Broke On Two Incomes

(CBS)  One would think in a solid middle-class household where both spouses worked, that financial stability would not be a worry.

Yet current bankruptcy statistics show middle-class couples with kids are twice as likely to file for bankruptcy than their childless counterparts.

The reason for that occurrence is the subject of a controversial new book, "The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke."

The Early Show co-anchor Hannah Storm finds out from Elizabeth Warren, the book's co-author, some solutions to the financial problem.

Warren says today's middle-class, two-income family is worse off than families of a generation ago, because today families need both incomes to simply make ends meet.

Over two decades ago, most middle-class families lived off one-income with a stay-at-home parent who had the option to join the work force to supplement the family income in times of need. This supplemental second income option — often discretionary — provides the family with what Warren calls a "safety net."

Middle-class two income families today have no safety net, she says, because their entire income is sapped. But they are not sapped by the excesses of groceries, designer clothing, expensive vacations and expensive sports shoes and equipment. Instead, the authors say it's the non-discretionary expenses such as the mortgage, health insurance, private pre-school, college tuition and a second car for mom that has shifted the American dream and driven middle-class families into bankruptcy.

Warren explains committing both mom and dad's income to the necessary family expenses has made families more financially vulnerable than ever before.

As banking rules changed to allow for mom's income to count toward mortgage loans, families found themselves buying into larger and larger more expensive housing properties. The understanding, she explains, was a good home would buy them into a good public school district, thereby setting their children up for a solid future.

Warren warns the dual income middle-class families living off both incomes doesn't allow for significant savings.

Warren suggests the following to help families free themselves from the two-income trap and build financial safety.

Survive Without One Income

Ask yourself if the family can live on one salary and survive for 6 months, Warren suggests. If you can, money saved from a second income becomes savings for a rainy day, vacation and any needed splurges.

Down Shift Fixed Expenses

Warren says to take a look at the necessities, not the frills. Can you manage a few years without a new car? Can you choose a lower cost HMO? Buy a smaller house in a lower taxed based community? Confront these questions now, she suggests, before living above your means makes it harder to scale back on the necessities.

Avoid the Blame Game

You are not alone. Financial crisis happens to almost everyone. Warren says husbands may feel shamed by their inability to provide, and wives may feel over-burdened by the demands of bill collectors, bosses and children, so be kind. She says a couple will be under enormous strain and taking it out on each other will only make things worse.

Protect Your Treasures

Warren says to think like a family at war. Never borrow against your home. Ask the question, which of your assets do you want to hold onto? The car? The home? The health insurance policy? Decide which things you value most, and pay those bills 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 — and you should be fighting for the things you care about. Warren says you shouldn't look to satisfy the loudest or most aggressive creditor.

Warren says couples should look for some governmental relief. She suggests the following:

• Subsidize pre-school programs and make them public (Currently some pre-schools cost more than a state college tuition)
  
• Look for fully-funded vouchers for public school
  
• Apply for tax exemptions on all savings not just on education and retirement
  
• Amend Social Security Disability Insurance to cover all serious illness not those likely to end in death (Universal sponsored disability benefits)
  
• Improve financial footing for married couples so each party is on more solid financial ground if divorce results
  
• Reinstate usury laws to put a cap on how much creditors could lend families (Warren says it would cut down or predatory lending and sub-prime mortgages)

Read an excerpt from "The Two-Income Trap":

1
Just the Way She Planned
Ruth Ann smiles when she talks about the summer she was pregnant with Ellie.
Those were the good days, when life was working out just the way she had planned.

Dexter was five and learning to swim. Ruth Ann would pick him up from day care in the late afternoon, and the two of them would head for the town swimming pool. While Dexter thrashed about in the water, Ruth Ann would dangle her feet in the pool, waiting for her husband, James, to swing by on his way home from work. Dinners were late and haphazard, but no one cared. Ruth Ann's life was exactly as she had wanted it, exactly as she had planned.
And Ruth Ann was a planner. In college, she had majored in accounting. It was respectable and dependable, a little bit the way Ruth Ann saw herself. After graduation, she resisted the lure of Houston or Dallas and moved back to her hometown, Wylie, Texas, where she could live near her parents, get some experience doing payrolls and tax returns, and build up a little savings while waiting to begin what she always thought of as her "real life."

