If you’re tired of always playing catch up with your finances, this article is for you.
It comes down to raising your financial literacy. It does not just mean knowing some good information. It has everything to do with you actually applying the information. Otherwise, frankly, you’re wasting your time.
What’s the point of learning something if you’re not going to use it?
What is Middle-Income?
First let’s make sure we’re all on the same page as to what Middle-Income actually is.
According to the Cambridge Dictionary it is an adjective:“having an income that is not low and not high”
The thing is, Middle-Income depends not just on someone’s income but also depends on how many members of their family are dependents (requiring financial support).
A single person who makes $100,000 annually is very different from a family of five with the same annual income.
Another characteristic of middle-income that is widely known, is that they can pay their bills, but not save much. They have a decent job, but it’s not enough to afford many luxuries.
Now we’re ready to talk about navigating the maze. There are three very common challenges Middle-Income earners face. I will take them up one by one and give you tips and resources to tackle them.*
Challenge 1. Debt Management
Many middle-income families struggle with managing various types of debt, such as credit card debt, student loans, and mortgages.
Debt is actually a budget and savings issue.
A starting point would be to ask yourself these questions:
How did you get into debt in the first place?
Was it reckless spending?
Was it an emergency?
When you really want to buy something:
A. Do you save up for it and patiently wait
B. Throw it on a credit card and hope to pay if off without any hiccups along the way
When you have a $2,000 emergency:
A. Use my emergency fund because I saved up for times like this
B. Throw it on a credit card again!
If you cannot save, it is one of two things. You’re either not budgeting or you need to make more money. Easier said than done I know, but it can be done!
This may inspire you to save and budget more.
The average credit card balance in 2023 was $6,501.**
The average credit card interest rate is 2023 20.75%.***
Hypothetically, if someone had this scenario of a credit card with this balance at this interest rate and they only paid $130 per month, it would take them about 10 years to pay that card off! An estimate of $8,668 in interest paid to the lender for borrowing $6,501.
Had this person saved the money first and spent it out of savings instead of borrowing, they would have saved themselves the $8,668 in interest that was charged.
The truth is, banks make A LOT of money on people’s ignorance. Who else is consistently making 20.75% on their investments like that?
That’s right, basically no one.
Yet, the banks pay essentially nothing in interest to the customers who are saving through them!
Look at it this way, if every consumer knew these facts and were better savers, the lenders would starve!
Isn’t it convenient that financial literacy is very rarely taught in school? Think about our spending culture and worsening instant-gratification. Just something to think about.
Challenge 2. Savings & Investment Knowledge
Building up savings for emergencies, retirement, and other future goals can be challenging for middle-income families, especially with competing financial demands.
Although it may seem like an optional aspect of finances, I can assure you it is most definitely not.
The truth is, if you don’t treat savings as a rent or mortgage payment or a grocery bill, it won’t get done or will always be at the bottom of priorities.
Without understanding the power of compound interest, the average middle-income earner ends up making lenders super wealthy instead of themselves (as I mentioned earlier in this article).
That scenario didn’t even include the factor of what that person could have grown with that money if it were earning interest for you instead. Waiting to build wealth can cost you a lot of money.
Want to know more about that?Read: The Cost of Waiting to Build Wealth.
Assuming you have a solid budget or discretionary income that’s just getting spent mindlessly. The best way I’ve found to create a good savings habit is to set up automatic savings.
You can do this through your payroll company or directly with your financial institution by way of recurring transfers that align with your paycheck. Out of sight, out of mind. General rule of thumb if you’re trying to really work on this habit. Start small, and increase the amount as soon as you can.
The Priority of savings:
Emergency Fund Aim for 3-6 months of income.This will reduce your chances of getting into debt.
Long-term savings & wealth Know your financial independence number. This will help create a better life for you and your family and you won’t have to work the rest of your life (if you don’t want to) so you will need to include this in your savings.
Major purchases Like houses, cars, vacations, etc. This will also reduce your chances of getting into debt.
Challenge 3. Proper Protection
If you were to build a house. Would it make sense to build a house from the foundation and up or from the roof down?
Obviously, it would make sense to start with a foundation.
Proper Protection is like the foundation of your Financial House, so-to-speak.
Protecting from what? RISK
What Risks? LOSING YOUR INCOME
How does someone lose their income? GETTING SICK OR PASSING AWAY
Even if you saved millions of dollars, without Proper Protection, your assets are at risk of being reduced or even wiped out by:
Major Medical Expenses Cancer, Heart Attack, Stroke, Organ transplant, nursing-home. Top reason why people file bankruptcy is due to medical expenses and reasons.
Law suits
Taxes Income, Capital gains, Estate, this can increase and decrease
Stock Market crashing This matters depending on when you need to take out the money, which you cannot exactly time the market when you’re close to needing it.
People who lack financial literacy undervalue the importance of risk protection from bad things happening.
There’s a saying that goes: It doesn’t matter how much you make, it matters how much you keep.
Diversification, or not putting all your eggs in one basket, is another way to manage risk.
Life Insurance, Living benefits and Disability insurances help solve these concerns.
Life Insurance
Can protect your loved ones who depend on your income, in the event of you passing away.
It transfers the risk of financial impact on your loved ones in the event of you passing away to an insurance company, so those who depend on your income and assets are taken care of.
Other types of insurances cannot state they will guarantee you will file a claim like Life Insurance does. Auto insurance cannot guarantee you will be in an accidentHomeowner’s insurance cannot guarantee your house will burn down
But one thing is for certain, nobody lives forever!
Later in life, with estate planning, it can also help with transferring wealth to the next generation, beneficiaries generally receive the funds income tax-free, and it can help cover funeral or end of life expenses, the list goes on.
Living benefits
Are a type of coverage that can be included in a life insurance policy, or a stand-alone policy, that can provide funds in the event of a major medical condition such as: cancer, heart attack, stroke, going to nursing home, and more.
Depending on the company who is providing that coverage, and the condition, they can pay up to 100% of the death benefit while you’re still alive. Leaving your savings, your house minimally impacted, if at all.
Disability insurance
Covers some or all of your income if you were unable to work due to medical reasons. Some jobs offer this as a benefit, mainly for full-time employees.
But if your job doesn’t offer this, this might be a good opportunity to check, because you can get your own regardless of where you work.****
Although, Proper Protection is the last challenge listed in this article, it is actually the most important one!
Summary
Everyone starts somewhere. It’s okay to feel overwhelmed at, first. But the good news is the first step to improving your financial situation is simply having the ability to face it. You can handle it, you can improve it. It all starts with facing it and learning what you need to apply in order to improve it.
Now that you understand these 3 challenges better.
I am actually going to recap them in order of importance this time!
First, Properly protect your income and all your hard work
Second, Save and Build Wealth
Third, work on Eliminating your Debt
Have questions?
*For financial educational purposes only. This is not financial, legal or tax advice. ↩︎
**Experian 2023 Consumer Credit Review https://www.experian.com/blogs/ask-experian/consumer-credit-review/
***According to Bankrate As of 4/15/2024 https://www.bankrate.com/finance/credit-cards/current-interest-rates/
****Must be approved through underwriting and approval depends on various factors such as age, health, and more