The Upper Middle Class Trap

Over the last year, I've come to an unsettling realization—the upper middle class is caught in a trap, and many of them don't realize it. A few weeks ago I wrote about why private school isn't worth the cost. My argument hinged on the fact that the upper middle class pays a lot for private education despite there being no significant impact on lifetime outcomes. In The Death of the Amex Lounge, I found the same thing—premium travel experiences had become crowded while remaining expensive. And, after recently digging into the data on housing, I'm having déjà vu. Homes are getting smaller even as prices rise. LendingTree reported that, from 2014 to 2024, the average size of new single-family homes shrunk by 11% even as the price per square foot surged by 74%! This is just the average too. A home near a public elementary school with a GreatSchools rating of 9 or 10 costs 78.6% more than a home in the surrounding county. All of these trends point toward the same thing—people are paying more and getting less. This is what I call the upper middle class trap.

The Financial Arms Race

Right now, the upper middle class is in fierce competition for a marginal improvement in lifestyle. They're working more and relaxing less to purchase products and services with clearly declining quality. It's a financial arms race that doesn't make any sense. You have people making six-figure incomes going into a frenzy for nicer homes, better schools, and more luxurious travel experiences. What's the end result of this status contest? Overpaying, and by a lot. For example, one group of researchers found that bidding wars on housing tend to decrease long-term returns by a significant margin. As they stated:

The coefficient estimate for bidding war transactions is negative and statistically significant, indicating homebuyers who purchase their house in a bidding war experience 6.9% lower levered annualized returns than homebuyers who did not purchase their house in a bidding war.

That's nearly 7% per year in lost returns simply due to price competition. This same competitiveness partially explains why college tuition and private school costs have grown twice as fast as overall inflation over the past few decades. With more students applying to roughly the same number of spots, you can keep raising prices. This is especially true at the top universities. Since 2015, the number of college applicants has gone up 78% while acceptance rates at elite colleges have plummeted: This increasing struggle for scarce positional goods keeps the upper middle class overworked and trapped in the rat race. And do you know what's making this problem even worse? AI. Not only are many high-income workers worried about AI taking their job, but they're competing with other high-income workers to increase their productivity and not get left behind. We see this clearly in the data. As the Brookings Institute noted in November 2025:

AI use also varies across income levels, rising from 9% usage among earners below $30,000 to 34% among those making $100,000 or more.

Individuals with the highest incomes tend to use AI the most. This is a rational response if you believe that AI is a serious threat to your high-paying career. However, it has an unintended consequence–it makes the upper middle class trap even more solidified. How? Because it forces people to work even harder to continue competing for the same set of scarce resources. Think about it. If AI doubled everyone's productivity overnight, suddenly someone with half your skill would be able to compete with you just by using AI. Therefore, you have to learn AI just to keep up. It's the Red Queen all over again. You have to run as fast as you can just to stay in the same place. Anecdotally, I'm seeing the same thing. The most successful people I know are using AI more than anyone else. Though they would still be successful without such tools, they are learning them nonetheless. If you're already working hard to live an upper middle class lifestyle, AI has made it such that you need to work harder to stay on top of the latest developments. But is there a better way?

Escaping the Trap

The issue with the upper middle class trap is that it's a collective action problem. Individually, every decision is rational. It's rational to send your children to the best schools, to want a nicer home, and to travel to opulent destinations. But, collectively it's self-defeating. When everyone is vying for the same limited resources, it lowers quality of life across the board. It reminds me of the value of college degrees over time. When fewer people had them, a college degree made you stand out. But now that so many have them, it's table stakes. Now, we spend four years and tens of thousands of dollars to end up in the same place. This is why the best way to escape the upper middle class trap is to stop participating in it altogether. Opt out of those ultra-competitive sectors that won't materially change your lifestyle. Send your kids to good public schools instead of costly private ones. Skip first class and fly economy. Buy a little less house than you can afford. The ironic part is that the data supports this. Children from the upper middle class who attended elite schools performed no better than similar kids who attended public ones. The bidding war data illustrates that many people overpay for housing. And, as I demonstrated last year, premium travel experiences aren't what they used to be. So figure out if private school, a nicer home, and more extravagant vacations are actually worth the high price, then move on. Ask yourself: Am I buying this to improve my quality of life, or merely because other people are buying it? Those who can navigate this question successfully will end up better off financially and with more leisure time too. You'll have more flexibility and freedom without having to worry about chasing more status trophies. That's how you escape permanently. But there's one part of the upper middle class trap that will be difficult to opt out of—AI. Thankfully, if you're spending time learning AI this early in the cycle, you're already ahead of the game. The people most at risk from AI aren't reading about it. They don't even know what it is. The same is true for the upper middle class trap—it only impacts those who don't see it. But, hopefully, now you do. Thank you for reading! If you liked this post, consider signing up for my newsletter. This is post 497. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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