"THE
TWO-INCOME TRAP" by Elizabeth Warren
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This Book
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Additional thought
of Graham White in highlights.
This
book points out the "trap" that setting up your lives around two incomes
can create if you are focused on maximizing lifestyle and Zip Code.
While it is short on specific advice (other than blaming credit corporations
and banks for the problem and suggesting that the government create
legislation that would prevent people from making bad financial decisions), it
provides some excellent food for thought.
This
review will be heavy on additional thoughts because of the lack of actual
solutions provided in the book itself. You can determine for yourself
the validity of the ideas and suggestions I put forward.
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As
long as you think money is to be used for the accumulation of things, you will
never be wealthy and ultimately can never be happy. Financial abundance
is a RESULT of living your life in balance and giving your gifts in a way that
brings the greatest amount of benefit to as many people as you are able to
serve.
The
more control you really have, the happier you will be. To have more
control, you must have more power. To have more power, you must have
more knowledge. To have more knowledge, you must continue your education
through reading, seminars, courses, internet and networking with people
outside your immediate circle.
The Big Mistake:
Committing both incomes to cover monthly
expenses.
The
Big Misconception: It's working hard that's important and makes you
a responsible member of society. Working smart, becoming financially
educated and fiscally responsible is MUCH better than working really hard and
remaining financially ignorant.
It used to be that one
parent, usually the father, worked while the other one stayed home, raised the
family and ran the household. After the women's movement and the work to
create pay-equity for women, many mothers headed out into the work force
hoping to add their income to their husbands and create a higher standard of
living for their family and their children.
If two-income families
would save the second paycheck, they would build a safety net that comes from
having money in the bank and other investments, but with the best intentions
they instead funnel their second income into a bidding war for the best home
they can afford in the communities with the best schools for their
children. Mom's paycheck has been pumped directly into the basic costs
of keeping the children in the middle class (or
more accurately: trying to move the family and children into the UPPER-middle
class).
Unwittingly, they have
actually created a higher likelihood of financial disaster hitting the family
and splitting it apart. By committing the second income to a higher
standard of living the two-income family has eliminated the ability to send an
additional member out into the work-force should something happen to a now
NECESSARY income.
If dad was laid off, got
sick or left the family, mom used to have the opportunity to go out and get a
job to replace the income that was lost. She was their if a child or
close relative needed extended care due to illness or injury and if extra cash
were needed for an emergency or special purchase she was able to take on some
part-time work.
The reason for this in most
part is not the over-consumption of the small things (although this certainly
contributes), but the fact that today we are buying far more house and far
more community than our parents generation would in order to give the greatest
advantage to our children. We are unwilling to accept living in an
average home in an average neighborhood. This is happening to such a
degree that even what we now consider "average" would have been
luxurious to our parents generation.
What
we are trying to do is to speed up the process of the "American
Dream". We feel that if we simply apply more of ourselves into the
money making machine of the economy, we will be able to better offer our
children the advantages they need to get ahead. We're afraid that if we
don't keep up with this almost impossible standard, it is our children who
will suffer.
We
push ahead with our lifestyle in order to one-up our neighbors, who are also
trying to slightly outdo us. We're not satisfied with average, ordinary
or sameness - we constantly struggle to prove that we're just a little bit
better. In the never ending game of catch-up we are playing with each
other, we forget to plan for unexpected eventualities and when they occur they
rip our lives apart. We live as though life is unchanging, but change is
occurring more rapidly than ever before and when it does occur, we are almost
always caught unprepared.
Today, almost any
eventuality can tear apart the financial fabric of the home: If one or
the other parent is laid off, if one or the other partner gets sick, if
someone needs to quit work to look after a sick relative, if the parents
separate and must now pay for two homes instead of one, if one or the other
would simply like to quit in order to be home with the children, or if BOTH
suddenly lose their jobs at the same time - any of these scenarios can destroy
the financial stability of the home.
A generation or so ago, we
were more likely to believe that there were many avenues for a young person to
make their way into the middle class, including paths that didn't require a
degree. Today, we are twice as likely to believe that man never
walked on the moon as we are to believe that a college degree doesn't
matter! This has created yet another active bidding war, one to get into
the best colleges.
I
believe that part of the reason we believe we need to make so much money is
that we believe we need to be able to purchase the things that these high
income salaries provide to be completely happy and fulfilled. This leads
us to believe that we must get high paying jobs. The result is an
overwhelming demand on secondary education.
