Debt affects each income bracket differently. Wealthier income brackets, those earning $150,000 a year or more, usually feel the impact of debt to a much lesser extent than lower-income families earning less than $20,600 a year, according to MSN Money. The reasons for this wide gulf in debt have just as much to do with income as the illusion of the middle class and what it means to be wealthy in America.
The 40 Percent Rule
Families earning $20,600 or less annually are the income bracket most likely to have debt which eclipses 40 percent of annual income. This 40 percent figure is the amount the Federal Reserve uses to determine which households are under significant financial stress. Debt of this size cripples financial mobility and puts many families just one unexpected serious illness or sudden unemployment away from bankruptcy or other adverse financial actions, including home foreclosure and repossession of assets. As of 2007, 26.9 percent of all households earning $20,600 or less in the United States carried debt equal to 40 percent of annual income, according to the Federal Reserve.
The Middle Class Definition
What defines someone as middle class is becoming increasingly difficult to determine because the financial benchmarks commonly associated with the middle class are disappearing, according to economist Charles Hugh Smith writing for Business Insider's website. Effects of the economic downturn of 2008, including the mortgage crisis and countrywide job layoffs, forced many middle-class households to tap into savings and retirement plans earlier than expected to keep making debt payments. As a result, many middle class households are left without significant retirement savings or even the health benefits associated with middle class employment. According to Smith, if the middle class is measured by who owns property outright, 100 percent of a business, a retirement plan or gold/cash investments, only 20 percent of U.S. citizens could be considered middle class.
Debt and Income
The lower a household's income, the more likely that financing from outside the household is needed to purchase property, including a home or an automobile. Debt stretches a lower-income household's income to a much greater extent than a wealthy household's income because there's less money to go around. Lower-income employment typically offers fewer benefits, including retirement planning or health benefits, requiring a lower-income family to devote more money out of pocket to purchase those benefits privately. The percentage of debt carried by the household also can influence the family's ability to secure these benefits.
Debt and Savings
Debt keeps a household from devoting a portion of income to savings. Because a lower-income household is forced to devote more gross income to debt, it has proportionally less to devote to savings as opposed to a wealthy household that is able to pay off debts quickly and contribute regularly to a retirement plan. This results in preventing a lower-income household from rising out of its income bracket unless the household can somehow bring in more money through a promotion or better job opportunity.
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