The middle class is the backbone of America. Without the middle class, the United States would suffer because the middle class make up the majority of the labor force.
The problem with being middle class is that income has stagnated over time, while the wealthy have gotten tremendously wealthy since the economic recovery began.
Notice how from 1998 to 2016, the median household income went nowhere! Only in 2017 did the median household income finally start reaching a new record high.
Some areas in some states have gotten so expensive, that it’s very hard for some people live a middle class lifestyle earning $300,000 a year.
With the global pandemic accelerating the work from home trend, I’m pretty sure there will be more flight to the suburbs, city outskirts, or lower cost areas of the country.
Let’s first define what a middle class income is and then look at middle class income by state.
Definition 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 $2500,000.
When the cost of an entire house is only 80% more than your annual income, you know you’ve got it made! Conversely, the median price of a home in San Francisco is $1.6 million as of 2020, or roughly 20X the median income in the city.
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.
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.
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.
Middle Class Income By State
Here is the latest data from the Pew Research Center on what a middle class income is by state using median, lower bound, and upper bound thresholds.
As you can see from the chart, over half of the states have making $100,000 or more as the upper bound level for a middle class income. Gone are the days when making a six figure income was considered wealthy due to inflation.
I believe $3 million is the new $1 million if you want to consider yourself a real millionaire. Further, in many coastal cities like NYC and SF, you really need to earn closer to $300,000 to live a middle-class lifestyle in 2020 and beyond.
Kids graduating from college nowadays earn $100,000 their first year if they land jobs at the best firms in technology, banking, or consulting.
If you’re going to spend a fortune on higher education, then you might as well join an industry that has the potential to pay a top 0.1% 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.
Related: Estate Tax By State
Long Live The Middle 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 soul 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.
It’s best to stay in the middle. Politicians will pander to you. Nobody will target you for being a leach or for being greedy. Once you blend in, people will leave you alone to live your life the way you want.
Recommendation To Build Wealth
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.