Private education before
university is one route some parents take to give their kids an
advantage. In the United State, the cost is $100,000 by the time they
are done.
Like parents, institutions
of higher learning have entered into a bidding war of their own--not the war
to provide the best value to families, but the war to produce the best
research, win the most basketball games, and serve the best food...and parents
are paying the bill. Ever year, more than a million families take out a
second mortgage on their homes just to pay for educational expenses.
Borrowing does not reduce the costs; it simply means that families can pay and
pay and pay some more. The result is a tripling of the debt load over
the past ten years.
Is
the advice, "Go to school, get a good education so you can get a good job
so you can make a good salary so you can be financially secure" still
good for today's economy? The $40,000 - $100,000 a secondary education
costs today is considered a "necessity" by many. Do you know
how much that amount will have cost you if you take it in student loans and
don't pay it back for 15 years?
Do
you know what kind of financial security you could create by intelligently
investing that same amount of money? $10, 000 invested at 10% for 21
years (the amount of time between when you took out the first year's loan and
the time it was paid back) would create $64,000 in interest. If you took
the $10,000/year a year for 6 years (assuming you take 6 years of schooling at
$10,000/year) and invested it at 10% instead, you would have created $300,000
in INTEREST!!!
If
you invested $10,000/year in property, using the $10,000 as a 10% cash to
mortgage for a $100, 000 home and did this each year for six years with an
average market increase of 5% in real estate growth, you could sell your six
properties for over $1,000,000 at the same time your friend finished his 6
years of post-secondary and paid off his original $60,000 loan and $56,000 in
interest!!!
So,
consider that you get out of high school, stay at home, get the best job you
can find and invest the $10,000 a year for six years into rental property -
you would be able to retire a millionaire 21 years later at age 39. Can
the same be said for where you'll be at with the degree your job provided you
with? Something to think about isn't it?
We
have an unconscious misconception that the most important things in life are
learned in school. We may give lip service to the fact that the
fundamentals of being a good person, living in balance and finding a personal
mission are things that are taught in the home, but how much time is
SPECIFICALLY spent teaching these principles? What lessons did you sit
down and talk about with your children about Relationships, Financial
Planning, Organizational Skills and Personal Development?
What makes the drive to get
into the better neighborhoods and better schools so much more tragic is that
there was never a MEANINGFUL statistical gap between the schools in the center
of the city and those in the surrounding suburbs. Neither were the
streets all that much safer, but the media led us to believe so.
Statistically, we live in the SAFEST, WEALTHIEST, LEAST POLLUTED, HEALTHIEST
and the most OPPORTUNITY ABUNDANT time on the planet....EVER!!! (http://www.incrediblepotential.com/articles/10mythsjohnstossel.htm)
What ultimately mattered
was that we believed that there was an important difference--and that
the difference is growing. The solution? To buy our way into a
decent school district in a safe neighborhood--whatever the cost.
The result was a bidding
war. Over time, demand heated up for an increasingly narrow slice of
real estate. This in itself would have been enough to trigger a bidding
war for suburban homes in good school districts. But a growing number of
families brought new artillery to the war: a second income. Millions of
women went to work in a calculated attempt to give their families an economic
edge. Where a generation ago, one car per family was the norm the second
car has become a necessity with mom in the workforce. With
a second car also comes the need for a bigger garage. With the bigger
garage, usually comes the need for a bigger house, and on and on it
goes. Their motivation was in the right place, their reasoning was flawed.
Because of deregulation,
banks became willing to issue larger mortgages relative to income. As
bidding heated up, families took on larger and larger mortgages just to keep
up, committing themselves to debt loads that were unimaginable just a
generation earlier. With extra income from mom's paycheck and extra
mortgage money from the bank, the usual supply and demand in the market for
homes in desirable areas exploded into an all-out bidding war.
This bidding war has
created a situation where the average police officer can not afford a median
priced home in two-thirds of the nation's metropolitan areas on the
officer's income alone. The same is true for elementary school
teachers. Without a working spouse, the family of a police officer or
teacher is forced to rent an apartment or buy in marginal neighborhoods.
These families have found that in order to hold on to all the benefits of a
stay-at-home mom, they will be shoved to the bottom rungs of the middle
class. Today's mothers are no longer working to get ahead; now they must
work just to keep up. Somewhere along the way, we fell into a
terrible trap.
(The
book suggests ways that we can legislate good neighborhoods and school
districts. I don't believe this is possible. You can't force
organizations to be effective or efficient. You achieve more choice
through the choice to grow and become more educated. Knowledge is
power. If you want to be better off than the average person, know
more than the average person. Specialize and continue to learn.
