Middle class income earners can reach financial independence by consistently saving money and through buying income generating assets.
I will start by telling you that I have not reached full-financial independence yet.
But it’s in the process.
I have been able to achieve the exact lifestyle I desired by 34 (remote part-time work + part-time Blogger), and I strongly believe that any middle class income earner can become financially independent with the right mindset.
So, I created these principles to create long term wealth, since I’m a middle class income earner myself.
For the record, this is not a get rich quick scheme, and these principles will not necessarily help you retire early.
These are principles to help any middle class income employee become financially independent over the long term.
Before sharing on how to reach financial independence on a middle class income, let’s define what it means to be financially independent and overview the middle class income level worker.
First, let’s define what it means to be Rich
The dictionary defines ‘rich’ as follows:
“having abundant possessions and especially material wealth”
Frankly, this sounds likes Merriam-Webster’s dictionary teamed up with Instagram to define wealth. Flashy wealth doesn’t last. You still have to trade your time for more money if you spend it all. Being rich goes much deeper than that.
Over the course of my career, which has included a 7 years between two different banks, I have observed enough to realize that the majority of society doesn’t understand money.
For instance, most people measure wealth by how much a person can afford. They think if someone has a big house or an expensive car, they are rich. But in reality, that is extremely false. These folks aren’t rich at all! Unless they have an unusually high income or received an inheritance, those ‘rich-looking’ people just have a lot of debt. It’s basic math.
Conversely, a truly wealthy individual can afford to not work. They own enough money and assets to cover their expenses for the rest of their life.
Therefore, the mark of a rich person is their ability to do whatever the hell they want at any time they want.
But more often than not, wealthy people may not even exhibit the appearance of wealth. This is the conclusion that ‘The Millionaire Next Door
After studying and interviewing the affluent for more the 20 years, the authors, Thomas J. Stanley, Ph.D, and William D. Danko, Ph.D, determined that most millionaires are extremely frugal, average-looking people. Millionaires aren’t out there flashing their wealth on Instagram. In fact, most of them wouldn’t even buy themselves an expensive watch, even though they are millionaires.
So, really, ’Rich’ is just another term for financially independent.
Which leads to the next question.
What is Financial Independence (FI)?
My definition of financial independence is having abundant assets that permanently cover your expenses and lifestyle.
According to Wikipedia, “Financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income.”
I like their definition a lot because it includes passive income. Passive income from owning assets is what middle class earners need to strive towards to reach financial independence. But we will get to that in more detail later.
For an average income earner, financial independence is their annual salary multiplied by how many years they will live. If I earn and live on $50k per year, my life costs $50k per year. If I live until 100, at my current age, I need to have $3,300,000 saved to cover the remaining 66 years of expenses. That’s without factoring inflation.
And unfortunately, on a middle class income, it is unlikely that an individual will be able to save that much.
Who are the Middle Class Income Workers?
There is a lot of confusion around the term ‘middle class income’.
Melanee Thomas, a political science professor at the University of Calgary, had the following to say about the confusion:
“Anyone making from $30,000 to almost $200,000 a year might consider themselves in the middle.”
So what exactly is a middle class income?
Well, it’s hard to say because it depends on a lot of factors, such as location.
Since the majority of this blog’s traffic is from the U.S. and Canada, I will try to focus on the middle class income levels for North America.
According to a 2019 article in the Global News, middle class income in Canada is between just over $25,000 to $66,000. In 2017, the median annual income for a single person was $33,000, while it was $92,700 for families.
As for the U.S., according to Investopedia, the median income was between $40,500 to $122,000.
Financial Independence has nothing to do with how much money you earn
Most middle class income workers I’ve talked to seem to view wealth as something that is reserved for doctors, lawyers, athletes, artists, and actors.
But that’s simply not the case.
In truth, the amount of money you earn doesn’t matter. Any middle class income worker can become financially independent. Yes, more money makes it easier to become rich, but it often leads to lifestyle inflation.
Going back to the definition of financial independence: having abundant assets that permanently cover your expenses.
This means that becoming financially independent depends on two factors: how much assets you own, and the cost of your expenses.
If the cost of your lifestyle is low, but you still get to do whatever you want because of assets you own, you are financially independent.
Life Style Examples of Assets Covering Expenses
If my life costs $1,500 a month, but my blog, which is an asset, earns $1,600 per month, I am financially independent. I can blog from anywhere that has an internet connection, I can create my own schedule, and I’d blog for free because I love it so much. So, technically, I would have an asset that covers my expenses in that example. I may not be able to afford flashy cars, but that’s not what I want anyways.
Another example is dividend income covering my expenses. If my expenses cost $1,500 per month and I earn $1,600 per month from dividend investing, I would consider myself independently rich. I would have the time to do whatever I wanted, which would be blogging and investing in my case.
