Let’s talk about some prevailing factors that often shape the middle-class perspective on money. In this article, we challenge certain societal taboos to clear up ten common myths that make it harder for middle-class individuals to manage their money well.
The Context
It’s crucial to acknowledge that the term “middle class” holds subjective significance in our philosophy, functioning more as a mentality than an objective classification.
This perception is relative, shifting in comparison to different benchmarks. For instance, a millionaire might be considered lower middle class from a billionaire’s perspective, highlighting the subjectivity of such labels.
The use of classes as a standard marker for assessing prosperity primarily stems from statistical considerations. Sociologists, economists, and government agencies define lower, middle, and upper classes based on socioeconomic indicators like income, occupation, education, and sometimes wealth.
In the Indian context, the middle class is typically defined as households with an annual income ranging from ₹6 lakh to ₹18 lakh. Understanding oneself as middle class can act as a deterrent, influencing predispositions and behaviors toward money management. The struggle to handle earnings can reshape your approach to rewards, either with excessive caution or a sense of entitlement and resentment.
These behaviors and beliefs often extend beyond income benchmarks, persisting through generations and shaping dubious fragments of conventional wisdom with questionable origins.
This article aims to challenge ten such perceptions among individuals who believe that they are middle class and explore ways to recondition their mentality for a more rational approach to handling their money.
1. Higher Income Guarantees Financial Security
Many middle-class individuals believe in a sort of painful idea that pushes them into a never-ending chase, often called the “rat race.” It’s a mindset that makes many people work really hard for something, even if they’re not sure what that something is.
This belief is about thinking that having a higher income automatically means you’re financially secure in the long run. But here’s the catch — it doesn’t take into account the important things like saving money and having a plan for investing. So, people end up running in this race, thinking they’ll find financial stability, not realizing it’s about more than just how much money you make.
Merely relying on external validation and a higher paycheck doesn’t ensure financial security. Therefore, when pursuing your next promotion and contemplating significant sacrifices, pause to reflect on your honest plan and purpose.
2. Material Possessions Equal Wealth
In the middle-class mindset, there’s a common misconception that owning expensive items or leading a luxurious lifestyle automatically means you’re truly wealthy. This belief can be deceptive, potentially leading to financial troubles.
Many individuals influenced by this perspective heavily invest in luxury items, linking them to a sense of financial prosperity. However, the risk lies in neglecting the crucial importance of accumulating financial assets, which are vital for long-term wealth and security.
To overcome this belief, it’s advisable to shift focus from extravagant spending to strategic wealth-building. Rather than measuring wealth solely through material possessions, consider constructing a diverse portfolio of investments, savings, and assets. Although it might not make as much noise as a super luxury car, this not only offers a more comprehensive perspective on true financial well-being but also sets the foundation for long-term prosperity.
3. Debt is Inevitable
Ever wondered about the shift in our societal attitude toward debt? In India, until the early ’90s, debt was primarily associated with crisis situations. However, with the advent of modern financial models, debt has become a normalized aspect of our society.
For many in the middle class, embracing debt as a routine part of life happens without distinguishing between good and bad debt, often without active management. It becomes a tempting solution to bridge significant gaps resulting from a lack of opportunities, talent, or earning capacity.
Conversely, the wealthy view debt differently. For instance, they would often capitalize on their existing assets by pledging ownerships like stocks with banks to secure loans. As their stocks are under the bank’s custody, they generate additional income by reinvesting the loan into their businesses while also benefiting from tax rebates provided by the government.
They systematically deploy debt as a weapon against the system itself!
To gain insights into strategically weaponizing debt in your favor, explore this comprehensive guide.
4. Homeownership is Always a Good Investment
Our culture frequently emphasizes the notion of obtaining a home as the top priority by any means necessary, but this belief raises valid questions.
In India, the home affordability ratio (salaries to home prices ratio) is significantly messed up, challenging the notion of homeownership as the biggest misconception for the Indian middle class. It’s also crucial to remember the principle that if an ownership isn’t generating income, it’s termed as a liability.
Many middle-class individuals believe that buying a home is a foolproof investment, disregarding market conditions and associated costs. Although there are constraints with rentals, a thoughtful approach involves deferring a home loan and systematically channeling future EMI-equivalent sums into income-generating assets.
