Hi all,
Assuming an age range between 35 and 55, can someone tell me at what financial point does one move from lower socioeconomic class to middle class and then onto wealthy?
How / can this be measured?
How long is a piece of string?
What story do you want the stats to tell?
99% of the media and nearly that proportion of research academics equate 'high income' with 'rich' which is sloppy. Income and wealth, though both concern money, are quite different things and the relationship between them is not straightforward.
But since nearly everyone equates 'rich' with 'high income', let's talk about income, which is often taken to mean taxable income as people report to the ATO each year.
Once you get away from ordinary PAYE workers to businesspeople and investors, taxable income means bugger-all.
Eg There have been times when my taxable income has been low (ie low enough to qualify as a low income earner and get the government's low income tax offset) purely due to depreciation on IPs. Another time my taxable income was high due to a one-off capital gain from a property sale. We're talking an income difference of over 3:1 yet my address, living standard, attitudes, educational level etc remained unchanged.
Investors might be 10-20% of the population, business owners maybe a similar proportion, so for 60-80% of the population the taxable income stats might be accurate enough for conclusions to be drawn. But they're not going to be very complete, with the inaccuracy increasing the more you get away from the typical PAYE earner with few investments.
Having dealt with income there's a few other definitions we need to clear up, eg wealth.
I personally think that wealth is related to financial independence, ie being able to support yourself at from your investments if you wish to. Given normal rates of return this requires an unencumbered asset base of at least 20 times annual expenditure, maybe more for safety.
But what if you live a modest life on $20k pa coming from $600k assets? You're financially independent but that level of income implies an expenditure more in common with unemployed people or age pensioners (the former at least considered at the bottom of the socio-economic heap) than a 'wealthy person'. Hence financially independence does not always translate into 'wealth' or 'high socio-economic'. But does it really matter if you're happy?
Conversely there's those on very high incomes, top jobs, MBAs, houses in the best suburbs who you'd naturally say were high socio-economic. But if they spend it all they're certainly not wealthy.
The bulk of most Australian's wealth is in their own homes. But this is very very middle class.
People at the bottom wealth end generally don't own their own homes. Therefore only a small proportion of what little assets they have is in their own home.
Moving to about the middle 60% has the majority of people's wealth in their own homes. This provides a roof over their head but doesn't help with the 70-80% of living costs that aren't to do with housing - thus they are NOT financially independent. And if they're wealthy it's a very unbalanced form of wealth, ie a $2m house in Brighton but little else to speak of.
Most people at the top wealth end also own their own home. But it accounts for a diminishing proportion of wealth, because they will have substantial equity in businesses and/or investments.
Hence it's a sort of bell curve, with middle wealth (but not financially independent) people having most of their wealth in their own home but with both the lower and top ends only having a minority of their wealth in their own home (former as they don't have one, latter as they have bigger assets elsewhere).
The trick with property invesment for young people starting is to move straight from the bottom end to the top end (in terms of structure, the actual dollars will follow) without going through the middle, since we know that a PPOR mortgage is so crippling that most people in the middle stay stuck there, with some putting any spare money into 'trading up' their PPOR, which makes them no more financially independent. A trap!
While you hear about 'poverty traps' due to the interaction between the tax system the social security system and wages, you don't hear so much about this middle class trap (except from some hippies), even though I think this is equally real. Those who have bought IPs before buying their own home have avoided this trap, with a 'rich-type' structure from the start (and when the PPOR comes it's only one of several properties so forms an acceptably low proportion of assets).
We've covered the economic, what about the socio bit?
Well again it's a generalisation, ie high socio-economic mean high income people with degrees who don't get their hands dirty living in nice houses. But what about the undegreed skimpy-watching forklift operator in a mining settlement on $100k pa - where do they fit into the socio-economic spectrum? Or the gallery-going doctors daughter arts PhD who does waitressing at $15ph while they write their book? Again it's not defined and these hyphenated concepts are shorthand at best.
So to answer the question, it cannot be measured unless there are tighter definitions and you know what you really want to know and why it's important.
Peter
