Two incomes, more debt?

As a bankruptcy expert, Elizabeth Warren has seen the devastating effects on families when their finances collapse. She has also watched the number of bankruptcies escalate, rising 400 percent in the past 25 years. By the end of the decade, she says, an estimated 6 million families with children - 1 in every 7 such families - may declare bankruptcy. This year, more children are going through their parents' bankruptcies than their parents' divorces.

But Ms. Warren, a law professor at Harvard, rejects the conventional theory that overconsumption - squandering money on big-screen TVs, McMansions, restaurant meals, oversized cars, and luxury vacations - is to blame for insolvency and all those maxed-out credit cards. Instead, she points to the high cost of housing and education - fixed expenses that can quickly create a sea of red ink when families face layoffs, illness, or divorce. Skyrocketing healthcare costs add to the problem.

Ironically, Warren sees Mom's paycheck - a family's second income, the very asset meant to provide more financial stability - as a potential culprit rather than an economic cure. When middle-class mothers began entering the workforce en masse, she explains, their incomes gave parents more money to spend on housing. This created "frenzied bidding wars" for homes in desirable school districts. A deregulated mortgage industry compounded the peril by allowing homeowners to assume larger mortgages.

As a result, Warren says, dual-income families have less discretionary income and are more vulnerable economically than their single-breadwinner counterparts in the past.

She spells out her unusual theories in "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (Basic Books), written with her daughter, Amelia Warren Tyagi.

"Two parents working hard at two jobs is not a guarantee against economic disaster," Warren says in a phone interview. "Today's parents feel they have no option but to pour enormous energy and all of their economic resources into getting their children into decent schools."

Problems arise, the authors add, when couples commit both incomes to fixed expenses. "Families aren't going broke because of one extra pair of Nikes," says Ms. Tyagi, a business consultant. "Families are vulnerable because they've stretched the fixed costs they have to pay month in, month out, no matter what. If something goes wrong and you face a period of unemployment, there's no way to cut back on the mortgage."

The No. 1 question every two-income couple needs to ask, Warren says, is whether their family can survive without one income. If not, she urges them to create an emergency backup plan as a hedge against the possibility that one of them will lose their income at some point.

The authors shun the conventional advice financial advisers often give, such as: Keep track of every penny. Don't eat out too often. Save on dry cleaning. They take the opposite approach, encouraging families to enjoy treats. If a layoff or illness occurs, the money allocated for these small pleasures can buy necessities.

Barbara Bergmann, an economist and a senior research associate at the Council on Contemporary Families, disagrees. She criticizes their theory that working mothers' salaries are partly to blame for the high rate of bankruptcies, calling it "totally fallacious." And she takes issue with the notion that the money mothers earn has fueled bidding wars.

According to the Bureau of Labor Statistics, Ms. Bergmann says, housing costs have risen 5.1 percent a year since 1970, when married mothers began entering the labor market in substantial numbers. During the same time, prices of consumer goods have gone up by almost the same amount, 4.9 percent a year.

She notes that rising mortgage payments include the home-equity loans people use to finance cars, renovate houses, and pay off credit-card debt.

For some two-income couples, cutting back on expenses remains important. In the early years of their marriage, Joe and Kristie Tamsevicius of Gurnee, Ill., faced more than $30,000 in credit-card debts. Mrs. Tamsevicius, who worked her way through college, had student loans to pay off. The arrival of two children added more expenses. "Babies are money-eating machines," she says. "They need so much."

By paying careful attention to what they spent, the couple gradually paid off their debts. They now have $40,000 in investments and savings. Among other cost-cutting measures, they drive to southern Wisconsin to shop for food, reducing their grocery bills from $180 a week to $110.

Last month, Mr. Tamsevicius, who does specialized computer programming, was laid off. To protect their assets, he has refinanced his truck, saving $200 a month. A rental property they own also brings in $300 a month. He plans to join his wife as a partner in her Internet business, Webmomz.com.

As Warren and Tyagi note, a second income produces extra expenses. Creighton and Liza Abrams live in New Jersey and work in New York, he as a public relations executive, she as a marketing director. Their dual incomes require two expensive commutes, totaling $20 a day. Child care siphons off almost $2,000 a month and now costs more than their mortgage. They have "reasonable" credit-card debts and a small school loan, plus a car loan.

"Saving for two college educations while paying off a college education and saving for two retirements is tough," Mr. Abrams says. "We need to buy new appliances and paint the house, but we also want our first vacation in two years." Each choice will cost about $2,000. "If we killed off the credit cards, we could wipe out the college loan faster, then pay for the car and have an extra grand a month. That would really put us ahead."

