Two_Income_Trap_Warren_Tyagi_2003 - THE TWO—IN COME TRAP...

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Unformatted text preview: THE TWO—IN COME TRAP WHY MIDDLE—CLASS MOTHERS AND FATHERS ARE GOING BROKE By Elizabeth Warren & Amelia Warren Tyagi Basic Books (2003) Pages 163 —- 180 ional ac— ? core of rce rates narriage. rested in is of kids at thinks hould be illions of niily eco- organiza- irgne that uitaged is igions."113 the group ll because h their re~ iily was at those who her faith~ rad. p that sees and bank— ending is a mily issue. tan anyone 'orrn, child es than the their eco- fe . The Financial Fire Drill I |ow should a family protect itself from the Two~lncome Trap? The deck is stacked against today’s parents who strug- gle to solve financial problems on their own. A. generation of bid— ding wars has launched an army of competing buyers against any family that tries to cut back on its spending. And a generation of layoffs, divorces, and spiraling medical costs has hit pretty much ages of this book we have offered suggestions dations for Congress and state faith—based organizations, e firmly believe everyone. In the p legislatures, political action groups and school districts and community institutions. W that collective action is the most effective remedy and that it is es~ sential for reestablishing the economic security middle—class par‘ ents so badly need. But such changes take time, and families need to safeguard themselves now. So what should a family do? For starters, everyone raising a family should read a good book on financial planning. But be warned: The basic premise of most of these books can be mis— leading, even dangerous. They show how to draw up a budget or choose a mutual fund, but in most cases their advice is aimed only at those lucky families for whom work is steady, everyone is healthy, and there are no emergencies. Disaster—ma lost job, a premature birth, a divorce~is the defining theme of the financial lives of mil- l63 '- .,.-__._5 . .-'-.- -. -_.. ,-,-.'...> .€‘..'L£-.-i..w‘r1'hyfinu ti". -'i>-! v.55 53.4! .- 164 THE T\R’i)~lNC(}ME TRAP lions of families, but it doesn’t appear in most financial advice hooks-or in most families’ financial plans. Any firefighter will explain that the time to prepare for an emer» gency is be are the house catches on fire. Install smoke detectors, get the oily rags out of the garage, run through a practice fire drill—and do it now, when there is no smoke in the air. The same advice should hold for financial protection. In the same spirit as a fire drill for home safety, the clever parent should run her own financial fire drill. A financial fire drill should pose three questions: I. Can yourfamily survive without one incmne? If your family is like the average m’(,)—iiicoi‘ne family, then you face a one in sixteen chance that in any given year, at least one of you will lose your job.1 If you are a single parent, you actually face smaller odds of a layoff (be cause there is only one person at work), but the consequence of a job loss can be even worse if that sole income disappears. In either case, the litmus test is the same: Can you survive for six months without one of the incomes that you currently rely on? If you are a married couple with only one earner, then the question is easier: Could the stayuat—home parent enter the job market if something happened to the primary hreadwinner? Regardless of your group, if the answer is, no, then it’s time for some disaster planning, :2. Can you downs-heft the fixed expenses? If you are having trouble maldng ends meet, the average financial planning book advises you to “pass up those impulse purchases or another dinner out” so that you can save more and get out of debt.2 But the experts have it exactly wrong. If you eliminate all the treats now, while times are good, then where will you cut back when a real financial crisis appears?> Take another look at your budget. If you are feeling squeezed during ordinary times, it is likely that you have a much bigger problem than an occasional dinner at the Olive Garden, You have a problem with your fixed costs. Now is the time to take a hard look at the necessities, not the frills. If you’re having a difficult time making ends meet, think about low~ ering your fixed expenses, Can you manage a few more years witl’iout a new car? Can you sign up for the lower~cost HMO, even if that \ s means dler hi should smalle famih . flexihil credit: Lurl shoppi affirm] . dream do it. guara: wiser oversii even i Tl’u splurg. tion c; away i or tre; can di pense: can c: 3, l painfi grand your s for th happi sider rate is Th your l"‘.‘-"-"__-"-";F. -—'.'