For the longest time I have been of the opinion that since computer technology changes so fast, we should buy the cheapest possible computer and when it stops working, just throw it out and buy a new inexpensive computer again. This way, we always have the most recent and up to date technology. Well, we currently have a Toshiba Satellite laptop computer that we bought a few years ago on Black Friday. At first, it worked really well, it was fast, loaded with new features, and a dream to use...however, that changed after about six months. For the last 12 to 18 months this computer, essentially my wife's computer as I have my work laptop and my iPad, has slowed down, takes forever to open programs, freezes up, the cursor disappears, and is consistently running updates. Most mornings, while my wife and I are sitting downstairs prior to her getting the kids up for school, and while I am happily checking email and surfing the web on my iPad, my wife is accross the room waiting, sighing and making snide comments as she waits for our computer to respond. I have defragmented the hard disk, run anti-virus software, adware, spyware and any other type of "ware" available to clean the computer up and get it to run faster...we have updated the hard drive (thank you Gabby, my daughter...that is a story for another day), added more memory, deleted all unnecessary programs, cleaned out the start up menu, but NOTHING has worked. So fast forward to the other morning, when I receive an email while at work entitled "Computer Woes". I was really impressed with what she wrote (particularly given that she has little time in the morning before she must get the kids up for school) but I keep getting this nagging feeling that she is, in a not so subtle way, trying to tell me something...
Computer Woes
Need a new computer cuz it doesn't work at all,
It doesn't need a battery, it needs a wrecking ball.
When I'm in the midst of typing, the cursor will disappear,
"I'm going to lose all my work", is my constant & daily fear.
I hardly accomplish my work when the clock begins to chime,
I'm so tired of sitting here, wasting all my time.
My husband is so tired of hearing me bi*ch and moan,
As he sits there working fast on his darn smart phone.
I'm so frustrated, expected to perform,
It's sad that such inefficiency has become my daily norm.
After all this, there's only one thing left to say...
Honey, do we have to wait all the way until Christmas day?
Pretty good, isn't it...not bad for probably taking all of five minutes to write it. She is one amazing mommy... Needless to say, two things have happened since I received this. One, I have started to question my computer purchasing strategy. Maybe there is some truth to "you get what you pay for". Maybe there is some middle ground? In March I purchased an iPad 2. It cost me more than any laptop I have ever purchased, actually it was twice as much as any laptop computer I have personally purchased. However, that 0.38 inch thick piece of electronic hardware has been a dream and a joy to use. The user experience has been unbelievable, it is fast, feels good to hold, has amazing functionality, and has become one of those pieces of technology that I did not know that I could not live without. Which brings me to the second thing that has happened since I received my wife's email...we have ordered a brand new MacBook Pro laptop which should be arriving any day...
Saturday, November 19, 2011
Thursday, November 17, 2011
The Dual Income Household...Not the Model for Financial Security
Over the last two posts I have provided my opinions regarding both the decision to have a stay at home parent to raise your children, as well as the reasons why I think we see such a rise in the two income family household. In my third and final post about this topic, I would like to provide a few more statistics about the two income household, and in this case the decision to have a two income household as opposed to a single income household with a stay at home parent. I will also discuss some thoughts on how the return to a prevalence of single income family households can positively impact our economy and improve the solvency and financial security of the family.
Let's take a look at some of the numbers (some of which originate from Elizabeth Warren's book "The Two Income Trap").
1. The current unemployment rate is published at about 9%, or roughly 14 million Americans are out of or searching for work (this does not include those who have "given up" searching for work).
2. Per my prior post, there are 5 million two income households with children under 5.
3. There are, on average, 4 million births per year in the U.S.
4. In 1970, a family of four with a single income dedicated approximately 1.5 % of their disposable income toward short term revolving debt such as credit cards. Alternatively, today, the average two income household with two children has approximately 15% of the household income attributable to short term revolving debt.
5. In 1970, a family of four with a single income earned approximately $32,000 per year on an inflation adjusted basis, the two income household of four earns an average of $75,000 per year today.
6. In the 1970's, the personal savings rate was about 10% to 12%. What this means is that families, on average, we're saving 10% to 12% of their disposable incomes annually. As late as 2010, following a much deeper recession than experienced in the 1970's, the personal savings rate was at roughly 4.2% which was a huge improvement over the preceding decade, where the personal savings rate was less than one percent and more frequently than not, was at zero or even negative.
7. In 1970, approximately 50% of a households income was spent on "the big five"...housing, healthcare, automobiles, taxes and child care. Today, these same five categories are approximately 75% of a household's income.
8. A single income family in the 1970's had more disposable income, on an inflation adjusted basis, than a two income family today.
Numerous references indicate, and the data above show that two income households spend more, consume more, borrow more and save less than their single income household counterparts. One thing to keep in mind is that the increase in spending seen with two income households is not a function of the purchase of food, clothing or other basic necessities. In fact, on an inflation adjusted basis, food and clothing have actually remained relatively flat or in some cases have even decreased since the 1970's (thank you Super Walmart). The biggest hitters regarding the increased spending for two income households (other than housing, which I will address later, and healthcare, which has increased for everyone) are child care, taxes and transportation.
Let's first look at taxes. There is an interesting dynamic within a two income household as it relates to taxes. The dynamic is that first dollar of the second income is taxed after the last dollar of the first income. See, every dollar that we earn is not taxed at the same rate. The first dollar is generally taxed at a lower rate than the last dollar. So, the second income in a two income household is taxed after the last dollar of the first, meaning that, the second income begins being taxed at the tax rate of the last dollar of the first income, effectively "missing out", if you will, on the lower tax brackets for the first portion of the second earners income. The net effect of this, to return to my 1970's comparison to today, is that a two income household today pays about 25% higher taxes than a single earner household in the 1970's. And, just in case you are curious, the tax rates in the 1970's we're much higher than today. The bottom tax bracket in the 1970's was 14% versus 10% today, and the top tax bracket was 70%, versus 35% today.
