Sunday, June 18, 2006

The Two-Income Trap

Why Middle-Class Mothers and Fathers are Going Broke
Elizabeth Warren, Amelia Warren Tyagi

Nonfiction, Sociology

Face it. When you hear the title of this book, your immediate impulse is probably one of two things: 1) You think that the reason for rising bankruptcy is that most people are going into huge credit-card debt because of luxuries, and/or 2) The authors of this book are going to advocate that one parent gives up an income to stay home with the kids - probably the mother.

But you'd be wrong on both counts. Warren and Tyagi have spent the last decade or two looking at bankruptcy statistics and, more importantly, doing in-depth interviews with bankruptcy filers, and they've come up with a surprising conclusion: Middle-class families are filing bankruptcy because they've spent all their funds on necessities, not luxuries. The deadly math behind this is simple. If something is a luxury, such as CDs or theater tickets, when bad things happen they can be dropped from the budget immediately. If it is a necessity, such as a mortgage or car payment, it comes back month after month without a letup, and the back payments accumulate as well.

And here is where the "two-income trap" of the title comes into play, because two incomes added together is not equivalent to one larger income. When there is one income, and something happens to the income provider such as injury or layoffs, the second wage earner of the household can step up to the plate while the first recovers. But if both wage earners are already earning wages, there is little the second member can do. So if both incomes are dedicated to necessities already, there is little to be cut from the budget.

Furthermore, the authors provide figures that show that a modern two-income couple has less discretionary income as a percentage than their single-income counterparts from thirty years ago. The fact that most couples nowadays have two wage earners has driven the middle class into the Red Queen's race, running furiously to stay in the same place. This is also shown in seemingly unrelated items such as housing cost - because there is a perception that schools are failing, the cost of homes in the districts of "good" schools is skyrocketing badly, so that the same floorplan in houses a few blocks apart can be priced in widely different ranges. A couple may feel pressured into an outrageous mortgage because the alternative is abandoning their kids to a substandard school.

The authors are careful to point out that these couples are not trying to "keep up with the Joneses." Most of the needs of these bankrupt couples are ones we can identify with: the need to provide for your child, the need for reliable transportation, the need to keep a clean, safe place to live. Too many couples, however, don't know that two incomes are not the same as one, and fall into the trap. One little setback is all it takes.

The solution, for the most part, is fairly simple: one income is all that should be dedicated to necessities, including bills, mortgage, and food. The second income in a relationship is the discretionary one, used for saving, or even frivolities - because frivolities, you remember, can be ruthlessly cut when the need arises. Thus the couple can escape the trap.


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