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Disappearing Middle Class [An Analysis]

08.15.2011 by Jon the Saver //

Social structure in the United States is in the midst of vast changes. The lower, middle, and upper classes are shifting their lifestyles as the national wealth flows in new directions. Statistics abound suggesting the “middle class” is vanishing, never to return. The problem with statistics about the middle class is that the term itself is somewhat indefinable. In fact, according to FactCheck.org a majority of Americans identify themselves as “middle class” or “upper middle class” or “working class.”

The technical

For years, the most common way to define the middle class was to refer to a specific income bracket. Using data from the U.S. Census Bureau, it is possible to quantitatively measure increases and decreases in the numbers of people in that bracket. In 2008, this data split the earnings of all people in the United States into five quintiles. Many commentators and analysts identified the middle class as belonging in the third quintile. The lower limit of this quintile was $39,001 and the upper limit was $62,725. According to the Census data, the number of Americans within this income bracket is indeed declining.

Real median household income declined by 3.6 percent from 2007 to 2008, according to the Census Bureau. Changes in the composite structure of the middle class combined with other factors such as technological innovation and income growth have drastically shifted what it means to be a member of the middle class. Once, a family of four could afford a house, a car, education and entertainment on a single paycheck. Today, the same family of four needs two incomes and debt in order to stay on top of their finances.

To complicate matters further, data from the U.S. Treasury suggests that the middle class is declining, but the reason is the members of the middle class are experiencing upward mobility. An op-ed published in the Wall Street Journal reported on the results of a study that tracked tax filers aged 25 and up from 1995 to 2005. Controlling for inflation as measured by the Consumer Price Index, over 58 percent of the poorest income bracket in 1996 moved to a higher income bracket by 2005. Of those, over 26 percent made it into the middle class income bracket, and over five percent made it into the highest income bracket.

So what’s the truth?

So what is the real story about the declining middle class? The truth is undoubtedly somewhere in the middle. The obvious explanation is that the middle class is not a fixed group of people. Income brackets stay the same, but people change throughout their lives. The poor can become rich and the rich can become poor, often in a very short amount of time.

The economy is almost alive, adapting to internal and external changes organically. While the middle class is declining in absolute terms, overall more members are becoming richer than they are becoming poorer. The economic crisis of 2008 led to much ink being spilled about rising income inequality and the destruction of the middle class. Income mobility changes the entire picture about income inequality and changing class structure.

To be sure, not all of the developments have been positive. Local and regional real estate markets have become stratified with the wealthiest zip codes experiencing tremendous demand. To make matters more complicated, even the definition of middle class by income brackets is relative to where the hypothetical family of four is located. In Beverly Hills, even a six-figure salary may be considered middle class, thanks to the high prices for almost everything!

It’s all relative really

In the end, “middle class” is a term over which a lot of hullabaloo is raised but the truth is complex and hard to summarize in a few key talking points. Technology has increased productivity, and income growth has resulted in greater upward mobility. The middle class does appear to be declining, but all of the data seem to suggest that this is a good thing.

Categories // Housing Tags // economics

Using Cash [It’s the Only Way to Go]

08.01.2011 by Jon the Saver //

More and more people are giving up on credit cards. Sick and tired of the endless bills, late fees, interest rate hikes and annoying spending requirements, there is a growing movement of “cash only” consumers. Some are going a step further and getting rid of their bank accounts in addition to their credit cards. No interest is a small price to pay compared with the cost of high fees. Cash only living has the advantage of protecting cash from digital thieves, who are becoming much more sophisticated. Another advantage is eliminating the time it takes to manage a checkbook every month.

People who live on a cash-only basis do not have to wait for checks to clear or for credit card balances to be charged. Paying for everything in cash eliminates all of the time spent waiting for the financial system to move money from one account to another. Living a cash only life has many advantages, especially for recovering spendthrifts or compulsive buyers. Cash only offers several advantages to the newly or established frugal consumer. Aside from the loss of both convenience and hassle, cash only living can help people gain control over their financial lives. Here are four big advantages that convince many people to go cash only and bank-free.

Using cash makes budgeting easier

With a cash only budget, it is easy to keep track of every expense and how much money goes to that expense each month. Running a budget is much simpler when credit cards and bank accounts are eliminated. Every single expense can be tracked, and the various small expenses that can sneak up on even the most careful budgeter are eliminated. A budgeter on a cash only financial diet is often surprised by the savings that can result. Going cash only provides an incentive to minimize expenses, which can itself lead to a more fruitful experience.

