the two income trap

money-trapHaving a family nowadays almost always requires both parents to be working and earning. The costs of child rearing are pretty hefty and would be difficult to manage if living only on one spouse’s income. When I gave birth to Uri, Turo and I decided it was best for me to take a break from work and spend more time instead in taking care of our children. This was a very bold move, given the financial implications, but it was an “investment” that we wanted to make during our children’s formative years.

In the book The Two Income Trap, the authors argue that sending both parents to the workforce does not guarantee financial security. While two income families certainly make more than a one income family, by the time the basic expenses are paid, and the costs of joining the workforce are paid, the family actually have less money at the end of the month to show for it. Families that are maxed out living on a two income lifestyle are in a heap of trouble when one spouse loses his or her job.

I can’t say this was the case for us. Maybe because even when I left full-time employment, I always found ways to earn extra income on the side. Or maybe because I never earned much to begin with. LOL. But this is not to say that it was financially easy for us.

Every quarter I update our household budget and I am faced with the glaring reality of the increasing costs of child-rearing over time. Heck, we’re a small family living a simple lifestyle and we take conscious effort to cut back on costs and only spend for the basics and maybe a little beyond the basics, but it’s still financially difficult. I can’t imagine those families who earn less than we do but manage to go malling regularly and follow the latest fashion trends. I always wonder what costs they cut back on, when there’s hardly anything we can cut back on (mystery # 1).

Tonight I thought of revisiting our monthly budget after staring at our grocery receipt for half an hour wondering how we spent P5,000 over the stuff that we regularly buy. And this is just for two weeks (mystery # 2). Besides, we also need to come up with a drastic savings generation plan because Turo’s quitting his job by the end of this year to set up his farm. Boy, do we hate employment.

From our combined income (with me earning much less because I only work part-time), at least 72% goes to the regular expenses. With regular expenses I mean those shown in the chart below.

family budget

The rest of our income are divided into savings, investments and irregular expenses, such as travel, parties and events (we just love hosting parties), and sporadic shopping for shoes and clothing.

Naturally, food is the biggest expense. But living allowances and childcare costs are considerable expenses as well. Taking the Two Income Trap perspective, these are costs that we can actually cut back on had one of us been staying at home. Unfortunately, we just work harder so we can pay for these additional costs. Employment is a vicious cycle, but we become a statistic if we’re unemployed (mystery # 3).

So what do we do when we’re stretched too thin and life gets harder by the day? Here are my four P’s to financial moderation.

PLAN. Set your short-term expenses and long-term financial goals. Plan your short-term expenses and strictly make your payments and purchases based on your list of expenses.Β  Work your budget and make a savings plan so you can achieve your long-term financial goals. And if you can’t seem to stick to your budget or your goals, plan for a more realistic budget and limit your goals to what your income minus expenses can afford. Says John Stuart Mill,“I have learnt to seek my happiness in limiting my desires, rather than attempting to satisfy them.”

PAY UP YOUR DEBTS. Despite the papers I have written on financial literacy, Turo and I have not yet emerged from the debt trap. I think it was a couple of years ago when we got into the habit of maxing out our credit limit because we were careless about our spending. It was a tough lesson learned and until now, were still paying up interest from our previous purchases. I know, we should pay up our debt first, rather than keep savings sitting in the bank, that’s what we teach in financial literacy, but it’s just too dramatically difficult to let go of lumpsums just to pay for debt and not for something tangible like an LCD TV. But this happened to us, don’t let it happen to you too.

coin coverPOOL YOUR RESOURCES and EXPENSES. The ability to combine your income is one of the benefits of marriage. When you combine your income and share on the expenses, you end up with more savings rather than dividing your expenses and your savings as well. We follow a semi-pooling of resources. Regular expenses are assigned to Turo and irregular (in terms of timing) expenses are assigned to me, mainly because the timing of my salary varies. But we keep combined savings in a joint account, although we can still add to our individual accounts on our personal capacity.

PLEASE SAVE. Filipinos are so unbelievably resilient that we never got into the habit of saving. But savings is very, very important, specially if you have kids who will go to school in a few years or if there’s a real estate property that you want to acquire. The savings standard is set to at least 10% of your income. That’s at least. This is where you start, but your savings percentage is expected to go up as you get into the savings habit. Another must is to keep an emergency fund of 3 months worth of your living expenses. This is for unforeseen cases of being laid off from work or being unable to report for work in case of sickness or accidents.

There are a lot of other ways like investing or getting insurance or looking for discounts on your purchases, but these four P’s are for me the core principles of family financial management. It will take time to unlearn bad financial habits, and even more time to learn sound financial practices, but we have to start somewhere. Like paying up credit card debt.

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8 thoughts on “the two income trap

  1. sometimes we know the answers to our problems, hindi lang natin sinusunod. hehehe. as a saving measure, i have planned to allot a weekly allowance for myself, like nung college where i am forced to work around a specific budget lang per week. pero hanggang ngayon plano pa rin. i don’t know why i keep delaying it πŸ™‚

    1. ako naman, may naka-set din na allowance every month. kaso pag may mga emergency expenses na di ko napaglaanan when i do the monthly budget, dun ko din kinukuha. so in two weeks, halos ubos na ang allowance ko at uutangin ko na kay turo ang pamasahe ko the next day. LOL

      on a more serious note, why don’t you try the auto-save feature of some of the larger commercial banks? you can assign a specific amount that is automatically saved to a linked account every payday. the linked account usually has access restrictions so it keeps your savings more or less untouched until there’s something major that you want to use it for.

      1. really? hmmm.. that’s perfect for me. makapag-research nga kung anong banks ang may ganung service. thanks!

      2. BPI and Metrobank have it. They call it Direct accounts. You can apply for it using your existing account. Ilibre mo ko pag nagwithdraw ka na ha!

      3. ay, ang problem pala my salary is directly deposited to my landbank account. i think landbank doesn’t have that kind of service. if i withdraw then deposit naman to bpi every time, hassle naman. haaay..

      4. Try registering for Landbank’s online banking, baka pwede ka na lang mag-fund transfer so you don’t have to withdraw. Alam ko kasi they’re pushing for this that’s why they stopped issuing bank statements. At least that’s what I understood from the letter they sent to me. hehe.

  2. it’s comforting to know that we’re not the only family experiencing these financial struggles. although one can assume that a lot of young families such as ours are on the same boat, it’s different when somebody like you spells it out. we really have a lot to learn and unlearn.

    nicki (my husband) prepared a cashflow template a few months ago which we try to update daily. it takes a lot of effort to keep myself from panicking whenever i see negative balances in the very near future. they are easy to spot because of the automatic change in cell color. but i guess, all of us really have to go through this so that we can develop into experts in personal finance. πŸ™‚

    nakakatawa talaga kung iisipin mo kung tungkol saan ang trabaho nating dalawa… parang hindi natin ma-perfect yung credit discipline na hinihingi natin sa iba. πŸ˜€

    1. kung gano ata kadami ang alam natin sa credit, ganun din kalaki ang utang natin. LOL.

      but you’re right, there’s a lot to learn and unlearn. ako i feel there’s so much we’ve already learned in terms of our finances. pero it takes a while din before you can see the benefits of sound financial practice. so wag ka magpanic diyan. maybe in a few years we can walk the talk.

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