7 Reasons Middle-Class Incomes Don’t Stretch as Far as They Used To
Written by
Jennifer Taylor
Edited by
Rebekah Evans
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Once upon a time the middle class could easily afford a comfortable lifestyle. They could buy a nice home, go on modest vacations and shop for necessities without a second thought — but things have changed.
“The middle class is getting squeezed by soaring fixed costs,” said Noah Damsky, principal at Marina Wealth Advisors. “Surging fixed costs related to housing, utilities and insurance reduce the budget for what is leftover, which is flexible spending such as entertainment, travel and everyday luxuries.”
If you’re part of the middle class, you might feel constantly mystified as to where your paycheck is going. Here’s a look at seven reasons why a middle-class income doesn’t stretch as far as it once did.
Housing
It’s a necessity, but housing keeps getting more expensive.
“Housing is the biggest expense taking a bite out of the middle-class budget,” Damsky said. “Monthly mortgages are as much as 50% higher with current interest rates compared to those in 2020 and rents jumped as inflation ripped through the economy.”
Utilities
“Utilities continue to soar as we pressure the electric grid with our insatiable demand for additional power,” Damsky said. “Electricity costs have been steadily increasing and will become a more pressing concern as our consumption for power, data and renewable energy grow while we simultaneously underinvest in infrastructure.”
Unfortunately, he said relief on this bill might not be coming anytime soon.
“The long-term trends point to these issues getting worse — more expensive — before they get better, so add cushion to your budget for higher fixed costs going forward,” he said.
Insurance
Being properly insured is a must, but it isn’t cheap.
“Insurance costs, from auto to homeowners, have soared in recent years with the increase in claims stemming from natural disasters and more costly damages given elevated labor and material costs,” Damsky said.
Recent World Events
Global tensions and instability can — and have — trickled down to the middle class.
“Persistent high prices have certainly been exacerbated by inflationary events over the last five years, including COVID-related supply chain issues, the subsequent unprecedented stimulus packages and the overall deglobalization due to tensions with China and Russia,” said David Flores Wilson, certified financial planner (CFP), chartered financial analyst (CFA), accredited estate planner (AEP), certified exit planning advisor (CEPA) and managing partner at Sincerus Advisory.
Long-Term Accommodative Monetary and Fiscal Policy
“The seeds of today’s high prices were planted years ago, as the Fed has basically had dovish policy since the Global Financial Crisis in 2008 with a few relatively short breaks,” Wilson said. “That, coupled with implementing a highly market favorable tax policy with the 2017 Tax Cuts and Jobs Act (TCJA) during an already hot economy has positively impacted corporate earnings and the stock market, but sent prices soaring.”
Many TCJA provisions affecting individuals and families are slated to expire at the end of 2025 — others impacting businesses will end between 2025 to 2028, according to a Congressional Research Service report — unless President-elect Donald Trump renews them, which is likely.
The ‘Wealth Effect’ From Higher Stock Prices
“The ‘wealth effect’ from surging stock prices under this overly accommodative policy has impacted prices for many middle class families,” Wilson said. “With many high-income [investors] benefiting from high market participation, their growing balance sheets have translated into simply more dollars in our economic system and higher prices.”
Needless to say, the rich getting richer can make it harder for the middle class to get ahead.
Lingering Effects of Inflation
“Prices are a one-way elevator,” Wilson said. “The economists are telling us that inflation isn’t going up much anymore, but already high prices simply aren’t going down in a world where public companies report earnings quarterly and are punished harshly for earnings missteps.”
Continuing to pay high prices for essentials is straining the budgets of the middle class, but finding an alternative isn’t always easy.
“Cutting expenses is challenging for almost everyone,” Wilson said. “In the current environment, it takes an intentional mindset and significant discipline to combat higher prices, as most people are conditioned to spend a little more each year.”
Finding ways to spend less can seem like the obvious route, but he said that’s often easier said than done.
“Curbing spending is unbelievably challenging for most people, so understanding where one’s money is going every month and budgeting out future expenses is paramount to reining in expenses in the current environment,” he said.
Doing so won’t be easy, but this may be the only way to maintain a healthy set of finances going into 2025.
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