re limited to what they can provide rather than what you can do for yourself.
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This article originally appeared on GOBankingRates.com: Stop Budgeting Like the Middle Class and Do What the Rich Do Instead
