According to Forbes, the average annual salary in the United States is $59,428, more than four times the federal poverty line of $14,580. So how can someone who earns the salary that the first number represents wind up in the financial straits of someone who has to get by on the second?
There are more ways than one, actually.
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People earning an average salary who live frugally, save diligently and invest wisely can leverage their income as a springboard to generational wealth. On the other hand, with reckless spending and poor planning, the same salary can lead to a life of debt, missed opportunities and endless financial stress. But other times, even the most responsible average earners can fall into financial turmoil through no fault of their own.
In short, there are many ways that average earners can become poor. Here’s a look at the most common paths from middle-class security to subsistence living.
Living Beyond Your Means
Jake Claver is a finance expert with a Qualified Family Office Professional (QFOP) certification and the founder of the wealth management firm Digital Family Office. While only the wealthiest one-percenters rely on family offices to manage their fortunes, Claver’s experience is that both average earners and the rich are susceptible to many of the same money-management pitfalls.
The most common by far is living beyond your means. “One of the quickest ways to deplete your wealth is by consistently spending more than you earn,” Claver said.
This is especially true if you habitually spend more as you earn more, a budget-busting phenomenon known as lifestyle inflation.
“It’s tempting to keep up with the Joneses, but purchasing the latest gadgets, cars, or taking lavish vacations without a budget can lead to accumulating debt,” said Claver. “Over time, the interest on this debt can compound, making it even harder to break free.”
Financial consultant Paul Walker, author of “A Money Book Anyone Can Read,” sums up the self-destructive behavior of spending more than you earn with what he calls the rule of 7/7/7.
“A BMW 7 Series in the garage of a home with a $700,000 mortgage and only $7,000 in the bank,” he said. “High-income earners who believe they deserve the good life and borrow to achieve it will be poor.”
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Being Financially Illiterate
Many thoughtful and knowledgeable low-income earners have saved and invested their way into middle-class comfort and beyond. But there’s also no shortage of impulsive and ill-informed millionaires who mismanaged their way into bankruptcy.
In most cases, the difference between those two outcomes is not income, but knowledge.
“Many people don’t take the time to educate themselves about basic financial principles,” said Claver. “Without understanding concepts like compound interest, inflation or the importance of diversifying investments, individuals can make poor financial decisions. This lack of knowledge can lead to missed opportunities for growth and potential financial pitfalls.”
Failing To Plan
Whether you’re a millionaire or a person of modest means, being financially literate won’t save you if you take an “I’ll get to it tomorrow” attitude in applying all the things you’ve learned about money management.
“Procrastinating on setting up an emergency fund, retirement account, or even basic insurance can be detrimental,” said Claver. “Life is unpredictable. Without a safety net, unexpected events like medical emergencies or job losses can quickly drain savings and push people into debt.”
Emergency Medical Expenses
Spending too much, remaining financially illiterate and failing to plan are all things that people of any income have the power to change. But sometimes, even the most prudent average earners fall into poverty thanks to the No. 1 cause of bankruptcy in America.
“Unexpected medical emergencies can throw a wrench into even the best plans,” said Melanie Allen, founder of the Partners in Fire personal finance blog. “The soaring cost of medical care coupled with inefficient insurance means many Americans are one illness away from medical poverty.”
According to RetireGuide, medical expenses account for 66.5% of all bankruptcies — the leading cause by far — and people desperate to pay their health care bills launch 250,000 medical fundraisers on GOFundMe every year. While the rich might be able to absorb five- or even six-figure medical expenses without falling into poverty, average earners can not.
Being a Caregiver
Even when insured, paying the out-of-pocket expenses for an injury, accident or serious diagnosis can plunge average earners into dire financial straits. But so, too, can the long, slow monetary drain of being a caregiver for an older parent or anyone else.
“Caring for an aging relative or a sick spouse or friend is often a way people who are earning a good living can suddenly become poor,” said Renee Fry, CEO of the estate planning site Gentreo.
According to Regions Bank, the average caregiver spends $7,000 out of pocket per year, but other costs like insurance premiums and lost income from missed workdays add to the tally. When professional in-home care is needed, the annual expenses can match or exceed the salary that the average earner brings home.
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This article originally appeared on GOBankingRates.com: 5 Ways People Become Poor While Earning an Average Salary
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