Common Middle-Income Earner Lifestyle Traps That Hinder Wealth-Building

How The “Middle-Class Lifestyle” Might Be Hindering Your Wealth-Creation Potential

Middle income earners range across most age brackets, with a range of skillsets and work in a multitude of industries. They are the tradespeople, professionals and paraprofessionals, service providers, primary and secondary producers and retailers who earn a wage or salary, benefit from personal services income, and operate micro, small and medium business enterprises: Middle income earners are the people who keep the country running, and they constitute over 58% of the total amount of income earners in Australia.

Middle-income earners are, by no means, the wealthiest income bracket – the top income earners are the group who, disproportionately, hold the largest percentage of wealth in the Australian economy due to the their increased ability to make money from investments. However, these differences in demographics alone do not constitute the only reason for the high-income earners’ greater percentage of wealth. Why? Well, we’re glad you asked… Let’s take a look at the common lifestyle traps that hinder the middle-income earner’s ability to build wealth.

The Pitfalls Of A “Middle-Class Lifestyle”

The “middle-class lifestyle” has certain expectations associated with it – decent housing, good education, the acquisition of certain goods and use of particular services. However, in recent years, the costs associated with these lifestyle conditions has risen much more steeply than general inflation, and out of line with the increase in median income.

Over-priced housing

Housing has become more expensive and, according to OECD figures, now accounts for approximately 25-30% of the average middle-income household’s budget. The Australian Bureau of Statistics reports that median house prices across Australia are now at an all-time high, equating to 8.5 times the average household earnings.

Increased Consumption And Spending Patterns

Australian statistics show that the average weekly expenditure on goods and services almost tripled over the 30 years to 2015, well outpacing increases in the Consumer Price Index (CPI).

The OECD also notes that middle-income households have experienced a change in consumption preferences, seeking to emulate the spending patterns and preferences for certain good and brands as those demonstrated by high-income earners.

Increased Debt

Weighed against slight increases in wage growth, increased living costs and greater expenditure on luxury items has meant that many middle-income households have, in recent times, found themselves in financially vulnerable situations – particularly when it comes to debt. In fact, according to the OECD, one in eight middle-income households have debts worth more than three-quarters of their assets.

Savings and The Australian Middle-Income Earner

Australian middle-income earners reported having increased gross disposable income in the 2019-20 financial year , compared to the preceding four years. Australian Statistics also increased household savings growth over the 2019-20 financial year, probably driven by the government’s COVID-19 restrictions that meant many businesses were unable to operate and people were encouraged to stay home.

This situation not only allowed more households to increase their savings, but the economic uncertainty encouraged people to funnel disposable income into savings in the event that economic instability persisted and their circumstances became dire.

Financed Purchases And The Australian Middle-Income Earner

As middle-income earning individuals and business owners enter their peak earning capacity, they tend to purchase “luxury” items: The latest and greatest ‘toys’, cars, jet skis, computers and consoles, holidays etc.) and they are often purchased through a finance agreement.

The problem is, that these items might enable middle-income earners to “keep up with the Jones’” but they depreciate quickly and have no real lasting value. Middle-income households are becomingly increasingly less likely to live according to their means. Instead, they often use finance to purchase what they want while keeping weekly/monthly/yearly expenditure at a manageable level. This is partly attributable to society’s desire for instant gratification.

Given the opportunity to attain what they want immediately, with minimal initial outlay, while incurring little ongoing financial discomfort (by paying off that purchase in manageable instalments), many people will choose to “buy now, pay later”.

This, however, is a false economy. Financed purchases end up costing more in interest or fees. Not only this but increasing the amount of debt held dilutes an individual’s borrowing capacity and weakens their ability to begin the wealth creation phase.

What Are The Financial Learning Opportunities For Australian Middle-Income Earners?

How do Australian middle-income earners avoid the “middle-class lifestyle” traps and begin their journey of wealth creation? We have compiled a list of ways that will transform your financial position immensely:

1. Change Your Mindset

The middle class can fall into the trap of attaching themselves to a “tolerable” job that is reasonably secure, hoping they will keep their job and a steady income until retirement. In comparison, the top income earners tend to find a career that inspires passion and they give it 100%. They then reap the financial rewards that inevitably come from being the best in their field.

A change in mindset can make all the difference to increasing income and improving business success. Find a mentor to inspire you or business coach you can relate to – someone who is successful and has the tools to help motivate you and guide you to find your own path to successful wealth creation.

2. Spend Money (on the Right Things) To Make Money

If your home needs repairs or an upgrade, and you have the funds available – get the repairs or upgrade; if your business needs new equipment or resources, and you have the funds available – purchase what you need. These are examples of expenditure that are investments in an existing investment, and they will continue to make you money into the future.

If you are a business owner and your accountant or business or financial advisor ever tells you that you are in danger of having earned too much this year, that you should buy something like a car, which you can then claim as a business expense… find a new advisor. Spending tens of thousands of dollars to save a relatively small amount in taxation is not a smart business decision.

This is a prime example of wasting capital that could be used to cushion your business from a potential crisis, or used to show stakeholders or lending institutions proof that your business is flourishing and worth investing in or lending to, so that you can increase your operations or build your wealth.

The key here is to understand the difference in spending on liabilities and spending on assets.

3. Invest!

As any good accountant or business or financial advisor will tell you, savings are the basis for wealth creation. However, money is a dynamic medium that needs to be exchanged and circulated in order to grow. Savings not only provide a financial buffer, but they also increase your capacity for investment and can provide a passive income stream over time. This will allow you to continue to build wealth.

If you’re a business owner, perhaps that means investing the money back into the business, or it may be smarter to diversify your portfolio and invest a portion of your money (not all of it) elsewhere. A good financial advisor, accountant or business coach will be able to assess your position and give you reliable advice on the best course of action for your individual situation.

Need Help Building Wealth And Avoiding The “Middle-Class Lifestyle” Traps? Contact Leveon Today.

At LeVeon, we want to you (and your business) to improve your financial position and, what’s more, we can give you the tools you need and start you on your wealth creation journey: Today.

Our experienced financial advisory and business coaching services can provide individuals and micro, small and medium business owners with the skills and advice you need to take control of your finances and smash your wealth creation goals.

To learn more about how LeVeon can help you begin to build wealth, call us on 0488 008 259, send an email to rod@leveon.com.au or fill in our contact form and we’ll contact you shortly. Together, we can get you on the right financial track for you.