What is the mindset of middle class people that keep them middle class?

In My Humble Opinion
221

If you go with the concept that your house is an investment, you’ll see that it doesn’t make a lot of sense to sink everything into a single investment. You could just as easily get a loan to buy $200k worth of gold. The weird thing about a house is that you get to do something with it. Alternatively, you could also buy a rental property, that pays you more than the amount of the loan.

Like your father said, paying off your mortgage means all of your money is tied up in the house. This [may] put you in a position where you need to use credit card debt to pay for near term expenses (like auto repairs), or need to take out a auto-loan where you otherwise wouldn’t need to.

From my personal standpoint, when my wife and I bought our house, we used some of our medium term savings to put down 20%, that meant we didn’t have to pay for mortgage insurance*–that makes a significant difference to our monthly payments. Any more than 20% and we didn’t see much of a change in our monthly payments for a 30 year mortgage.

It also meant that the house we could afford was based on how much we wanted to use for that 20%, which was lower than 3 times our income.

From there, we also shifted some of our medium term savings to become part of the house payments. Instead of investing $X a month in the stocks or bonds, we invested that $X in a house.

But in this situation, the cost of our mortgage (plus taxes and insurance) was considerably lower than our rent–and we are investing in real-estate.

*This is an example of how by renting cheap and saving, we were able to avoid a situation where we lose money to mortgage insurance. We could have used that money for a better apartment. But mortgage insurance is a cost that doesn’t get us anything, and is effectively a tax on the poor or the greedy.

222

Re: Paying off Loans

I just realized why there is so much confusion: Start with the assumption someone has $20k in savings.

  1. If he/she has a $5000 loan, regardless of interest rate, I’d say pay it off and be done with it. You still have savings, and now you are avoiding interest. The one caveat to this is that some times it’s a 0% car loan, and some times the $20K is earning great interest because the account needs to be larger than $19K

  2. If on the other hand, the loan is substantial like $100k in student loans or a mortGage AND it is amortized, putting $20k into it is a horrible idea.

a) You have lost all of your savings and will now have to use credit for unexpected costs.
b) Your payments won’t change. It doesn’t matter how much I put into my mortgage, I still pay the same monthly rate. It would mean I’d pay it off sooner, but in terms of putting $20k into a $100k mortgage, I won’t see that benefit for 25 years (or there abouts).

223

Yes, I understand what you’re saying.

But can something be said for trying not to take on that much debt in the first place? From where I’m standing, I can cut this year’s debt in half by using at least some of the savings, reducing my student loan burden from $100k to $75k or even $65k. But in order to do that I’d have to use savings. I’m not talking about using my savings to pay off a loan, I’m talking about using the savings to avoid taking out the loan in the first place. It’s the difference between having to pay interest on $100k or having to pay interest on $70k, at the expense of savings.

It’s risky, but I feel like there’s risk either way. The hard part is evaluating the risk.

Another thing I’ve considered is taking some or all of the savings and investing, then using the investment returns + principle to pay off some of the debt once it’s grown for 5 years or so.

It’s like there are 20 options and I can see good points and bad points to either one, but they ALL involve risk. This is why I’m decidedly :dubious: when people imply that becoming wealthy is simple. This is not simple, this is confusing!

If you think of things completely in terms of numbers, maybe it doesn’t make sense to pay off the loans ASAP or try to reduce their amount. But I’m just thinking about trying to make major financial decisions 5 or 10 years down the road and having to always account for this ridiculous debt obligation that will dog me until it’s gone. I don’t have words for how much I hate debt. Even the thought of a mortgage drives me nuts, but at least a mortgage is an actual asset.

On preview: You just articulated perfectly why I hate fixed loans. No matter how much money I sink into it, I don’t see the benefit until it’s completely paid off. But if anything that would seem to me like a compelling reason to pay it off ASAP. Of course, I’m not the rich person here…

224

Yeah, I looked at that. Know what’s funny about your wiki cite? You are quoting from one commentator’s opinion - when it is part of a chart containing two others. The other two describe almost the exact same category as “Upper Middle Class”.

In my opinion, and I think in common use, $1 million “largely in the form of home equity” is most definitely not rich.

No. By that standard, many of the partners I work with are “super rich”. They don’t consider themselves such - they are, alas, still largely upper-middle class, perhaps verging on rich for superstars.

Why need you go on about that, when I must have said ten times over that I agree?

Again with the “rich”.

