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We have all heard the
phrase “keeping up with the Jones” but how many of us look at our
lives and apply this phrase. In America it has been found that
families going broke are not the poverty stricken. They are
actually middle class families that you find in every town across
America. So why are our middle class families going broke? There
are many theories about why people go into bankruptcy and two of
the major assumptions are over consumption and people cheating
they system. In “The Two Income Trap,” by Elizabeth Warren and
Amelia Warren Tyagi they discuss why these assumptions are myths
and some ways that middle class families can protect themselves.
The over consumption myth
is probably the one thing we think of the most when we see people
going into bankruptcy. Even though “The Two Income Trap”
indicates that this is a myth there are still the people out there
who just like to spend. The reason this is considered a myth is
because even though Americans do consume so much it is the big
ticket items that we are spending too much of our income on such
as a house and a car. Americans are willing to spend way beyond
their means to live in the perfect neighborhood next to the
perfect schools. They are overextending their families, making it
hard for ends to meet and adding to the family debt.
The next myth or
assumption is that people are cheating the system. This myth
deals with people who spend and spend and in the end file for
bankruptcy, leaving the government to bail them out. In other
words, they are leaving their friends and neighbors to bail them
out of their debt. In “The Two Income Trap” they state that 9 out
of 10 families with children cite three basic reasons for filing
for bankruptcy: job loss, family breakup, and medical problems.
Another 13% state acts of God, being called up for military
service, and personal extravagance. As you can see this leaves
very few people who are filing for reasons of overspending without
a care.
“The Two Income Trap”
discusses many ways for middle class families to avoid bankruptcy
through a financial fire drill. The first item in the financial
fire drill is; can your family live without one income? Have you
and your family put yourselves in a place where it takes two
incomes to pay the bills? Could your family go for at least six
months on one income and savings? Is there another person in the
family that could enter the workforce if necessary?
The second item is can you
downshift your fixed expenses? It is not the extras in life that
we need to cut back on because when tough times come, what would a
person cut out? It is important to take a look at your fixed
expenses such as car payments, house payments, and health
insurance and decide for you and your family what you can
downsize. If it is taking both incomes to make the mortgage
payment it may be time to look at finding a smaller house or
renting. It is also time to look at those car payments do you
really need such an expensive vehicle? Can you get by with just
one car? When looking at health care which is something that is
going to cost no matter what. Could you go with a cheaper plan
and still receive adequate care for your family? These are just a
few questions to ask yourselves and make some decisions on your
fixed expenses.
The third item is what is
your emergency backup plan? Now is the time to ask the dreaded
questions. What will you do if your spouse loses their job? What
will you do if a parent becomes ill and needs assistance? What
will you do if you become ill? It is so important to ask these
questions now and come up with a game plan so that if these
circumstances present themselves you are more prepared than you
would have been. Now is the time to look at getting a shorter
length car loan so that you can hold onto your vehicle for a year
or two longer and continue to pay that car payment to yourself so
that you have more of a down payment for the next one. Or it is a
time to look at adding any additional insurance coverage such as
disability insurance so that if a accident happens you have
something to rely on.
There are many things we
can do to protect ourselves from bankruptcy and “The Two Income
Trap” discusses many of them. The authors also suggest getting
yourself a book on financial planning so that you can work a
budget for your family and really understand what you are doing
and where you are going with your financial future. For more
information regarding the issues discussed in this article I would
suggest looking into “The Two Income Trap.”
Source: “The Two Income
Trap” written by Elizabeth Warren and Amelia Warren Tyagi 2003.
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