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the two income trap

In doing research to talk about budgeting at my conference talk last month I read some interviews with Elizabeth Warren about her book, "The Two Income Trap". I read All Your Worth last year and really liked it. In reading the interviews and summaries I opted not to read The Two Income Trap because it seems to be mostly a public policy book, whereas All Your Worth was about stuff you can do, but the concept behind the book was interesting.

We have this idea that bankruptcy numbers have been on the rise because people spend frivilously. But that's not really the case when you look at incomes versus the cost of living. medical bills, not overspending, account for most bankruptcies. As a society there are a lot of areas where we've all cut back since the days we're so nostalgic for... even my parents have said that when I was a kid there weren't these discount places to get cheap shoes for us. Very few people wear 3-peice wool suits to work every day.

A big reason we've had to be thrifty is because housing costs have increased in cities with good school districts. It's a competitive world of haves and have nots, people feel pressured to move out to the newer areas so their kids can get ahead, pick their side of the divide. But that competition drives up the cost of living on the "right" side of the tracks, where areas without good schools get worse and worse.

One solution is to have both parents work. You would think this would lower bankruptcy because more money is coming in, but the numbers aren't reflecting that. Here's the problem she describes: with both parents working to make ends meet, if one parent loses his/her job it's up to that one person to get a new job FAST, and the existing mortgage/daycare/car expenses aren't going away while that search is going on.

Back in the day when only one parent worked, if that parent lost their job, both parents hit the street to try and replace the income. Yes it's scary to have no income, but it reminds me of the awful quote you hear in the aircraft industry: "An airplane with two engines has twice the chance of losing an engine."

This all makes it very clear why, in "All Your Worth", she recommends living on half your income. Add up all your mandatory expenses (mortgage, insurance, contractual obligations, USDA food budget minimums) and keep it under 50% of your take home pay. Having a second income is great if you're using it to save up or get ahead, but if you depend on the majority of your income just to make ends meet, that's a risky situation.

Of course, take all this from me being biased. Right now we do NOT live in a nice school district that Warren labels as so important... time will tell, maybe in two years josie will be in school, I'll snap and have to move out someplace pricey, my lofty goals of raising my child in among economically diversity cast aside.


( 7 comments — Leave a comment )
Mar. 25th, 2014 01:07 pm (UTC)
We did buy a smaller house than we could "Afford" so that if I ever lost my job we wouldn't HAVE to move, at least not withina year or two...

We don't live in a nice school district either though. We're kind of debating whether to stay or move. There's pros and cons of doing each. It's interesting how most of my friends moved to the same one or two or three districts-- yet there's obviously thousands of kids in the less "desireable" districts. It's a definite class thing... If we moved to the fancy district we'd definitely have to get a smaller house and/or yard, maybe even an attached home, or a view of a highway or something. Maybe it would be worth it, I don't know.
Mar. 26th, 2014 11:10 pm (UTC)
I haven't read the book, but the idea as you present it seems a bit confused because it really depends on which decade/century one is referring to as "the good old days". If you're talking about the fifties and early sixties, that's not exactly a fair comparison. That was an era when large parts of the world had either recently been completely turned into ash (Europe, Japan) or hadn't yet been developed (India, China, Brazil). This basically means the U.S. was one of very few functioning industrialized nations who produced all the stuff the rest of the world needed to build and re-build itself. Jobs were very plentiful. You could rely on only one person to have a paying job. Not because the woman would step in if the man lost his job but because most people weren't out of work for very long due to huge demands for labor. Also because of the demands for labor wages were high relative to now (practically no competition from the a fore mentioned other nations). The theory that women would go look for work if the man lost his job doesn't seem very plausible to me in this era because 1. women got paid explicitly and intentionally less for the same jobs 2. women could get very few jobs and the jobs they could get didn't pay nearly as much as men's jobs 3. I don't think men of that era would be willing to take care of the kids while the women worked.

If the era you're talking about the eras before the 50's, obviously there is a lot of variation depending on time period. However, I do think that one cultural thing had been different prior to the middle of the 20th century. That is, people were much more likely to live close to and/or with extended family and multiple generations. This actually means they could depend on many more than just one or two incomes in the group and/or move in with family if needed. Also children were much more likely to be sent to work starting with their early teens if the family was hard up.

I do agree that it's a good idea to not live paycheck to paycheck if you're anything above poverty level. It turns out if you look at people's incomes and spending, the percent of people who live paycheck to paycheck is almost consistent across the economic spectrum (it's a little concentrated at the bottom but not much). When I first learned this I was surprised but upon further thinking it made sense. Many people compare themselves to their neighbors and try and keep up with them. If you earn more, it's likely true for your neighbors too so there's more to keep up with. Personally, I think trying to live on 50% of your income is a bit unrealistic, but hubby and I do 80%. We figure should one of us loose their jobs there are other luxuries we could cut to make up the difference (gym, entertainment, eating out, etc.).

Anyway, a book you might be interested in if you haven't read it is "When everything changed" by Gail Collins. It's a great intersection of money, politics, and gender.
Mar. 27th, 2014 11:53 pm (UTC)
Can you explain this school district thing?

Here there are certainly bad schools, but that's more a factor of the people in administration and actually teaching there. School boards here are at least the size of a county (or multiple counties!) or city, and they mostly get funded equally based on the number of students there, so I'm not sure there's this same inequity that American parents really seem to fear.
Mar. 28th, 2014 03:52 am (UTC)
Where I live in the US, the schools are funded by property taxes. Property taxes are higher in nicer areas with bigger houses and yards. Not sure if that's what its like where Spacefem is, though.
Mar. 28th, 2014 02:39 pm (UTC)
Schools are funded by property taxes here, but it's collected for an entire county and then redistributed. So, an entire city and it's suburbs would be included in one school board, and they would all get roughly equal funding per student.

I'm not entirely sure, but I imagine the province does some higher level redisbrution so that the farming counties don't have substantially worse education than say, the city of Toronto.
Mar. 28th, 2014 03:58 pm (UTC)
That's not how it works here. When we file taxes, we're even asked what school district we live in. There are districts that haven't passed a bond issue (question on the ballot about increasing school funding) in YEARS, people just won't vote for it. So people in other school districts say, "Our money had better not go to those areas!" and so it goes.

The problem is further complicated by terrible urban sprawl in some cities. They're so spread out, everyone is trying to get away from the "bad" areas and those are the people who'd vote to fund schools. there's just nothing to even anything out.
Mar. 28th, 2014 04:00 pm (UTC)
How big is a district?
( 7 comments — Leave a comment )

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