225

I think the one exception I can think of for this is if you have a substantial amount to put down, then you can re-amortize your loan. At least that is my understanding on it and what I plan on doing with the equity in my current home. I just purchased a new home and am in the process of selling my old home. Once it is sold I have to place those funds somewhere so that I don’t pay captial gains taxes, and I plan on rolling them into the equity in my new home. According to my banker I can then re-amortize the loan (reducing my monthly payment). I plan on doing this and then continue to pay the old mortgage payment–thus reducing a 15 year note into an 8 year note. For me an 8 year window is acceptable whereas a 30 year window would not be. But I haven’t looked into that too far as I am not sure how long it will take me to sell my old house and it has only been on the market for a week anyways! You looking to buy a house by any chance? :smiley:

226

If a fisherman living in a shack loves fishing and doesn’t mind living in a shack, is he “rich”?

The problem with you guys is that you are using an emotive term (“rich”) which has a meaning - and it doesn’t, to most people, mean “the security of being able to live one’s modest, humble life without work”.

That may be your goal in life, and if so, more power to ya. However, the techniques designed to achieve that goal (and I’m not dissing the goal) will not actually make you “rich” in the way most people understand the word. Also, it is not everyone’s goal in life, and those who do not share it are not necessarily fools. In fact, as I point out, people who actually seek to become rich in the way most people understand the word do not merely seek frugality! They are just as focussed on growing income; and indeed, without growing income beyond what the middle-class person has, you can’t really become “rich”.

If a Zen monk were to say, ‘all you need to do to become rich is to follow the eightfold path to enlightenment, and give up desiring material things’, he doesn’t mean to be taken literally. You guys seem to think he does.

227

Well I think you and I are probably closer in thinking then you and emcknight. I am just saying I see where he/she is coming from. But I agree that the definition as defined by him/her is NOT how most people see it. I think if you read my posts I haven’t ever indicated that, nor have I in general indicated leading a modest life is rich. But then I suppose a modest life will be as difficult to define as rich wouldn’t it!

My post above was to try and define that line–thus the $ amount question and the gilding the lily comment. Not that it matters in the least but more as a curiousity as to how people define that line. Early on someone in the thread said $2 in assets (I would say without equity of your home) makes one rich–is that true? Is it $30m? Clearly it is somewhere between those two. It is why I actually prefer the definitions by** Dangerosa**.

228

Whether paying off your mortgage early or not is wise depends on several factors:

  1. Tax treatment. Are you in a jurisdiction which treats mortgage payments in a certain way? In Canada, there is no such thing, making carrying mortgage debt less attractive.

  2. Relative rates. How do they compare what you could get with other investments? If your mortgage is a fixed rate at 3% and you could invest that money at 6%, it is better to invest than pay off your mortgage … but -

  3. Risk tolerance. Paying off mortgage is a risk-free investment with a relatively known return (assuming you have no intention of walking away, you’d have to pay it off anyway at a certain rate - assuming fixed rate). For the risk-averse, that’s attractive.

  4. Liquidity. As your dad says, house is one asset, you have to sell it, or take a reverse mortgage, to get that money out.

229

Well, it is going to be at least somewhat situational and varies by location. To take an example, I was chuckling happily at the notion that having $1 million mostly tied up in home equity makes you “rich” as per that Wiki cite above - in cities like Toronto (let alone places like London or New York), that describes pretty modest digs, of the sort owned by many who would not dream of calling themselves “rich”. A definition based on national averages, let alone internationally, is never going to be helpful, for that reason.

While I like ** Dangerosa**'s definitions, they are of no help in defining “rich”. There are I submit at least three different questions, each related to each other-but not strictly:

  1. Relative financial security;

  2. Relative social class; and

  3. Relative wealth.

So, for example, your happy pensioner who has an adequate pension or annuity-type investments supplemented by savings in other secure investments may be highly financially secure (on ** Dangerosa**'s scale), while remaining “middle class” (scale #2) and having only moderate actual wealth; whereas a lawyer who blows all his money on fancy homes, cars and jewelry is financially insecure (no savings, expenses greater than income) or actually insolvent, but is upper middle class by virtue of his occupation and has reasonably high degree of wealth (albeit in forms that are highly illiquid).

Some confusion is created by the fact that “rich” tops two of these three scales; more, I contend, is created if it is used to top the third.

I appreciate what you guys are saying - basically, that one should not trade in financial security for the trappings of wealth.

230

Re-amortizing the loan is only going to do one of two things: reduce the monthly payment by creating a new 30 year loan on a smaller principle, or shorten the length of the terms while still paying essentially the same monthly amount. with a mortgage this could also mean you don’t have to pay mortgage insurance

First thing to remember is that there is a cost to refinancing and it’s not small. The second thing is to consider that money might be put to better use–most importantly to avoid new debt.

Incidentally, the scenario you are describing is what screwed up most people when the housing market crashed.

I think the general rule is that if it is amortized, there is no point sinking more into the principle–up until the point that you can completely pay it off.

