What is the Middle Class Trap and How Did I Get Stuck in It?
Hello from the middle class trap, aka the debt death spiral. You are not about to read an uplifting, inspirational blog post about someone that has already overcome their financial issues and achieved financial freedom. I am not about to give you an easy button, or a step-by-step manual on how you can achieve financial freedom. Instead, I will give you the perspective of someone that currently has a long, difficult financial journey ahead of them. Someone that has a large amount of debt, doesn’t have a lot of cash savings, is solely reliable on their W2 income, doesn’t have a lot of immediately accessible assets, and doesn’t have a lot of marketable skills that easily translate into side hustle income. Wow, that sounds awful, but I know I’m not alone in this struggle.
What is the Middle Class Trap?
While not just reserved for the middle class, the middle class trap is an all too common scenario where an individual or household gets caught in a debt death spiral. They succumb to temptation and lifestyle creep and they buy themselves nice things (because they deserve it) by accumulating debt. Nice house? Get a big mortgage. Fancy car(s)? Get an auto loan. Consumer goods, like a new laptop or skis? Put it on the credit card, or sign up for a 0% down, 0% interest buy now, pay later (e.g., Affirm, Afterpay) loan.
The accumulation of debt, and therefore the commitment to an increasing amount of monthly debt service payments, removes the individual’s ability to save cash or invest. The lack of cash, or liquid assets in general, causes the person to take on additional debt whenever unexpected or unplanned expenses come their way. Car requires new brakes? Can’t pay for it in cash, so just put it on the credit card. Friends going on a ski trip? Again, can’t pay for it in cash, so just put it on the credit card. Friends buy brand new Mercedes Benz Sprinter Vans? Don’t miss out! Put a small percent down and finance the rest.
While the person may be able to afford their required monthly debt payments, and they may not have an immediate risk of missing mortgage payments or other financial obligations, the person has placed themselves in a financial house of cards that could collapse on top of them in a moment’s notice. Additionally, they have placed themselves in a never ending cycle of accumulating debt, paying down that debt, starting to build savings, encountering another unexpected/unplanned expense, draining savings to cover part of the unexpected expense, putting the remaining amount of the unexpected expense on a credit card, and paying down the credit card. Rinse and repeat.
The Walls of My Trap
It took me far too long to recognize that my family and I had entered the middle class trap. The floor, walls, and ceiling of our trap were of my own making, and consisted of various forms of debt. At its height, our middle class trap was made of $107,000 in non-mortgage debt, that required the following monthly payments:
- $1,400 auto loan payment – I mentioned that brand new Sprinter van, right?
- $450 of 401k loan payments
- $360 AC/Furnace Loan payment
- $200 credit card minimum payment
- $180 buy now, pay later loans
Our non-mortgage, monthly debt payments totaled $2,590. Wow. That sucks.
If you add our $2,500 mortgage payment to that total, we were making $5,090 in monthly debt service payments, which took away far too high a percentage of our monthly household income. This massive debt burden, along with the money pit that comes along with building out a van significantly reduced our ability to build an emergency fund of 3-6 months of bare-bones living expenses, and some other savings for covering unexpected home and car issues. That meant that any time I needed to get some light on my car dashboard addressed, I would take on credit card debt to pay for it. My next pay check would be used to pay off the credit card, which then led to an ability to build up cash savings for that month.
How Did I Get Here?
TLDR: Stuck in the middle class trap. Took on too much non-mortgage debt and did not diversified my income sources, so I am solely dependent on my W2 job to cover my expenses, debt service payments, savings, and investments.
My financial enlightenment journey began in 2022 when I was 34 years old. Mind you, this is 12 years after I had received a Bachelor’s Degree in Finance from a four year university, where I learned next to nothing about how to manage my personal finances. Let it be known, that I also showed zero interest in pursuing building personal finance knowledge outside my core classes. I was too busy being a college student.
My pursuit of personal finance knowledge didn’t start until I was in my 30s and had a family. At 34, I had become obsessed with the idea of investing in real estate, so I devoured every possible real estate investing book, Bigger Pockets podcast, and started making connections with investor friendly agents and lenders in my target markets. I had momentum, desire, and the drive to make my real estate investing dreams happen.
However, in my self-education journey into real estate investing, I had started to read books and listen to podcasts on personal finance. This is where I started to gain a better grasp on personal finance best practices, and how I had deviated from them. At that point, I decided to put my real estate investing dreams on hold and build a strong financial foundation by addressing each one of my financial shortcomings first.
Zero Budget
A budget, even a loosely defined one where you don’t track every single penny, is the the most important aspect of financially wellness. If you don’t have any idea how much money is coming in, and how much money is going out, then you will never have control of your finances. I was 34 years old when I learned this lesson.
While I knew how much money was coming in (due to my sole source income), I didn’t have a clue how much was going out. I tracked nothing. For the most part, I would just make sure that my checking account didn’t go negative. If I wanted to make a big purchase, then I would briefly think about whether I could afford the item, or the monthly payment. My “can I afford this” litmus test basically consisted of me licking my finger and sticking it into the wind, and saying “Yep, this feels right.”
