Thoughts on the ‘Two-Income Trap’

Jenny writes in:

Was wondering what your thoughts were on the two income trap. It’s the idea that a dual income household with kids is actually more likely to fall into bankruptcy and financial problems than a single income household. Doesn’t make sense to me but I got into an argument with a friend about it and wanted to hear your take.

The idea of the “two-income trap” comes from a classic personal finance book (one that was revised and brought up to date a few years ago) entitled, smartly enough, The Two-Income Trap. The book’s authors, Amelia Warren Tyagi and Elizabeth Warren, make the case that, in fact, dual income families where both adults are working are more likely to hit financial hardship than families where one adult is working and the other is handling domestic concerns.

They offer several points to back this up, each one backed up with quite a lot of data.

First, dual income households, especially those with kids, deal with a lot of extra expenses that typically more than eat up the second salary. Such families usually face child care costs, costs for larger living quarters, costs for more food, and so on, and furthermore are often so strapped for time that they end up taking on additional costs just to make their time budgets meet, such as picking up takeout on the way home from soccer practice so everyone can eat quickly before the next activity comes up.

Second, dual income households face more points of failure than a single income household, particularly when you add children. With two incomes, there are two different jobs and careers at risk for unexpected setbacks, nearly doubling the chance of a professional crisis. If you add kids, you add in additional risk of issues such as health crises and you significantly increase the logistical challenges and costs due to things such as child care. There are just so many points of potential risk and failure with a two-income family, especially with children.

Finally, escalating education and housing costs hit dual income families incredibly hard. Again, this is amplified if you add children to the mix. College costs are orders of magnitude larger than they were a generation or two ago. Housing costs have far exceeded inflation, too, and those costs are amplified if you have children as they do require significant additional space.

The core point of the book is that if your family is in a position to make it on one income, you’re more likely to enjoy lasting financial stability simply because there are fewer points of failure. One parent can focus on making a strong income, while the other parent can focus on domestic issues and logistics. You don’t have to worry about child care. There’s no need to eat out all the time. There’s a lower risk of a job loss in the family. The big challenge, of course, is that the income level of the family will be much lower than it could be, but much of that additional income is eaten up by the additional costs brought on by the commitment of so much time to an additional job.

I agree with most of these points. They match up with the experiences that Sarah and I have had during our years as married partners and parents, each with our own career. There are a lot of responsibilities and risks when both parents work full time and also have children. It’s stressful and difficult at times. There is a lot of time and energy management involved. The costs can be stupendous – for example, Sarah and I are looking forward to as many as three kids being in college at the same time in a decade or so, and forecasting those costs is incredible. That often comes at the same time as the parents are paying off their own student loans. Housing costs are incredibly high compared to what they were even a generation ago, with housing costs definitely outpacing inflation in most areas where good jobs are available.

This book nails it – there are a lot of potential points for financial failure for a two-income family today, especially one with children.

As well as the book lays out the problem, it moves on to prescribe social and political solutions that don’t practically apply to people who are currently facing or about to face this predicament. If you’re in this situation – or about to be in this situation – consider the following.

First, you need to make absolutely sure that it makes financial sense for both parents to work outside the home. There are many situations where it makes financial sense for one parent to function as a stay-at-home parent until the children are all in school. Child care costs, especially for multiple children, are tremendous, and when you add that to commuting costs, wardrobe costs, food costs (for all of the meals eaten outside of the home or ordered in because of time needs), higher taxes, and so on, you often end up in a situation where it makes financial sense for one parent to stay home for a few years.

This suggestion might not work if both parents are on tight career tracks, but that’s often not the case for both parents in the average American household. Most American families with children on the way or in the plans for the next few years should look seriously at one parent staying home with the kids. (We did this for a year with our third child and then my own writing career was flexible enough to allow me to handle some child care, too, while still working.)

Second, if you are committing to bills at a level that would make day-to-day life impossible if one of you is without a job, you need to seriously rethink that situation. Many, many families today get into a situation where the combination of their student loans and their mortgage and their consumer debt and their car loans create a situation where everything will fall apart if either partner loses their job. That is a terrible situation to be in.

Not only are you running a serious risk of financial collapse in the case of job loss, you’re ceding power to your employer. If your employer knows that you’re going to suffer financial apocalypse if you lose your job, they’re going to take advantage of that and put you in difficult professional positions. I was once in this situation, where I found myself doing pro-bono work on the weekends to salvage projects just because my job had a financial leash around my neck.

What can you do, then? Keep your expenses low. Don’t put yourself in a situation where you can’t pay the bills or put food on the table if someone loses a job. If you’re in a dual income household, you should be striving to spend significantly less than you earn and put aside money for the future. Get rid of your debts quickly. Build up a nice emergency fund. Save for retirement now while you have steady work. If you are in a dual income household and not spending significantly less than you earn (and applying the rest to extra debt payments, building an emergency fund, saving for retirement, or saving for other big financial goals), you’re making a major financial misstep.

A healthy emergency fund is particularly important. Having cash in hand if something goes wrong – and, remember, with a dual income household, you have more opportunities for things to go wrong than in a single income household – means that you can handle that problem without debt and that problem can’t cause a domino effect of problems. I usually encourage people to have a “bottomless” emergency fund; rather than saving up to some set amount and stopping, you should set up an automatic weekly transfer to a savings account somewhere and never turn it off unless employment changes. That way, it replenishes itself whenever you tap it and you can always be sure that there’s at least some money sitting there in case things go badly.

In summary, the “two-income trap” is a real thing. Sarah and I have faced it ourselves. The best way out of it for individuals is financial responsibility, particularly in terms of keeping your spending in check. You need to be spending less than you’re earning by a significant margin, and that gap should be used to get rid of debts and save for long term goals. Yes, that might mean having a smaller house than you want or staying in an apartment longer than you might want or driving a car for longer than you might want, but that’s a minor drawback compared to the huge financial problems that can occur if something else goes wrong in your life.

If you have children, you should seriously investigate the financial value in having one parent stay at home with the children, particularly when they are preschool aged, because the cost of child care and other logistics can really add up.

Good luck!