How can parents avoid the two-income trap Warren and Tyagi describe? Sending Mom home is not the answer, they insist. Most families cannot afford to live on one salary. Instead, the authors advise couples to try to pay fixed expenses - mortgage, car, preschool tuition, health insurance - from one salary.

Other remedies require policy changes. Warren and Tyagi call for reregulating mortgages to require larger down payments for first-time home buyers. These have shrunk from an average of 18 percent in the mid-1970s to about 3 percent today. They propose public school vouchers, allowing parents to choose schools, thus freeing them from the need to live in high-priced neighborhoods. And they rail against usurious practices by credit-card companies, proposing caps on high penalties for late payments.

"Bankers who wear $3,000 suits and starched shirts are now charging interest rates that Jimmy the Leg-breaker didn't charge 25 years ago," Warren says. "Nobody sounds the alarm. The consequence is a wealth transfer of tens of billions of dollars every year from middle-class families to a handful of big banks."

A new study by Demos, a nonpartisan public-policy group in New York, supports that view. In the 1990s, the report finds, the average family's credit-card debt rose by 53 percent; middle-class families saw a 75 percent increase in that debt. For very low-income families, the figure shot up to 184 percent.

"Deregulation of the credit-card industry has allowed companies to take advantage of tough economic times," says Tamara Draut, coauthor of the study, "Borrowing to Make Ends Meet." The group wants Congress to rein in aggressive lending practices.

Whatever a family's economic challenges, they can be compounded by a cultural silence about money. Tyagi calls financial distress "the last great taboo." She notes that people will go on nationwide television and talk about intimate details of their lives, but they won't tell their own families that they're getting calls from collection agents who want to repossess the car.

In a study conducted by the authors of more than 2,000 families in financial trouble, more than 80 percent said they didn't tell anyone, even when their difficulties stemmed from a job loss or illness, rather than overconsumption.

Many financial planning books ignore this kind of domestic fiscal crisis. "They tell how much to put in your 401(k), how to choose an IRA, but they tend to leave out the folks who are trying to decide whether to pay the health insurance or the car insurance," Tyagi says.

To those facing heavy debts, she offers reassurance, saying, "You're not alone. There are families at the PTA, at church, at work who are in just as much trouble as you are. They just don't talk about it." Emphasizing that most of those in financial straits are not immoral people trying to sneak away from their debts, she says, "It could happen to any of us. Families must try to overcome that shame and talk about it."

Unfortunately too many Americans are beginning to believe the government owes them, when in fact they need to understand the government is bleeding them dry.

What's unfortunate is that the people who believe that the "government" owes them are not the same people who the government is bleeding dry.

***But Ms. Warren, a law professor at Harvard, rejects the conventional theory that overconsumption - squandering money on big-screen TVs, McMansions, restaurant meals, oversized cars, and luxury vacations - is to blame for insolvency and all those maxed-out credit cards. ***

SIMPLE RULE of economics: The more money people make, the more they spend.

Although i agree people have more than they should, tvs and dvd players are relatively cheap. they don't cause people to have debt problems. now cars on the other hand is a different story. also people tend to buy way too much house than they need. i think the 1600 sq foot house i live in is plenty for my family of four although my parents who should be older and wiser have given me hell about it and think i should live in at least 200 square feet. its funny how their child is wiser than they are in that aspect.

It sold for 90,000. We now have a 2000 sq ft house that we bought for 161,000.

It amazes me --- the same house my dad bought new in the 1950s for $15,000 with a 15 year mortgate --- same wood, same neighborhood, same size now would sell for over $100,000. Something someone with a high school diploma, several kids, and living on one income could once afford would likely take two incomes now. I'd hate to guess the difference in property taxes and home insurance.

I suspect it all depends upon where you live. Here on Long Island, $2900/month would barely pay for the cost of housing ALONE. For example, we own a 4BR Cape Cod house on 1/3 acre of land. When we purchased it, it cost $151,000 and the taxes were listed at $4200/year. It is a nice neighborhood, but by no means is it an exclusive or wealthy neighborhood. Seven years later, the house is worth about $400K (insanity; it is NOT that nice a house), and last year we paid $7,700 in propery (school) taxes.

Last June, our property (school) taxes went up 12.5%, which will bring our yearly tax bill up to nearly $9,000. Add that to the mortgage, and you're looking at $2,500/month in housing costs alone. And we haven't bought FOOD yet!