For the longest time, I was under the impression that having a budget was some super intense, fun killing, time suck. This misconception prevented me from starting a budget for a very long time, and my delay was to the detriment of my family’s finances.
No Emergency Fund
I can honestly say that I never thought about the need for an emergency fund while I was in my 20s. This mindset certainly came from a position of privilege in that I was never concerned about the possibility of losing my job, or having a very expensive medical emergency. It makes me sweat now to think about the stupid decisions I made in my 20s that could have ended in disaster. Luckily, I escaped my 20s both physically (for the most part) and financially unscathed to reach my 30s.
It probably took me until I had a child and a family that I started thinking that an emergency fund was something I needed. However, this was after I got the wakeup call when every single piece of personal finance guidance I read spoke about the criticality of the emergency fund. The realization of how vulnerable our family was without an emergency fund led to a lot of sleepless nights.
Debt Accumulation
Previously, I felt like I was doing all the right things, even though I had debt. Everyone has debt, right? I had a high-paying job, I was squirreling money away into my 401k, and I owned a house. My problem was that I was only focusing on building up my retirement savings, which I couldn’t access for another 30 years. I was cash and non-retirement asset poor, but on track with my very loosely defined retirement goals.
What happened if my family and I experienced an emergency where we needed some cash? What if I needed to keep up with the Joneses? What if a “once-in-a-lifetime investment opportunity” came around? In each scenario, I would need to take on debt to act. Unfortunately, all of these scenarios happened to me, as they do with most people, and I took on debt. Below are my most atrocious financial mistakes that led to debt accumulation.
- I had taken $25,000 worth of 401k loans to pay off some existing debt, and invest (i.e., gambled) in crypto during the 2020-2021 boom. Given how hot the crypto market was during this time, I figured I could double or triple my money really quickly, pay back my 401k loans, and have my earnings money still invested in the crypto market. Who doesn’t love free money? When I took out the loans, I foolishly thought I would be able to pay them back in full in 3-6 months. However, I failed to sell at the top and then watched my $50,000 crypto portfolio decrease to $10,000 over the course of a few months. I then was afraid to sell the “investments” for fear of admitting my mistake, realizing the capital losses, and missing out on the potential to recoup my losses in the event the market recovered.
- My primary residence had a 27 year old furnace and a 25 year old AC, and I had not planned ahead and budgeted for the inevitable replacement of both. When the furnace started to leak carbon monoxide, I had to take on a, $11,000, 0% interest loan to purchase new units.
- I had purchased a $75,000, brand new Mercedes Benz Sprinter Van, which required $25,000 to build out before it was usable. The long-term goal was to rent out the Sprinter van to help with the monthly payment, at least this is the excuse I told myself when deciding to make the purchase. However, I failed to take into account the large amount of money it would take to build the van out and the large amount of time it would take to do so. I also failed to adjust my anticipated monthly payment after I decided to only put 3% down instead of 20%. The massive decrease in my down payment caused my monthly payment to jump from the $700-$800 I was anticipating, to $1400.
Previously, my poor money management and spending habits had not been a problem because I was always able to course correct by throwing money at whatever problem I had created. However, I had grown used to my ability to quickly pay off any debts before I had a child and owned a primary residence. When taking on debt in 2020 – 2023, I failed to take into account how child and home expenses impacted my ability to service my debt. Since I could not pay my debt down quickly, I wouldn’t be able to pay off the debt and save up some cash before the next major expense came my way.
Undiversified Income
In addition to my poor tracking, spending, and saving habits, I had not diversified my income at all. I was content in a well-paying job and had not even considered the possibility of a side hustle. Maybe it was because of laziness and, at the time, I would rather watch Netflix at night or doom-scroll on my phone instead of dedicating time to building skills that could make me extra money. Perhaps it was because I didn’t know what skills to dedicate time towards developing. Maybe it was because the majority of my free time went to building out the Sprinter Van.
Regardless of the reason, my journey towards financial enlightenment informed me how foolish I was to solely rely on my W2 pay check to make ends meet. I may not have had an earnings problem, but I certainly had a source of earnings problem. While a large amount of people solely rely on their W2 and/or their partner’s W2, it is a very precarious situation. You are giving your company all the power in your relationship. You need them so you can make ends meet more than they need you. This is never a situation you want to be in. If you’re like me, it makes you resent your company because you feel trapped, especially if they pay you well and you don’t have the confidence and/or skills to job-hop every few years to get pay bumps.
Conclusion
My complete disregard for the very basics of building a strong financial foundation led my family down a very scary path. A path that could completely destroy us financially. Now maybe this is a little dramatic, and maybe everything would have turned out okay. However, I like to frame my financial mistakes as massive and terrifying, so I know what they could lead to if a series of unfortunate, expensive events happened. Especially if those events happened while we didn’t have a budget or emergency fund, and while we were carrying large amounts of debt.
Fortunately for me and my family, we got the slap in the face we needed before things spiraled completely out of control and were stuck in the middle class trap forever. While our situation seemed scary after adding up all our non-consumer debt, we knew what we needed to do to course correct. We knew it was going to be a long, difficult path, but one we had to take.
