The way we think about economic class in America doesn’t make any sense.
In the past, there was the “poor,” the “middle class,” and the “rich.”
But there’s just one problem:
EVERYONE THINKS THEY’RE MIDDLE CLASS!
“Middle class” is a common term spoken by news pundits, politicians, and that annoying friend of yours who likes to debate politics at dinner parties. But what is middle class, really?
While a lot of people like to bloviate about the middle class, there’s no hard set definition for what middle class means. In fact, not a lot of economists know exactly how to define it.
There are some ranges we can point to though.
For example, a three-person household would be considered middle class if they earned $45,200 to $135,600 a year (per Pew Research).
Of course, there’s a lot more to that range than meets the eye. Let’s take a peek behind the numbers and see where you fall.
What is middle class?
Middle class refers to a social and economic class in America.
I’ll say that again: Middle class refers to a social and economic class in America.
That’s because middle class can encompass much more than just how much you earn each year. Some sociologists believe that the middle class is as much a state of mind as it is how much you earn.
Christine L. Owens, the executive director of the employment advocacy firm National Employment Law Project, says, “I would consider middle class to be people who can live comfortably on what they earn, can pay their bills, can set aside something to save for retirement and for kids in college and can have vacations and entertainment.”
What do you notice about that definition?
It didn’t even mention income once.
That’s not to say that income isn’t a huge part of the equation — it is. But it’s just one part. Other factors such as where you live, your education, and your job can play a role as well.
Sherry Linkon, a co-director for the Center for Working-Class Studies at Youngstown State University, believes so too.
“I think that we define middle class in a couple of different ways,” she said to NPR. “We do it, in part, by income. […] But if you also include things like college education, the status of people’s jobs, and their sense of whether or not they’ve achieved the American Dream and whether that’s possible, then we have to think about it a little bit differently.”
Okay, so we know that it is as much a psychological and social issue as much as it is to do with our finances — but what income ranges do middle-class people fall under?
Middle-class income ranges
As mentioned above, the amount these people earn is a big topic of debate among economists and other nerdy weirdos.
Using extensive survey data, Pew Research was able to come up with some good ranges for what income level would be considered middle class though.
According to their 2016 study, a household of three (the average size for an American household) earns about $45,200 to $135,600.
In 2016, the national income range for this group was about $45,200 to $135,600 annually for a household of three. Lower-income households had incomes less than $45,200 and upper-income households had incomes greater than $135,600 (incomes in 2016 dollars).
Here’s a table from Pew that illustrates middle-income ranges for household size:
Source: Pew Research
So now you know roughly what can be considered middle class in America … BUT that doesn’t answer the question of what middle class looks like to you.
Middle class across the country
Middle class is going to look different to different people across the country.
After all, a middle-class person in Sioux City, Iowa, is going to likely look very different than a middle-class person in New York City. This is known as “purchasing power parity” — a concept of economics that describes the differences in purchasing power in different locations.
For example, there was a recent study done by the U.S. Department of Housing that found that a family of four living in San Francisco earning $100,000 a year would be considered a “low-income” family.
Compare that to $60,000, or about the income for the average American household, and you have a great example of purchasing power parity.
But what does middle class look from a state-by-state basis? Take a look:
Source: Business Insider
This information comes courtesy of Business Insider using information from the U.S. Census Bureau coupled with the Pew Research study above.
Is the middle class shrinking?
There are a lot of talking points around the middle class — the most prevalent of which is the idea that the middle class is “shrinking.”
BUT WHAT DOES IT MEAN???
To understand why this is often a popular talking point for pundits and politicians, you need to understand that middle-class households have made up the majority within the income classes for decades.
However, since 1971, we have seen a decline in people in the middle class. From Pew:
It’s decreased nearly 10% over the four-decade period.
Why is that bad? A healthy economy requires people participating in the market. That means buying goods and services, and having a good amount of consumer confidence in the market.
Can you guess which class consumes the most? That’s right. The middle class.
As the middle class shrinks, the market tends to shrink with it. People become less confident in the market and are less likely to participate in it.
There are a lot of theories behind why that is — and much of it is partisan finger-pointing and fearmongering. So we’re not going to get into them in this article.
A better approach: the IWT philosophy on economic class
In America, the almighty dollar rules, but don’t you dare talk about class.
Buy a Tesla, walk around with your LV bag, renovate your kitchen, take lots of vacations…and post it on Instagram, please. But don’t ever say you’re rich. You’re just “moderately affluent.”
I see it myself. I get lots of people who teasingly ask me, “So are YOU rich?” Even though I’ve spent 15+ years talking about how money is just one part of a Rich Life, most people wink and nod and smile, like deep down they know I’m just playing a trick and they’re in on it.
“Yeah yeah, I know…life isn’t just about money. [Now that we got that out of the way…] So are you rich?”
Once, just to see what would happen, I replied, “Yes.” No caveats, no clarification, just yes.
Try to imagine the pin drop silence you’d hear in outer space. That was their response — an awkward, stunned silence. They were completely unsure how to respond. Would you? Have you ever heard someone openly acknowledge they were rich?
Not in this country. Because we worship the almighty dollar, but you can’t talk about it.
I now soften my answer to say, “Well, I was rich before I had money and I live a Rich Life now.”
A Rich Life is about more than money. Especially when everyone lies about it.