Forget new cars or vacations; we drive 'em till they fall apart and haven't been on a real vacation since the kids were born.

We do not use the local public schools at all, so we're getting stiffed there.

I HATE New York, and can't wait till we can escape.

Regards,

PS: I happen to agree with those other posters who advise living SLIGHTLY below your means (as we do). That little bit of wiggle room sure can come in handy if necessary.

Unfortunately too many Americans are beginning to believe the government owes them, when in fact they need to understand the government is bleeding them dry.

AAAAAAAAAAAFREEPIN MEN! That thought ought to somehow become a ballot initiative that every adult in this country needs to go to a five-day tax education course during which people find out just how much of their earned dollars are going to some form of taxation and just what, exactly, those taxes are being spent on.

Actually, it's fairly easy to open a bank.

If you can raise five million in capital, you can do it. I've known some guys who've done it.

Unfortunately, if you're small your operational costs will be high relative to your revenue stream from credit. This is what kills small banks.

If you're successful, you usually get bought out by a larger bank.

My house in the burbs of Cleveland was bought by my parents in 1961 for 18,000. I paid off the mortgage when they were both gone. My taxes were 1200 a year. Now we have basically the same house and pay 5000.00 a year in taxes (up 2000 since we moved in in 2000)and 1000.00 in insurance (up 400.00).
If life were perfect, I could find a job I could do at home while I stay with my three year old. I WON'T send her to daycare. Now we maintain and pray that life will improve.

A lot of people don't understand that about property taxes ---- in some areas you really need that second income just to pay for those alone. Here even the small tiny houses have property taxes over $3000 a year. Plus one out of three wage earners makes exactly minimum wage, only one out of three makes over $10 an hour. The average person cannot afford a house and family on one income.

Dude you're gonna get pounded for that typo. hehehehe

and from your following post:

...and think i should live in at least 200 square feet

Your parents don't sound all that nice...

The house my parents bought in 1974 for $23,000, now is "worth" $310,000 in Los Angeles. It at least resold for that amount that year. To show how nutty the housing market went in California, my parents bought in 74 for $23k, then sold just 7 years later for $89k in 1981.

You needed to make $2.87 an hour in 1973 working full time, to have a yearly salary that is 1/4 of the price of the home. You need a salary of $38.75 an hour working full time to do the same thing.

The house hasn't changed much, other than getting repainted several times. Still small, in a middle class neighborhood, but much less affordable.

People are always saying it's because of McMansions. Not here in Cali, or NY for that matter. You can literally be paying $5,000 a year in property taxes for a shack.

Boy does this post hit close to home. I am currently taking classes, online--which I should be reviewing questions for instead of FReeping, but you know how that goes--to get my real estate license. PaDad and I have five kids--two now in college (so you know where our money goes). He works fulltime in engineering, I work parttime (eve. and weekends so that there is always one parent w/our three younger kids), and as I said retraining to be a realtor. As a second parttime job, I sometimes 'show' (babysit) open houses...mostly 'McMansions.' In depressed western Pennsylvania there is a building boom in 350,000 plus homes (and land is cheap here, low property taxes). There is, conversely, a glut of 350,000 plus homes being resold (finanaces gone bad). What amazes me, is going into a 300,000 homes, owned by a two income couple, usualy late 20s early 30s, that have basically no furniture (card tables and mattresses on the floor). Walk in pantries have neat top of the line appliances (wedding gifts?) but when you open the door to show the space it is usually devoid of food (always eating out?) It is like these people put every penny into their granite countered/marbled floor/cathedral ceilinged McMansion and live on nothing else...AND lendors are approving these loans--the debt/income ratios must be out the window for these folks to have gotten the credit needed to mortgage such an extravagent home.

Its a whole sham. In NY, for the sucker buyers of real estate, you have crazy title costs, lawyers, MORGTAGE TAX!, junk bank fees, etc etc. Its such a joke. Our parents NEVER had to deal with this stuff, let alone the fact that the house they bought for 15k now sells for 400k. Oh yeah, property taxes through the F'n roof.

That's why we elect Republicans. They will cut it back. Bush has proven that in his whooping tax cut.

Deficit spending is simply a delayed tax PLUS INTEREST. Bush has increased not decreased the fiscal burden of government via deficit spending.

Your statement is equivalent to saying "I didn't spend any money, I put it on my credit card!!"

duuuuuuhhhhh..

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