Why the Middle Class Struggle
The middle class finds itself in a constant state of financial struggle. Their primary income is
through their salary. As their wages increase, so do their taxes. Their expenses tend to
increase in proportion to their salary increase: hence, the phrase “the Rat Race.” They treat
their home as their primary asset, instead of investing in income-producing assets.
This pattern of treating your home as an investment, and the philosophy that a pay raise
means you can buy a larger home or spend more, is the foundation of today’s debt-ridden
society. Increased spending throws families into greater debt and into more financial
uncertainty, even though they may be advancing in their jobs and receiving raises on a
regular basis. This is high-risk living caused by weak financial education.
The massive loss of jobs in recent times proves how shaky the middle class really is
financially. Company pension plans are being replaced by 401(k) plans. Social Security is
obviously in trouble and can’t be relied upon as a source for retirement. Panic has set in for
the middle class.
Today, mutual funds are popular because they supposedly represent safety. Average mutual-
fund buyers are too busy working to pay taxes and mortgages, save for their children’s
college, and pay off credit cards. They do not have time to study investing, so they rely on
the expertise of the manager of a mutual fund. Also, because the mutual fund includes many
different types of investments, they feel their money is safer because it is “diversified.” This
educated middle class subscribes to the dogma put out by mutual-fund brokers and financial
planners: “Play it safe. Avoid risk.”
The real tragedy is that the lack of early financial education is what creates the risk faced by
average middle-class people. The reason they have to play it safe is because their financial
positions are tenuous at best. Their balance sheets are not balanced. Instead, they are loaded
with liabilities and have no real assets that generate income. Typically, their only source of
income is their paycheck. Their livelihood becomes entirely dependent on their employer.
So when genuine “deals of a lifetime” come along, these people can’t take advantage of them
because they are working so hard, are taxed to the max, and are loaded with debt.
As I said at the start of this section, the most important rule is to know the difference
between an asset and a liability. Once you understand the difference, concentrate your efforts
on buying income-generating assets. That’s the best way to get started on a path to becoming
rich. Keep doing that, and your asset column will grow. Keep liabilities and expenses down
so more money is available to continue pouring into the asset column. Soon the asset base
will be so deep that you can afford to look at more speculative investments: investments that
may have returns of 100 percent to infinity; $5,000 investments that are soon turned into $1
million or more; investments that the middle class calls “too risky.” The investment is not
risky for the financially literate.
If you do what the masses do, you get the following picture:
As an employee who is also a homeowner, your working efforts are generally as follows:
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