How to Avoid Common Middle-Class Money Traps

Stagnant wage growth combined with rising costs of living means middle class households face additional pressure to use every dollar efficiently. Spending is inevitable and necessary, but by budgeting and being careful to avoid common money traps, families can enjoy financial security while dodging unnecessary stress or hardship.  

Budgeting will account for your family’s core needs while helping you identify areas where you can cut costs. As a financial advisor, some older clients I talk to have never had a budget and they are worried that they won’t have enough money to retire. Those who have followed a budget are much more likely to build up sufficient savings and feel more confident in their ability to meet their goals. They are used to living within a boundary and that helps find the extra money they’ll need later on. (For related reading, see: How to Make Your Nest Egg Last.)

Tracking Food Spending

Part of budgeting means monitoring your spending closely to help you determine how much of your consumption is truly essential and where you may need to trim the fat. For instance, according to some estimates, an average family of four wastes $1,350 to $2,275 on food each year. Reducing consumption to eliminate that waste could result in significant savings.

You can also take a look at how much your family spends on going out to dinner. A great way to cut food spending is by reducing the frequency of eating out, including lunches. Are you and your family packing lunch each day? Adjusting your consumption in these ways can help you avoid overspending—or wasting money—on food.

And remember, budgeting is important for high-income families too. For example, I recently encouraged a wealthy couple to do a budgeting exercise where they had to look at how much they had spent in the last two months. They were shocked to see that they spent around $1,000 alone on just eating out. It’s one thing to choose to spend on indulgences; it’s another when it takes a person by surprise. That’s the great thing about a budget; it actively forces you to make choices about how you choose to spend your excess dollars. Like exercise, budgeting is a discipline that turns into habit if done for long enough. (For related reading, see: Top Tip for Financial Success: 'Start Planning Early.'

Ballooning Costs of Healthcare

The cost of healthcare is one of the biggest financial burdens for many families, and I can personally say that it has had a large impact on my own family. Three years ago, my family’s maximum out-of-pocket expense for healthcare was $8,800 for the year. Today, that price is now a staggering $21,500—an increase of more than 144%. And while the costs associated with healthcare have increased, incomes have remained flat, according to a study from Pew Charitable Trusts.

This creates even more pressure on your budget. Because of the increase in healthcare, emergency fund savings have to be a major priority in our financial plans. The general recommendation for young adults was to strive for saving $1,000 in emergency funds. The next milepost was three to six months of expenses. Job loss, unexpected home repairs, vehicle issues and the like are all emergencies, with the main one of the group being a job loss.

With that said, it’s interesting how popular culture has changed our financial perception of healthcare. We don’t usually say we have healthcare expenses, we say we have medical emergencies. They’re not all emergencies. There will be some expenses that are necessary. Annual checkups, vaccinations, blood tests, and the like should be accounted for instead of forgoing them and having a real medical emergency caused by the absence of preventative care.

Another healthcare issue is that when someone loses their job, they usually have access to COBRA from their employer for up to 18 months. With most companies, however, the cost of COBRA is higher than the amount an employer deducts from a paycheck. So saving enough to cover that expense along with the out of pocket limit for a year is close to a necessity. (For related reading, see: How to Budget and Spend to Maximize Your Happiness.)

Housing Costs

In addition to healthcare, housing costs can put a strain on the budgets of many middle class families. Some people wonder if switching from renting to home ownership is more beneficial, but this is not the case for everyone.

Far too many people purchase homes without enough equity, the difference between the market value of a house and the mortgage amount you still owe. Purchasing a house with the minimum down payment and a 30-year mortgage can easily land you in financial trouble. If you only have 3% equity in your home, and the value drops by 6%, you suddenly find yourself owing more on a house than it is actually worth.

The other extreme isn’t any better. Some people save for a long time and put 20% down on their home. However, in the process, they fail to save for retirement and forgo contributing to an emergency fund, which can lead to more financial trouble.

While home ownership is a wonderful goal, trying to get there without being financially ready causes unnecessary stress. To protect against this risk, wait to buy a home until you have saved enough for a sufficient down payment. Consider 20% as ideal, but I’d also be comfortable with a 10% down payment if the house is a fixer upper and the necessary renovations will increase the value of the house by 20% in two years to avoid paying the mortgage insurance for longer than that. But at the same time, don’t fall into the trap of neglecting your other important long-term savings goals like retirement. 

Financial Strain

When too much of your income ends up going toward maintaining a lifestyle—whether it’s eating out often or owning a home you can’t afford— there isn’t enough left over to make provisions for the future. Your goal should be to have as little debt as possible, rather than dealing with as much debt as you can while still being able to handle the payments.

Of course, sometimes you don’t have complete control over your spending. Any number of obstacles or unexpected events can keep families from creating an emergency fund or saving for retirement. So what do you do if your family is already experiencing financial stress? It’s important to try not to tackle everything at once. Some people try to pay off debt, build an emergency fund or increase their income all at the same time. These solutions would work to some extent, but if you have a hard time controlling your spending, for example, then increasing your income won’t solve the problem. This is when some financial planners have to put on their psychologist hats and help find the root cause of the financial issues. Make sure you consult a financial advisor before making a decision that could ultimately put more strain on your finances. 

No matter what your family’s current financial situation is, it’s important to remember that just because you have the option to buy or spend on something, that does not necessarily mean it’s a good idea. Creating and sticking to an appropriate budget are great skills to have when trying to manage your family’s finances. (For related reading, see: 5 Financial Strategies to Last a Lifetime.)

Ash Toumayants is the founder of Strong Tower Associates in State College, Pa.

 Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Strong Tower Associates and RWA are not affiliated.