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Updated: May 11

FULL TEXT OF 04/20/24 GOBANKINGRATES ARTICLE:

 

6 Reasons Why the Poor Stay Poor and Middle Class Doesn’t Become Wealthy

 

By G. Brian Davis, GOBANKINGRATES – April 20, 2024

 

Social mobility and wealth inequality make for easy political bullet points to bash “the other side.” But buying into the sound bites won’t make you any richer.

 

To hear people on the left, the poor have no agency, no control whatsoever over their own lives. To hear people on the right, anyone can pull themselves up by their bootstraps and increase their net worth if they work hard.

 

One narrative removes all personal power from the individual, and the other removes all acknowledgment that we’re shaped by our communities. Both lack any sense of nuance.

 

We all know that people can change. We’ve seen it happen by witnessing people evolve both personally and financially. So why don’t more people push beyond the socioeconomic class of their birth?

 

1. We Learn Financial Habits Privately (Not in School)

It’s hard to get rich if you don’t know much about money. Surprising no one, financial literacy shares a strong correlation with wealth. Yet, teaching personal finance or investing in schools isn’t prioritized. Instead, each of us must learn them at home, or worse, on our own in adulthood.

 

2. We Adopt the Views and Habits of Our Communities

If you grow up surrounded by attorneys, investment bankers or entrepreneurs, you’ll likely consider those career paths first. You may also get some help along the way with tuition, test preparation and introductions to people who can help with your career. But even if you don’t, you’ll grow up with a clear view of these career paths. You’ll know every step it takes to get exactly where you want to go.

 

Your role models probably work long hours and value education. Your parents probably press you to get good grades in school, learn foreign languages and travel for exposure to other cultures.

 

If you grow up surrounded by high-school dropouts, some of whom work low-wage jobs, others of whom collect Social Security or disability benefits, what views and habits will you absorb? They probably won’t be the ones that lend themselves to financial success. You may even develop a disdain for education.

 

3. Higher Education Equals Higher Earnings

Again, it comes as no surprise that education is highly correlated with wealth. In fact, the Social Security Administration puts the average lifetime earnings of men with advanced degrees $1.5 million higher than those with high school diplomas.

 

But growing up in a poor community, you’ll face several challenges in attaining higher education. The first is cultural: you’re simply less likely to want to go the distance if no one in your community has pursued it.

 

You’ll also face financial challenges in pursuing your education. Your parent(s) might ask you to chip in financially once you reach your teenage years, making it harder to stay in high school and earn strong grades. And that says nothing of the cost of college or even applying to them.

 

Finally, you face a knowledge gap: if no one in your family has gone to college, they can’t guide you through the application process or the process of applying for financial aid. Not to mention, you won’t have someone close to you to advise you about scheduling classes, dealing with professors and paying back student loans.

 

4. Ongoing Education Is Lacking

Higher earners know the value of ongoing education. They never stop learning.

 

At the high end of the ladder, the wealthy invest enormous sums to join high-performance peer groups that constantly challenge them to keep growing. They embrace accountability partners, executive coaching, masterminds and endless personal development. They never stop learning, because they know that the more you learn, the more you’ll earn.

 

It takes time and money to invest in yourself this way. The poor and middle classes either don’t have enough of either or don’t prioritize the investment even when they could make it.

 

5. Homeownership Is Out of Reach

The average homeowner has a net worth 40 times higher ($396,200) than that of the average renter ($10,400), according to Federal Reserve data.

 

However, it takes tens of thousands of dollars to buy a home, between the down payment, closing costs and cash reserves. That puts homeownership out of reach for many lower-income Americans — and with it, a major avenue to building wealth.

 

6. Investing and Leveraging Aren’t Practiced

Some of the reasons above are practical or financial. Others revolve more around cultural views and habits.

 

Robert Kiyosaki wasn’t wrong when he explained that the rich put their money to work for them while the poor and middle classes work for money. You can argue for your own limitations and come up with perfectly “reasonable” reasons why you (or someone else) can’t afford to do likewise. You wouldn’t be wrong per se, but you also won’t get rich.

 

Years ago when my business partner was a low-wage single mom with four young children, she house hacked by subleasing the master bedroom in her rented home. She moved a bed into a hall closet for herself, and her sublessee covered most of her home’s rent. That enabled her to save money to eventually buy a home, which she again partially rented out to cover her housing payment.

 

She scored free housing because she learned how to leverage other people’s money. She didn’t spend the money she saved — she funneled it into more income-producing assets and investments, growing even more income. Later, she learned how to put other people’s time to work building her business.

 

And, of course, she’s the exception. She rose to wealth because she learned how to play the game more like the wealthy.

 

Achieving Economic Mobility

As you climb further up the socioeconomic ladder, the rules of the game change. In fact, the game itself changes.

 

In poverty, it’s hard not to constantly play defense. You don’t think about the big picture. You just want to make sure you can put food on the table this month.

 

With greater security, the middle classes start playing a broader game. They aim to buy a home. They might contribute to retirement accounts and start taking advantage of compounding returns.

 

But they don’t know how to use backdoor Roth contributions to maximize tax-advantaged accounts for example, and let their investments compound tax-free. Or how to use leverage on real estate to earn “infinite returns” with no money tied up in the investment. Or how to build diversified, recession-resilient portfolios with dozens of streams of passive income.

 

As a final thought, consider that in the four decades from 1979 to 2019, vast numbers of Americans climbed up the ladder from poverty. In 1979, 48% of Americans qualified as either poor or lower-middle class. By 2019, only 29% did, while the upper-middle class grew from just 13% of the population to 37%.

 

We don’t see these broader trends in our headlines because a few outlier billionaires get all the press. But economic mobility in the US has improved over the last few decades, even if it doesn’t make for a pithy political rallying cry.

 

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