-\'—','. ';. .. The Financial Fire Drill i65 "ice means shifting the kids to a different pediatrician? Would your tod- l dler be all right in a less expensive preschool? And, toughest of all, Ier- ‘ should you move to a cheaper house, one you can manage on a Fiat l smaller mortgage? These are obviously difficult decisions for any and family. But it is better to confront them now, when you have time and mm flexibility to make reasonable choices, rather than later, when the nne creditors are calling and your back is to the wall. Lurking in these words is a piece of corollary advice to the family shopping for a home: Don’t stretch yourself to buy a house you can’t l?" is afford. if the only way you can meet the mortgage payments for your “9” dream home is to tighten your belt and commit both incomes, don’t “1 If do it. The fact that you have been approved for a mortgage is no the l guarantee that you can actually afford it. As painful as it may be, it is ‘lOb ‘ wiser to rent for a few more years or to buy a smaller home. That “5‘37 , oversized mortgage will leave you with no room for error, no cash for rout ’ even minor emergencies—Jet alone a real disaster. tied There is a silver lining to all this abstemious advice. It is okay to the splurge on extras. Never mind the dour looks from the Over—Consump- d to i tion camp. 80 long as you are staying out of debt and putting something or is ‘ away in sayings, you should feel free to buy the kids a new pair of Nikes 1 or treat yourself to a night on the town. If the tough times come, you uhle ; can drop those expenditures in a heartbeat. As long as your fixed ex— "1 to l penses are low enough that you can manage during a crisis, then you lean l can count yourself secure enough to go ahead and have some fun. ‘g- If 3. What is your emergency backup plan? Now is the time for the ‘ Will painful game of “what-ifs.” What if your husband loses his job? What if "k at grandma’s health fails? What if your own health fails? What if you and it is your Spouse split up? The pOint of this litany is not to send you running “"1” at for the aspirin bottle. but to help you be prepared if the unthinkable happens. As difficult as it may be, you need to make a plan and to con- fl‘ills. sider what could be done now to make that plan feasible. Add a sepa- loW« E rate line to your budget for these just—in-case safety precautions. hont g The emergency backup plan may cause you to rethink some of that your financial commitments. Pay particular attention to timing. In fi— l66 THIS T\'\”()>I;’\'(i()i\iii TRAP nances, long-term commitments are the most dangerous kind. Some- times they are unavoidable, such as when you buy a home or go to college. But whenever possible. go for a shorter con’uniti’nent, since that will give you what you most need in times of troublemtiexibility. So, for example, choose a 36-month car loan instead of a 60~1nonth commitment. If that drives the payment up too high, then heed the warning: You cannot afford this can and you should opt for something cheaper. Once you pay off this car. hang on to it for an extra year or two and keep making payments to yourself: After two or three times around. you can pay for your car in advance, giving: yourself that much more flexibility in your budget. Details may vary on any loan. but think of every long-term commitment in terms oil walking a tigl’itropc«——50 long as your ian'uly is on the rope, there is a risk of dis» aster. Take the shortest walks you can. You should also assess your insurance coverage. Should you purchase a disability insurance policy, just in case? Should you beef up your life insurance policy? Talk with your parents about their plans. Can you help them buy long-term care insurance? Perhaps your siblings could help out as well. Long—term care insurance can give several families-w your own. your parents’ and your siblings—a better chance of surviving financially if your parents need daily assistance. \Vlien everyone is healthy, the thought of disability can seem like a rei'i'iotc possiliiility. a bad dream that strikes others, not busy families with young children. But the fact remains: Medical problems send threequarters of 3 mil- lion families to the bankruptcy courts each year. So think about more insurance. If you never use it, then count yourself lucky. Help that won’t help. A growing number of credit card companies have begun to hawk “credit protection” insurance, urging you to “pro— tect your family” in the event of a job loss, disability, or death in the family. This sounds like a perfect prescription, but buyer beware. Most of these policies do nothing more than make the minimum monthly payment on the balance you were carrying at the time you lost your job or developed a disability: Some policies also promise to discl‘iarge your debt in the event of your death. but this, too, is a flimsy benefit. Re— gardlm your b; debts i Mom: does: 1 “ expci is an aw disahi‘i ITlOUt‘fi ill/hr”: \Vhai They they 2 Tlit‘Si offer At temp math troul‘ Mayl Sick i your abou A1 thing is lik any « Fem sum iiitis the best me— o to ince ility. inth a the hing u‘ or lines that loan, mg a ‘diS- base I‘ life i you ould iris»- hing ue is lity, a then. i inil— ithYE? ianies “pro- n the .