Two incomes, more debt?

As a bankruptcy expert, Elizabeth Warren has seen the devastating effects on families when their finances collapse. She has also watched the number of bankruptcies escalate, rising 400 percent in the past 25 years. By the end of the decade, she says, an estimated 6 million families with children - 1 in every 7 such families - may declare bankruptcy. This year, more children are going through their parents' bankruptcies than their parents' divorces.

But Ms. Warren, a law professor at Harvard, rejects the conventional theory that overconsumption - squandering money on big-screen TVs, McMansions, restaurant meals, oversized cars, and luxury vacations - is to blame for insolvency and all those maxed-out credit cards. Instead, she points to the high cost of housing and education - fixed expenses that can quickly create a sea of red ink when families face layoffs, illness, or divorce. Skyrocketing healthcare costs add to the problem.

Ironically, Warren sees Mom's paycheck - a family's second income, the very asset meant to provide more financial stability - as a potential culprit rather than an economic cure. When middle-class mothers began entering the workforce en masse, she explains, their incomes gave parents more money to spend on housing. This created "frenzied bidding wars" for homes in desirable school districts. A deregulated mortgage industry compounded the peril by allowing homeowners to assume larger mortgages.

As a result, Warren says, dual-income families have less discretionary income and are more vulnerable economically than their single-breadwinner counterparts in the past.

She spells out her unusual theories in "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (Basic Books), written with her daughter, Amelia Warren Tyagi.

"Two parents working hard at two jobs is not a guarantee against economic disaster," Warren says in a phone interview. "Today's parents feel they have no option but to pour enormous energy and all of their economic resources into getting their children into decent schools."

Problems arise, the authors add, when couples commit both incomes to fixed expenses. "Families aren't going broke because of one extra pair of Nikes," says Ms. Tyagi, a business consultant. "Families are vulnerable because they've stretched the fixed costs they have to pay month in, month out, no matter what. If something goes wrong and you face a period of unemployment, there's no way to cut back on the mortgage."

The No. 1 question every two-income couple needs to ask, Warren says, is whether their family can survive without one income. If not, she urges them to create an emergency backup plan as a hedge against the possibility that one of them will lose their income at some point.

The authors shun the conventional advice financial advisers often give, such as: Keep track of every penny. Don't eat out too often. Save on dry cleaning. They take the opposite approach, encouraging families to enjoy treats. If a layoff or illness occurs, the money allocated for these small pleasures can buy necessities.

Barbara Bergmann, an economist and a senior research associate at the Council on Contemporary Families, disagrees. She criticizes their theory that working mothers' salaries are partly to blame for the high rate of bankruptcies, calling it "totally fallacious." And she takes issue with the notion that the money mothers earn has fueled bidding wars.

According to the Bureau of Labor Statistics, Ms. Bergmann says, housing costs have risen 5.1 percent a year since 1970, when married mothers began entering the labor market in substantial numbers. During the same time, prices of consumer goods have gone up by almost the same amount, 4.9 percent a year.

She notes that rising mortgage payments include the home-equity loans people use to finance cars, renovate houses, and pay off credit-card debt.

For some two-income couples, cutting back on expenses remains important. In the early years of their marriage, Joe and Kristie Tamsevicius of Gurnee, Ill., faced more than $30,000 in credit-card debts. Mrs. Tamsevicius, who worked her way through college, had student loans to pay off. The arrival of two children added more expenses. "Babies are money-eating machines," she says. "They need so much."

Page: 1 | 2