I’m a Financial Planner: Here’s What the Middle-Class Trap Is and How You Can Avoid It
Written by
Laura Beck
Edited by
Molly Sullivan
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For many Americans, being middle class is a mixed bag. On one hand, you have a reasonably comfortable lifestyle and standard of living. You likely have a decent job, can afford life’s basic necessities and maybe even take an annual vacation. On the other hand, you might often feel stuck or trapped, living paycheck to paycheck with little ability to get ahead or build real wealth.
This predicament is commonly referred to as the “middle-class trap”– a situation where you’re earning enough to pay your bills, but not enough to build any savings. You’re caught in an unfortunate cycle where the vast majority of your income goes toward expenses, debt payments and meeting your basic needs, leaving little room for investing in the future.
While challenging, the middle-class trap is far from inescapable.
“With a few of the right strategies, it’s definitely not impossible to overcome,” said Adam Paoli Sr., lead financial planner at Coltiva Wealth.
Here’s a closer look at how to avoid this money trap.
Understand Your Monthly Expenses
The first step in avoiding the middle-class trap is to understand where your money is going each month. Track every single expense, no matter how small. Get crystal clear on the cash you’re earning and spending.
“Closely examining where one’s paycheck is spent opens the door to identifying areas where spending can be reduced or eliminated,” Paoli said. “This exercise is eye-opening to many and is key to freeing up extra cash that can be put toward savings and investments. This lays the foundation for the creation of a budget, which is crucial to overcome the ‘middle-class trap.'”
Review bank and credit card statements line-by-line. Categorize costs as either needs or wants. You may be shocked at how much is leaking out each month on things you don’t need or value. You’ll also see how much surplus income you might have available to save and invest.
Set Goals
You can now set clear financial goals to work toward. Want to get out of debt? Saving for a down payment on a home? Planning for retirement? Get specific and set timelines for each goal.
“Setting specific, and tangible goals can also help provide motivation and direction, whether it’s saving for retirement, building an emergency fund or paying off debt,” Paoli said. “Very few people like to be told how to spend their money, but when they are given a goal to pursue it is common to see renewed energy behind achieving that goal.”
Figure out exactly how much you need to save each month to achieve these objectives based on your income after expenses.
Start Saving, Even If It’s Small
When you can’t save much, it may not seem like a priority. But saving even a small amount can make a big difference over the long run, as long as it’s done consistently. Treat saving like any other mandatory monthly expense and pay yourself first before any other spending occurs.
“Even a small amount each month will build good habits and gradually build a financial cushion to provide more stability in the long run,” Paoli said.
Even just $25 or $50 per paycheck into a separate savings account is far better than nothing. As you cut expenses and potentially increase income, raise the amount you’re saving. The sooner you make it a habit, the faster you’ll make progress.
Increase Your Financial Knowledge
Too many people never learned the basics of money management, budgeting, taxes and more. This leads to poor financial decisions and behaviors that prevent you from building wealth.
“Understanding basic financial concepts such as budgeting, investing and understanding good versus bad debt can empower individuals to make informed decisions about their finances and break free from the disheartening ‘paycheck-to-paycheck’ cycle,” Paoli said.
The more you learn, the more confidence and control you’ll have over your financial situation. You’ll be empowered to set goals, save appropriately and invest wisely.
Work With a Financial Planner
Even after increasing your financial literacy, guidance from a financial planner can be invaluable. A good planner will provide expertise on your full financial picture including savings, investments, taxes and planning for the future. They can help you optimize accounts, select good investments, reduce your taxes and get you on track for retirement.
“Working with a financial planner can provide personalized advice and strategies that are unique circumstances for you, helping to create a personalized roadmap towards financial stability and achieving long-term goals,” Paoli said.
The right financial planner will easily pay for themselves many times over. Their expert help can make the difference between a lifetime of struggling in the middle-class trap versus long-term financial independence.
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