15 Damaging Financial Mistakes Middle-Class Americans Make
If you’re a middle-class American worried about money, you’re not alone. When you’re making between $40,000 and $120,000, every dollar you bring in counts, and it’s important to maximize your income if you want to build wealth.
However, if you’re like many Americans, you don’t have much experience in finance. It’s not something teachers typically cover in school, and the financial landscape seems to be constantly changing.
We can’t give you a full financial education in one article. Still, paying attention to these 15 financial mistakes is a good place to start.
Defining Middle Class
Determining what makes someone middle class can be tricky. US News and World Report defines middle-class earners as those who make slightly less than $40,000 to slightly more than $119,000.
However, what counts as middle class can vary greatly by your specific living area. In some states, you can make close to $200,000 and still fall in the middle-class range. So, if you make more than $119,000 but live in a high-cost-of-living area, you might still be middle class.
1: Buying New Cars
Buying a new car isn’t always a mistake, but it can be. If you’re constantly trading in your old model for the latest option and taking on a new car payment to go with it, you’re not making the best financial decision.
Sure, new car models might give you better gas mileage or have certain features you want, but it’s usually a better decision to finish making payments on a car and then drive it as long as possible. This keeps more money in your accounts which you can put towards savings or retirement.
2: Forgoing an Emergency Fund
According to Bankrate’s Annual Emergency Funds report, 20% of Americans don’t have any form of emergency savings, and two-thirds say that if they lost their primary source of income, they wouldn’t be able to cover more than a month’s worth of expenses.
Emergencies happen, and savings are crucial to cover unanticipated expenses. If you have to borrow in the event of an emergency or use a high-interest credit card, you could end up in debt that’s difficult to get out of.
3: Paying for Adult Children
If you still have children under 18 at home, supporting them isn’t optional. But when your kids reach adulthood, it’s in their own best interest that you stop letting them rely on you as early as possible.
It’s normal to want to help your children, even if they’re well into adulthood, but it’s important that they learn to manage their finances independently. Handing them money whenever they need it doesn’t empower them to become financially literate, and it can hinder you from reaching your savings goals.
4: Not Diversifying Your Income
According to a Brookings Institute analysis of IRS data, the top 0.1% of Americans make most of their money from investments and interest, which receive better tax rates. So, take a page from their book and start diversifying your income through a broad range of investments.
You might choose to invest in a rental property, the stock market, or in your own home with updates that will bring big returns when you sell. Diversifying your income will help you increase your wealth now and come in handy during retirement later.
5: Racking Up Credit Card Debt
According to data from the Federal Reserve Bank of New York and the U.S. Census Bureau, the average American household has $7,951 in credit card debt. This one of the biggest money traps the American middle-class faces.
Credit cards typically have high interest rates, making even a small amount of debt difficult for some people to pay off. If you’re dealing with credit card debt, it’s crucial to make a repayment plan and stick to it. The faster you pay it off, the faster you can start building more wealth.
6: Needing Instant Gratification
We live in a world where instant gratification is all too easy. If you want something, it’s only a click away.
As convenient as this is, it also contributes to a major financial pitfall. Spending on items to fulfill an immediate but passing need might feel good in the moment, but it often takes away from long-term savings goals.
7: Not Sticking to a Budget
Budgeting is a good tool for increasing wealth. It’s a simple concept: record everything you bring in and everything you spend. Then, cut your spending where needed.
Unfortunately, many Americans don’t utilize or stick to budgets. A CFB poll showed that 68% of consumers know a budget would help them reach their financial goals, but over 40% have never had one. If you can make a budget and stick to it, you’ll be ahead of the financial curve.
8: 401(k) Fails
Having a 401(k) is a great step to building long-term wealth, but if it’s your only investment, you’re missing out. Many financial experts recommend making additional investments in stocks, bonds, or other non-traditional investment avenues.
You should also ensure you max out your 401(k) contributions. This is especially crucial if you have an employer that will match your contributions. That’s free money when you retire!
9: Not Shopping Smart
Shopping smart is a learned skill, and not everyone has it. Rather than purchasing what you want when you want it, it pays to wait for store sales and foreseeable discounts to make a purchase.
Shopping smart includes things like buying produce when it’s in season and buying in bulk when possible. For clothing, it means waiting for end-of-season sales to buy next year’s summer or winter gear. You can also shop at outlets or buy items second-hand.
10: Lifestyle Creep
As a working middle-class American, you’re bound to get a wage increase now and then. Maybe it comes with a promotion, or maybe it’s a cost-of-living increase. In any case, when you start making more, it’s all too easy to start spending more, too.
Avoiding lifestyle creep is one of the best ways to build wealth over time. That means not taking on new payments or major expenses with every pay increase. Instead, put it into your investments or savings and watch your wealth grow.
11: Overlooking Insurance
It’s easy to overlook your insurance needs in an attempt to save money. However, doing so probably isn’t a good idea.
Opting for low-end car insurance, skipping homeowner’s insurance, or not paying into life insurance are all good ways to put your family into debt. Although paying for insurance upfront may feel annoying, it will be more than worth the cost in the event of an emergency.
12: Failing Financial Literacy
Financial expert Suze Orman suggests that about 95% of Americans are financially illiterate, and she’s probably correct; financial literacy isn’t typically taught in high school or college classes.
Becoming financially literate will help you, though. Whether you take a course or use online resources to self-educate, learning about your different options for investment, retirement, estate planning, and more will help you build wealth while avoiding financial traps.
13: Not Investing in Yourself
One of the best things you can spend money on is yourself. We’re not talking about buying a new wardrobe or spending big on a vacation. But, if you’re improving your skillset with more education in a field that pays well, it could be worth the investment.
U.S. Bureau of Labor Statistics (BLS) data shows that each degree you earn increases your earnings and decreases your chance of unemployment. So, whether you’re going back to finish high school, pursuing a master’s degree online, or gunning for a PhD, more education could be a smart move.
That said, it’s crucial to study a field that pays well and has a high job demand. Otherwise, you could be left trying to pay student loans with a low-income job.
14: Sticking With the Same Job
Company loyalty isn’t a bad thing, but staying at the same job for too long can cause career stagnation for many. Doing the same job day after day and year after year means you’re probably not learning new skills that could help you grow your career.
In some industries, changing jobs every year or two is the norm, but that’s not the case everywhere. Regardless of your industry, learning new skills that future employers want to see is important. That way, you have a higher chance of landing that next promotion or snagging a higher-paying position at a new company.
15: DIY-ing Everything
If you own your home, investing in it is a great way to increase its value and get a bigger return when you sell. However, don’t fall into the do-it-yourself (DIY) trap.
It’s tempting to try and save money by tackling big projects single handedly. However, DIY jobs don’t always increase your home’s resale value. If you’re putting in new floors, refinishing cabinets, or making other updates that you have little to no experience doing, paying an expert is usually worth it.
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