Elizabeth Warren, The Two-Income Trap and the Pursuit of Financial Independence
This post is part of the #MommyMoney Series. A series that explores money, motherhood and financial independence. Having children is a great gift, but it can also be the single most challenging event in a woman’s life.
This month’s book is not your typical personal finance book. It doesn’t espouse the same list of recommendations on how to save, what accounts to open, etc. Instead, it is a well researched book about the American family, its American dream and challenges of being middle class in the current financial and government system.
If you haven’t noticed already, the book, The Two-Income Trap: Why Middle-Class Parents Are (Still) Going Broke, is written by Elizabeth Warren with her daughter, Amelia Warren Tyagi. Before she was a presidential nominee, before she was a senior state senator, Elizabeth Warren was a Harvard Law Professor specializing in bankruptcy law. She was instrumental in the creation of the Consumer Financial Protection Bureau, which is a government agency established to ensure banks, lenders and other financial companies treat consumers fairly. I have to admit that this book gave me a newfound appreciation for Elizabeth Warren’s tenacity and her lifelong work to highlight the plight of the middle-class and need to protect them (us).
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The Two-Income Trap
By the usual logic, sending a second parent into the workforce should make a family more financial secure, not less. But this reasoning ignores an important fact of a two-income life. When mothers joined the workforce, the family gave up something of considerable (although unrecognized) economic value: an extra skilled and dedicated adult, available to pitch in to help save the family during times of emergency. When Junior got sick, the stay-at-home mother was there to care for him full-time, without the need to hire a nurse. If Dad was laid off, Mom could enter the workforce, bringing in new income until Dad found a new job. And if the couple divorced, the mother who had not been working outside the home could get a job and add new income to support her children. The stay-at-home mother gave her family a safety-net, an all-purpose insurance policy against disaster.
If two-income families had saved the second paycheck, they would have built a different kind of safety net - the kind that comes from having plenty of money in the bank. But families didn't save money. Even as millions of mothers marched into the workforce, savings declined, and not as we will show, because families were frittering away their paychecks on toys for themselves or their children, instead, families were swept in a bidding war, competing furiously with one another for their more important possession: a house in a decent school district.
What a startling few paragraphs! Today, it is not uncommon for families to send two parents to the workforce. Based on data over the years, it seems that two-income households are worst off than their single income counterparts a generation ago. Why? Because fixed costs have risen and continue to rise. The big culprits: Healthcare, Childcare, a Good Home and a Good School. If either parent lost their job, there is nothing to fall back on.
The Two-Income Trap highlights the big changes that American families have been facing, namely the rise of major expenses relating to healthcare, childcare, and school. Take a look at this graph from AEI.org using data from the Bureau of Labor Statistics. As we can see, Hospital Services, College Tuition, Childcare and Medical Services have risen significantly more than Wages. Items such as cars, clothing, household furnishings and TVs have actually become more affordable over time debunking the myth that families are over consuming themselves to debt. Of course, there are still exceptions that overconsumption does lead to debt as families compete with the Joneses and let lifestyle inflation get the best of them.
…the mother…to the extend that she had an economic role, it was seen as one of careful spending; it was her job to ensure that Dad’s salary went as far as possible, and so she mended torn shirts, packed bag lunches, and counted the family’s pennies. Her economic contribution in effect, was that of careful guardian of what her husband brought home.
A stay-at-home mother served as the family’s ultimate insurance against unemployment or disability - insurance that had a very real economic value when it wasn’t drawn on.
This book is one of the few personal finance books that also addresses the role of government and it’s affect on personal finances. Mostly every personal finance book puts the onus on the individual to educate themselves on finances and take it upon themselves to save and do their own due diligence, but there are a lot of systems in place that have made it easy for people to accrue more debt and get into financial trouble.
Deregulated Lending Industry
A few generations ago, the average family couldn’t borrow a lot of money. Prospective borrowers had to face bankers in person to produce past tax returns, pay stubs, credit references and the 20% down payment in order to quality for a mortgage. The rules for borrowing money were much more stringent and tightly controlled because the banking industry was highly regulated. It wasn’t until the 1970s when federal regulation opened the door for banks to increase interest rates and charge different interest rates across different state borders. Borrowing became easy. Lenders saw credit as a highly profitable product and “banks can now lend to anyone and everyone (including those in financial trouble) and still make a handsome profit”. We see this with the current credit card interest rates and the various pre-approved offers we all get in the mail for credit. We also see this back in 2008 with the mortgage crisis. Banks allowing people to sign on the dotted line knowing for a fact that lenders would struggle to make ends meet while the banks would continue to make money.
