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May 29, 2020

Why the middle class has been losing ground with wealth building

What does being middle class mean? There is no official standard that defines the middle class, but historically it has been interpreted to mean a stable income, a modest home, maybe a nice car, college savings for any children and a comfortable retirement. People are told that if they work hard enough and spend consciously, they’ll be able to make a good living and take care of themselves and their family. While this sentiment comes from a genuine belief in the upwardly mobile nature of America, the truth is more nuanced than that. 

According to Pew Research Center, about half (52%) of Americans live in a middle-class household, using household income as the metric. Despite forming a majority of the American society, the middle class is less financially secure than ever before. There are a few factors that come into play: incomes that don’t keep up with cost of living increases, a decline in the value of assets causing drops in personal wealth and savings, and diminishing health and pension benefits for employees

Most middle class Americans now have a smaller safety net than ever before. Because the middle class has been experiencing sinking savings and investments at the same time as rising personal debt, the share of families who can afford to pay for an emergency is lower than ever. 

Although upper-income families have more than recovered from the losses experienced during the Great Recession, the wealth of lower- and middle-income families in 2016 was comparable to 1989 levels. Forty nine percent of U.S. aggregate income went to upper-income households in 2014, up from 29% in 1970. The share accruing to middle-income households was 43% in 2014, down substantially from 62% in 1970. 

Drops in personal wealth due to differences in investment types have also contributed to the decline in middle-class financial security. Owning a home remains a major part of the American dream, signifying prosperity and a milestone achievement. Surprisingly, upper class Americans don’t seem to share that sentiment.

This article explains how the rich invest in stocks and alternatives, while middle class Americans put higher value on owning a house. Since the Great Recession in 2009, the stock market was up 500% in the beginning of 2020. The housing market has seen volatile growth in a few geographical urban locations, but nowhere near the same increase in value. If you are interested in investing in real estate, a REIT (Real Estate Investment Trust) like DiversyFund’s offers opportunity for diversification and liquidity benefits.

Costs of living and debt. The sharpest discrepancy between a middle-class American family and an upper-class family is the level of debt taken on between the two. An estimated 33.9 percent of families had enough wealth in 2007 to cover the cost of a medical emergency, down from 35.0 percent in 2005 and 43.7 percent in 2000. This deterioration comes as a result of less wealth and higher costs of medical emergencies.

Consumer debt is also a big portion of the average household debt in the US. According to an analysis of Federal Reserve and TransUnion data by the personal-finance site ValuePenguin, credit-card debt stood at about $5,700 per household in 2015.

The final nail in the coffin: employment and wages are declining for middle class Americans. There has been remarkable innovation in the US economy in the past couple of decades. Technology plays an increasing role in how we work and live and the job market has shifted rapidly to reflect that. Unfortunately, this leaves the more vulnerable portion of the employed at higher risk of decreasing wages and unemployment. Wages for workers with skills that are less in demand declined or stagnated. And as college becomes out of reach for more Americans, workers with a college degree can still expect to earn over 80 percent more than those with just a high school diploma.

middle class income

The chart above shows that the median income of middle-class households in 2016 was about the same as in 2000, partly due to the lingering effects of the Great Recession but also due to a changing job market.

America, the land of underdogs and legendary rags-to-riches stories, has witnessed wealth inequality for many decades. Regrettably, that gap has widened after the Great Recession and continues on that trajectory. Years of financial instability have given rise to a host of other problems: distrust in the community, rising crime levels, and mental health issues and suicides linked to financial stress. 

While many middle class Americans remain optimistic and believe that they can achieve financial independence, the data shows that there is much work to be done to address the root causes of the wealth building gap. By providing access to wealth building tools and quality investment products to the everyday investor, DiversyFund aims to contribute to turning this trend around. Every step counts to empower American families to build a secure future for themselves.

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