Money And Investing  -

13 9 | § ¶There is no Upper Middle Class
   -- There is no Lower Middle Class Either

I almost laugh every time someone says that they or someone they know are “Upper Middle Class”. I wonder what they really mean with that.

I consider there are only three classes:

• Poor or Lower Class – Those who can’t cover their heads with a roof, clothe themselves, or get three square meals – even if they tried hard. They also die or suffer of easily preventable diseases. These people are in “survival” mode.
• Middle Class – Most of us fall in this category. Working or not, we are trying to find a way of covering our needs and have some amount of luxury in our lives. Although we feel a natural pressure when we can’t have everything we want, we know we can get a roof, food, and clothing with the income (earned or unearned) we receive. We worry about getting a medical insurance that covers most diseases and most treatments. We are in a situation where we want to acquire more money to live a better life now. We are in a constant struggle to make our equation ends meet: make our income meet our wants.
• Rich or Upper Class – These people can cover their expenses indefinitively, without working a single day of their lives. They can cover their basic needs and have some amount of luxury – maybe even a lot of luxury. If they decide to work it is simply because they are bored, or because they want to amass even more. These people worry about extending their money over generations, since they know that they are covered now.

Now lets take a closer look at the “Middle Class” in the USA. Inside this class we can probably put most of the population; I am willing to bet it is 90% or more. I have noticed that most people in this society, regardless of primary source of income (salary, pension, social security, or government subsidies) has access to luxury items. Some people have access to a TV, others to Nike footwear clothes, and an increasing number of people nowadays have access to what could have been considered frivolous 10 years ago, like any of the available flavors of an iPod. Look around you: almost everyone in your office, from the janitor to the Vice President has some luxury items he/she is happy with. Now get to the street, get into the subway and you will see the same. Go to an expensive restaurant or go to a public housing site and you will see almost everyone has luxury items – and they do not differ too much from one place to the other. You will find Nike shoes, iPods, and modern electronics in a very broad variety of residences in the USA.

Can we risk separating the “Middle Class” further into “Upper-Middle”, “Middle-Middle”, and “Lower-Middle”? How would we do so?

I believe most people classify the ”Middle Class” divisions on what could be perceived. I think quantity of luxury items makes people believe someone is above or below the average within the class. It could also be the market value of the primary residence of the family in question, regardless of ownership status or value of other assets that the person may have. Some people also throw into the equation the market value of the car driven: again, regardless of ownership status. Social circle participation also tends to be a way to classify people.

Upon some reflection I tend to start thinking that “Upper Middle Class” refer to the Joneses! We all want to be better than the rest, but climbing all the way to the “Upper Class” is too much of an effort – so it is easier to try to climb and sustain a concept of “Upper Middle Class”. “Reach the Joneses Level! Be the Joneses! Live Richly!” Aren’t those the messages that we get from the advertising media? There are plenty of massively produced designer labels to create the “Upper Middle Class” idea.

I prefer to keep the labels to real needs. Either you can survive or you are in peril (Middle vs. Poor). Either you worry about how to live today or you are at a stage in which you worry about how your descendants will enjoy life in the future (Middle vs Rich).

7 3 | § ¶Good News For People Who Take Charge
   -- Of Their Own Future

President signed the Pension Protection Act of 2006 that makes permanent the extended contribution limits to saving plans including Individual Retirement Accounts, 401k, and 529 plans. The law that our current Congress agreed on also establishes automatic inflation adjustments to the contribution limits that may help increase the effectiveness of these plans.

The law also open makes it harder for companies to under-fund their pension plans. Unscrupulous companies have been promising some workers that they will receive some amount of money upon retirement, while at the same time knowing they do not have the funds to keep the promise. The law might force some companies to either fund the pension plans adequately or stop making the promise that they will give a pension without enough money to back it up.

Current pensioners will benefit since the companies will have to fund their current pension plans. Many pensions have been lost when companies go bankrupt and it is then discovered there wasn’t enough money to cover the pension. Even when the pensions are insured, they are capped at yearly benefits of less than 40,000 USD – a lot less than what some pensioners have been promised.

Employees with traditional pension plans may see their pensions frozen – no more benefits accrued, or converted into cash-equivalent plans. These employees will also see benefits in the future – adequately funded now. However, these employees will need to take quick action to quickly fund their 401k and IRA plans to replace the over promised pension that was in risk of being reduced when handed over to the government upon a company bankruptcy.

The law signing is a reminder to all of us that the future is in our hands. The current Congress hasn’t moved anywhere with saving Social Security, and most companies will offer the improved 401k plans that where signed into law today rather than offering under-funded traditional pension plans. It is up to all of us, employees of this great nation to fund our 401k and retirement accounts as much as we can.

Some ideas on how to invest on your 401k.

6 5 | § ¶10 / 10 / 10 + 3 Plan
   -- Pay Yourself First

For people with steady lives it is easy to incorporate the 10 / 10 / 10 plan previously described. For people that are just starting, it may take a while until they get on the full 10/10/10 plan. I suggest the following schedule / priorities.

Now:
10% of all money received goes into the Fun Account(s).

10% of all money received goes into the Emergency Account(s). Until Emergency Account(s) contain 3 to 6 months of post-tax earnings.

In 60 to 90 Days:
10% of all money received goes into the Retirement Account(s).

When Emergency Account(s) Fills Up:
10% of all money received goes into Growth Account(s).

If you still find yourself with more money…
Increase each of the 10 / 10 / 10 by one percent. 11 / 11 / 11. And keep increasing by 1% if you still find yourself lucky.

Account Descriptions:
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