7 Financial mistakes the middle class makes

It is a fact that most middle class earners survive on loans to stay afloat as well as keep up with the Joneses. While it is true that most middle class live exaggerated lives, it is worth noting that they work very hard to maintain their lifestyle. The only problem is that they forget to be financially smart and in the long run, their efforts prove futile. So, what sabotages their efforts? We tell you…

The middle class earners are an integral part of the society because they significantly contribute to the economy by not only providing the much-needed workforce but also as consumers of goods and services.

As such, many business models have been created to focus on this particular group. But who is a middle class earner?

There are many competing definitions of who is middle class and who isn’t. According to a report – The Middle Class in Formal Sector Kenya – by the Institute of Economic Affairs, a middle class individual is one who takes home an average of between Ksh76,392 to Ksh102,429.

Whether you fall in this bracket or not, you will definitely benefit from learning the financial mistakes that middle class earners make and thus avoid them.

Buying things they don’t need

Truth be told, many middle class earners are extravagant and impulse buyers, buying almost everything and anything they find on their way provided they have money and if they don’t have money, they borrow.

The downside to buying things one doesn’t need can be found in Warren Buffet’s saying, “If you buy things you don’t need, soon you will have to sell things you need.” This is a call for us to spend our money wisely for every shilling spent on unnecessary item contributes to lost wealth.

Depending on one income

The saying, “Don’t put all your eggs in one basket” holds water in financial matters. Simply put, it is imprudent to depend on only one source of income. We live in uncertain times and anything that may compromise your income could happen. What will you do if that happens?

You therefore need a fall back plan or something on the side to cushion you for such times as well as enable you increase your investment portfolio and/ or savings.

Spending too much on depreciating assets

If you want to get rich, avoid investing in liabilities and instead put your money on assets. Assets will help you to create wealth for yourself.

Don’t strive to impress people with your lifestyle: work for what will help you in future. You don’t have to drive an expensive big car while a cost-friendly, small car can do.

Always weigh your options before making decisions and ask yourself questions like the value you will get if you settle on option B and not A.

Not having an emergency fund

Most middle class earners don’t keep an emergency fund. They also don’t bother with insurances. In a nutshell, they live for today without giving much thought about the future.

However, emergency funds help you not to enter in debt in case something unexpected happens. And bad things happen every now and then but we can prepare to counter attack in case they happen. The counter attack lies in the emergency fund.

Not planning for retirement

You can blame this on our culture of parents depending on their children for survival. However, we needn’t put unnecessary pressure on our children who are already struggling to feed their families as well as make ends meet.

It is therefore recommended for one to start saving as early as possible to ensure they enjoy their sunset years.

The services offered by the National Security Social Funds are not enough to cushion you during retirement; so look for alternative ways to save for your retirement.

Not saving at all

Due to the nature of their lifestyle, many middle class earners are left with little to nothing to save. The rule of the thumb is to spend what remains after saving. According to the 50/30/20 rule, one should save at least 20 per cent of their income.

Fifty per cent should go to essential items such as food and housing while 30 per cent should be allocated for lifestyle choices such as nights out.

Accumulating too much debt

The middle class is synonymous with debts including mortgages, car loans, student loans, emergency loans and so on, which add up to a massive consumer debt.

The loans eventually catch up with them, putting them at a vulnerable position financially. Avoid taking loans to finance your lifestyle; if you must take a loan, borrow only what you need and invest wisely.