This is my first new year as part of the financial blogsphere, and the year-end income and balance sheet share-athon took me a little by surprise. Not that I’m opposed to people sharing information about their finances. In “real life” it can cause social friction, but I see little harm in it on the internet – any people you offend will disappear silently into the night. I just didn’t expect it. I do think such disclosure is overall a good thing – it’s entertaining from a voyeuristic perspective, and it’s educational. Enter the obvious question: am I going to share my income?
And the answer is ‘yes’, but I want to go about it a little differently. Rather than breaking the number down by job income and trading income and the $0.00 I made from Adsense on this site (2012 goal: triple that) I want to look at where my income sits from a class perspective.
The accounting isn’t quite in yet, but my 2011 income was about $130,000. For reference I turned 30 years old this year. What strikes me about this number is that it’s substantially over the 80th percentile household income cutoff that is frequently viewed as the top of the middle class in the US. The 80th percentile value for 2010 was $100,065 according the US Census Bureau (data back to 1963 - use table H1). Looking at it another way, I’m making more than twice the median household income. My intention here is not to brag, but rather to explore the implications of leaving the middle class.
That’s right, leaving. I was once a card carrying member of the middle class. Now, by at least one metric, I’m gone. Upper class. Rich. I’m sure they’ll be sending me my new membership card any day now. Wait, you don’t get a card? Damn. Actually, truth is nothing’s changed except for some numbers. I rent the same house I rented when I was middle class. I drive the same car, although at 16 years old its days may be numbered. I’m married to the woman I then dated. I eat the same types food, but cook and eat in more often now that I’m married. Net cost hasn’t changed much – the expense of cooking for two is counterbalanced by not eating out. My wife generates her own income and we have more separate finances than is typical for a normal couple. She’s also quite frugal and net cash flow positive, so that’s not an issue. On more than one occasion I’ve been tempted to go cash out a brick of $100s from the bank and make her spend it. But I’ve refrained because I’m sure it would make her anxious.
If you’ve been paying any attention, you probably know that the question of where the top of the middle class lies is highly politicized. Some of this is good old fashioned class warfare associated with carving out political majorities. Some of it is fresh angst from Occupy Wallstreet’s focus on the top 1% of earners and the resulting nation-wide look at income in general. Some of it is related to the the unsuitable nature of income as a measure of economic situation – $100,000 in Manhattan is not even vaguely the same thing as $100,000 in Oklahoma City. That’s a legitimate issue, but it doesn’t apply to me – the city I live in has housing prices within 10% of the national median. Let’s ignore the controversy for a second though, and go with the definition pushed by the New York Time that the bottom 20% of households are “poor”, the middle 60% are “middle class” and the upper 20% are “rich”. This is the definition by which I’ve exited the middle class.
What’s remarkable about this definition is that the middle class spans household incomes from about $25,000 to about $100,000 – a 4x range. One might expect that a 4x difference in income would produce radical differences in household economic policies. Yet this doesn’t seem to be the case – choices seem to be broadly similar across the range:
- ownership of a mortgaged single family home
- ownership of one car per driving household member
- 1-3 children per household (1-2 is becoming more common)
- the intention of college educating those children
- 1-2 pets off an approved list: dogs, cats, and small things that can’t get out of their cage/tank
- marriage or long term co-habitation
- the man is primary wage earner and works a job
- this job is a “desk” job involving little interaction with capital either financial or via physical tools
- the woman balances child rearing with at half-hearted attempt at a career
- no co-habitation with parents, adult children, or extended family
- the “family vacation”
- investment for retirement at about age 60
- this list could go on for 100 items…
Now clearly this list is generalizations. Somewhere there’s a middle class gay couple with four children living in a paid off communal yurt with eight extended family members and a pot bellied pig. But each of the listed choices is sufficiently common that it represents part of the middle class identity. As you move through the middle class income range, the differences lie not so much in these big decisions, which are taken as givens, but in the minutia how they’re implemented. How big a house, and where? What cars? Which college? Where do we vacation?
My personal theory is that this fixed set of decisions has produced broad based economic discomfort for at least the last 60 years. Implementing each of those policies to an socially acceptable degree probably costs about $75,000 per year in current dollars. More than 1/2 of the middle class earns less than that. Those households have two choices – fail to keep up with the Joneses and suffer social stigma, or use debt to stretch for an ideal which is out of reach. It may also explain why overall happiness increases with income up to about $75,000 – that’s the point where income catches up with these collective decisions to create a harmonious financial situation. It’s also worth noting that the target for “middle class” has moved upward over time. In 1950 two adults could share a car and it wasn’t a big deal, for example.
There’s a good bit of talk about people leaving the middle class and becoming poor: academic studies, blog posts etc. But there’s essentially no discussion I can find about exiting into the upper class. Googling [leaving the middle class] and [exiting the middle class] finds bubbkis about leaving upwards except for one intriguing blog post on Ribbonfarm which was my inspiration to write today and to which I will soon return. Googling [joining the upper class] has a few more things, but nothing very deep – stuff like Swiss watch ads. The internet seems to, by omission, take the position that no one ever leaves the middle class – it’s some sort of economic Hotel California.
That can’t really be the case – many thousands of households must move upwards across the 80% income line every year. But it’s a silent transition, marked by no rituals or public acknowledgement. Downward exits from the middle class, incidentally, do have a scripted ritual: “losing your home”. But I know there’s interest in the topic of leaving upwards. I posted a short comment about leaving the middle class on the Ribbonfarm article, and it’s been the #1 non-google source of traffic here for the last month. I have no idea what Venkat’s traffic looks like but clearly the topic intrigues people.
Venkat’s take on the subject is a little different than mine – he ignored income (I have no idea if he’s “over the line” or not) and instead focused on abandoning the assumed economic decisions of the middle class. He seems to be viewing his exit as more sideways than upwards. I think this is a fruitful avenue, since those middle class decisions are proving to be less than ideal for many people. Not that they’re WRONG – each one also makes sense for a lot of people. But it’s nearly certain that at least some of them are wrong for you.
In as much as I’ve figured it out, and it’s something I’m still pondering, this is how I view my exit from the middle class: I’m abandoning the assumption that a long list of pre-made decisions are automatically right. I’ve already written about abandoning mortgaged home ownership and investment. The whole point of this site is abandoning a desk job in favor of a capital-intensive one. By the time any kids of mine reach college age, I think that question will be much closer to break-even as well. This approach to leaving the middle class is much more attractive to me than simply incrementing the cost of all the standard middle class choices – a bigger mortgaged house, more powerful and newer car, trophy wife, send the kids to Harvard. I think the attractive uses for money lie in different, not more.
The reason I raise this issue is that, if you successfully follow the course I’m laying out here, you too will end up leaving the middle class. It’s worth some time to think about what that will mean to you and what you will do differently.