Yahoo Finance 6 Reasons You May Not Be Considered Middle Class in 5 Years
The middle class has been steadily shrinking over the years. According to Pew Research Center, roughly 50% of Americans are considered middle class, whereas that percentage was 61% back in the 1970s.
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As the gap between upper and lower class widens, it’s entirely possible that people who are currently in the middle class will move up or down in the coming years. Here are some of the big reasons this could happen to you.
Wages Aren’t Keeping Up
It’s no secret that wages across the board haven’t been keeping up with inflation or even corporate profits, but this continues to cause a larger gap in the American class system.
“Wage growth has risen roughly 1% since 1965 while corporate profits have skyrocketed some 200%,” said Kevin Thompson, investment advisor at 9i Capital Group. “With the natural rate of inflation and healthcare now making up 20% of GDP, the middle class continues to have headwinds getting ahead in this current landscape.”
Find Out: 6 Reasons the Poor Stay Poor and Middle Class Doesn’t Become Wealthy
Technological Advancements May Threaten Job Security
The growth of technology, such as artificial intelligence, has threatened many industries and has led to job security concerns across the board. These advancements could either replace or automate many traditional jobs, making it harder for those who rely heavily on one source of income to keep their current lifestyle.
“The truth is that to maintain a middle-class or upper-middle-class lifestyle, individuals may need to take proactive measures,” said David Schlossberg, EA, RFC, senior partner at Assured Concepts Group. “Examples of this could be to participate in continuous learning and education to stay competitive in the job market and to enhance career advancement.”
Costs Keep Going Up
“The middle class is indeed undergoing a significant shift in our society now. There are several factors that contribute to the change, but some of the key ones include the rising cost of living [and] rising cost of homeownership,” Schlossberg said.
Traditionally speaking, people in the middle class were homeowners — and many still are today. But with wages not keeping up and real estate prices skyrocketing in many parts of the country, it’s becoming harder and harder to afford even a starter home.
“As a direct lender, we’ve financed various real estate ventures and observed the fluctuations in the housing market,” said Vincent Cerniglia, principal and vice president of Noreast Capital Corporation. “Middle-class families often invest a significant portion of their wealth in homeownership. Market volatility can thus heavily impact their net worth and financial stability, especially if they are overleveraged.”
You Advance in Your Career — or You Don’t
Another reason you might not be in the middle class in five years is because you advance in your career.
“Five years is enough time for some serious wins to happen in your career. If you find yourself climbing the ranks and earning several significant pay raises along the way or becoming eligible for large bonuses or commissions, you could wind up leaving middle-class life behind,” said Todd Stearn, founder and CEO of The Money Manual.
But on the other hand, if you don’t advance in your career, you could end up falling lower on the spectrum.
“If your job isn’t really a career with a path you expect to follow to grow significantly in your field but more a job that you expect will stay pretty much the same with little change in pay over the next five years, then inflation could potentially knock you out of the middle class,” Stearn said. “That’s because while your pay might stay the same, the cost of everything will increase over that period, giving you less spending power. This is even more likely to become a problem if you also cut back on hours or wind up in a lower-paying job.”
Your Debt Levels Increase
People in the middle class often rely on some kind of debt to support their lifestyle. This could be an auto loan for their car, or it could be student loans for a child’s education. Generally, there’s at least one mortgage involved as well.
“Many middle-class individuals rely on credit for major purchases,” Cerniglia said. “While this can be initially beneficial, the long-term accumulation of debt, especially with high-interest rates from sources like credit cards or unsecured loans, can lead to financial instability.”
If you keep accumulating debt, you could find yourself dropping out of the middle class in the next few years or so. But you can also avoid this issue by relying more on cash and other investments rather than financing for the things you need. And if you’re already nearly debt-free, you might even end up in a better financial situation.
Your Investments Don’t Pan Out — or They Do
The way you invest your money plays a big role in how financially stable you are.
“If you have the bulk of your money in an investment portfolio filled primarily with high-risk investments, you could stand to lose a great deal if those investments don’t play out like you hoped,” Stearn said.
That’s why diversifying those investments to mitigate risk is so important. This could mean investing in things that don’t typically offer as high of returns — like certificates of deposit or bonds — but that also carry far less risk.
And, of course, if your investments perform better than you thought they would, you could see the opposite happen.
“Even a relatively ‘safe’ investment portfolio can surprise you with stellar performance,” Stearn said. “If, for example, some of your stocks perform much better than expected and you had a significant amount of money invested, those investments could propel you beyond the middle class.”
Try not to rely too much on one asset class. Diversification can protect you against major market downturns and help you build long-term wealth and financial security.
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This article originally appeared on GOBankingRates.com: 6 Reasons You May Not Be Considered Middle Class in 5 Years
