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📂 Category: Wealth,Personal Finance
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Key takeaways
- The middle class is shrinking, and the upper class is growing. If your income exceeds $161,000, you are considered part of the upper class.
- Your social circle, your media consumption, and where you live can shape your perceptions of wealth. These influences can lead to poor financial decisions that hurt rather than help.
- It is essential that you only think about your financial health and not compare yourself to others. You may be richer than you realize because of how well you manage your money.
There are several ways to look at your wealth and determine whether you are “rich” or not. You may have a high salary that is considered part of the upper class. You may have a high net worth. Or maybe you’re really good at managing your money so you feel wealthy based on what you have in the bank and how you live your life.
The term wealth is relative according to these factors and more. People evaluate their success by comparing themselves to their neighbors, and a middle-class income in one part of the country may be lavish in another.
Where you are, who you surround yourself with, and the type of media you consume affect how you judge your wealth.
Comparison is the thief of joy
It is difficult to resist the urge to compare your wealth with others. Someone might think they’re doing pretty well with an income of $130,000 a year to visit the Hamptons. Surrounded by boats, big houses, and expensive restaurants, they may suddenly feel like they don’t earn enough.
Wealthier places also have higher expenses. If you live in a large financial center like New York City or Chicago, even a high salary may not be enough. Depending on your social circle, you may be tempted to spend beyond your means.
“These comparisons can go both ways: they can make people feel less wealthy than they really are, or they can make people have an inflated sense of their own wealth,” said Dan Cunningham, founder and CEO of financial advisory firm One Day in July. “If you see yourself as wealthier because you see yourself as wealthier than those around you, this can lead to overspending or taking greater financial risks. This can drain your wealth over time.”
To show how diverse income is, the following table shows the upper income limits by quintile for a selection of U.S. states, as well as the country as a whole, according to Census Bureau data.
| How does your salary compare in your area? | |||||
|---|---|---|---|---|---|
| region | First quintet – 20% | Second Quintet – 40% | Third Quintet – 60% | Fourth Quintet – 80% | Minimum top 5% |
| US | $31,942 | $61,190 | $97,458 | $155,515 | $250,000 |
| Minnesota | $37,850 | $68,223 | $103,805 | $160,398 | $250,000 |
| Mississippi | $21,071 | $42,400 | $69,475 | $111,926 | $206,135 |
| New York | $30,308 | $62,380 | $104,135 | $175,120 | $250,000 |
Shrinking middle class
But wealth inequality isn’t just in your head.
According to the Pew Research Center, a middle-class family is defined as one whose income is two-thirds or twice the median. In 2023, the real median household income in the United States was $80,610.
In 1971, 61% of Americans lived in middle-class households. By 2023, this number has dropped to 51%. In the same period, the number of high-income households – those earning more than twice the average – rose from 11% to 19% of the total, while the share of low-income households rose from 27% to 30%.
Income growth in high-income households far exceeds growth in middle- and low-income households. In 2022, the average upper-income household earned 7.3 times as much as low-income households, up from 6.3 times in 1970. Likewise, upper-income households earned 2.4 times what middle-income households earned, up from 2.2 times in 1970.
So, while your $130,000 salary may be well above the national average of $80,610, it may not seem like much in high-cost areas, like New York, where the cost of living is 132% higher than the national average.
“As income inequality widens, people may change what they consider to be ‘enough,’” Cunningham said. “Even people with high salaries who can save and invest consistently may feel left behind because the people at the top are simply out of reach of most of the population.”
Quick fact
Wealth and success are often measured by income or net worth, but another factor is time wealth: the amount of freedom and flexibility you have during your day.
Psychological effect
People who feel less wealthy may make poor financial decisions, such as cutting back on retirement contributions, overspending, and taking on unnecessary debt to keep up with the lifestyle they live.
About one in five households in the United States are high-income. This may make everyone feel better, but this is not the norm. Believing that everyone is better off and that you are falling behind can lead to feelings of inadequacy and frustration.
The metric by which you measure yourself can change the way you look at your financial security and the decisions you make.
“People often adjust their spending, saving, and investing habits based on how they feel about their wealth compared to others,” Cunningham says. “The best way to measure wealth is to look objectively at your own accounts and identify decisions that can move you closer to your long-term goals.”
How to accurately measure your wealth
Here are some ways you can evaluate your wealth without being affected by external factors:
- Check your wealth with the Pew Research Center’s calculator, which looks at income, family size and location.
- Focus on your net worth, not your income. Net worth gives the true picture of your wealth. This takes into account savings, home equity, investments, and debt. “Keeping track of what percentage of your income you save and invest can help you give a more accurate picture of your wealth,” Cunningham says. “Keep the amounts in these calculations in mind when you inevitably measure yourself against someone else, not just the size of your house or the number of vacations you take.”
- Compare your wealth locally, not nationally. Making $130,000 may be an average income nationally, but it’s a high income where you live.
- Pay attention to your social circle, because if all your friends and acquaintances are high-income people, it will distort your reality. Try to pay attention to the quality of life you live, your comfort, and your financial security.
- Pay attention to lifestyle creep, or the tendency to spend more when your income rises. This can lead to higher costs in the future and kill gains. “If you get a pay raise, use that time to increase your savings and investments instead of immediately directing that money toward purchases,” Cunningham says. “Over time, we see how [your net worth] Changes can give you a good idea of the direction you are headed. Ideally, your net worth will grow.
Bottom line
How rich you feel isn’t just about how much money you get at work. It’s affected by where you live, who you spend time with, and what you see on social media. Even if you’re in a strong financial position, you may feel like you’re not making enough if your reference point is skewed by your environment and media consumption.
This feeling can also be reinforced by the fact that the middle class is shrinking and the upper class is growing. The best way to avoid this trap of inefficiency is to focus on your financial health, define what wealth means to you, and be honest about your surroundings.
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