Increasing Cost of College Tuition
For many of us who have graduated from college in the past 20 years, we most likely had student loans. College tuition continues to get more and more expensive each year. We still rely on a college degree as a measure of success even though some of current jobs do not necessarily need a traditional college degree to get done. As Seth Godin states: “While a high-status college admission confers a measure of status, it doesn’t automatically grant a great education. Sometimes, a student gets both, but not always. Because learning is taken as much as given. Along the way, many of us have conflated the status with the learning. We’re also confused about the correlation between big college sports and the expected outputs of a university. One symptom: We often say “good college” when we mean “famous college.”
Declining Public Schools
It is no secret that the United States public schools have been declining for many years now - partly due to lack of funding, overcrowding, lack of competent leaders, an outdated curriculum and poorly paid teachers. The sad reality is that with only a few school districts earning a high rating, it is increasing the competition for housing in these towns with parents wanting the best for their little ones and stretching their budget more and more to afford the house in the best school district. Betsy Davos isn’t exactly doing much to improve the current of the public school system which is a shame as millions of children rely on the this system for their future.
I see this now in the current town where we live. It’s a small town, but has a highly rated school district and the difference in the cost of a similar house between this town and the town over can be in the thousands. My husband and I are assessing if this is the place where we want to be. We still have a few years before our first child goes to school.
Lack of Subsidized Childcare
In New Jersey, the median full-time daycare for an infant is $1040 per month though it varies depending on what county and/or city you live. Imagine that cost. Add another child or two, the costs add up. The US does not subsidize childcare though there has been a lot of debate around it. Childcare is a necessary expense for most families. It seems there could be a good economic incentive to provide subsidized childcare and all we need to do is agree on a way to pay for it.
My Own Parents
Growing up, my own parents were a one-income household. When my youngest sister was born (13 years my junior), after a year or two of coordinating schedules to take care of the kids, they decided that it was best if my father stayed home to take care of the three of us. I doubt it was an easy decision for them to make, let alone actually go through with it given we just moved into a new home with a new mortgage. It was my mother’s income, my father’s savings and both of their hard work, immigrant mentality and careful decisions that allowed my three sisters and I to finish college with as little student loan debt as possible. We still had some, just not as much as we could have.
I never really thought about the impact of a job loss on our family. We were a 5 person household relying on one person’s income for many years. My mother as the primary breadwinner was an SICU nurse working 12 hour shifts every few days or so. Based on my observation as a young child, her job seemed pretty secure, but it wasn’t without its mental, emotional and physical challenges.
There something to be said about watching your own parents run a household on one income. You learn to live within your means.
The Pursuit of FI
It’s seems counter intuitive that having two incomes could actually be a trap, but after reading this book and looking at some of the statistics, two incomes could very well be a trap for many families chasing the American dream. It’s not the fault of families, but the fault of rising costs eating up most of the parent’s hard earned income. Lifestyle inflation becomes automatic as the family MUST rely on both incomes to make ends meet. A job loss, divorce, or illness/death cuts the income in half and thus the livelihood of the family. This is important to understand and plan for.
Two-incomes doesn’t necessarily mean all the riches in the world. Families have to put a strategy in place to weigh the cost of one parent going to work and how to ensure that the second income gets saved instead of spent. I think this is very common in FI families where one partner’s income is used to pay down debt and is saved for the future.
I realize that many women before me have tirelessly spent their lives fighting for the right to work and for that I am grateful, but it seems the exchange of freedom to earn a living on our own might be jeopardizing the well being of our family structure.
It’s scary to think that competition is so heavy in a two-income world and this is what is driving the increase in prices for housing - which remains one of the biggest expenses for many families.
I think there is where I continue to champion the goal of financial independence. FI is about thinking outside the box. It’s about living unconventionally. It’s about using housing hacks to reduce the cost of housing or finding college hacks to reduce loan debt. It’s refusing to just go with the societal flow and creating your own version of success that allows you to reclaim some of your money, your time and your sanity.
A two-income household doesn’t have to be a trap.
I think this is an important book to add to your reading list. No, it’s not your typical personal finance book, but I think it gives a sense of the challenges many families face today and some of the possible solutions. It’s important to note too that many of these solutions require the right leaders in place and why we not only need to pay attention to our own household economics, but the overall economic system that governs all of us. If we improve the overall financial well-being of most families, I think we can create a society that functions more productively and chooses to do better.
Stay-at-home mothers in families pursuing FI have a great role to play. Don’t downplay your part. Pay yourself and understand where the money is going, not just the day-to-day expenses, but also the future long-term investments.
What do you think? Have you read this book?
Do you think two-incomes can be a trap for most families?
Are you a one income or two-income household?
Want to know what’s happening with your family’s money besides the monthly budget? Consider using Personal Capital to track your family’s finances for FREE which includes a review of investment fees and allocations.
If you are a dual-income, no kids household, I recommend this article to help you manage your money a bit better before the kids are in the picture.