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Middle Class in Decline

The well-being of American families is often viewed through the lens of annual income. From that angle, many families appear to be living comfortably, with the average household income topping $50,000 in 2014. However, reality sometimes fails to fit the neat mold implied by averages. Many families are living month to month, paycheck to paycheck, or even day to day. For these households, financial ups and downs keep them trapped in a vicious cycle that makes financial security a seemingly unattainable goal. While this narrative is all too common for lower-income households, a growing number of middle-class households have only a tenuous grip on their finances as well.

Unexpected situations such as car repairs, medical bills, and household repairs may only pop up once every year or two, but they can cost families $2,000 or more. Unfortunately, a study conducted by the Center for Financial Services Innovation found that $2,000 is an expense that more than one-third of families in the country simply cannot afford. Even middle- and upper-income families reported having trouble affording emergency expenses, with one-fifth of households that reported annual incomes of $75,000 or more admitting that they were not sure they had the funds to cover irregular or unforeseen expenses.

On the surface, many of these families appear to be financially sound, with college degrees, well-paying jobs, mortgaged homes, health coverage and retirement accounts. But looking deeper into their financial circumstances reveals a significant lack of leeway in their budgets. There are a number of factors that contribute to this problem, including:

  •          Volatile income
  •          Increasingly unmanageable expenses
  •          Lopsided household balance sheets 

Income inconsistency has become one of the fastest-growing concerns for many Americans over the past decade, especially in the low- and middle-income ranges. These households are more likely to rely on part-time and seasonal work to make ends meet, leaving them more vulnerable to income fluctuations than full-time employees. According to a report from the U.S. Financial Diaries, poor and moderate-income households experienced an average of three months each year during which their income decreased by 25 percent or more. These valleys were typically accompanied by another three months when incomes exceeded the average by the same amount.

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Without predictable paychecks, these families often find themselves struggling to afford the basics, let alone put money aside for emergencies, savings, education or retirement. This may be why 77 percent of participants ranked “financial stability” higher than “moving up the income ladder” when asked about their most important money-related goal. This sentiment was echoed in research conducted by Pew Charitable Trusts, with 9 out of 10 respondents stating that “achieving financial stability is more important than making more money.”

Once these factors combine, the household ledger no longer adds up. The erratic nature of these families’ income and expenses makes it nearly impossible for them to create or stick to an effective budget, crippling efforts to gain financial stability. In addition, many families find themselves bridging gaps in their income by tapping their home equity, taking on costly short-term loans and running up credit card debt. The end result? The amount that families are able to save and the value of the assets they own end up being dwarfed by how much they owe.

A large part of the problem is that over $16 trillion of the household wealth that American families enjoyed in previous decades was decimated in the Great Recession. As housing values plummeted, the average wealth of families fell as well. Coupled with an over-reliance on credit cards and other debt to maintain cash flow and severe losses in the stock market, many households were unable to maintain the value of the assets they had acquired, including retirement accounts.

Younger Americans, the generations known as Gen-X and Millennials, were hit particularly hard, with many entering the declining workforce at the very beginning of the financial crisis. These effects have been exacerbated by student loans that are now coming due with no careers to show for them. In fact, experts believe that many Americans who are currently in their 20s and early 30s will be unable to recoup the losses they have incurred, leading to decreased income and wealth over the course of their lifetimes. As stated by the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, younger Americans were most likely to lose wealth in the Great Recession, and have been the slowest to recover it. The same study found that minority households and those with less education are also disproportionately affected by financial troubles.

On the other hand, older, educated, white and Asian families regained much of the wealth they lost during the recent financial turmoil, with some even experiencing increases. This has created a growing disparity between those who are thriving and those who are struggling, a trend that seems likely to persist into the future without effective intervention.

Restoring the financial health of American families is a complex task. It requires a holistic, comprehensive approach that views housing, employment and financial services as equally important pieces of the puzzle. The key is to address all the factors affecting a household’s finances, including unreliable income, unmanageable debts, and societal inequalities, that make it difficult for people to prosper.

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