How to Fall Out of the Middle Class

These three things often trigger downward mobility.

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There's a vast library of formal research and folksy advice on how to get ahead. Now there's an unfortunate new corollary to that field of study: how to fall behind.

Nobody wants to, of course, but a brutal recession and hollow recovery have hammered away at Americans' living standards and pushed many people down the socioeconomic ladder. Real median income has fallen by more than 4 percent since 2007, to just under $50,000 per household. That means the typical family has less money, after inflation, to pay for food, healthcare, housing, cars, education, and everything else they need. Record numbers of Americans receive food stamps and live below the poverty line, a clear sign of downward mobility. Columnist David Brooks has identified a new social stratum: the formerly middle class. Arianna Huffington calls it "Third World America."

[See 12 ways to stop America's decline.]

The pathways to personal decline are familiar. The fastest way down is to lose your job, fall behind on your mortgage and other bills, face foreclosure, and declare bankruptcy. Many of the long-term unemployed—who currently number about 6.1 million Americans, nearly five times the level before the recession started—fit this profile. Another 1.2 million people have given up looking for work altogether, and many of them may join the underclass permanently. There are also less dramatic ways to fall behind. Many working people lose their grip on financial security simply by being in dead-end jobs with no obvious way to earn more money; their income stagnates but their bills keep rising.

While a lost job may be the trigger that opens the economic trap door, some underlying causes make it more likely that a job or career setback will lead to a permanent decline in living standards. Here are three ways to depart the middle class:

Let your skills become outdated. It's clearer than ever that education is what separates haves and have-nots. The unemployment rate for people with a college degree or higher, for example, is just 4.5 percent. For high school grads, it's 9.3 percent, and for those without a high-school diploma, it's 14.3 percent. It's also clear that a college or even advanced degree alone no longer guarantees the regular career advancement that it used to. Linda Rohman of Omaha has a law degree plus a Ph.D. in psychology, and she decided to go back to work as a lawyer a couple of years ago after taking time off to raise her two sons. But her network of contacts had gotten stale and nobody was hiring. So she took a variety of part-time jobs, brushing up on her typing skills to do freelance court reporting and using her academic background to tutor local kids. She now hopes that may lead to a teaching job at a community college. "You're told to check off all the boxes, do well in school, get a degree, and you'll be secure," she says. "That's not always true. "Coming to grips with that is hard, but you roll up your sleeves and do what's necessary."

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Some companies are hiring, but with nearly five applicants for every job opening, employers are clearly calling the shots these days, and the people they're interested in hiring often have more than one set of skills. "Everybody needs to look out for their own skill set," says Stanford University professor Robert Sutton, author of Good Boss, Bad Boss and the 2007 bestseller The No Asshole Rule. "You always need to ask what more you need to learn." Manual or skilled laborers, for example, might gain an edge by getting some management training. Salespeople can get ahead by developing expertise in online marketing or social media. Understanding how global supply chains work can benefit anybody hoping to work for a multinational company. Foreign-language skills help too. And everybody should do their best to keep up with technology and how it might apply to their own field.

Yes, it can be exhausting. Formal education is prohibitively expensive for a lot of people. And many companies that used to offer training programs no longer do. Still, people who continually build up their skills are the ones getting raises and promotions and fresh job offers after being laid off. Some take classes at community colleges or enroll in local training programs. Some teach themselves, using resources they find at the library or on the Web. Networking helps, too. And people you meet while you're out learning sometimes have leads on jobs or get hired themselves, giving you a fresh, valuable connection.

Take on too much debt. It's well-known that Americans binged on debt over the last two decades, to fund purchases of homes, cars, and everyday stuff they didn't quite have the income to cover. That has now created another huge wall separating consumers into "credit haves and have-nots," according to economist Cristian DeRitis of Moody's Analytics. Consumers who are able to manage debt will be the ones who qualify for loans in the future, which will allow them to purchase homes and cars and borrow if they hit a rough patch. As the economy gradually recovers and banks ease up on lending, those people will still have the financial tools to get ahead. But the growing group of consumers who have more debt than they can pay down will end up with defaults and tarnished credit, which will shut them off from normal lending. They'll struggle to enjoy the trappings of middle-class living and won't be able to borrow in a pinch. Instead, they'll have to muddle through on cash, or nothing.

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Taking on debt makes sense if it's in modest proportion to your income and is likely to produce some return, the way student loans finance an education. Mortgages still make sense, as long as the payments add up to no more than one-third of your monthly income and the loan isn't predicated on an unrealistic spike in the value of the property. But unnecessary debt that offers no return can be deadly in a slow-growing economy like the one we're in now, when incomes are flat and it's hard to earn your way out of hock. Debt can severely limit your flexibility, such as the ability to exploit a new opportunity that might have long-term promise but would entail a short-term pay cut. There are also many people who live in hard-hit areas of the country and probably need to move to places where there are more jobs, but can't because they owe too much on a home or don't have enough financial freedom. Too many Americans are now learning the hard way that instead of springboarding people to a better life, debt can be an anchor that drags them ever downward.

Fall without a net. American society has a considerable safety net for those who hit hard times. Yet Medicaid, Social Security, food stamps, unemployment insurance, and a raft of other government programs have not halted a broad decline in living standards over the last couple of years. The number of Americans living in poverty increased by 6.3 million between 2007 and 2009, to nearly 44 million. The number without health insurance rose by 5 million, to nearly 51 million. One reason people end up in desperate circumstances is that something unexpected happens, and there's no backup plan. And there's been a lot of that going around. Nearly two-thirds of all personal bankruptcies, for example, are due to costs associated with a severe medical problem, up from just 8 percent in 1981.

[See how to plan for a double-dip recession.]

It's obviously hard to anticipate unforeseen events, and prohibitively expensive to insure against every catastrophe. Yet Americans can at least anticipate some of the strains they'll face over the next several years and try to plan for them. The economy is likely to grow slowly for a good long while, with robust hiring not likely again until 2012 at the earliest. Government at every level is under financial pressure, and likely to offer less help, not more. At the same time, taxes are going to rise sooner or later to pay off massive federal deficits from the last 10 years and fill huge gaps in state and local budgets. Like it or not, Americans are going to have to rely less on government and corporations, while building their own safety nets based on community, family, and personal resources. Those who create their own cushion against adversity will get ahead, while those waiting for politicians and bureaucrats to solve their problems probably won't. Self-sufficiency, after all, has always been a key characteristic of the middle class. It still is.