8 Money Mistakes of the Middle-Class
Politicians consistently cater their promises to correspond with the economic concerns of the middle-class. Why? Well not do about half of all American households fall into the middle-class, this demographic also possesses families with incomes that are two-thirds to double the median household income the United States. With cost-of-living adjustments included, this results in earnings between $42,000 and $125,000 per household.
While the middle class accounts for workers of all varieties that keep the economy going, the American middle class faces some of the largest economic challenges, usually in the form of housing and healthcare, that put a squeeze on their budget and result in little to no money saved for retirement and leaving workers stuck in the middle class. Are all their issues, the result of economic pressures. Not at all. Here are the eight most prominent mistakes that middle-class Americans make that keep them stressed and struggling for the rest of their lives unless something is done.
1. Racking up too much debt
The Federal Reserve Bank recently noted that approximately 65% of all credit card users carry a balance month-to-month. With an average APR of 15%, this can be a costly mistake. Keeping up with the latest trends by charging items to a credit card can result in thousands of dollars being owed to credit card companies.
2. No Emergency Fund
One of the reasons for dipping into credit cards is not having any savings to handle emergencies. According to another Federal Reserve report, nearly half of the US population (about 46%) say they would struggle to cover an emergency payment of $400. Most financial planners suggest keeping about three to six months worth of expenses in savings in the event of a job loss or major medical emergency.
3. Not Contributing More Money To Retirement After a Raise
I've wrote about how my now 90-year-old grandma has managed to keep a good handle on her finances, despite having retired over 30 years ago. Throughout her life, whenever she got a raise, she simply saved the difference and only lived off of the same income for her entire career. Most people see more money, and think more spending, saving only the same amount of money in their retirement accounts their whole career. Most 401(k) plans allow the option to automatically increase contributions on an annual basis or as your income grows - take advantage of these!
4. Using only a 401(k) Plan to Supplement Retirement
Many middle class workers think that employer 401(k)s and Social Security will be enough to get them through retirement, and this is wrong. While both are important, an account like a Roth IRA is imperative to avoid tax consequences that are prominent with other retirement savings plans. Don't put all your retirement savings in one basket; you'll pay for it later.
5. Not Using a Healthcare Savings Account (HSA)
Many families have healthcare plans with high-deductibles in order to save some money on their monthly premiums. However, an HSA is a great way to make up the difference so you don't end up with massive healthcare bills. These deposits are deducted from your income on your tax returns, and thereby lover the amount you owe. This money also grows tax-free until you need it, and it can be spent on any medical-related expenses. Some financial advisers say that if you're not using an HSA, you're effectively giving up a 25% discount on your medical expenses.
6. Putting Off Retirement Savings
We've talked about this many times people. I understand that it's easy to keep pushing out retirement savings in order to stash away money for a house or to take care of kids, but waiting to save for retirement until you're only a few years out is a costly mistake. The sooner you start, the sooner you'll avoid panic and heartache later.
7. Forgetting to update beneficiary designations on retirement accounts, life insurance policies, and annuities.
Are you still planning to gift your 401(k) to your parents? How about your life insurance policy to your ex-wife or ex-husband? Making sure that your beneficiaries are updated as your life changes is very important. It could cost those who are important in your life a lot of money.
8. Spending Too Much on Assets that Don't Appreciate in Value
Real estate is one of the few assets that most people invest in during their lives that will appreciate in value. The biggest waste? Cars! Middle-class families shell out tons of extra money on fancy, expensive cars that they just cannot afford, and these investments turn out to not be smart. The second you drive off the lot in a brand new car, it starts to lose value, and the longer you own it, the less valuable it becomes. Most middle-class Americans would be much better off driving older, cheaper cars and investing extra income into retirement, rather than giving the illusion that they are rich by driving a BMW or a Mercedes.