I have a theory the majority of us, no matter how little or how much we make, consider ourselves part of the middle class. When I worked at McDonald’s for $4 an hour, I was dirt poor, but considered myself middle class because both my parents had jobs and I had a bicycle and a cozy home to come home to.
When I finally graduated from The College Of William & Mary and started making more money, I felt poor because all I did was work in expensive New York City! For example, I shared a studio with a high school classmate for $2,100 a month and that was in 1999. It was only after I moved to San Francisco did I feel I was part of the middle class again. Money was more plentiful, a starter home “only” cost about $1,100,000, and I had more free time to explore.
I’ve experienced all three classes to varying degrees and I believe there are wonderful merits to each of them. From the poor Haitian immigrant who goes to college and becomes the first black female mayor in Utah, to the billionaire investor who gives 99% of his net worth to charity, everyone tends to come to center. My favorite class is the middle class. But first, we must define what middle class means.
DEFINITIONS OF A MIDDLE CLASS INCOME
Standard Definition: $25,000-$100,000 a year is what most would consider as a middle class income. The $75,000 spread accounts for the wide cost of living differential between places like New York City and Fargo, North Dakota. Everybody who lives in NYC or San Francisco will tell you that $25,000 a year is poor. There’s just no way to get ahead, support a family, and one day retire with that type of income.
If you’re making $100,000 and live in Des Moines, Iowa, then you’re living large. The last time I was there, I had a fantastic ribeye steak for $20 bucks and saw a 4 bedroom, 3 bathroom, 3,000 square feet houses go for $180,000. When the cost of an entire house is only 80% more than your annual income, you know you’ve got it made!
Republican Middle Class: Ex-GOP presidential candidate Mitt Romney came out and said the middle class is “$200,000 and $250,000 or less.” The $200,000 refers to an individual, and $250,000 refers to a couple. Why $200,000 + $200,000 doesn’t equal $400,000 still baffles me. The government is sexist and it takes people to really care before math can change. There just aren’t enough individuals who earn $200,000 each and are married. Hence, the rest of us who are not affected let this sexism continue.Hence, the rest of us who are not affected will let sexism continue.
If you live in an expensive coastal city, $250,000 for a household isn’t exactly rich since about $65,000 of your income goes towards taxes. You can afford a car, take a couple weeks of vacation a year, max out your 401K and send your two children to private school. But if you ask any $250,000 a year couple whether they think they are rich, I’m sure most would privately tell you no. It costs $1.5 million here in San Francisco to get a decent house in a decent neighborhood. That’s 6X a $250,000 household salary.
Democrat Middle Class: President Obama’s middle class is also $250,000 per household or less. He just doesn’t say it! Instead, he says “the rich” are those who make $200,000 or more as individuals and $250,000 or more as households. Strategically, this is a better way of getting more votes because there are mathematically less people to anger. If you say “the middle class is $250,000 or less,” you run the risk of angering a huge portion of the 95% of people who make much less because they might think you’re out of touch with reality.
Republicans and Democrats have the same definitions of what a Middle Class income is, but they say it differently. In politics, you have to be careful with verbiage. Math always triumphs at the end. If you can get 50% of the 95% of the population who makes $200,000 or less in America to vote for you, it’s much better than getting 100% of the 5% of the population who makes more than $200,000 on your side! Thankfully, these bozos on 1/2/2013 came to a Fiscal Cliff compromise and raised the definition of “rich” to now $400,000 for singles and $450,000 for couples.
Financial Samurai Definition Of Middle Class: If you make within +/- 50% of your city’s household income for your age, you are middle class. For example, the average household income in San Francisco is ~$80,000. A person making $54,000 – $120,000 can comfortably consider himself or herself middle class.
You can also consider yourself middle class if you are making + / – 50% of your city’s median house price. Using San Francisco again, the median house costs $1.1 million. Therefore, if you are renting or own a property worth about $750,000 – $1,600,000, you are also considered middle class.
The cost of living in Des Moines, Iowa is obviously much lower, and incomes and home prices will adjust accordingly. Income is only one part of wealth. I highly recommend people focus more on building net worth over income.
