If you listen to politicians, they talk about the middle class all the time which is the reason why nothing gets done. There are many theories to how to help the middle class and part of the concern is while the rich can spend, they can only buy a limited number of goods and services. For the economy to do well, the middle class has to spend, however if the middle class is spending, at some point they spend too much. What is good for the economy is not necessarily good for each household.

The question is why are households including two income households increasingly going broke or declaring bankruptcy? In a book written by Elizabeth Warren and Amelia Warren Tyagi titled The Two Income Trap – Why Middle Class Mothers & Fathers are Going Broke? published by Persues Books, NY, 2003.

There are many reasons why the middle income or two income families are going broke and one of them has to do with interest costs and credit. Many years ago it was hard to gain access to credit and because it was hard, most people did not access it. They lived their lives as much as possible with it. Credit card was invented with Diners Club and know the two biggest names are MasterCard and VISA. The banks own most of the shares in the companies and individual banks “sell them or give out credit” as they see fit. If you pay off you credit cards every month, the service is invaluable. If you do not and pay fees and late payments and other fees, you are the people the banks want as customers, you make them money. There lies the problem, the people who need the most help, the people who should have the least credit and the money makers or there is very little reason to stop them from having credit to pay interest upon interest and other fees along the way.

What should the average person do – go through the financial fire drill on a regular basis.

1. Can your family survive without one income? Could you survive on one income for 6 months?
2. Can you downshift the fixed expenses? How much of the budget is fixed expenses or need to be paid month after month no matter your income? What can be cut to save on expenses? Do not stretch yourself on a house you can not afford. Most people move 4 or more times, buy then upgrade with a bigger down payment.
3. As long as your fixed expenses are low enough for you to manage through a crisis, then you can splurge or have fun.
4. What is your emergency backup plan?  Whenever possible go for the shorter commitment, that will give you most need in times of trouble. It will also save you money – you will pay less interest.
5. Plan your expenses and solutions the same as in business. If you have to pay creditors, remember companies plan for non payments.

Linking to dividend paying stocks, above MasterCard and VISA were mentioned. For the past few years, the companies have maintained a 40% return on investments and their stocks rose in value. The new concern in the market place is will Amazon, Google and Pay-pal on the phone change those margins to under 10%?  There are many reasons why the 2 income trap of the middle income group is under pressure and it will not likely let up soon, there are many individual stories of families doing ok and well.

There are more questions than answers, till the next time – to raising questions.