This is easiest done of you connect with your passion and mission in life.)
The problem is that the
lifestyle that the two-income family sets up is done with the assumption that
nothing is going to go wrong. They now depend on all of their $68,000
income. They decide that their children need a good home now,
good day care now and involvement in all kinds of extra-curricular
activities now. There is no leeway. If anything --anything
at all-- goes wrong, today's two-income family is in big, big trouble.
Even
good planners and responsible parents can forget to delay gratification when
it comes to doing something for their children. But the goal of getting
your children into better neighborhoods and schools does not justify poor
financial decisions.
By sending both adults into
the labor force, families actually increased the chances that they
would need a safety net. In fact, they doubled the risk. With two
adults in the workforce, the dual-income family has double the odds
that someone could get laid off, downsized, or otherwise left without a
paycheck. Mom or Dad or BOTH could suddenly
lose a job.
There is a painful irony to
this. The family that sends both workers into the workforce in order to
"buffer themselves against the changing economy" have just made
themselves more vulnerable to those very wrenches. Twice as
likely.
If something happens to one
income, they could (but sometimes don't) cut back around the edges. They
might cancel cell phones, eliminate satellite TV, reduce dinners out and take
some luxuries of the shopping list. But the effect of this
belt-tightening would be modest at best. They cannot make up for the
almost $20,000hole in the family's budget by eating less or forgoing a new
pair of sneakers. In order to pull back to a $48,000 budget, they need
to sell their home, trade in their car, pull their younger child out of
preschool, and enroll their older son in a lower-cost after-school daycare --
a process that will take moths to accomplish. Moreover, they will be
unlikely to take such drastic measures until they are deep in financial
trouble and forced to admit that the lives they once lived are gone forever.
It
is perfectly fine to have a two-income family, just make sure you create a
lifestyle that still only relies on one and invest the rest in opportunities
for passive income, then you can BOTH quit working!
What's even more
unfortunate is that working wives are 40% more likely to divorce than their
stay-at-home counterpart. (This may be because a home-maker creates a
more stable). What makes this situation doubly dangerous is that with a
divorce comes the splitting of resources, requiring separate housing,
additional travel costs etc. Cohabiting couples with children are more
than twice as likely to split up as their married counterparts. So
statistically, the healthiest, most financially stable families are ones where
the parents are married and one stays at home.
There are many things that
may occur that create financial and marital strain beyond just the loss of a
job. Illness, family break-up, illness in the immediate or extended
family etc. There is nothing glamorous or mysterious about the events
that conspire to drive families into financial ruin. They are remarkably
common, ordinary--and painful. Life doesn't wait for families to become
financially independent before these things occur.
HERE ARE THE STATISTICS:
Risk:
Change since 1970's
Involuntary job
loss
Up 150%
Missed work due to
illness/disability Up 100%
Divorce
Up 40%
Lack health
insurance
Up 50%
Missing work to care for
family member Up 1000+%
Single Mothers, an
Ironic Statistic
Single mothers who are
college educated are 60% more likely to end up bankrupt than those with less
education. The reason for this is that they give their family a better
lifestyle and when something happens, it is more difficult for them to get by
on government assistance. Their less educated sisters have a very modest
lifestyle and can continue to get by much easier with the assistance that is
available.
Over the past generation,
average savings have dropped from 11% of income to negative 1%, while
credit card debt has climbed from 4% of income to 12%. The difference
over all means that a generation ago, net worth was 7%, today it is negative
13%! That's a difference of 20%! As a consequence, the modern
mother starts out her post-divorce life with higher fixed costs, more debt,
and less money in the bank -- a recipe for financial disaster.
Even now, a generation
after the Women's Revolution, the surest way for a woman to regain her
financial footing after a divorce is to find a husband--and to do it
quickly. In a world of economic hurt, even a guy with half a job looks
good.
Did
you know that divorce is the most expensive decision you will ever make?
We have come to believe that money can solve virtually any problem, that if we
have enough money we won't have any problems. We prefer to pay for
divorce rather than investing in counseling because we are confident that the
problem doesn't lie with us, it lies with our partner and we're both secure
enough in our ability to pay for ourselves that we don't need to look at the
fact that we've figured out how to make a living, but we haven't learned how
to create a life.
(Why
don't women look for other single mothers and create a blended family together
with them, at least until they remarry a man they really want?)