WHY WE CONSIDER OURSELVES MIDDLE CLASS
1) We adapt very quickly. Remember how fast the excitement went away after getting into college, getting a promotion, a holiday present or receiving a nice big raise? After about a couple months, we revert back to feeling like our old selves. We could be very upbeat selves in general, but we no longer feel that high of a big win. I have a friend who makes a million dollars a year, but considers himself middle class because his other friend makes tens of millions of dollars a year! The hedonic treadmill gets us all.
2) Nobody likes to feel inferior. If we so happen to earn below the median household income of $55,000 in America, we should realize we are “below median” and perhaps “below average” in household income generation. But, nobody likes to feel below average in anything which is why the term “lower class” sounds derogatory! Instead, we’ll find a way to justify our below median income by saying we live great, happy lives, and are doing things we love to do. We’ll tell ourselves making less is a choice, that grades don’t matter, and that money isn’t everything. There are certainly truths to all these reasons. Happiness stays constant above a certain income range, so there’s no reason to justify why we are poorer than average, but we curiously do.
3) We are scared of being murdered. The more you make above the median household income, the more you need to fear for your life. A lot of wealthy people cannot control the urge to splurge the more they make. It’s just natural to buy fancier cars, wear nicer clothes, and live in bigger homes. You only live once is Gen Y love to say! All is good until you realize there’s a stranger standing in your living room with a butcher knife ready to splice open your guts unless you give him all your valuables. We are seeing an uprising by the people against anybody who has more. We also see the government take away more of our income the more we tell them we make. By projecting we are middle class, we avoid the uprising, deflect criticism, and get to join in the hunt.
* The above chart is my calculation for the average net worth of the above average person. I use Personal Capital’s free financial software to not only methodically track my net worth, but manage my cash flow and run my investment portfolios at least twice a year through their Portfolio Fee Checker. I discovered I was paying $1,700 in fees I had no idea I was paying! Personal Capital also has a great Retirement Calculator where you can run your numbers to see whether you are on course. The above average person takes action and leverages free technology to his or her advantage.
MIDDLE CLASS IS A WONDERFUL CLASS
I’ve been rich and I’ve been poor and I will unequivocally tell you that being right in the middle is wonderful. When I was poor, I was insecure about my future. I wondered whether I’d ever be able to earn enough to buy a home and raise a family. I worried I’d amount to nothing in my parents’ eyes after spending so many years in school. Envy, a feeling I despise often entered my body as I saw friends take wonderful vacations and drive new cars. Why them, not me? Protesting big corporations and those who have more made me feel better.
When I was rich, I wondered whether I really was as evil as people painted out rich people out to be. Self-doubt began entering my mind as I questioned whether I really deserved to make what I was making. There is so much poverty in the world, I began to feel guilty about my wealth. As a result, I worked harder by getting into work earlier and leaving later. I then spent hours at night working on my online endeavors, so that one day I would no longer have to work and return to the middle.
Now that I’m back in the middle in “retirement,” life is more carefree. I know politicians are now on my side because they need the middle class vote to remain in power. I no longer fear being ostracized by others for earning an above average wage because I am average. There is less insecurity about my future because I have a house, some clothes, and a beat up car named Moose to get me around. I now spend time connecting with others online through my sites, sharing my knowledge and learning what I can from all of you.
The income definition of middle class is whatever we want to project! We work hard to provide for ourselves and our families. We take action to save money where we can. We realize the importance of community and rely on each other to flourish. Don’t let anybody ever tell you that being average is not good enough. Being middle class is what makes all our countries great!
Finally, one of the best ways to get ahead is to start a business if you believe in your abilities. There’s nothing better than being your own boss and seeing maximum correlation with effort and reward. Not a day goes by where I don’t give thanks for starting Financial Samurai in 2009. Start something special on the side while you have a job, and work on it until it gains traction. You might surprise yourself and reach a new class!
RECOMMENDATIONS TO BUILD WEALTH
* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their brand new Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Updated for 2017 and beyond. Rocky times have returned with interest rates going up and corporate profits slowing down. Buckle down and manage your finances as much as possible!