‘v’iost mthly or job * your t. Re- . .._... fl—fi-I—i-‘u—FF-I-If-HH '- , mm«MWWwvlmwywuwsmtmfifimm,Wm:’ The Finmtcial Fire Drill 167 gardless of your insurance status, your heirs will not be required to pay your balance; in most cases the credit card company will write off your debts even if you never purchased the credit protection insurance."3 Moreover, it you don’t have an outstanding balance, credit insurance doesn’t do a thing for you. \Vorst of all, this form of insurance is wildly expensive. if you carry a $3,000 balance, you’ll pay over $300 a year for an average policy‘t if you can scrape together some money, buy a real disability policy from a reputable insurance company or put your money in the bank. Credit insurance is a suckers bet. iV/wn the House Is Already on Fire What about those families for whom the tire drill comes too late? They are the ones most often ignored by the advice peddlers, and they are the most likely to be victimized by unscrupulous creditors These are also the families to whom this book is dedicated, so we otter them a few direct words of advice and (we hope) comfort. Avoid the blame game. With the benefit of 20/20 hindsight, it is tempting to beat yourself up about the smarter choices you might have made. But it you are like nearly 90 percent of the families in financial trouble, you got that way because something lousy happened to you. Maybe your business went under, your husband left you, or you got too sick to work. If you made the decisions you did in order to take care of your family, then, at least in our opinion, you have nothing to feel guilty about. Go easy on yourself; your creditors certainly won‘t. And go easy on your spouse. Your financial well~being isn't the only thing at risk right now; so is your marriage. Consider this: If your family is like most, your marriage may be more vulnerable right now than at any other time in your life. Myra, a dental hygienist in a small town in Pennsylvania, filed for bankruptcy after her husband lost his job. She sums up the problem neatly: “Except for the financial problems that al- most destroyed our marriage, we have a perfect relationship. Money is the only thing that we argue about, but that’s enough to ruin even the best friendship.” Husbands may feel shamed by their inability to pro- 168 THE TWOJNCOME TRAP wide, and wives may feel, overburdened by the demands of bill collec~ tors, bosses, and children. Be kind. You are both under enormous strain right now, and taking it out on each other will only make things worse. You should also know that you are not alone. There are several mil— lion families in situations not too different from your own. They worked hard, tried to provide for their families, and ended up in fi— nancial hell. You may not know it, but scattered among the folks in your grocery store, your PTA, your church or synagogue, and even your family, are men and women ~iust like you—people who have done their best for their families and who are now in financial col— lapse. You are in good company. Hold on to your treasures. The greatest danger for a family in finan— cial distress is not hill collectors (although they can be the most annoy— ing). The greatest danger is false optimism. We heard it over and over again in our interviews: “We thought Mark would be back at work right away.” “I thought I could work things out with my husband after a little time apart.” “we didn’t think grandpa could go on like this much longer.” These families knew they had been hit by a disaster, but they didn’t respond fast enough because they thought it would pass quickly. That is the deadly trick about a financial crisis: It is nearly always im- possible to predict when it will end. For families already in trouble, now is the time to plan for the worst, just in case the bad news doesn’t get better. So turn off the phone, ignore the junk mail, and pop in a Video for the kids. It is time for some cold, hard calculations. A family facing a financial crisis should think like a family at war. You must concentrate on preserving what matters most, and you must let the other things go. When trouble comes, ask the central question: \Vhich of your assets do you most want to hold on to? Maybe it’s your car, your home, or your health insurance policy. De— cide which things you value most, and pay those bilis first. It doesn’t matter who else is making demands on your resources or what they are threatening you with. Once you are in trouble, you will need to fight—wand you should be fighting for the things you care about, not trying to satisfy the loudest or most aggressive creditor. eli ii ban moi ties. few risk f: you year you: that ablt witl ll ban job. the illec- strain irse. l mil~ They in ii- lks in even have d col~ finan— innoy- d over it right a little much it they prickly. iys im- ‘ouble, doesn’t 'ip in a at war. nd you central on to? cy. De- doesn’t nit they need to mt, not The Financial F ire Drill 169 Most important, do not, under any circumstances, put those assets at risk. You will be bombarded by offers to “lower your monthly pay ments” by taking out a second mortgage or cashing out