Many families today are facing a financial meltdown. A two-income family typically earns significantly more than the one-income household they grew up in — but they have less discretionary income. Rising housing costs, increased health insurance and tuition bills has led many middle-class families to live paycheck-to-paycheck.
Matt and Jenise Yagle say “the good life” they enjoy may be just a little better than the lifestyle they grew up in. They moved into a million-dollar home in Glendale, Calif. six months ago. It’s in a great school district for their two kids. They have a pool and nice cars. But there is a major difference between now and then.
“My parents came from the generation where it was all about saving,” said Jenise. “It was all about having a safety net.”
The Yagles are walking a tight rope — balancing expenses and putting away little in savings.
“We don’t have that great of cash reserves right now,” said Matt. “I’d feel better if we had more if one of us should lose a job.”
Another change from a generation ago has significantly impacted their finances. Their parents made ends meet on one income. The Yagles have two. Jenise works full-time as a design director and Matt is a film and videotape editor. But at times, that two-income lifestyle can feel like a trap, according to Harvard University law professor Elizabeth Warren, co-author “The Two-Income Trap.”
“About one in every seven families has trouble paying bills at the end of the month,” she said, “feeling extreme financial pressure, wondering if they’ll be able to keep the house and the car.”
Warren says today’s two-income family makes 75 percent more than their one-income parents made a generation ago, but have less money to show for it. Why?
“I thought it would be a story of over consumption,” said Warren. “Of too many trips to the mall, too many Gameboys, too many sneakers.”
But Warren found today’s two-income families are actually spending less on clothing, food, furniture, and appliances than their one-income parents. Instead, it’s fixed expenses that are pressing families against the wall.
“They’re spending more than ever on a mortgage, on health insurance, a second car so that mom can get to work, and tuition, pre-school, private school and sometimes college for those at the other end of the spectrum,” said Warren..
When doing a budget with clients, financial planner Mohammed Barakat says they’ll discover about 90 percent of their expenses are fixed. Meanwhile, their debt continues to grow.
“If they have over 36 percent of their income going to service things like mortgages, cars and credit cards, they are really leveraged to the max,” he said. “So their objective then becomes to reduce their fixed expenses and bring it down to something more tolerable. Something in the high 20s or mid 20s.”
DEBT VS. INCOME
Barakat says couples can do that by consolidating debt — refinancing their home and using the extra cash to pay other bills. And, hope for pay increases.
“After a 24 month period, [two-income families find they’ve] got a bit of breathing room, [their] income has gone up gradually,” he said. “A bonus has been paid, a car payment has been retired. Now [they’re] in a greater comfort zone.”
To work their way out of the “two-income trap,” financial experts say families need to draft a budget, see what expenses can be cut, reduced or postponed. Then come up with a plan that would let them to survive for at least six months on one income.
“Have you put aside money so you can still pay the mortgage?” asked Warren. “If you haven’t been able to put aside money, do you have a plan for what you can sell or would you plan to sell your house and downsize?”
The Yagles are working on their emergency plan, though it is a work in progress.
“I wouldn’t say that it’s where we want to be by any stretch,” said Jenise. “But we’ve definitely given it a lot of thought.”
They’re trying to stay disciplined with the help of Barakat, their financial planner. His advises they follow his “golden formula.”
“The family that can mange to live off one income and save the second is the family that’s headed toward financial wealth,” he said.
Still, that’s a lofty goal for many families — making them wonder if they’ll ever get out of the “two-income trap.”