Read a textbook description of a middle-class family and Dave and Bridget Rudolph practically walk off the page. They own their own home, drive two cars, take one family vacation per year, save for retirement and hope to cover at least some of the college bills for their two children, Camila (age 5) and Adriana (3). Dave, 43, works for a health-tech company; Bridget, 44, runs a business out of their home. Their total income, about $90,000, puts them squarely in middle-class territory, defined by the Department of Commerce as about $50,000 to $120,000 a year for a family of four.
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Get to know the Rudolphs, however, and you’ll find that life in the middle class can sometimes feel like being between a rock and a hard place. The couple stretched to afford their house in the Bay Area, one of the most expensive housing markets in the country. (Recently, the median home price was $724,590.) They both lost their jobs during the recession and have yet to rebound financially. The couple has a retirement stash that’s decent but not stellar, a virtually nonexistent college kitty and a skimpy emergency fund.
If middle-class goals—buying a house, putting the kids through college, having a secure retirement—haven’t changed over the past few decades, achieving them has gotten harder. Middle-class incomes have stagnated while the costs of higher education, health care and housing have skyrocketed, and private pensions have slowly disappeared. The recession wreaked havoc on jobs and home equity, the latter one of the biggest sources of middle-class savings. More than three-fourths of middle-class adults believe it is more difficult now than it was a decade ago to maintain their standard of living, according to a 2012 study by the Pew Research Center.
But one middle-class characteristic remains unchanged: resilience. Despite the recent recession and the still-recovering job market, most middle-class families are optimistic about their long-term financial security and believe that hard work pays off, the Pew survey reports.
Here is how one middle-class couple is meeting the challenges of making ends meet and getting ahead.
Buying a Home
Over lunch at a small taqueria a few miles from their home, Dave and Bridget describe what they like about living in Daly City. “We’re ten minutes to downtown San Francisco, but we come home to a parking spot and a backyard. It’s really quiet here,” says Bridget. Their house is a few blocks from the local elementary school and in a great school district. They can get to the San Bruno Mountains in five minutes and the Pacific Ocean in 15. “We’re not paying dead center of San Francisco prices, but we have all the amenities, which is why we’re blessed with this little place,” says Bridget.
The Rudolphs once lived in a hip neighborhood in downtown San Francisco. They loved the location, but “the apartment was old, noisy and drafty, and we knew we wanted to have kids,” says Dave. They bought their house, a 900-square-foot, 1928-vintage bungalow in Daly City, in November 2007. At the time, the house seemed a bit undervalued at $500,000—“We didn’t realize it was the beginning of the landslide,” says Dave—but the price was a stretch for them. To come up with the 5% down payment, he borrowed against his 401(k).
That turned out to be a bad bet. In October 2008, within a week of Camila’s birth, Dave lost his job in a companywide layoff. He had to repay the 401(k) loan in full upon leaving his job or pay a 10% penalty for early withdrawal plus taxes on the balance of the loan. (If you’re at least 55 when you lose your job, distributions are penalty-free, but you’ll still owe taxes.) Lacking the cash to cover the loan, he had to pony up both the taxes and the penalty. A few months later, Bridget lost her job at a nonprofit. Meanwhile, housing values were tumbling.
Anyone who lived through the next few years knows the rest of the story. Prerecession, “mortgages were far too easy to obtain, and unsustainable mortgages were heavily marketed,” says Stephen Brobeck, of the Consumer Federation of America, an advocacy group that has studied middle-class finances. When the economy went south, families who had benefited from those easy terms, including the Rudolphs, not only struggled to make their payments but were also underwater on their homes. Says Dave, “It was scary. Bridget and I had the conversation about what we would do if we had to walk away.” The Rudolphs were paying 6.25% on an ARM, which had yet to adjust. Eventually, they were able to refinance to a lower rate, making the payments more doable.
Even if the recession hadn’t happened, the couple might have been better off choosing a cheaper neighborhood farther out, says Ross Schmidt, a certified financial planner and member of the Alliance of Comprehensive Planners, which specializes in working with middle-class families. Taking on too much mortgage for the sake of location is a common temptation, he says. “It’s like hearing the Sirens on the rocks. People think, I can’t live anywhere else.” But if you’re making a middle-class income in a high-priced area, “you have to make choices,” says Schmidt, who has advised the Rudolphs.
Since 2008, mortgage lenders have tightened their standards: Many now require a 20% down payment, although some lenders have relaxed that requirement. Your total monthly payment usually can’t exceed 28% of your monthly gross income, and monthly payments for all debts usually can’t exceed 36% of income. Dave has mixed feelings about the decision to buy when they did. “We were able to get in with 5% down. You can’t do that anymore. To come up with 20% in this area—if you’re middle class, you don’t have that. For better or for worse, we got into the housing market.” Still, he admits to occasionally sneaking a peak at Zillow.com, the real estate site, to check the estimate on his home value. (It recently came in at $483,000.) “I’ll feel more stable once I know we owe less than what the property is worth.”