Personal and Family Finance: The Debt Trap savvy consumer only needs to turn on the local news or open up a national newspaper to hear that Americans are burdened with ever-increasing amounts of debt. The reason for this, according to Elizabeth Warren, is not due to a recent phenomenon, like the ‘credit crunch’ or the fall-out of the subprime mortgage market, but a long-standing issue that relates to what she calls the Two-Income Trap. Warren states that as more women began going to work, rather than use the money to supplement necessities, instead the extra disposable income made luxurious versions of basic necessaries, like larger houses, SUVs, vacations, and going out to eat seem more accessible and desirable. Instead of a small home, a car, a vacation near the home, and home-cooked meals, families used the money coming from the wife’s second income to buy pricier versions of shelter, food, entertainment, and transportation.
Because of the new infusion of money into the middle-class, the cost of college educations went up, and families, willing to pay for what has traditionally functioned as the securest route to staying in the middle-class, faced with even higher expenses for their children’s tuition than ever before. Then, when ordinary American families suffered a financial crisis, they were saddled with expenses they could not afford. The increase in what Warren calls fixed costs, like a mortgage, is especially damaging, because if one partner loses a job then the family’s means of supporting its lavish but seemingly ‘normal’ middle-class lifestyle can easily collapse, and there is little the family can do to get back on its feet, because it cannot pay the bank or its credit card companies.
The rapid injection of women into the workforce increased the standards and also the demand and thus the cost from everything from houses to college. Also, having two parents work drives up family expenses. Two cars are required, with gas for both commutes. Day care is an expense, and often so is the need to hire a housekeeper, to go out to eat more frequently — even to dress for the office. But parents do not want to sacrifice an extra salary or a home in a nice area, often rationalizing that they need to stay in places they can ill-afford for the sake of their children’s education.
Once upon a time, if the father in a household lost his job or faced a financial setback, the mother could go to work to offset the financial crisis, but now couples are ‘addicted’ to the two-salary lifestyle.
Warren advises families to cut back, and essentially budget themselves as if they only had one income. Pay the regular, family expenses from one salary, rather than from both salaries as ‘insurance’ for the rainy day that will inevitable come. Families must need to engage in regular ‘financial fire drills’ — doing a preliminary audit of expenses, to make sure they can still remain solvent with their heads above water, provided they face some unexpected circumstance or simply a downturn in the economy, as is occurring today because of the increased price of gas and looming recession. According to Warren’s companion book All Your Worth, families must clearly distinguish in their budgets from ‘Must Haves,’ such as rent, mortgage, gas, food, and car payments, with ‘Wants,’ or extraneous expenses. If ‘Must Haves’ exceed 65% of the family budget, the family is courting disaster, given that one financial setback could mean a loss of shelter, transportation, and basic necessities.
Warren does not blame spendthrift families or selfish women, it should be noted. Warren believes that requiring more stringent standards to obtain mortgages of any kind is essential, so couples do not take on more debt than they can handle. She also advises against such tempting schemes as refinancing a home to pay for luxuries or even living expenses. Warren calls for Congress to regulate credit card companies and the amounts of debt that they charge, so consumers will not be tempted to take on more credit card debt than is wise. But ultimately she stresses that it is the consumer’s responsibility to distinguish between necessities and luxuries, and above all to keep in mind the danger of buying necessities that function as luxuries, by purchasing that large SUV, for example, when a used Corolla might suffice. Some of the ideological tone of her work may make feminists uncomfortable, but viewed from a purely financial standpoint, boiled down to its barest essence, Warren is suggesting that to live below one’s means and prepare for potential financial setbacks are important steps on the road to financial security. She does not even state that women should turn back the clock and head home, acknowledging the changes that have occurred in the American economy are irreversible, but she does say that both men and women must have a realistic point-of-view of what they can afford, for better or for worse.
Works Cited
Warren, Elizabeth with Amelia Warren Tyagi. All Your Worth. Free Press, 2006.
Warren, Elizabeth with Amelia Warren Tyagi. The Two Income Trap. Basic Books, 2003.
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