[ryanwitt112]

interesting take. I'd like to hear what PG and others think. Coming from a middle class background, I can relate a bit and see-observationally-the other components to what Ricky's calling "mindset inequality". It's almost like "new money" vs folks that have bigger dollars to spend growing up. I know a lot of friends that have deeply entrenched psychological elements they need to overcome before reaching that "next level" that were engrained because of their upbringing. And, to Ricky's post, it's sometimes more of a challenge than the monetary differentials.

[jtolmar]

My parents started out very poor and climbed into the middle class by the time I got to high school. The extended family is still poor, so I'm still exposed to how they think about money. I think the mindsets can break down into three levels, but not cleanly.

Poor: You may have to make decisions about which bills to pay or which needs to meet, and being able to pay all your bills and eat is considered a moral virtue. Money is naturally transient, because your obligations have similar weight to your income, and having excess money in your bank account is weird, unnatural to the point that your instinct is to spend it before it goes away. If you use a budget, line-items are on the size of a grocery trip. You're more likely to budget small purchases than large purchases. If you are trying to build savings, putting money into a savings account is another bill.

Middle class: Your bank account is the intermediary between your bills and income, with a mean and a natural trajectory. If your account's trajectory is positive, your natural instinct is to spend it, either on better lifestyle or a large purchase, very occasionally savings. If you have a budget, components are like "monthly food" and you deal with going over-budget by cutting a few more corners next month. Savings are still another bill. Putting the right amount into your savings account to retire in 40 years is a moral obligation.

Capital class: Interest on your earnings is your primary source of income. Your rate of spending must be lower than the rate you earn interest; to do otherwise is dipping into capital, which is morally wrong. Any interest you don't plan to spend is folded back into your capital, giving you a small, permanent raise. I don't understand this class too well because I'm still working on entering it.

[bbcbasic]

I am planning a transition from middle class to capital class, which will take 10-20 years and require investing in real estate.

Real estate is a great investment (at least in Australia) because it allows you to get access to larger amounts of credit to purchase assets which will generally go up in value over time because of the policies of central banks to target inflation. In addition buying in the right location will insure that on top of location future scarcity will add more value to the investments.

It is also super transparent compared to stocks, where you don't really know what is going on inside a company, land is land and all the data you need to assess the investment is available. And you can control the asset (think renovations, rebuilds, subdivisions etc.) so there is more you can do compared to the stock (buy, and perhaps short the similar stocks)

The downside to real estate is you have to be a little bit patient. Did I mention 20 years? :-)

[jtolmar]

I've heard that being too keen on real estate is a common pitfall for middle class investors. Between that and personal bias, I'm avoiding it (at least directly).

My portfolio is primarily stocks, which I find surprisingly easy to work with. You just pick well-run companies in fields you understand, ignore financial news, and wait. I should be capable of living off interest in four years.

[dba7dba]

I've heard that being too keen on real estate is a common pitfall for middle class investors.

I'm in US but I agree. I'm not old enough yet (I hope) but most of friends' parents lost all they had later in their life and from what I heard they were heavily into real estate. Some owned few houses and others worked as realtor.

For those that owned houses, they were extended too thinly and couldn't sell fast enough to cover mounting interest and cost when economy tanked, resulting in bankruptcy.

[bbcbasic]

I am not sure about the reasoning for real estate being a pitfall. Can you elaborate?

[dennisgorelik]

This is good description of how different classes of people think. "If your account's trajectory is positive, your natural instinct is to spend it" - that pretty much explains why most of middle class people do not move up into capital class.

[LinkPlug]

Great insights