Savings: a Better Predictor of Success than Social Class
I don’t know about you, but I hate just about any discussion that involves identifying different segments of our population as upper class (“rich”), middle class and lower class. These terms are not only loaded with lots of negative social baggage but they tend at, least in my mind to be, unhelpful or even harmful to “upward mobility.”
In the minds of many, the upper-class rules, the middle class is always trying to move into the upper class, and the lower class feels trapped and unappreciated.
Please allow me to propose a new paradigm for the way we think about the economic classes in America. I believe it’s more constructive and practical to allow households not to be identified by their income (which may be hard to influence or change for innumerable reasons) but by what I believe is our most important financial habit: Savings.
Our Savings Habits Determine Our Financial Future
Are we wealth builders or do we only consume? Do we save for emergencies, short-term needs, and long-term goals? Or do we live paycheck-to-paycheck, regardless of our income?
Here’s my proposed class paradigm (no, it’s no longer a pyramid either):
If we see ourselves in terms of being a Builder or a Consumer, then we’ll realize that our habits, behaviors, and actions are what most impact our economic situation in life, not merely our place of birth, our income, or the community into which we are born.
I have chosen not to place Builders at the center of the three “classes” since that would infer that we have to work through a progression from one to another. Some may not be in a situation to become Builders at the moment, but in many circumstances, we can move from either class of Consumer to Builder immediately. All it takes is having more money (financial worth) to our name month after month. It might be as little as a dollar more each month, though significantly more would be preferable.
The point is, if we’re living paycheck-to-paycheck, our income is almost irrelevant. In the current class model, households with high income are placed de facto in the upper class. In reality, someone making $100,000 a year but spending $100,000 a year (yes, it happens very often) should not be considered to be among the enviable upper class. The household earning $45,000 a year but saving $5,000 a year is in a MUCH more stable financial situation. True, they don’t have the “trappings” of the $100K income household, but trappings are the appropriate term. Expensive lifestyles become money traps that are hard to get out of.
If you are now realizing or have previously realized you are more of a consumer than you’d like to be, here are some actionable steps you can take to begin building wealth:
Track and Adjust Spending
You cannot truly build wealth until you create a sizeable gap between the amount you are bringing in and what you spend monthly.
Pledge that from now on, you’ll track your spending. Two easy ways to do so include creating a log of your purchases or by reviewing and adding up last month’s purchases from your bank and credit card statements. Take ample time to consider not only what you spend, but how you spend. You’ll likely be surprised by the amount you spend in an area such as groceries because of things you may not even need!
Once you’ve identified excessive spending (which may include the frequent lunch out or a ridiculous cable bill), make a conscious effort to go without those expenses in the future. Then, divert this money to some kind of savings. You can cash out a certain amount of each paycheck and keep it in a secured place at home.
Once this savings has reached over $500, it may be a safer idea to open a savings account at a financial institution. You can then ask your employer to set up a direct deposit into the savings account or you can arrange a monthly transfer from your checking account to a savings account. No matter how you go about it, the key is consistency.
Building wealth is largely about accumulating assets including savings, investments, a business and properties. However, this does little for your financial security if you are weighed down by debt. First, you’ll want to create a plan for debt repayment. You can tackle this on your own, or you can reach out to a nonprofit credit counseling agency for a free consultation that can offer advice and a structured management program. Once you’ve eliminated credit card balances, loans, and medical bills, you’ll want to target other types of debt such as student loans and even your mortgage. The less you owe, the more your own. What an empowering feeling that is!
Diversify Your Savings and Investments
You likely know from life’s experiences that putting all your eggs in one basket is a huge risk. Avoid doing this with your wealth by utilizing many financial tools. These may include online savings accounts with high APY, mutual funds, Exchange Traded Funds (ETFs), bonds, and Certificates of Deposit (CDs). The right combination depends on your tolerance for risk in relation to how many years you are able to save before retirement.
In any case, you’ll want to look for investments that outpace inflation and increase in value over time. Keep in mind that aside from the above-mentioned methods, spending money, particularly on physical possessions results in lost money. Secure yours with investments that promise growth.
I’d love to know your take on this. Agree or disagree with the power of savings? Does my own graphic “miss the mark” or is it practical and helpful? Let me know in the comments below.
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