the equity from your home. Don’t do it. Refinancing their homes to pay down other bills is the single biggest mistake made by families in trouble. The mortgage companies (and even some financial advisers) may tell you it is savvy to replace your high-interest credit card debt with low—interest mortgage debt. But if you are in financial trouble, you will probably be steered into a high-cost, subprime mortgage, mak- ing any gains illusory. Worst of all, you will be jeopardizing the roof over your family’s head. Take a moment to consider. Do you honestly believe those “low monthly payments” are a Free gift? Not a chance. If the mortgage lender gives you a lower rate than the credit card company, it is because the mortgage lender gets something in re- turn’the right to push you into the street, seize your home, and sell it. If your troubles get bad enough, you can file for bankruptcy to eliminate your high~interest credit card debts and cash advances, but bankruptcy cannot help with a home equity loan or a refinanced mortgage. You must pay the mortgage lender in full (plus all penal- ties, late fees, and interest) or face foreclosure. The chance to save a few dollars a month on your credit card bills is not worth running the risk that you won’t have a place to live. Plan strategically. If the bills keep piling up, take a realistic look at your overall situation. Can you pay off your debts in the next two years? If the answer is no, talk to an attorney, read a good book about your legal options, and look into filing for bankruptcy.5 But be aware that bankruptcy is essentially a one-time option that will be unavail- able again for six years. Once you file for bankruptcy, you must fly without any parachute.6 If at all possible, wait until the crisis has passed before declaring bankruptcy. If you are out of work, wait until you have found a new job. If you have a child who is seriously ill, wait until he is better and the health insurance has paid what it owes. it can be extremely tough 170 rm: Twoincoms TRAP to hold on that long, especially if collection notices are stacking up _ with c and creditors are calling you every night. But if you wait, you mini- - you ca mize the risk that you will once again find yourself buried in debt you in after you file for bankruptcy. The bankruptcy system gives a rare op- end u portunity for a second chance. If you wait to file until the worst of merits your problems are over, you give yourself the best odds of getting ex- tomcr actly what you need from the bankruptcy judge—ma fresh start. a lot n Cuiltfree defizult, \Vhat about all those bills you will never repay?J more W hateyer you do, don’t reassume any old debts that were discharged self lit by the courts. One in four families signs on to pay off debts they no you sl longer owe after filing for bankruptcy.7 “ilin Because they don’t una bankri derstand their rights. As the story about Sears showed (chapter 6), ‘Wc creditors routinely bully bankrupt families by tl’ireatening to repos— panics sess the family’s possessions. Except for the house or the car, this is you an nearly always an empty threat. Creditors almost never repossess? be- your 0 cause it is just not worth their time and money. It typically costs a medit- creditor at least $350 to send a truck to your house and cart some- Bes thing away; and even more to clean it up and resell it.8 Are your used paying goods actually worth that much? much Another favorite tactic is to warn families that no one will ever took a issue them another credit card after they file for bankruptcy. Many lost ye creditors hire agents to patrol the waiting rooms in the bankruptcy would courts, typically friendly older ladies who make seemingly generous ever 2; offers: “The company is willing to extend you a line of credit, you’ll that ti 7 agree to repay the balance on your credit card.” But think again be- intere fore you sign, These agents may seem like nice people, but they are and ti peddling poison. Not only will you get stuck paying a bill you no time longer owe? the effective interest rate on that new line of credit may Thi be as high as 1,000 percentl‘J \ Airlin How will you get a new credit card if you forfeit your old one? By their opening your mail. Within six months of filing for bankruptcy, 84 L they 1 percent of families had already received unsolicited offers for new mean credit.m Half of bankrupt families received more than thirty offers! then .2 You may find that after filing for bankruptcy you are more popular familx *«WL‘;..:'...‘.._....... .. .. .. _. .. . ay? gad 5'10 :11- 5), OS- «21' my icy )IIS u’ll {1'8 HO my 1-— l'lh' y'"."nmu'n:l l'm UH” lTl will: l_'|'l'(lll' (‘urcl l’llllll);l|1l("h‘ lllnn {‘\'I'I' lH--|Iol'c. l.l'll(ll‘!'.‘i liumx' {lull you trunnot (la-lure l‘ntnkr‘uplry :tguin Ior' xix _\'l-:u‘w. :nul lllov lull-ml }n11u|:1y~4l'ill lu' ululcr enough E‘inzluL-iul ~:truin that you will ~:oon mul up (.‘zlrl‘yiug :1 balance :nnl making: m...
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