Until recently, a two-income family with a couple of children could generally get by without too much financial pressure.
However, rising interest rates and inflation are taking their toll.
Saba Kazmi has two school-age daughters with her husband, Hasan Shahzad.
“Things are getting a bit tight,” Ms Kazmi says.
“I've always felt that, if you work hard — and you have a good, simple life — you can still enjoy and provide for your kids, but now I think the worry is creeping up.
“You're not really able to save that much at the end of the month, and we are having to dip into our savings as well. So, that just makes me a bit worried."
As interest rates rise and other cost-of-living pressures increase, middle-income households such as Ms Kazmi's are pulling back on spending, and that has big implications for the economy.
Just under 4 million households fall into the middle-income bracket.
The biggest group is working-age couples with children. These middle-income families have an annual taxable income of between, roughly, $96,000 and $200,000, according to research from ANU PolicyMod.
And the median household income for this group is $145,725.
Middle-income couples of working age with no children make between $75,149 and $179,805, with a median of $118,245.
Single adults of working age earn a median of $49,807, while for single parents it is $44,656.
Australian National University’s centre for social research and methods Associate Professor Ben Phillips explains what that can mean.
“[For] singles and, particularly, single parents, often there's barriers to being in employment. So their employment income is often quite a bit lower than, say, couples with kids," Mr Phillips says.
“And we also know that some of the welfare payments — so the JobSeeker payments and some other payments — are relatively frugal in Australia, which means, if you're stuck in those payments, your living standards are likely to be quite low."
It's important to note, the definition of middle income can vary depending on where you live, Mr Phillips says.
“Certainly capital cities — such as, say, Sydney and Canberra — tend to have higher incomes than the rest of the country,” he observes.
“Whereas, say, Adelaide and Hobart and certainly regional areas of Australia will tend to have lower incomes than the median across Australia."
Middle-income households drive the economy
Because there are so many middle-income households, they are key drivers of the nation's economy.
"Household spending, or consumption, is very high in Australia — looking at well over $1 trillion a year — compared to a GDP of, say, $2.5 trillion or so," Mr Phillips says, "and certainly middle-income [households] contribute very heavily to that."
Middle-income families, in particular, also tend to spend more than other cohorts because of costs such as childcare, education and other expenses related to raising children.
The average expenditure for a couple with children was around $2,000 per week in 2015-16, according to the most up-to-date data from the Australian Bureau of Statistics (ABS).
Average expenditure for a couple without children was $1,600, a single-parent family would typically spend $1,187 a week, while a single person spent around $900.
However, the cost of living has gone up a lot since that ABS data was published.
Mr Phillips says national accounts data shows a 23 per cent increase in consumption spending per household since 2015-16.
Independent Economics' economist Angela Jackson says things are getting tight for middle-income families.
“They can be comfortable families, they're not in poverty, but certainly things aren't necessarily always that easy to make ends meet," Ms Jackson says.
“So, they're really important. Politically, they're also obviously very important, but from an economic perspective, they are the people who are working, but also raising the next generation.”
Rates hit middle-income families
Middle-income families with children, in particular, tend to have higher levels of debt because they are more likely to own a home and have higher levels of debt at that stage of their lives.
That makes them more vulnerable to inflation and interest rate rises.
While the average new home loan in Australia is $600,000, many middle-income households owe a lot more than that, particularly those with children.
At the moment, housing debt is close to a record high compared to income, according to the RBA.
That’s because people were allowed to borrow a lot of money while interest rates were at record lows.
However, things have changed. After nine consecutive rate hikes since May 2022, the cash rate has been lifted from 0.1 per cent to 3.35 per cent.
Katy Daily and her family live in a classic, middle-income suburb in Melbourne’s northern suburbs.
They owe about $800,000 on their family home, but with cash in an offset account and other savings, Katy says they are more insulated from interest rate rises than others.
"I think when Stuart and I purchased this house, we did it with the understanding that interest rates can go up, and we were able to cover that," she explains.
"So I don't think we over-bought our house, which I know, isn't possible for a lot of people."
Nonetheless, the family is paying an extra $300 a week on their mortgage because of the rate increases.
"With subsequent hikes, I think we will be feeling that a bit," Ms Daily says.
Ms Kazmi and her husband are feeling the double whammy of higher interest rates and rising rents.
They pay $820 rent a week for their home in western Sydney which, Ms Kazmi says, is about the maximum they can afford.
Priced out of the Sydney property market, the couple bought an investment property in Brisbane.
Ms Kazmi says that, even if they sold that property, they would not be able to get into the Sydney market.
However, despite the rising costs of renting and running their investment property, Ms Kazmi says they are reluctant to increase costs for their own tenants.
“We're human, right, and we're paying our own rent, so we don't want to increase it to an amount that is just not very feasible for the people who are renting there," she says.
Spending cuts
There are growing concerns from some economists that that the consequences of too many interest rates will tip Australia into recession.
When households come under pressure, they cut back on spending and, as key drivers of the economy, Ms Jackson says that has has broad consequences.
“We are starting to see that already in terms of those discretionary items,” she says.
“So, when we look at those retail figures that are coming out, we see an overall decline on those discretionary items … So we'll see things like restaurant meals, takeaway meals [disappearing].”
The next step is cutting back on non-discretionary, or essential items, such as groceries. Some may have to sell their homes.
“They might have thought everything added up and then, suddenly, there's increasing interest rates, increasing inflation and everything doesn't add up anymore," Ms Jackson says.
“And that means making some really difficult decisions."
Ms Kazmi started making changes to their household budget last year.
There's no more Netflix, she has cancelled her gym membership and said goodbye to her personal trainer. Now she is looking at ways to save on groceries.
Ms Daily's household has installed solar and ditched gas, and made other changes around the house to eliminate energy bills.
"Changing your showerhead, for example, to a low or ultra-low flow model can save 50 per cent or more on your energy bill for your hot water, or you can improve the thermal efficiency of your house by insulating or draught proofing to save on your heating bills in the winter. The savings all add up," she says.
However, for other families caught in the middle-income crunch, more difficult decisions loom.
"A number of families are under that severe financial stress where they have to think about selling the family home, because they simply can't afford those mortgage payments anymore," Ms Jackson says.
“It is a difficult beast to slay, inflation, and so the RBA [is] trying to slow the economy down in a way that doesn't necessarily lead to a recession.
"But where that tipping point occurs, can be very difficult to judge.
"And, so, yes, it will be those middle-income families we want to look at."
As the man in charge of bringing inflation down, Reserve Bank Governor Philip Lowe frequently says the path to a soft landing for the economy is narrow.
That makes households such as Ms Kazmi's very nervous.
“We don't know what's happening, month on month. I think just some sort of certainty, some direction, I think that would really help people like me," Ms Kazmi says.
