How to live a financially smarter middle class lifestyle

According to the PewResearch Center, 51% of Americans live in middle class households.  Most of these Americans seem to be stuck in a sick cycle of living paycheck to paycheck and working 40-50 year careers.  Half of all Americans have absolutely nothing saved at all for retirement.  Two thirds of working Americans don’t contribute any money into an employee sponsored or tax deferred retirement account offered by their employer.

Why are Americans such bad savers? 

A common reason cited as to why Americans stopped saving their income is that income growth as stopped while other expenses have gone up.  It’s true that expenses such as housing, health care, childcare and college costs have skyrocketed.  Student loan debt repayment can also take up a big part of one’s monthly expenses.

What is not often discussed is that American spending has gone up considerably.  This can be partly attributed to rampant consumerism along with easy credit and financing programs.  Too little income combined with increasing spending leads to poor savings rates.

Consumerism is on the rise

Advertisers have convinced consumers that they need to spend their extra money on material goods.  Consumers have become focused on buying shiny new things, thinking that their purchases will make them happy.  Retailers of fast fashion, mass producers of cheap and disposable clothing, have seen retail sales grow 10% over the last 5 years.  Americans now spend over $250 billion a year on clothing.  Poor individuals often spend money on things that give the appearance of wealth, such as name brand clothing and shoes.   

Unhealthy obsession with cars 

Americans continue to pay more and more for new vehicles, locking in monthly payments for longer durations.  I’ve noticed a trend among middle class individuals to judge someone based on the type of car they drive.  If it’s a luxury vehicle, people automatically assume that the car owner is rich.  New research shows that the average car loan is now almost $31,000.  The average monthly car payment is now $517.  The average term for an auto loan is now 69.3 months, or 5.8 years!

Nonstop monthly subscriptions and payments

Consumers often focus on monthly payments instead of paying for things up front.  Companies know this, and often try to get consumers to sign up for subscription-based services.  Look at all the different monthly subscription programs are available, everything from Dollar Shave Club shavers to Bark Box dog treats delivered monthly.  Very few care about the true cost of their purchases.  Homeowners are often encouraged to take out a HELOC (home equity line of credit) to use towards home improvements or other expenses.  Financing makes it easy for anyone to afford anything.      

Paying for conveniences disguised as necessities

With housing costs increasing dramatically in cities, many choose to move further away from their jobs into suburban areas where housing is cheaper.  This leads to long commutes, often over 30-45 minutes each way.  Many of these individuals end up exhausted by the time they get home.  Lack of time to cook and clean leads to increased spending on conveniences such as: eating at restaurants, bringing home take-out or hiring house cleaning services.  I’m surprised how many of my neighbors and friends regularly pay for a housekeeper.  Other conveniences people spend on (that they consider necessities) include dry cleaning, barbershop visits, manicures, pedicures, and even massages.  $20 here, $50 there and then your entire paycheck is gone with nothing to show for it. 

There are very few things we need to be truly happy: healthy food, safe shelter, and good relationships.  Once you get the basics covered, everything else is just nice to have, and not a necessity.     

Act your wage

Many people don’t bother acting their wage and often spend beyond their means.  I’m sure many of us know middle class people who complain about not having enough money.  Almost every middle class individual I know who complains about having financial troubles fit a common profile:

-       They finance a smartphone that is less than 2 years old with a cell phone bill at least $75 or more.

-       They have car payments on one or more vehicles.  Or worse, they lease vehicles, locking in a perpetual monthly car payment forever.

-       They have an expensive mortgage or high rent payment. 

-       Their homes are very nicely decorated with high-end kitchen appliances and furniture.

-       They own name brand clothing and accessories such as pricey purses, wallets, watches and jewelry. 

-       Many commute over 30 minutes each way. 

-       Many eat out for lunch and dinner frequently.  Alcoholic beverage frequently accompanies dinner.

-       They think that the only way to get rich is to win the lottery or inherit the money from their parents. 

-       They are waiting until they get a raise before saving.

-       They need to do more “research” before they start investing.  This basically means that they won’t be investing for a long time.

The spending habits of the middle class simply keep them on a hamster wheel, stuck in an endless loop of living paycheck to paycheck.  I suppose financial independence for them means being able to start collecting Social Security checks on their 62^nd birthday. 

How can you live a financially smarter lifestyle?

If you want to start saving and investing significant amounts of money, you have to change your current lifestyle.  Tracking your spending is the first step towards living a financially smarter lifestyle.  If you don’t keep track of how much money you are making and spending each month, you’ll never know how much money you will need to retire.  It’s hard to create savings and investment goals if you don’t even know where your money is going.  If you prefer to track your finances manually, I recommend ClearCheckbook.  If you want to have all of your income and expenses tracked automatically, I recommend Mint or Personal Capital.  Mint seems to be better at tracking income and spending or creating a budget.  Personal Capital excels in tracking and managing your investment accounts. 