Real life began when she saw James Wilson, a friend from her high school days, who was managing a carpet and flooring store in Wylie. It was his hands, she would later say, his capable hands, the sure hands of a carpenter, that drew her to him. But it was something else as well. During her junior year at Texas Tech, Ruth Ann had broken off an engagement because she couldn't shake the feeling that her intended was not the kind of guy she could count on. With James she felt she was marrying someone who would work as hard as she did to build a life together.

After a brief courtship, they married. A year later, in January 1994, Dexter was born. Ruth Ann was back at work in six weeks.

Three years later, Ruth Ann and James took a deep collective breath and jumped. They bought their first home. It wasn't the house of their dreams, but it was the house they thought they could afford. The roof needed to be replaced and the kitchen hadn't been updated in fifty years, but the house had three nice-sized bedrooms, a big yard, and, most important, at $84,000 it was within the couple's price range. Ruth Ann recalls the day they moved, a happy confusion of uncles and cousins carrying furniture, while Ruth Ann's Aunt Ida set up a big picnic in the front yard of the new home to feed both the movers and the neighbors. That night, Ruth Ann sank down in the big old tub in the upstairs bathroom and let the joy run through her.

Two years later, in September 1999, there was another cause for celebration: Ruth Ann gave birth to a little girl, Ellie. Nine weeks later, Ruth Ann returned to work and life settled down again.

Then it happened. Just after the 1999 Christmas season, when Dexter was six and Ellie was five months old, James's boss announced that he was closing the store. A national megastore had opened a few miles away, and its huge floor-covering department was sucking away business. To save on costs, layoffs were effective immediately. James was out of work in one day.

James was frantic about finding another job. Like Ruth Ann, he didn't want to disturb the life they had put together. But nothing came through that matched his previous salary. "After I lost my job I did odd jobs. Carpet cleaning, crazy stuff. I figured any work is better than no work." Ruth Ann asked for extra hours at work, but her office was already overstaffed.

Cutting back was hard to do because they weren't really spenders in the first place. Most of their money went for the basics-the mortgage, car payments, day care, and food on the table. They hadn't realized just how tight their budget really was until they missed a mortgage payment three months after James lost his job. Both had been raised to pay their bills, and as an accountant, Ruth Ann had seen what happened to people who didn't. But they held on to the belief that their situation was temporary.

Within six months they were two payments behind on the mortgage. To raise cash, they had had two garage sales; then they sold the antique dining set that James had refinished. Ruth Ann quietly asked family and neighbors if she could prepare their tax returns for $50 apiece.

As Ruth Ann and James learned, the dance of financial ruin starts slowly but picks up speed quickly, exhausting the dancers before it ends. Few families have substantial savings, so they usually run out of cash within a month or so. Soon the charges start mounting up for the basics of life-food, gasoline, and whatever else can go on "the card." When there still isn't enough to go around, the game of impossible choices begins. Pay the mortgage or keep the heat on? Cancel the car insurance or the health insurance? Meanwhile, interest and late fees have piled on, making everything more expensive. Ruth Ann and James got a small reprieve from family. James's parents kicked in $4,000 and Ruth Ann's brother lent them $1,500. But these temporary infusions of money were just that-they covered the minimum payments for a few months, but they didn't begin to provide a way out of the hole. Before it was over, Ruth Ann had taken to parking the station wagon behind the elementary school and walking the six blocks home, figuring the bankers wouldn't repossess her car if they couldn't find it.

A neat stack of manila folders on Ruth's bedroom bureau told the story of how quickly their carefully planned lives had unraveled. The first folder held a letter from the county threatening to foreclose on their home for failure to pay taxes, along with past due notices from the mortgage company. Other files held a variety of bills totaling $12,000, and Ruth Ann's carefully documented IOUs to their families.

The end for Ruth Ann and James came with a bang. One evening Ruth Ann walked into the living room to hear Dexter, now seven, on the phone, talking to a bill collector. "My mom doesn't do that, and you shouldn't call here any more. Leave us alone." When he heard her enter the room, he whirled around, his eyes wide. He slammed down the phone and ran out of the room. Ruth Ann wasn't sure whether Dexter was afraid or angry, but she knew this had to stop....

Copyright by Elizabeth Warren and Amelia Warren Tyagi. Published by Basic Books, a member of the Perseus Books Group.