Making It in the Middle Class

published 29 May 2014

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.

See Our Slide Show: Tax Breaks for the Middle Class

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.

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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.”

Shortly after losing his job, Dave was hired back as a contractor with his former company, at reduced pay and with no health benefits. He opted for coverage through COBRA, the law that allows former employees to extend their employer health insurance for 18 months or longer if they pay the entire premium. Although the company eventually put him back on staff, “we paid $1,000-plus a month out of pocket for a year,” says Dave. “It was brutal,” adds Bridget.

To cover their expenses, the couple resorted to credit cards (on which they already had balances), racking up almost $35,000 in debt, not counting their mortgage. That towering amount represents a small but troubling trend, says Brobeck. “The percentage of Americans who are overburdened by debt has declined, but a minority of those with indebtedness are more seriously overburdened than they were 15 years ago.”

At first, the Rudolphs relied on some good, old-fashioned denial. “We were not as diligent about tracking the budget as we should have been. It’s easy to get into the mind-set of, If I don’t look at it, it will go away,” says Dave. Finally, on Schmidt’s advice, they tackled their debt, paying off one credit card by using profits reaped from Dave’s employee stock-purchase program (which they continue to use to pay down debt), and putting the other cards into cold storage.

They also slashed their expenses, substituting home-brewed coffee for Starbucks, brown-bag lunches for store-bought sandwiches, basic cable for premium subscriptions, and Costco for Trader Joe’s. For a while, Dave commuted by bus, light rail and train to his job, turning a 35-mile drive into a two-hour commute. Finally, he bought an 18-year-old beater from a friend. “It gave us flexibility,” he says. So far, the couple has whittled the debt to $25,000. They are on track to be debt-free within three years.

For all their efforts, “we’re operating by the skin of our teeth,” says Bridget. She and Dave take turns enumerating the expenses that have torpedoed their budget over the past few years. A new timing belt for Bridget’s nine-year-old Subaru: $1,200. A new water heater for their home: $600. A plumbing overhaul of the bathroom: $5,000. “You think you’re going to have this significant amount of cash and it’s, like, nope,” says Dave.

How to win life’s little game of Whac-A-Mole? Make it a priority to fuel an emergency fund, says Cheryl Sherrard, a certified financial planner in Charlotte, N.C. “If you have one or two bad months, you’ll need the savings.” Protecting against job loss is especially crucial. A family with one breadwinner should have enough savings to cover at least six months’ worth of bare-bones expenses, she says; a two-income family might get away with enough to cover three months’ worth.

The Rudolphs have two expenses they wouldn’t want to live without: Camila and Adriana. In addition to keeping their kids fed and clothed (Adriana, in a flounced blue-jean skirt, purple leggings and purple sandals, rocks the preschool look), they pay for weekly dance classes and summer soccer camp for both kids. The cost for each activity is modest, but it all adds up: $100 apiece for the eight-week soccer session, about $85 a month for dance classes, $200 for tickets and a new costume for Camila’s ballet recital. And Dave is already dreading the “inevitable” trip to Disneyland, which he figures will run at least $1,000, even if they drive and stay with friends.

Rare is the parent who would squelch a budding Pelé or prima ballerina or forgo the trip to see Mickey. But even the most devoted parents have to factor such extracurriculars into the budget, says Sherrard. Limiting the kids to one activity at a time is one cost-saving (and stress-reducing) strategy. As for Disneyland, “you do a great service to your kids if you model to them how you save for the future. So have a vacation fund that the whole family knows about. Let them be a part of it,” she says.

A few years ago, Bridget set up a business managing the billing for several psychiatrists. She puts in about 15 hours a week, while Camila is in kindergarten and Adriana is in preschool. The job has enabled her to seed a SEP IRA, the tax-deferred retirement account for self-employed people, as well as a Roth IRA. Dave rolled the remainder of his 401(k) into an IRA when he left his previous job in 2008. He contributes 5% of his salary to his current 401(k); his company matches up to $1,500. Eventually, he hopes to max out his annual 401(k) contribution. In 2014, that would mean contributing $17,500 (people 50 and older can contribute up to $23,000).

Most retirement planners suggest setting aside at least 10% of your income, plus the company match, in retirement accounts, and 15% or more if you have gotten a late start or been sidetracked. That’s not in the cards at the moment, says Bridget. “We’re not really in a place where we can sock it away.” Even so, 5% is better than nothing, says Sheryl Garrett, of the Garrett Planning Network, an association of fee-only financial planners. Regular contributions let the family maintain the routine of saving and also capture the company match. “That’s free money—it’s part of your compensation,” says Garrett.

The Rudolphs are both from middle-class households where money was tight. “Dave and I had to make it on our own,” says Bridget. Each started out at community college—Dave in suburban Maryland, where he grew up, and Bridget in Santa Barbara, Cal., where she moved after leaving El Portal, her hometown. “Going to community college was smart. I took care of all my prerequisites there, rather than paying full price at a four-year college,” says Bridget. She later graduated from UC-Santa Barbara (Dave left San Francisco State University a few credits short of a degree).

The Rudolphs aren’t averse to having their daughters attend community college—which now costs $3,264 a year, on average, less than half the cost of tuition and fees at a four-year in-state school. Later, “we’d love to have them go to a school in the University of California or California State system,” says Dave. He figures that private schools are out of reach unless the girls get scholarships. When the time comes, they should check out all the financial aid options, says Pat Stark, a certified financial planner in Newport Beach, Cal. Need-based grants and merit scholarships, along with federal student loans, make it possible for many families of moderate means to send their kids to private colleges.

Camila snuggles next to her mom on the couch and does an impressive job of reading aloud from The Pigeon Wants a Puppy! by her favorite author, Mo Willems. Bridget has brought home a big stack of books from the local library, one of their favorite destinations, and Camila has been eager to dive in. After finishing the book, she loads her small arms with the rest of the pile and heads off to a quiet spot to explore them.

Given their budget, the family feels lucky to have access to plenty of free or low-cost resources—the library up the street, the park behind their home, the San Bruno Mountains spreading across the horizon, the Pacific Ocean a short drive away. With mild weather year-round, they spend a lot of their time outdoors, and they take a camping trip to Yosemite National Park every year. Every now and then, they visit Lake Tahoe, about three hours away by car, where a friend gives them use of his house. This past spring, they arrived just in time for 2 feet of snow, raw material for a platoon of snowmen.

Are they where they want to be financially? Yes and no. Bridget plans to work more hours once both kids are in school full-time; for now, her part-time schedule “is the best-case scenario for having two busy little girls,” she says. Dave is grateful to have a family-friendly work schedule, even as he believes his career has room for growth. Both are eager to pay off their debt and move on to other goals, including saving for college and adding a bedroom and bath to their already cramped house.

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The late Jane Bennett Clark, who passed away in March 2017, covered all facets of retirement and wrote a bimonthly column that took a fresh, sometimes provocative look at ways to approach life after a career. She also oversaw the annual Kiplinger rankings for best values in public and private colleges and universities and spearheaded the annual "Best Cities" feature. Clark graduated from Northwestern University.