Why
Your House Is Not A Good Investment
Ok,
a house is a good investment, but only if you have other investments as
well. If you don't have emergency funds accessible in some form you are
in trouble. You can't sell your kitchen, or your bedroom, or the bonus
room. You have to sell your entire house and when you're in trouble, you
likely will have to take less than it's worth.
You
need to start planning early. Give yourself a good financial
education. Money management is much more than having a job and paying
your bills, it's planning for the unexpected. It's not up to the
government to bail us out when tragedy strikes, it's up to us to plan for
those eventualities. By leaving it up to the government, we deny
ourselves lessons in personal responsibility and when something happens that
the government doesn't cover - we're in big trouble.
You
can't afford to not be an expert financial planner! You must be
prepared for disaster. It's not a question of "if", it's a
question of "when".
So, what can you do?
1. Can your family
survive without one income? If your family is like the average
two-income family, then you face a one in sixteen chance that in any given
year, at least one of you will lose your job. If you are a single
parent, you actually face smaller odds of a layoff (because there is only one
person at work), but the consequences of a job loss can be even worse if that
sole income disappears. In either case, the litmus test is the
same: Can you survive for six months without one of the incomes that you
currently rely on? If you are a married couple with only one earner,
then the question is easier: Could the stay-at-home parent enter the job
market if something happened to the primary breadwinner? Regardless of
your group,, if the answer is no, then it's time for some disaster planning.
2. Can you
downshift the fixed expenses? If you are having trouble making ends
meet, the average financial planning book advises you to "pass up those
impulse purchases or another dinner out" so that you can save more and
get out of debt. But the experts have it exactly wrong. If you
eliminate all the treats now, while time are good, then where will you cut
back when a real financial crisis appears? Take another look at your
budget. If you are feeling squeezed during ordinary times, it is likely
that you have a much bigger problem than an occasional dinner at out.
You have a problem with your fixed costs.
Now is the time to take a
hard look at the necessities, not the frills. If you're having a
difficult time making ends meet, think about lowering your fixed
expenses. Can you manage a few more years without a new car? Can
you sign up for lower health care costs? Would your toddlers be all
right in a less expensive preschool? Should you move to a cheaper house,
one you can manage on a smaller mortgage? These are obviously difficult
decisions for any family, but it is better to confront them now, when you have
time and flexibility to make reasonable choices, rather than later, when the
creditors are calling and your back is to the wall.
Don't stretch yourself
to buy a house you can't afford! If the only way you can meet the
mortgage payments of your dream home is to tighten your belt and commit both
incomes, don't do it. The fact that you have been approved for a
mortgage is no guarantee that you can actually afford it. As painful as
it may be, it is wiser to live in a smaller home for a few more years or
consider purchasing a home where you can rent out the basement in order to
make up the difference. An oversized mortgage will leave you with no
room for error, no cash for even minor emergencies--let alone a real disaster.
There is a silver
lining. It's ok to splurge on extras. Never mind the dour
looks from the Over-Consumption camp. So long as you are using cash
to make the purchases and paying off your credit cards in full every month you
should feel free to buy the kids a new pair of shoes or treat yourself to a
night on the town. If the tough times come, you can drop those
expenditures in a heartbeat. As long as your fixed expenses are low
enough that you can manage during a crisis, then you can count yourself secure
enough to go ahead and have some fun. (Or
even better, invest that money in a way that it provides you with residual
income.)
3. What is your
emergency backup plan?
Now is the time for the
painful game of "what-ifs." What if your partner loses their
job? What if a family member gets sick and you have to look after
them? What if your own health fails? What if you and your spouse
split up? You need to get prepared if the unthinkable happens. As
difficult as it may be, you need to make a plan to consider what could be done
now to make that plan feasible. Add a separate line to your budget for
these just-in-case safety precautions.
The emergency backup plan
may cause you to rethink some of your financial commitments. Pay
particular attention to timing. In finances, long-term commitments are
the most dangerous kind. Whenever possible, choose the shortest payment
plans you can afford. Once you pay things off, keep making the payments,
but into your own account. After the same period of time has elapsed,
you will be able to pay cash for the same item when you need it again (like a
car).
4. Sensible
planning starts with insurance.
You need to take a good
hard look at your insurance and disability plans. Make sure that you
understand them and that the plan is one that fits you as perfectly as
possible.
By
-- Elizabeth
Warren & Amelia Warren Tyagi (Mother & Daugter)
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This Book
