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Define Class with Financial Planning Time Horizons

Posted By Jim On 10/20/2008 @ 12:40 pm In Personal Finance | 5 Comments

I was talking to reader Mike Cannon, who lives a frugal lifestyle and runs a small business called Ascent Solutions Group [3] in Maryland, about Aldi [4] (more on them when I get a chance to check one out) when the conversation shifted off to an idea one of his professors at Maryland once told him about class (as in middle class, upper middle class, etc). I think it’s a very different and helpful way to look at class and how it should be defined, rather than how it is defined today (i.e. poorly).

His professor said, and I’m paraphrasing, that it’s far better to define class by looking at their financial planning time horizons than anything else. The higher you go in the class spectrum, the farther out the time horizon is.

At the low end of the extreme, the extremely poor are thinking only as far as their next meal. As you move up the spectrum, those living from paycheck to paycheck have a time horizon of two weeks (or their paycheck frequency). In both classes, the concept of saving is difficult because income is less than or barely meeting their expenses.

The middle and upper middle class are looking a few years to forty years into the future. They’re contributing to their retirement plans, contributing to their kid’s 529 plans, saving for their first/next home, or saving for their first/next car. Saving is possible here because income has exceeded expenses to the point where you can save for the future.

As you get even farther up the class spectrum to the upper class (and whatever is past that), you begin seeing people planning for their grandchildren and their grandchildren’s education. Once you have met your needs, you begin thinking about your future and your children’s children.

I think that’s a far better way of defining class than any income ranges or net worth figures. It’s about mentality, rather than income and I believe it’s a far healthier approach towards class than talking income. What does it matter being upper class if your expenses force you to spend the vast majority of your income? One stretch of bad luck and you could lose it all (just think about any number of bankrupt celebrities) and then you’re no “better” off than someone in a “lower” class. In fact, I would say that the stress of living on the edge of disaster is far worse than the enjoyment you get out of living in a huge house or driving half a dozen fancy cars. I’d much rather be happy living the simple life within my means than feeling the pressure to produce to sustain an expensive lifestyle. I suppose that’s why they say money can’t buy happiness.

What do you think about this definition of class?

(Photo: indieink [5])


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