231

Which part is the scenario you are talking about? Buying a new home before I sell my old one? If so, in general I agree with you, but the two mortgages together are well below the typical bank standards of my gross monthly income. I would never get myself into a situation where I felt I had a risk. We could lose one income and still pay both mortgages, although tighter then I would prefer, it is still within risk standards for homes.

I do need to look into what I am going to do with the equity in the old house though. Thanks for your thoughts and comments.

232

To answer the more abstract question. If you have the $100k debt, my personal recommendation would be to pay it down gradually, while saving, until you are able to pay it off completely.

So if you start with $100k loan and $20k in savings: each month put $1000 to the loan, and $500 to savings. When your savings are larger than the loan, that would be a good time to pay it off and be done with it.

I’m not sure I understand what you mean by “taking out the loan in the first place.” If you mean that you have $20k in savings and need $100k for school, my recommendation would still be similar.

When it comes to a mortgage or a car, as I said earlier, there are advantages to putting 20% down. If you have $20k in savings, you need to still have some savings, so start with putting $10k down.

Nice in theory, but a bad idea to count on those returns. Like I said a few pages back, the stock market doesn’t let you pick when it will be up or down.

I do know that when I was going through school, student loans were interest free until a year after you graduated. It encouraged a lot of kids to take out as much as they could and invest it. Didn’t work out well for most of them.

So again, to clarify: If you sink all (or even most) of your savings into the loan, that money is gone but you’ll still have a loan to keep paying. The best advice I can give you, as a guy on the internet, is to make sure you are funding your retirement, set up a payment schedule that you can afford, then make sure you are putting aside a good chunk of savings. After that you have to pay rent, buy food, and/or raise children.

233

Can you point to where I said that?

But since you brought it up, I have an interesting real world example for you to consider:

My sister is a public school teacher making a nice solid middle class income. As part of being in a union, if she gets a masters degree, her salary will instantly go up $5000 a year.

The question isn’t whether or not she should, but rather, how much should she pay? The beauty of the teachers union is that the degree is completely irrelevant, just has to be a masters. And 25 she’ll be earning that extra $5000 a year for the next 40 years.

She could either got to a public university and pay $6000 a year, or a private and pay $100k a year. What would YOU advice?

And since we’re putting words in people’s mouths: The advice given in this thread would suggest that she’s foolish for even considering it. She should just start having babies and living her life. What’s the point of sacrificing all those evenings and weekends if all she gets is another $5000?

234

Post 203.

You said:

To sum: I say, in paraphrase ‘you should consider focused education in an effort to increase income’, and you say (quote) " What you are saying, and covering it with the word balance, is that TODAY is more important to you than tomorrow".

Clearly, the implication is that instead of buying education, which you characterized as ‘living for today’-type behaviour, I ought to have saved my money instead.

Which is, in my opinion, completely foolish and short-sighted: if I had followed your advice, I’d still be earning in the $30,000 range.

Now it could be that you did not say what you meant, or did not understand what I wrote. But you have to admit, I’m not making shit up about what you said - read your post yourself.

That’s a specialized and set-up example. In the real world, 99% of the time you do not know in advance exactly how much your education will bring in in additional future income. You may know roughly that (say) a degree in social work will not lead to as much as a law degree, but you certainly will not know, aside from generalities like that, what it will be worth. It’s a financial risk.

Given that, the prestige of the university is a legitimate factor to consider. I went to a prestigious law school. That was a factor in me getting a big firm-type job. If I had gone to a lesser and cheaper school (though in Canada the price differences are nowhere near as extreme as in the US), maybe I would not have got the job; or conversely, maybe I would have. I risked paying more. Obviously, from a strictly financial POV, it would be a poor decision if I knew in advance I’d get the exact same reward anyway, but real life is rarely like that.

The decision as to whether to have babies or spend one’s evenings in school is of course a matter of priorities. What I have found is that ambitious folks somehow manage to have families and careers - either by finding someone willing to take on the majority child-care responsibilities (traditional if you are male), or through non-traditional means.

235

I think I could do all three. Renovate the house, pick up a GT40, and expand the irrigation system into the back yard; “retire” from my current job; and then use the rest to build my own empire.

236

Right, that’s not at all what I thought you meant.

So let me very very clear, I am 100% pro-education and bettering oneself.

And am also NOT suggesting that someone that doesn’t go to IT/law/grad school is some how inferior.

What I am advising, and what I believe is opposite the middle class mindset, is for people to at the very least consider the financial implications of their decision.

That sentence is a mess, so let’s look at what you described, and see how my advice plays out and try to avoid the ‘r’ word:

At age 22 with a BA (I assume) you are making (or could make) $30k.