Alternatively, let’s say an individual has expenses that cost $5,000 per month. Even if they have 3 times the assets, they would only earn $4,800 per month. So, that individual still needs to find another income source to cover their expenses. Therefore, this person is not wealthy because they have less financial independence and still need to trade time for money.
A Middle Class Income Earner MUST own ASSETS to become Financially Independent
So, you want to be rich on a middle class income, huh?
Since you’re not a top income earner, the only paths to financial independence is investing, starting a business, or acquiring an income producing asset.
Saving money alone is not going to cut it.
Simply put, it’s unlikely that you’ll be able to save enough money in a basic savings account to pay for your full retirement.
As such, middle class income earners must own income producing assets to be financially independent. It’s the only way to compete with the high income earners.
Personally, investing in dividend stocks and building an online business are my preferred assets.
Here are a few income producing assets to consider:
- Dividend Stocks
- Online business
- GICs
- Bonds
- High interest savings accounts
- B&M Business
- ETFs
- Rental property
- Index funds
How to Become Financially Independent on a Middle Class Income
Here are simple steps for any middle class income earner to become financially independent:
Be Frugal with what you don’t Value
Ok, so we established that someone earning a middle class income must own assets in order to become wealthy.
In order to acquire assets, you must have money.
In turn, it is wise to be frugal so that you save money to buy assets.
Related post: View Yourself as a Business to Save money
Then when the time is right, money is available to take advantage of low priced assets. Perhaps, a dividend stock dropped because the market dropped. But when you complete a stock analysis, it is obvious that the stock is priced at a discount. In that case, you can acquire shares to build a dividend income stream.
In my opinion, the key is to frugality is focusing on what doesn’t bring you value.
For example, I am passionate about phones and technology, so I don’t mind paying more for the latest Apple iPhone.
On the other hand, I don’t really care about brand name clothes or cars. So, I shop at Uniqloo because it’s affordable, and I’ve avoided buying a car altogether.
Consistently Pay Yourself First
If you gain anything from this post, I hope it’s the importance of paying yourself first. Check out this post on paying yourself first to learn more about the concept.
And if you are struggling with creating a budget to save money, check out this post on how to budget.
But back to the point—as stated above, you must have money to buy assets.
Since most middle class income earners don’t have a considerable amount of money to buy assets just sitting around, they must save money from each pay check.
Based on my experience, the best way to save money is to pay yourself first.
Middle class income earners must decide on a pre-determined savings amount and save it every pay check consistently forever.
Spend the rest on whatever you want. But just make sure you pay yourself first so you have money to buy assets.
Invest Savings in Assets that Pay More Money
Once you have money saved by paying yourself first, it’s time to buy assets.
Of course, I would recommend you choose an asset that you are interested in.
If you find real estate interesting, buy a rental property to generate an income stream.
If you prefer dividend investing like me, open a brokerage account and start buying high dividend stocks.
Or, just save money for a while in a high interest account to start earning interest. Start doing your own research on other potential assets.
Start a business
The only other option besides owning an income generating asset like dividend stocks or rental properties is starting your own business.
Technically, this method to becoming financially independent could place you in the upper income level if your business is successful.
But owning a business is the best way to obtain considerable wealth.
In my case, along with dividend investing, I am building an online business to cover my expenses.
As Zach from Four Pillar Freedom put in on Twitter, here is the path to internet wealth:
Location
One additional option to make your income go further is location. You may be able to reach financial independence faster on a middle class income if you are willing to relocate.
Since the middle class income is an average, money can go a lot further in certain places. The averages I presented above are quite skewed. To put it bluntly, it would be pretty difficult to make it on 25k annually in Toronto, Canada.
But in some small town without much of an economy, it might be a decent amount of money.
With remote work on the rise, I imagine a lot more people will move away from the more expensive city lifestyle.
Ideally, less demand for office space and rental apartments will lead to lower city prices too. Because I would benefit from lower prices in the city.
Concluding Thoughts
Although these principles will not necessarily lead to being mega rich, they will lead to being independently wealthy.
They may not lead to fancy cars, homes or brand name luxury items. Nor will they lead to restaurant takeout and delivery every night.
However, staying frugal and building income producing assets over time will provide you with time, flexibility, and lifestyle options.
In summary, it’s possible for any middle class income worker to become financially independent. Being financially independent is the ability to cover one’s expenses and afford the exact lifestyle you want through owning assets. If income from assets covers your expenses, you are financially independent. Middle class income earners can reach financial independence by consistently saving money and through buying income generating assets.
I am not a licensed investment or tax adviser. All opinions are my own. This post may contain advertisements by Monumetric and Google Adsense. This post may also contains internal links, affiliate links to Amazon, Bluehost, and Questrade, links to trusted external sites, and links to RTC social media accounts.
Just so you know:
Connect with RTC
Twitter: @Reversethecrush
Pinterest: @reversethecrushblog
Instagram: @reversethecrush_
Facebook: @reversethecrushblog
Email: graham@reversethecrush.com
Why Pursue Barista FIRE?