Focus on the big wins

Many people focus on little frugal hacks and ignore the big expenses.  Sure it may feel great to buy groceries or clothing on sale, but you’re not going to reach financial freedom with these small wins.  That’s simply being penny wise and pound foolish.  Focusing on the big wins is what really makes a huge difference.  Most people spend the most money on three big things: housing, transportation, and food. 

Housing doesn’t have to be expensive

The bigger your home or apartment, the more housing expenses you’ll have: higher insurance, higher property taxes, higher cooling and heating costs, and more room to fill with junk.  Consider house hacking by having a roommate or two.  Consider moving into a cheaper location.  Would you rather be house rich and financially poor?  Or would you rather live in a modest home and really be rich?  If you can save $500 a month or more on housing, you can save $6,000 or more each year.

When it comes to buying a new car, many people are only focused on the monthly car payment.  Other associated costs that need to be factored include: insurance costs, fuel expenses, maintenance costs, and registration fees.  All these costs get way more expensive if you have a luxury vehicle.  If you finance a vehicle, you are stuck making monthly payments for many years. 

Transportation costs don’t have to be expensive

Also included in transportation costs are commuting expenses such as fuel costs, vehicle wear and tear, and lost time.  Stuck in a car commuting through traffic is the absolute worst way to spend your time.  If you don’t have a car payment, you’ll have a huge chunk of money to save and invest.  We own 2 paid off vehicles and expect to drive them for as long as possible.  Having 2 car payments a month can take a huge chunk out of your savings potential.  If you have a short commute, you’ll permanently save on fuel expenses and your car will probably last longer too.  

If you can save $517 a month on car payments (the average monthly car payment), that’s $6,204 saved each year.  If you can save money on your car insurance with one simple phone call, you can save even more.   

Quality food doesn’t have to be expensive

We eat out for many reasons: to celebrate, to catch up with friends and family, or because we are too lazy to make our own food.  Eating out can be a fun and tasty experience.  Eating out also is considerably more expensive than preparing your own food.  Likely, food prepared in restaurants is unhealthier compared to a quality home cooked meal.  If you’ve never tracked your food expenses, you may be in for a shock when you finally add up the numbers.  For most people, food expenses (groceries, restaurants, Starbucks, fast food, and snacks) make up a large chunk of your monthly spending.  This is an area we are constantly working on.  I hate the feeling of throwing away food that’s gone bad in the fridge.  Nowadays, we keep our fridge lean and try to eat everything we purchase.  I’m convinced that a packed refrigerator is less of a sign of wealth, and more a sign of waste.    

We bring our lunch to work almost everyday.  We eat plenty of fresh fruits and vegetables.  We eat meat and poultry in moderation.  Preparing food at home doesn’t have to be difficult; we bake and use our crock-pot frequently.  We love to eat out - we just don’t do it every single day. When you experience little luxuries such as eating out constantly, they set the standard for the new normal.  If we were to eat out multiple times a week, it really wouldn’t be that special of an experience.  The benefit of rarely eating out is that when we get a chance to, we really appreciate the experience.  We are actually living a richer life by limiting our rich experiences.

If you’re looking for delicious, budget friendly recipes, check out the BudgetBytes website.  If you can save $300 a month on food expenses from eating out less, bringing your lunch to work and cooking at home, that’s $3,600 saved each year. 

 

If you can save big on housing, transportation and food like my examples above, you can save $15,804 a year, possibly more. There are many tiny frugal hacks such as clipping coupons, making your own laundry detergent or driving out of your way to a gas station that is only 2 cents cheaper per gallon.  Saving $10 a week on your groceries only saves $480 a year.  Saving $5 on each gas fill up won’t compare to cutting out your $500 monthly car payment completely.  Tiny frugal hacks won’t save you nearly as much as just focusing on the 3 biggest expenses in your budget.

Trim your expenses and optimize your spending
Middle class Americans spend an extravagant amount of money on conveniences as well as random crap.  Many of these extra expenses can be cut back or eliminated.  Are you paying for cable television?  Are you paying for visits to the barber every 2 weeks?  Are you spending over $100 a month on your electricity bill?  Is your cell phone bill over $100 a month?  If you have pets, do you take them to the groomer monthly?  

We’ve trimmed a ton of our monthly expenses.  We purchased a Roku years ago and cut DIRECTV from our monthly expenses.  Now we stream television shows and movies through Netflix or Amazon Prime.  If your cell phone bill is over $100, consider checking out Republic Wireless where phone plans with data start at $20 a month.  No one needs to pay for unlimited data.  You have much better things to do with your time than stare at your smartphone streaming gigs of data.  We are lucky to have our cell phone bill paid for by my company.  My wife has been cutting my hair since 2013 (going on 4 years now)!  We continue to work on keeping our electricity bill extremely low.  My wife recently started shopping at the local Goodwill thrift store.  We do our own dog grooming at home: we cut her nails, we take turns giving her hair cuts, and we bathe her every 3-4 weeks.  There's no need for us to spend $30-$50 a month on pet grooming.      

