Families Face Dual-Income Dilemma

After their first child was born, Mary Day, Madison, Wis., questioned why she was working full time as a teacher. The decision to quit--a no-brainer for her and her husband Joe--was based on only one factor. "The children," says Mary. "I just thought I should be the one raising them. We looked at our budget and, even though we didn't think we could do it at first, we just started cutting and cutting and skipped cable and made other decisions."

The Day's second full-time income had been nice while it was rolling in. But the decision to raise two children on less money required sacrifices. The Days drive older cars, their vacations usually are family-based and relatively inexpensive, they cut cable television, they don't go out to eat very often, and they set priorities. "It all just works," says Mary.

When asked about quality of life now that there is only one full-time income, plus her small salary from working one day a week, there's no hesitation in her response. "I love it. And my kids love it." She adds that once in a while the children--ages four and eight--will ask for something, and she'll respond that they can have it if she goes back to work. And their response is just as emphatic: "No! We can do without."

Feeling the squeeze

For other families, though, the dilemma of whether to be a dual-income household or budget for one income is not as clear-cut.

Each family is different. Spending patterns vary, views on raising children vary, and short-term and long-term financial needs vary. It's impossible to generalize about how lucrative a second income actually is, particularly with the added expenses of child care, commuting, parking, work-related clothing, lunches, vending snacks, and so on. But a growing number of dual-income households are taking another look at the expenses associated with the second income and asking, "Is it really worth it?"

The modern two-income family brings in 75% more inflation-adjusted income than the one-income family of a generation ago. However, that same two-income family has less discretionary income and far more financial instability, particularly if both incomes are needed for fixed expenses and suddenly there's an illness or unexpected layoff.

So why do some families--regardless of the number of incomes or amount--feel the squeeze more than others? One reason is our love affair with "affluenza," described as an epidemic of stress, waste, overconsumption, and environmental decay. Some families are squandering money on more and more "stuff" to keep up with the Joneses--ironically, often while the Joneses are struggling to keep up with other families. Others are paying the minimum due on credit cards and barely making a dent on the principal. When there's little left over for discretionary spending, those families are one layoff, medical crisis, or divorce away from financial disaster.

Bottom line doesn't tell the whole story

The dilemma facing other families, though, is about more than just having money for current expenses--it's about choice. For some women, regardless of whether they are the secondary or primary wage earner, the decision to work may revolve around the desire to use a college degree or make a difference in the community outside the family. Some women pursue a career because they see their job as an integral part of their identity. Some women want financial independence or they may want to maintain job viability. And others join the ranks of the employed to improve their financial future or that of their children by putting the extra earnings into retirement savings or college funds.

There is concern, though, that many of today's dual-income earners may be working without a safety net. For families that commit both incomes to fixed expenses like housing and car payments, the risk is high. If something goes wrong--such as a health crisis or temporary unemployment--there's no simple way to cut back on the mortgage payment.

Playing financial jeopardy

Elizabeth Warren, Harvard law professor and co-author of "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke," believes there's a dangerous pattern being played out in dual-income families across America. She surveyed more than 2,000 families, looked at government data on consumer spending, and concluded that families are going broke over mortgages.

The problem, asserts Warren, starts with high demand for good schools in decent neighborhoods. Increased demand in those neighborhoods pushes housing costs even higher, stretching budgets to the breaking point. With more expensive houses come higher property taxes, larger insurance premiums, bigger utility bills, and more maintenance costs. The income squeeze also is a product of rising costs for health care and day care, and, for most households, more than one vehicle.

Overuse of credit cards isn't helping the problem. In 1989, the average credit card debt for an American family was $2,697, calculated from the Federal Reserve Survey of Consumer Finances. That figure jumped to $4,126 in 2001, representing a 53% increase in credit card debt (all figures are measured in 2001 dollars).

Jeanne Hogarth, program manager of Consumer Education and Research with the Federal Reserve Board in Washington, D.C., has reviewed several research studies on credit card use by families. "My interpretation is that clearly the added earner in the household is a 'cushion' against unemployment risk, which may be why some dual-earner households feel more comfortable carrying a balance." In other words, dual-earner households expect some income coming in to be able to continue to make payments.

That expectation may be their downfall, contributing to yet another theory that the blame for high bankruptcy rates and maxed-out credit cards is simply overconsumption. In her 1998 book, "The Overspent American: Why We Want What We Don't Need," Juliet B. Schor insists that debt-ridden families pursue the baubles of social status as well as the necessities of basic security.

Take action

What's a dual income household--or any household for that matter--to do? There are relatively painless ways to make ends meet.

Play "what if." Ask yourself if you can get by on only one income. If fixed costs and regular payments are taking a large chunk of both incomes, that should raise a red flag. Plan your budget so, in a crisis, you can make ends meet on one income. Keep housing costs in check. Experts advise resisting the urge to stretch the budget and splurge on a bigger, more expensive house. Try to stay within the recommendations of experts. Ideally, basic housing expenses--mortgage, insurance, and taxes--would eat up no more than 25% of your pretax income. Some lenders allow you to spend 31% to 33%, although some now go as high as 60%. The bigger the mortgage bite, the more likely you are to run into trouble. Pay down debt. Get a handle on credit cards by only charging as much as you can afford to pay in full when the bill comes due. Consider debt consolidation through your credit union, or get help from the local Consumer Credit Counseling Service. Stash more cash. Put enough cash into money market or share certificate/certificate of deposit savings vehicles to support yourself for six months if necessary. Many people don't plan for the possibility of a layoff, although most of us know someone who's been laid off, or we've been through one ourselves. Beef up savings. Almost one-third of employees still don't contribute a dime to their 401(k) retirement plans. Many families don't have an emergency fund to fall back on when the refrigerator goes on the blink or when the car needs major repairs.

And for families who decide to take the plunge and forego that second full-time income, there can be substantial nonmonetary payoffs. "Our number one thing is 'what's best for the kids,'" says Day. "Once we made that clear decision, then everything else has to fit under that. They keep us centered."

Published May 17, 2004