A Rich Life is about FREEDOM and FLEXIBILITY. You can be rich on $50K/year if you’ve created a life where you can do the things you love — whether it’s traveling, eating sushi every week, or teaching drawing. You can also live that Rich Life on $500,000 or $5 million. And of course, more money makes it easier.
You can also have a lot of money and be drowning. For example, over the weekend, I had coffee with a friend who used to work in investment banking. He and his coworkers would get together and compare notes about their boss, who’d randomly share tiny bits of his life. One person overheard him talking about his lake house. Another heard him say his 3 kids go to private school.
For a bunch of young bankers stuck at the office for 14+ hours/day, they built a model incorporating all the “clues” they heard from his expenses. At a certain point, they looked at each other and realized that this guy — who was making $2.5 million/year — might actually be LOSING money.
That’s why I think we need a new framework to use.
A new framework for class in America
The old framework — poor, middle class, and rich — is reductive. It’s incomplete.
How many of us know someone who’s technically rich…but when they factor in the costs of housing, student loan debt, day care, and basic expenses, they don’t “feel” rich? You can have someone making $500K who feels trapped (or our banker friend who obviously is living beyond his means)…but someone making $40K who feels free.
That’s why a new framework should focus less on net worth and more on lifestyle, which you can intentionally design for yourself.
(Note: These classes don’t justify massive inequality and systemic problems, which are genuine problems. They simply provide a “lens” through which to view your financial state.)
Read below and see if you can spot yourself.
1. The “Trapped” Class
In The Trapped Class, you’re stuck working paycheck to paycheck, one accident away from financial disaster. There is no “buffer,” no time to think ahead and plan for the long term.
Key phrases used by people in The Trapped Class:
- “I’ll never be able to afford that”
- “Once I do XYZ, I’ll be rich”
- “I need money now so I can buy XYZ”
- “I’ll be working for the rest of my life, so I might as well buy X”
- “Don’t raise my taxes!!!”
- “Things will never change”
- “It just doesn’t matter what I do”
- “That’s not for people like you and me”
- “Money is the root of all evil”
- Remember, you can be trapped at $30,000/year or $300,000/year depending on your lifestyle!
If you’re living in The Trapped Class, you have very few options and fewer resources or free time to improve your situation. This is a scary place to be and a very hard cycle to break out of.
2. The “Treadmill” Class
People on the treadmill have a decent job and a small bit of savings. If you live in America, the treadmill is a relatively good quality of life — The Treadmill Class has a roof, a car, internet, pizza delivery any time they want, and they can take a vacation once a year.
But they’re stuck — and getting off the treadmill is more of a dream, not a plan. They usually have some credit card debt. They aren’t saving enough for retirement. They’re likely to spend most of their lives working their job just to stay afloat.
Key phrases used by people in The Treadmill Class:
- “If I just keep going, one day I’ll be able to do that…one day I’ll be able to afford that…one day I’ll be happy”
- “I’ve got some $ saved but I’ll never be rich enough to actually quit my job to do what I want”
- “That’s for rich people”
- “I wish I could do X, but I need to keep saving money in case I lose my job”
- “I really want X but I can’t afford it right now”
- “Don’t raise my taxes!!”
- “I feel stuck”
- “Everyone thinks I should be happy making this much…but they don’t understand my expenses”
- “My job pays the bills”
- “I work hard. I deserve this”
I remember my first time in NYC as an adult, when I met a friend for lunch near Grand Central. I loved seeing all the people casually eating $30 salads in their beautiful suits — it was like I was sitting in a glamorous TV show. Only later did I understand that the fancy suit and salad belied the 2-hour commute, the multiple mortgages, the $50,000+/year private school tuition (per kid), and the thankless jobs with a capricious boss.
Day to day, the treadmill can be “fine,” even nice. But 30+ years of running will drain you.
3. The “Freedom” Class
These are the people who have the ability to do what they want, when they want. Money is no longer a major constraint in their lives. In fact, cost is rarely the first thing they consider. More often, it’s time, quality, experience, relationships, or simply “I want it.”
I’m not just talking about billionaires and trust fund babies, even though they get all the spotlight. There’s actually a growing wave of people who are living this life by building small, automated businesses that support their lives.
The key insight here: It’s not simply about how much money you have. It’s how much FLEXIBILITY and FREEDOM you have.
Key phrases used by people in The Freedom Class:
- “My money works for me. I don’t work for it”
- “So what if I pay a little more? It makes my life easier”
- “I can afford to be generous”
- “I can afford to make investments for the future”
- “I want something created especially for me, not cookie-cutter for everyone else”
- “I work hard and I want the best”
- “Yes, I can do that”
- “I trust the people around me”
- “If I invest now, think how much I’ll gain later”
- “My business operates without me day to day”
We almost always fixate on the money required to be in The Freedom Class. Sure, more money helps. But I recently spoke to a retired couple and asked them, “What would you tell yourselves back in your 20s?” They looked at each other and said, “Save more.” I pressed them: “Why? You’re retired and you have good money now. What would you have used the extra money for?”
They just stared at me. They had no answer. In America, we believe that “more” is the answer — but in reality, you can reach The Freedom Class by creating a life of flexibility and purpose.
If you’re ready to start creating a life of flexibility and purpose today, put in your information below to receive my FREE Ultimate Guide to Making More Money. Getting in to the freedom class isn’t all about earning more money, but earning more on the side can help you discover how to build a life YOU want.
Which one of these classes do you fit into? What are your thoughts on my framework?