If you can increase your income, and decrease your spending, it’s only a matter of time before you hit financial freedom.  With each monthly expense you cut out, that’s more money that can go towards saving and investing.  If your expenses increase as your income increases, you’re actually moving further away from financial freedom. 

A simple rule we follow when it comes to spending on wants: we write down what we want and see if we still feel like we want to buy it in a week.  Most of the time, the excitement of the purchase is gone after a week has passed.  If there is something you want to buy, check if you can get it elsewhere for free or cheaper.  If the item you want to purchase is a tool, can you simply borrow it from a friend or neighbor?  Ask yourself if your purchase offers any true, lasting satisfaction.

When it comes to saving and investing, just get started
The most difficult part about saving and investing is often just getting started and being consistent with contributions.  Many people are full of excuses that basically self sabotage their progress. 

“I’ll start saving more money when I get a raise.” 

I recommend starting with just a simple percentage to aim towards saving.  You can start with 10% savings off ANY income: paycheck, side hustle, gifts from grandma, etc.  For example, if you get $100, multiply that by 0.1 and save $10.  Once you get into a habit of saving small amounts, you can easily and quickly accumulate significant savings.  Just get started.

“I need to do more research before I start investing.” 

For a quick run down of everything you need to know when it comes to investing, read my Investing Primer series.  For more in depth reading, you can’t beat the thoroughness and simplicity of JL Collins Stock Series.  I started investing in my 401K at 3% contributions, ramping up my contributions a few percentage points at a time until I hit the maximum ($18,000 contributions per year).  Now the balance in my 401K account 5 years later is over $180,000.  The balance in my 401K would have never reached this level if I didn’t just start with a simple 3% contribution to get the company 3% match.  The stock market will go down and it will go up.  Stay invested for the long run and you'll do just fine.  Just get started. 

Boost your income with side hustles
Many people have regular 8-5 jobs that bring in regular paychecks.  What many don’t realize (or don’t want to bother with) is that there are many ways of hustling on the side to increase your revenue stream.  The more side hustles you have, the more diversity of income you can bring in. 

You can hear great podcast discussion on side hustles on this Afford Anything podcast episode.  Three main types of side hustles are discussed: the sharing economy, freelancing / expertise based business, and e-commerce.

The sharing economy includes hustles such as Uber, Lyft, Airbnb, Taskrabbit (handyman type gigs), Rover (pet sitting), Wag (dog walking and pet sitting), and Turo (rent out your car).  With these types of hustles, you are trading your time or asset for more income.  With freelancing and expertise-based business, you are selling your skill set and knowledge base.  This includes side hustles such as tutoring or coaching.  E-commerce is basically selling products online.  This can include selling things on sites such as eBay, Craigslist, or Etsy.  You can either buy merchandise at low prices to resell at higher prices, or you can produce your own goods.  I’ve done all sorts of side hustles including renting out a room in our home, teaching at the local university, and reselling on eBay.  Side hustles can quickly bring in extra money and diversify your income streams.       

Commitment is habit forming

It’s easy to get excited about saving money and investing.  Staying committed and focused on your goals is another matter entirely.  The important thing is not make your life miserable trying to save every penny you can.  The path towards financial freedom is not about depriving yourself of all joy in life.  It’s about being efficient with your money, optimizing your spending, cutting out all unnecessary expenses and investing in your future.  When you start committing to good financial decisions, they eventually become habits that require no motivation to maintain.  

Listening to financial podcasts about money such as the ChooseFI podcast and Afford Anything podcast have kept me motivated.  I walk 3 miles everyday with my dog and enjoy listening to these podcasts on my walk.  I’m exercising my body and my mind at the same time.  

It’s nice to have friends with the same financial outlook and goals.  I’ve joined a few financially focus Facebook groups (Mustachians on Facebook, Mustachians in Practice, and ChooseFI) and it’s nice to constantly read and participate in discussions about saving and investing.    

The Bottom Line

Would you be satisfied with sacrificing your family’s future due to current poor financial decisions now?  Are you content with the status quo of a 40-50 year working career?  We only get to live so long on this earth, do you want to spend the majority of it working a 8-5 job with a 1 hour round trip commute? 

Financial freedom is about happiness, peace, and pursuing what is really important in life.  Financial freedom is about working because you actually enjoy what you do, not because you need the income.  Financial freedom is about being a positive role model for your children, family, and friends.  If you can educate your children on how to take control of their finances, they will be set for life.  Once you reach financial freedom, your life choices can be focused on happiness instead of money. 

We still have a ton of work to do on our journey towards financial freedom.  We continue to work on bringing in more income, cutting out frivolous spending, and investing the difference.  The best things in our lives don’t revolve around spending money.  Focusing on optimizing our finances has definitely helped us lead a more meaningful and happy middle class life.

Our son is happiest when he is running around our neighborhood and exploring all of the plants and flowers.  This costs nothing.