The middle class is often thought of as the backbone of the American economy -- and decades ago it was. Today, however, the American middle class has become a shadow of what it once was. A number of changes and challenges, including poor saving habits, stagnant wage growth, and growing income inequality, has altered the shape of middle-class America.
What does today's middle class look like? Let's define it with five figures so you can get a feel for what it's really like to be middle class in America.
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1. $24,173 to $72,521
First things first: we have to define what middle-class income actually is. According to Pew Research Center, which conducted a study on the shrinking middle class in late 2015, an individual would qualify for the middle class if he or she earned more than $24,173 in 2014 dollars, or less than $72,521. Pew's official definition is income of between 67% and 200% of overall median household income.
Back in 1971, some 80 million Americans were considered to be in the middle class, compared to 51 million Americans who were either lumped in the lower- or upper-income brackets. However, by 2015, there were 121.3 million lower- and upper-income Americans, combined (using Pew's definition of 67% to 200% of median household income). This is compared to 120.8 million middle-income Americans. In a span of 44 years, the middle class had become the minority.
2. 43% of aggregate household income
In addition to the middle class losing its majority status, the percentage of aggregate income heading to the middle class has fallen sharply since 1970. Back in 1970, U.S. middle-class households held 62% of aggregate household income, compared to 29% for upper-income households. As of 2014, upper-income households had basically half (49%) of aggregate income, and middle-class households had seen their aggregate income fall to just 43%. In other words, the rich were getting richer at a much quicker pace than the middle-class or lower-income folks were over the past four-plus decades.
3. 54% invested in the stock market
A recently released survey from national pollster Gallup found that just 54% of Americans with annual incomes of between $30,000 and $74,999, which is more or less the middle-class based on Pew's definition, were invested in the stock market as of 2017. Comparatively, this is down from 67% as of 2008.
Meanwhile, upper-income individuals in the $75,000 to $99,999 income range saw their stock ownership drop to a lesser degree (75% in 2017 from 85% in 2008). This 21% ownership gap (75% for upper-income and 54% for middle-income) could be one of a variety of reasons why more well-to-do folks have seen their wealth grow at a much quicker pace than the middle class. All three major U.S. stock indexes have more than tripled since hitting their troughs in March 2009, meaning those who've held onto their stocks have probably be greatly rewarded.
4. Approximately 70% have less than $1,000 saved for emergencies
It's no secret that Americans aren't good savers. The U.S. personal saving rate has dipped by more than 50% over the past five decades, and we're saving nowhere near the recommended 10% to 15% of our paychecks. But it'll probably shock you to see how bad the middle class is at socking away cash for emergencies.
According to a survey from GoBankingRates in September 2016, 37% of persons bringing home $25,000 to $49,999 annually didn't have a dime in savings, and another 35% had less $1,000. Similarly, 33% of the people making between $50,000 and $74,999 had $0 in savings, and 36% had less than $1,000. Essentially, 7 in 10 middle-class folks have less than $1,000 saved for emergencies, which is scary low.
5. Debt at 122% of annual household income
The middle class has also been highly proficient at racking up debt over the past two-plus decades, according to data from the Federal Reserve's Survey of Consumer Finances, which is conducted every three years. Though debt for middle-class households hit an all-time high of 140% of annual household income in 2010, the 122% of debt relative to annual household income that middle-class households are lugging around as of 2013 still isn't good. Comparatively, this is also nearly double the debt burden that middle-class families were contending with in 1989.
It's not all bad news, but changes need to be made
Yet, the steady disappearance of the middle class in recent decades isn't all bad news. Pew's data also shows that while we've seen some folks fall into the lower-income category, we've seen the upper-income class expand considerably. In other words, we're witnessing economic advancement whereby middle-income folks are pushing into the upper-income class -- and that's a good thing. While the share of adults living in middle-class households dropped from 61% to 50% between 1970 and 2015, the share of adults living in upper-middle and highest-income households rose from an aggregate of 14% in 1970 to 21% in 2015.
Nevertheless, changes need to be made if the middle class is to survive and once again thrive. They'll need to save more and invest smarter, plain and simple.
A Gallup poll from 2013 found that just 30% of households with between $30,000 and $75,000 in annual income kept a detailed monthly budget. For context, those households earning more than $75,000 and less than $30,000 failed miserably, too, but middle-income households had the lowest rate of keeping a monthly budget of all three groups. This has to change. Without an understanding of your cash flow, your ability to optimize your saving and spending habits is compromised. Formulating a budget is relatively quick, and it can easily be done online these days, taking the guess work and hated addition and subtraction out of the equation.
Likewise, the middle class needs to once again trust in the stock market. While CDs are extremely "safe," they also don't provide much in the way of a return. The stock market is a proven moneymaker over the long run, and you'll have a hard time finding investments that'll top its historic 7% return with dividend reinvestment
If simple changes like this aren't made, we could be talking about an even smaller American middle class a decade from now.
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