Using cash reduces debt and stress

Living a life without any debt or even the prospect of debt is liberating. The legal apparatus associated with debt can be intimidating, such as debt collectors, bankruptcy courts, debt management agencies and credit counselors. Avoiding debt altogether by going cash only can be a great stress reliever. Paying for everything in cash gets the budgeter control of his money instead of having his money control him. Being at the mercy of credit card companies is a very unpleasant experience. Cash only eliminates the many pernicious forms of debt and makes financial affairs less of a burden.

Using cash can lead to happiness?

In this modern world of one thousand and one entertainments, it is easy to lose track of the important things in life. An extravagant spending lifestyle is often financed by debt, and getting rid of the debt and the credit can reveal how hollow this lifestyle is. A family that cuts back on spending has to improvise and find ways to spend more time together. This can improve the relationships between family members. By making the choice willingly, everyone approaches their common situation with a sense of being in it together.

Using cash promotes personal growth

Debt allows someone to live beyond his means. When this is embraced as a way of life, personal behavior tends to deteriorate. Getting rid of the debt, in addition to increasing personal and familial happiness, can result in self-improvement and personal growth. Debt is a tremendous temptation that can ruin inner self-respect and self-esteem. Society still remembers the days when debt was looked upon as practically sinful. Attitudes have moderated since then, but a remnant of the old stigma remains. Going cash only can have emotional, even moral benefits, if done appropriately and for the right reasons.

Categories // Simplify Tags // cash, credit cards

Rules of Money for Engaged Couples

07.18.2011 by Jon the Saver //

It’s summer and a ton of my friends are getting married.  Most are still relatively young ranging from ages 20 to 25 but I guess it’s that time time of life for us now. I’m in the same boat and will be asking my girlfriend of nine months to marry me soon. While it is exciting, we must remember to ask ourselves whether or not we’re financially ready for marriage. It’s a necessary question too many couples ignore choosing instead to rush in unprepared only to find their lack of financial preparation usually leads to marital money problems.

There are basic principles young people should follow but in the end it comes down to marrying the right person. Wise financial management is important and you should look for the similar habits in a potential spouse. Thankfully God blessed me with someone just as frugal as myself who understands wealth is built through hard work.

If you find someone who has the same views about money as you do, don’t postpone marriage even if one person has a substantial amount of debt. Follow these principles and you will be able to get through anything together.

Rule 1: Hold nothing back

It’s oh so critical to disclose everything about your finances – be sure to lay it all out there. Doing so will increase trust and allow each of you to better prepare for the upcoming challenges of marital finances.

Rule 2: Don’t share accounts quite yet

Never share accounts until you’re married. You’re not married yet so don’t act married. Never rush in, anything could happen. If you shared your PIN number with your fiance and then a terrible breakup happened, do you really want the other person to have access to your checking and savings accounts? Engagement is a step above dating, but it’s not marriage yet! You are only fully committed when you say “I do” on your wedding day.

Rule 3: Learn together

If you need more education on finances don’t lose hope, just use every financial challenge as a chance to learn.  Marriage will present you with a lot of new financial situations, handle them together to grow in knowledge and love for each other.  There are also plenty of excellent resources that are both fun and educational. You could read personal finance blogs together and discuss what you’ve learned or even take Dave Ramsey’s FPU program together (which I highly recommend.) Whatever you end up doing, treat it as a team exercise and bounce ideas off of each other.

Rule 4: Share your vision and be willing to grow

Discover each other’s core financial values and talk about what you want out of life. Share your goals and dreams including what type of home you want, whether you want kids, what hobbies will your family be involved in, how often will you splurge, etc.  Make a list of all these things and formulate a rough budget to give you and idea of how much you need to earn to reach your goals. All this should be discussed before you’re married. Don’t let finances be a wall between the two of you. Start early and work together to envision money properly – as a tool given you by God to find and live your mission.

Going forward

If the goal is money harmony, using these financial rules will help you get there. Don’t wait for things to happen, take an active approach and talk everything over. The sooner you do, the smoother the transition to marriage will be.

Finances are the number cause of divorce so be sure to nail this down before tying the knot to help ensure a strong and lasting marriage!

Categories // Money Management Tags // marriage

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