Are You Upper, Middle, or Lower Class (and Does It Matter)?

As humans, we like to make sense of things by categorizing them. We even categorize ourselves into "classes," which makes little to no sense in the real world.

If you've ever wondered which income class you belong to, we're here to help. While we're here, though, we'll discuss why how much you earn doesn't matter nearly as much as how you use it.

Ranked by income

According to the U.S. Census Bureau's "Income in the United States: 2022," this is how much you need to earn to fall into the upper, middle, or lower class.

• Upper class: $153,001 or more annually
• Upper middle class: Between $94,000 and $153,000 annually
• Middle class: Between $58,021 and $94,000 annually
• Lower middle class: Between $30,001 and $58,020 annually
• Lower class: $30,000 or less annually

If you'd like to take a deeper dive into where you land, Pew Research Center offers this handy income calculator.

Why much of it is baloney

We've all heard about self-proclaimed billionaires who've claimed bankruptcy multiple times, professional athletes without a penny to their names a few years after retirement, and movie stars who can't bear to share their wealth by tipping restaurant staff.

Sure, it's interesting to learn how your income compares to others, but income alone does not tell the whole story. Once you have enough money to pay for a roof over your head and nutritious food, the rest is gravy. Admittedly, part of that "gravy" is having enough to invest and watch grow, even if you can only invest a little at a time.

A fascinating Wells Fargo report from earlier this year found that 1 in 3 Americans report spending more than they can afford each month. The fact is, how much those folks earn doesn't matter. What matters is that they feel unable to spend less than they earn. The financial stress is the same whether a person is short by $100 or $10,000 each month. It's the shortfall that hurts.

Life doesn't care how much money you earn

Another survey -- this one from CNBC -- found that 65% of respondents live paycheck to paycheck. Here are some of the reasons they cited:

• Inflation
• Lack of savings
• Interest rates
• Credit card debt
• Medical or healthcare expenses
• Layoffs or other loss of income
• Educational debt

Some of these factors are outside of your control, whether your income falls into the upper, middle, or lower range. Things like interest rates and loss of income can impact anyone, and serious illnesses don't care how much a person earns. Nearly anyone can find themselves in over their head, buried in medical debt.

Here's where the playing field evens out a bit

As adults, we must make certain decisions (and none of them are easy). One of them is whether we will try to live below our means. The word "try" is emphasized because the world is an expensive place to navigate, and the best any of us can do is create a budget that allows us to pay our bills and have money left over each month (on paper, at least).

For example, if you bring home $5,000 a month, ideally, your bills are low enough to allow you wiggle room and enough money to save and invest, even if it's a modest amount. It's that saving and investing that will determine your net worth, a figure that's far more important than how much you earn.

Here's what we mean:

• This is Earl. Earl owns a small painting company and brings home $150,000 after taxes each year. He's a great painter, but not a good budgeter. When Earl sees something he wants, he buys it. When he doesn't have cash, he finances it or puts it on a high-interest credit card. So far, Earl's been lucky and is able to pay his bills each month -- barely. What he doesn't do is put money into an emergency savings account or invest for his future.
• Kevin runs a small nonprofit and brings home $50,000 after taxes. Since graduating from college, Kevin has practiced "reverse budgeting." Reverse budgeting means that the first money off the top of his income each month goes toward saving and investing. Kevin has decided to save and invest 10%, meaning the first $416 of his $4,166 monthly income is spoken for. It's the remaining $3,750 that he budgets to pay bills, such as rent, transportation, utilities, and food.

After 30 years, Earl has nothing put away for retirement despite earning three times as much as Kevin. However, Kevin's investments have earned an average annual return of 7%, and his account balance is up to $471,548.

Ultimately, it wasn't how much each person earned that determined their net worth. It was how they chose to spend (or save) their money.

Is it easier to get by with an income of $500,000 per year than $50,000? It may be, as long as you make mindful decisions about money. However, money can be tricky. For example, a study from the Michigan Ross School of Business found that people frequently spend money to give themselves an emotional boost. It's a form of escapism, a distraction from emotional pain.

Regardless of your current personal finances, the challenge is to create a budget that provides spending boundaries and, perhaps, to find a healthy way to deal with stress without overspending.