The middle class is the backbone of many economies, but they often find themselves stuck in financial struggles. Despite earning decent salaries, they fail to break free from the middle-class trap. This blog unravels the reasons behind “Why are middle-class people not getting rich?” and explores practical solutions to overcome these hurdles.
The Root Cause: Money and Mismanagement
Fights within families, stress over rising expenses, and an overwhelming sense of financial stagnation—money is often the root cause. While money can’t solve every problem, understanding and managing it effectively can improve the quality of life significantly.
Problem 1: The Hidden Enemy Called Inflation
Inflation is like an invisible monster silently eating away at your money. Over the years, prices of essentials like food, education, and medical services have skyrocketed. Let’s break it down:
- In 2002, school fees were ₹2,200 per month. By 2022, they reached ₹9,000 and are expected to touch ₹19,700 by 2032.
- Similarly, petrol prices, higher education costs, and everyday expenses continue to climb.
Inflation also compounds, meaning it grows over time, much like how investments do. For example, if you think having ₹1 crore after 25 years will secure your future, think again—you’ll actually need ₹3.38 crores to match today’s spending power.
The Reality Check
Middle-class people often misjudge inflation. The government calculates inflation based on basic necessities like rice or basic clothing. However, for the middle class, luxuries like branded shoes, smartphones, and electronics account for a large portion of expenses. This makes the actual inflation they face much higher than government estimates.
Problem 2: Emotional Decision-Making
Middle-class families often make financial decisions based on emotions rather than logic. This tendency has led to:
- Panic selling during crises (like the Adani-Hindenburg crisis).
- Emotional investments in trends such as cryptocurrency, without fully understanding the risks.
Big financial players understand these emotional patterns and manipulate them. For instance, during the cryptocurrency boom, many middle-class investors were drawn in by the narrative of limited supply, only to lose their savings when the market crashed.
Problem 3: Misguided Financial Choices
Many middle-class individuals lack financial literacy, leading to poor decisions. Here’s a classic example:
- Term Insurance is a straightforward and effective life insurance plan. Yet, only 3 out of 10 people in urban India opt for it.
- Instead, people are sold complex products like ULIPs or endowment plans, which combine insurance and investment, often offering poor returns and hidden charges.
Solution
When evaluating financial products, ask yourself: How does the bank or seller earn money from this? If the revenue model is unclear, it’s probably not in your best interest. Stick to simple, transparent options.
Problem 4: The Wrong Attitude Toward Risk
The Indian middle class often swings between two extremes:
- No Risk: Many stick to fixed deposits (FDs) and low-return savings schemes due to fear of loss.
- All-In Risk: Others gamble on risky options like futures, options, or cryptocurrency without proper knowledge.
Neither approach works. The middle path—investing in long-term, stable assets like equity or mutual funds—is often ignored.
Problem 5: Neglecting Retirement Planning
Retirement planning is another area where the middle class falls short:
- Most middle-class individuals begin retirement planning around the age of 38–40. By then, they miss out on the power of compounding.
For instance:
- Investing ₹5,000/month from age 25 could grow to ₹1.77 crores by retirement.
- Delaying by just 10 years reduces it to ₹49.9 lakhs—a significant difference.
This delay forces many middle-class families to depend on their children during old age, perpetuating the financial struggles across generations.
Problem 6: The Loan Trap
In recent years, middle-class families have increasingly turned to loans for consumer goods like TVs, fridges, and smartphones. Here’s the alarming data:
- In 2022, consumer durable loans grew by 89%.
- Comparatively, housing loans grew by just 12%, and car loans by 14%.
Borrowing for liabilities rather than assets keeps the middle class stuck. Rising credit card debts and personal loans compound the problem, leaving little room for savings or investments.
Breaking Free from the Middle-Class Trap
So, why are middle-class people not getting rich? It’s a combination of inflation, emotional decision-making, poor financial planning, and misguided priorities. The solution lies in changing habits and adopting these steps:
1. Understand Inflation
Recognize that inflation impacts your purchasing power and plan accordingly. Invest in assets that can outpace inflation, like equity or mutual funds.
2. Educate Yourself Financially
Learn the basics of personal finance and investments. This will help you avoid falling for complex schemes or emotional traps.
3. Adopt Balanced Risk
Avoid extremes. Instead, take calculated risks by diversifying your investments across low, medium, and high-risk categories.
4. Start Early
Whether it’s retirement planning or building wealth, the earlier you start, the more you benefit from compounding.
5. Avoid Loans for Liabilities
Focus on borrowing for assets that grow in value, like real estate, rather than liabilities like consumer goods.
Conclusion
The middle-class struggle to build wealth is rooted in habits and misconceptions. By addressing these issues, anyone can break free from the financial trap and achieve long-term prosperity. The key is to act logically, plan strategically, and start now.
Remember, the journey to wealth begins with understanding why middle-class people are not getting rich, and then taking the right steps to change it.