-> My advice here is to first put away for retirement, pay taxes, then put aside 10-15% for mid-term savings.
-> After that pay no more than 1/3 of what’s left on living expenses.

From here, we have a major life decision: get more education. Could be law, medicine, social work, or IT. Point is, school will require both time and money, plus lost wages if you go full time. It’s not unlike buying a house, education is a major investment. And as an investment there are considerations, one of which is how to finance it. The other is what is the return.

What ever your new salary, my advice becomes

-> My advice here is to first put away for retirement, pay taxes, then put aside 10-15% for mid-term savings.
-> Repay debt
-> After that pay no more than 1/3 of what’s left on living expenses.

You choose law school, which costs a lot ($26k at UofT last I checked), but also has a high potential for return. Consider, if you were making $30k before, and only had the potential to earn $35k afterwords, would it still make sense?

Next thing to think about is how to pay for it. Once you graduate, you start to make more money, but you also have to pay down the debt. At 6% it’s not so bad, what if it was 20%?

This is where I see the middle class mindset kick in. I had a number of friends get sucked into the ITI trap, do you remember that school? It cost something like $26k for 9 months, wasn’t eligible for Canada Student Loans, and promised grads would make millions. Well, dot com bubble burst, the school went broke, and thousands of IT grads were left without any IT jobs but $26k in debt. All of them that I knew were then back working for $30k.

I also went to culinary school, and choose to go to community college for $3k where I could get both scholarships and student loans. I had friends go to le Cordon Blue which costs about $26k. After graduating, we both made $12 an hour. Do you consider any of that a wise financial decision? The waitstaff where I worked was bringing in $15 after tips.

So to recap: getting an education, like buying a house, is a very good investment to make–but only if you are willing to do the research.

237

Well sure, we all could if we lived in Mexico City :stuck_out_tongue:

238

Well, I’m all for considering the financial implications. But as I point out, there is usually a wonking big unknown that often prevents any real hard and fast analysis - that you don’t usually know how much (if at all) your education will increase your future income.

Perhaps in some fields it is straighforward: get degree X and your job will pay Y. But upper-middle-class type occupations tend not to work that way. Getting in on the track that will earn big bucks is not a given. More a possibility.

In short, higher education is a necessary, but not sufficient, condition for increasing earning power substantially. The world is filled with bartending PhDs; increasingly, it is filling with bartending business grads and law school grads. But OTOH, fail to get education, and you will never be a lawyer, or any other of the “professional” class careers; you will not even have the chance. It’s a risk - pay in time and money now for a possible return. Financially though, that return is high, and if you go to a good school it is pretty likely you can get a high-paying job, so the gamble is generally worth it.

We were discussing middle-class mindsets and poverty mindsets. To this, I’ll add another: you can’t achieve upper middle class or higher status without taking risks of that sort; though taking them is of course no guarantee of success. To achieve greater than upper middle class status, one must generally take even greater risks, with even less chance of success [unless of course one is born to it]. I myself lack the aptitude for entrepreneurship and was not born to money, so I will never be higher than upper middle class; had I failed to get education, I’d have found it difficult to achieve middle class status.

So, the “upper middle class” mindset is one willing to take certain levels of risk investing time in paying-career-focused professional education. This is generally associated, culturally, with people who place a high value on education in its own right, and people for whom achiving higher education is a status-marker. Lower-middle class people are more likely to find the investment too speculative and expensive; to them, setting sights on more accessible vocational training makes better financial sense.

Edit: I see the difference in mindset every day, in talking with support staff (administrative assistants, etc.). Often, they never even considered going for law school - they were not in situations that enabled them to take many years off work to get the necessary education.

[Once again, there is a correlation, but not a strict one, between wealth, class and financial security: there are plumbers and cooks out there who earn more than some lawyers, and obviously there are also some who, because of their habits of thrift, are more financially secure]

239

I think I could do all three. Renovate the house, pick up a GT40, and expand the irrigation system into the back yard; “retire” from my current job; and then use the rest to build my own empire.
[/QUOTE]

Screw that. I win a Lotto of reasonable size (say $40 mill, after taxes), I’ll throw it in escrow and spend the damn principal…JUST to piss off the economists!

There’s gotta be a certain point where the hassles with capital gains taxes aren’t worth it.

240

What’s funny is that getting an education involves exactly what I was trying to recommend way back on page 3: sacrifice now for a better tomorrow.

So it seems we have managed to find a common ground. There is a very frustrating middle class mindset that won’t bother to get a good education. To many (including those participating in this thread) living their life was more important. And at $30k or $50k a year a person can live comfortably, with no desire to earn more. Especially if earning more means taking out a massive student loan, not earning anything for a few years, and then working 18 hour days until you make partner.