Middle Class

How Do You Define The Middle Class?

by KNS Financial on February 24, 2011

When I was growing up, people talked about three main economics groups within society. There were the rich (upper class), the poor (lower class), and everybody in between (middle class). Investopedia recently posted an article looking at 6 signs that you’ve made it to middle class.

As I looked at some of the signs on their list, I began to wonder how exactly should we define what it means to be a part of the middle class. If we use a broad definition to describe the middle class, we come up with something like this – “a family that brings in too much money to be considered poor, but not enough to be considered rich”.

Well, let’s look at this list and decide whether these things actually demonstrate a family crossing the line from poverty into semi-abundance.

Signs That You Are Middle Class?

Home Ownership

The article proclaims that, “The step up from renting to owning signifies prosperity and achievement”. Most people who know me, already know how I feel about this subject. This idea of home ownership being a meaningful step in someone’s life is just not true.

My problem with using home ownership is that in order to be considered a homeowner, one only has to beg a loan officer to give him money apply for a loan to buy a house. Borrowing money to buy something, and then taking 30 years to pay the loan back is definitely not the same as buying an item. This is especially true when considering whether someone has “made it” to middle class or not.

Let me add that if someone has saved up enough money to buy a house without a loan, but then chooses to acquire a mortgage for other reasons (such as the ability to earn a higher guaranteed return on an investment then the interest rate on the loan), they have definitely crossed over into the middle class (and probably even higher)!

Automobile Ownership

This is a even more laughable than home ownership. Even though there are a lot more people who are able to purchase a car with their own money than compared to a house, there is still a lot to consider.

Firstly, many people who use automobile ownership as a status symbol, have a particular set of makes in mind. Some will only consider luxury cars to be a sign of moving up, others will include sports cars or even more “standard” cars with lots of accessories. The point is, this category is so subjective, that it can’t really be a clear sign that one has moved up from poverty to the middle class.

Secondly, many people borrow money to buy new cars. Actually, many people borrow money to buy used cars as well. Once this happens, you run into the same problem as with houses – you can’t borrow money to buy something and then use that purchase as proof that your economic status has changed!

The ability to purchase a reliable car, with cash, and without depleting your emergency fund, is a good indication that you have crossed over into a new economic class!

College Education For The Kids

I’ll save you the, “borrowing money to buy an item doesn’t count” speech and just say this – if you are able to pay for your child(ren) to receive a quality education from a college or university, then you are definitely not poor!

Obviously, we are not counting grants, scholarships, and other forms of assistance in this evaluation, since those are often the product of low income or high academic achievement. Having a significant amount of college savings speaks very highly of one’s financial condition!

Retirement Security

This is a tough one because it involves more than just the means and ability to save for the future. Many people had a significant amount of money saved up for retirement, but then lost some or most of it due to bad performance in their investment vehicles, or bad decisions.

I do believe that having enough disposable income to build up adequate retirement savings indicates that you [at least] belong in the middle class. The fact that someone would know both the IRA contribution limits, 401k contribution limits, and take advantage of both, is more than what most people accomplish in this area!

Health Care Coverage

This is another difficult one because most people do not pay for their health care (at least not directly). Most people are part of a group through their employer, and so their employer pays a large portion (sometimes all) of the insurance premiums. Therefore, health care coverage is not always a function of income. In fact, most companies will pay a lower income because your health care coverage is also a part of your total compensation package. They may even offer a flexible spending account to sweeten the pot!

However, many people who don’t have health insurance through their employer often work at low paying jobs, or only work part time. Therefore, there can be a correlation between net worth and level of health care coverage.

Family Vacation

I really don’t know too many families that fail to take vacations, regardless of income level or net worth. This is another category where debt has leveled the playing field. Also, I don’t think this is a good indicator because there are too many ways that a “poor” family can come across $1,000 or $2,000 (tax refund, bonus, etc.).

My Thoughts

The fact that most people have access to debt makes it very difficult to determine who is poor and who is middle class. Because of this, examining possessions alone is an incomplete way to evaluate someone’s economic status. We must consider their level of income and debt as well as their possessions before making such a determination.

photo by renjith krishnan

Reader Questions

  1. Do you think that the three main economic classes are still applicable today?
  2. Do you think that debt has changed the way people view these classes?
  3. Where do you consider yourself to by, and why?

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