Opting for instruments like equities, which have the potential to yield returns exceeding the average real estate yield of more than 10%, can be a wise strategy to progress toward achieving this goal.
Accumulating a significant corpus before purchasing a house can lead to better long-term rewards. However, taking loans beyond one’s capacity not only limits investment choices but also subjects the borrower to high interest rates payable to the bank.
5. Education Guarantees Financial Success
The belief that securing a college degree ensures financial success is a misconception. Undoubtedly, education is crucial for societal integration, but it doesn’t guarantee financial prosperity.
Middle-class individuals often only prioritize education without considering the broader perspective where a degree is just one piece of a larger puzzle.
Although education contributes to skill development, financial success depends on factors such as the right guidance, economic conditions, personal decisions, networking, interpersonal skills, and entrepreneurial abilities. Merely possessing a qualification doesn’t guarantee success; the real world demands practical application and adaptability to navigate professional intricacies.
When seeking knowledge on a subject, ensure you formulate a robust plan and alternatively acquire complementary skills to maximize its potential.
6. Job Security Means Financial Security
Starting with a job is good for stability, but relying solely on it without other income sources or savings is a common misconception.
Jobs can change, and unexpected expenses may arise. Building additional income streams and financial reserves acts as a safety net for financial security.
Aim to have a stable job while investing in side businesses or assets to diversify income and create a financial cushion. This way, if you face job loss or unexpected expenses, you have alternatives for income or savings, ensuring a more resilient financial position.
7. Underestimating Inflation
Attempting to boost income without grasping inflation’s impact is a losing game.
Inflation erodes the purchasing power of money over time. Over the 1960-2022, a 62-year period, the average annual inflation rate in India was 7.5%, according to World data.
Merely increasing your salary or investment returns at this rate won’t lead to progress. Even worse, falling below this percentage puts you on a path toward financial decline. Understanding inflation is crucial; always develop strategies to combat it for a more secure financial future.
8. Keeping Up with the Joneses
The notion of “Keeping up with the Joneses” reveals the common tendency to compare possessions and social standing with others, often leading to overspending and financial stress. Many middle-class individuals grapple with this misconception, believing others are closely watching. In reality, people are more focused on themselves, merely observing without harsh judgment.
The misconception revolves around an exaggerated belief that showcasing wealth is vital for social status, prompting risky spending and debt.
For a financially secure future, focus on yourself. Trying to keep up with endless social hierarchies is similar to imprisoning yourself in an unrequested commitment.
9. Believing Tax Planning is Only for the Wealthy
Tax plays a crucial role in our economy, ensuring governmental balance. However, grasping its complexities can be challenging for common individuals.
To simplify, if you’re in a 20% tax bracket, you essentially work 2.4 months annually for the government, and for those in the 30% bracket, it’s 3.6 months. Ignoring tax planning means sacrificing days from your productive life each year. Recognizing this underscores that tax planning isn’t exclusive to the wealthy; it’s a necessity for the salaried middle class.
Strategically manage your taxes and seek returns from investments to minimize the impact of taxes on your hard-earned income.
10. Ignoring Financial Education
If you’ve read this far, we’re confident to have captured your interest in financial literacy. Many in the middle class neglect the intuitive nature of personal finance, missing out on valuable financial principles. It’s interesting to note that people invest time in thorough research when buying a new car, phone, or even vegetables, yet they often stall when it comes to investments.
Financial education is a crucial life skill, and most individuals possess the ability; it just needs effective channeling for superior gains. In our experience, picking a great stock requires less time and effort than selecting a new car.
Make financial literacy a top priority to improve your relationship with money, and you’ll witness the results firsthand. Additionally, our blog is here to accompany you on your journey to overcome a middle-class mindset.
Conclusion
Among the middle class, money beliefs are firm convictions influenced by personal experiences, culture, or external teachings. Nevertheless, these convictions can be questioned due to their subjective nature, absence of evidence, and vulnerability to biases or misinformation.
By challenging some of these beliefs, we believe this article has offered you diverse perspectives and promoted critical thinking, essential for assessing these notions and dealing with them objectively.
Thank you for taking the time to read this article.
Invest wisely!
