How to Budget for a Middle Class Family – Forbes Advisor

Building a middle-class budget starts with knowing what being “middle class” means in your life. Is it a fulfilling job? A healthy bank account? A graduate degree? Owning a home? A well-funded retirement account?

Although a typical middle-class family can look very different to different people, there are some basic needs that define this group.

A Washington Post poll finds that most Americans generally agree on what it means to be middle class: finances, education and stability. The catch? Only about a third feel secure enough to claim the title.

Hunting for safety in a Pinterest-perfect world

While nine in 10 Washington Post respondents say financial stability—savings, health insurance, and a steady income—is essential to being middle class, fewer say milestones like owning a home or having a job with paid sick leave are musts. It turns out that being middle class isn’t just about having money; it’s about feeling secure in your future.

Christina Lynn, behavioral finance researcher and Certified Financial Planner at Mariner Wealth Advisors, says today’s middle class is feeling the added pressure to keep up with the “mythical middle class” often portrayed on social media. This can lead to financial anxiety and even long-term financial failure.

“Over the past 20 years, the definition of ‘middle class’ has changed dramatically. Compare our parents’ weddings, homes, and cars to today’s Pinterest-inspired lifestyles: Everything has scaled up,” says Lynn. “While dual incomes and higher education have helped, they haven’t quite kept pace with the rising cost of living and lifestyle expectations. In many ways, the middle class is living ‘on top of the hog,’ but at a price.”

This lifestyle inflation can also contribute to how much consumers borrow. Many homeowners are tapping into their home equity and relying on credit cards to cover their expenses.

Home equity lines of credit (HELOC) balances grew by $4 billion from the first to the second quarter of 2024, marking nine consecutive quarters of growth since the start of 2022, bringing the total to $380 billion, the New York Federal Reserve said.

Credit card debt rose $27 billion to $1.14 trillion during the same period.

Lynn argues that people can find a balance between short-term pleasure and long-term goals as long as they avoid debt as much as possible and develop good saving habits.

“Your retirement should come first. Think of it as putting on your own oxygen mask before helping others. Secure your financial future before tackling other expenses, whether it’s funding a child’s education or managing mortgage and healthcare costs,” she says.

Start with the basics: how to make a budget?

Your budget is a blueprint based on your unique situation, including your household income and lifestyle, so it probably won’t look the same as your friends’ budgets, even if you all consider yourself middle class.

Experts agree that keeping track of what you take in and what you spend is essential to taking control of your money.

Whether you prefer pen and paper, a spreadsheet, or one of the best budgeting apps, try to track your spending and income for at least a month or two. That way, you’ll know exactly where your money is going.

Many banks have built-in budgeting tools, so take advantage of them. Then, break down your expenses into fixed (rent, utilities) and variable (groceries, entertainment) categories.

Once you see where your money is going, you can decide if that’s where you really want it to go. You might be surprised at how much you’re spending on streaming services or takeout, and decide to put that money toward something more important.

A rudimentary budgeting method is an easy place to start

A simple budget can be just as effective as a complex algorithm that takes Einstein to figure out, especially if you are consistent. The 50/30/20 rule is one such method.

The idea is to use 50% of your income for essentials, 30% for wants (such as dining out or traveling), and 20% for savings and debt.

If you typically get paid in cash or prefer to see the money actually spent and saved, cash stuffing might be your type of budgeting system.

It’s basically the old-fashioned “envelope system” with a trendy name. You set aside money in envelopes for different expenses, like groceries, bills, or fun money, and only spend what’s in each envelope. It’s an easy way to manage your budget and avoid overspending. For those who prefer to stay digital, many online budgeting tools offer this feature.

No matter what budgeting style you use, make sure you prioritize the basics, like saving for retirement and building an emergency fund.

Build up your pension savings now

Unless you plan to work forever, your future self is counting on you to save money for retirement now.

Start by calculating how much money you will need when you retire.

Take into account your current age, your retirement age, your family income, your savings and the expected investment return before and during your retirement.

Consider the percentage of income you will save, expected income increases, years you will need retirement income, desired retirement income, and expected inflation. Finally, adjust based on individual goals and circumstances.

Using a pension calculator you can easily estimate the required pension income.

Most experts agree on these three principles:

• Start on time: The sooner you start saving, the more time your money has to grow with compound interest.
• Max out your 401(k) retirement fund, or contribute at least as much as your employer’s contribution, if offered: Make the most of employer contributions and contribute as much as possible to your retirement account. In 2022, more than a quarter of private sector workers with access to a 401(k) or similar plan did not participate.
• If you don’t have access to a 401(k), invest in a traditional IRA, that’s a retirement savings account where your money grows tax-free until you withdraw it. You may even be able to deduct what you put in now from your taxes.
• Diversify your investments: Spread your savings across assets such as stocks, bonds and mutual funds to balance risk and return.

Lynn says it is absolutely out of the question to withdraw retirement savings for short-term needs.

“If financing a child’s education means not preparing for retirement, that’s a shortsighted trade-off,” she says. “A troubling trend we’re seeing is people withdrawing their 401(k) when they change jobs to pay off credit cards or improve their lifestyle.”

Investing in education

Budgets vary here. For households without children, it’s best to plan ahead. If you have children and want to help pay for their further education, you can use a tool like a 529 plan.

A 529 plan is like a special savings pot for college. All 50 states and the District of Columbia offer at least one 529 plan, and you can open a plan in any state, no matter where you live. You put money in it, and it grows over time without paying taxes on the growth, as long as you keep the money in the account and eventually use it for qualifying education expenses.

If your child goes to college, you can use the money for things like tuition, books, or housing. But the downside is that if you use the money for things that aren’t college-related, you may have to pay a penalty.

To calculate how much you need to save each month, you can use a tuition cost calculator.

Eliminate high-interest debt

If you carry a balance on your credit card every month, you’re spending money you’ll never see again and paying high interest rates.

For example, if you have a credit card balance of $5,000 with an average interest rate of 28%, you’re spending an extra $116 each month that could have been put toward one of your goals.

In addition to paying off high-interest debts all at once, you can also apply for a balance transfer card with an introductory rate of 0%. You must plan to pay off the debt within the introductory period; once the interest rate kicks in, you will begin paying interest on the remaining balance. Remark: Typically, you must have at least good credit to qualify for a balance transfer card.

If you are behind on your credit card payments, contact your credit card company immediately. Lenders are generally more willing to work with you than through collections or even small claims court.

If you miss too many payments, your debt could be written off as a loss, which will hurt your credit score. But even after that, you may still have room to negotiate.

You can also turn to reputable credit brokers. These professionals can help you create a personal budget, offer free resources, and guide you through a plan to manage your debt without making unrealistic promises.

A budget can set you free

Creating a budget is essential to making middle-class goals a reality. Whether it’s buying a home, saving for your kids’ college education, or just taking that dream vacation, a budget helps you prioritize. It gives you control over your money, making it easier to cut unnecessary expenses and build a safety net.

Plus, it’s encouraging: seeing progress toward your goals keeps you motivated. With a clear plan, you’re not just reacting to bills; you’re actively shaping your financial future.

If you’ve never made a budget before, it might seem limiting at first. But the reality is that you’re freeing yourself from future problems, says Erika Rasure, chief financial wellness advisor at Beyond Finance.

“It creates a plan and gives you the power to say ‘yes’ or ‘no.’ If an expense isn’t in the budget, it’s off the table,” she says. “Remember, it takes about 60 to 90 days to become a habit, so don’t give up. Practice makes perfect. It’s easy to let shame get in the way here. People often get upset when they check their budget inconsistently, so dedication is key.”