"THE TWO-INCOME TRAP" by Elizabeth Warren 

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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.


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.


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 negative13%!  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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