Now let's look at child care...this is an easy one. With a stay at home parent, the need to shell out thousands annually for child care just goes away. In 2007, on average a family would spend about $7,000 per year for one child to be in day care.
Transportation is an interesting one, particularly for my wife and I given that we just, within the last year, bought a second car. Part of the reason for a second car was that our other vehicle was too small to handle our growing family. However, the other reason was the realization that as our children are getting older, we need to "divide and conquer" and frequently need to have different children in different places at the same time. The reason I mention this is merely to point out that I am not necessarily saying that a family with a stay at home parent can get by with only one car. I recognize and see the value of needing two cars, if one can afford it. However, the statistics about transportation are interesting, and speak very strongly to priorities and choices we, as consumers (and parents), make. Today, on an inflation adjusted basis, two income families spend 50% more annually on automobile expenses than in the 1970's. Some of this increase can be attributed to insurance and maintenance on two cars as opposed to one, but I would submit a larger portion is attributable to fuel consumption and vehicle choice. With both parents working, the "mandatory" fuel expense is arguably double that of a single income family. Additionally, with the decision and tendency to purchase bigger, fancier cars with "all the options", people are choosing to buy more expensive vehicles that translate to higher monthly payment obligations, despite the fact that, on average, the average cost of cars on an inflation adjusted basis has decreased from 1970 to today. Additionally, the move to larger homes (I will touch on this in the next paragraph) is effectively pushing people into suburbs of cities and has increased the average daily miles traveled, further exacerbating automobile expenses.
As far as housing is concerned, prior to the real estate bubble we experienced in the most recent recession, housing costs had grown exponentially since the 1970's on an inflation adjusted basis...in many cases well over 100%. Today, with housing prices having fallen substantially (put aside the fact that real estate prices are highly localized), on an inflation adjusted basis, housing is actually comparably priced to that of the late 1970's. However, prior to the recession, and despite the materially higher housing prices, what the price inflation does not take into account is the increase in square footage and amenities of the average house over the last 40 years. In 1970, the average size of a home was 1,400 square feet, compared to roughly 2,700 square feet in 2009. Thus, when comparing costs of housing on a per square foot basis, the cost of housing has actually remained quite flat. The main difference is that we are buying bigger homes, regardless of the need for the space, which are more expensive to insure, heat, cool, maintain etc...
So, where am I going with all of the above? What am I getting at? That can be boiled down to the following three conclusions...
1. The dual income household with children is an unsuccessful model to achieving financial security. Dual income households with children (and again, my focus here is specifically households with children under the age of 5), despite making significantly more money than single family households compared to a generation ago, spend more, consume more, borrow more and save far less (on average) than their single income household brethren. These same households also have a far higher likelihood of filing for bankruptcy than their single income household counterparts. The primary drivers for the increase in spending, and subsequently the reduction of financial stability, are a combination of the paradigm of consumption, which I addressed in an earlier blog post, as well as a function of increases in taxes, transportation and child care, all of which are a direct result of the decision to have a dual income household. Additionally, I would also submit that the two income household is less able to respond to the loss of the primary earner's income, since a single income family essentially keeps half it's earning potential "in reserve" for a "rainy day". A dual income family does not tend to have this option.
2. Dual income households with children are contributing negatively to unemployment. As previously discussed, there are 5 million dual income households with children under 5. That is 5 million people in the workforce, that were they to be stay at home parents, would free up, theoretically, 5 million jobs immediately, potentially reducing the current unemployment numbers from 14 million to as low as 9 million (this would put the effective unemployment rate at 6%). However, on an ongoing basis, there are 4 million births per year. If we assume that 50% of these births are to households with a stay at home parent, with at least one child under the age of 5 already, and 50% are to dual income households with older or no children, there would be an additional 2 million jobs per year that would be immediately available (and 2 million fewer people in the labor force) on a sustained basis, if that later 50% chose to have a stay at home parent. This would further reduce unemployment, all things being equal, to a sustained rate of 5%.
3. A return to the single income family household with children would have a net effect of raising the financial discipline of families with children, increasing, as opposed to decreasing the number of households actually achieving the financial security that dual income households are trying to achieve in vain.
Let's take a look at some of the numbers (some of which originate from Elizabeth Warren's book "The Two Income Trap").
1. The current unemployment rate is published at about 9%, or roughly 14 million Americans are out of or searching for work (this does not include those who have "given up" searching for work).
2. Per my prior post, there are 5 million two income households with children under 5.
3. There are, on average, 4 million births per year in the U.S.
4. In 1970, a family of four with a single income dedicated approximately 1.5 % of their disposable income toward short term revolving debt such as credit cards. Alternatively, today, the average two income household with two children has approximately 15% of the household income attributable to short term revolving debt.
5. In 1970, a family of four with a single income earned approximately $32,000 per year on an inflation adjusted basis, the two income household of four earns an average of $75,000 per year today.
6. In the 1970's, the personal savings rate was about 10% to 12%. What this means is that families, on average, we're saving 10% to 12% of their disposable incomes annually. As late as 2010, following a much deeper recession than experienced in the 1970's, the personal savings rate was at roughly 4.2% which was a huge improvement over the preceding decade, where the personal savings rate was less than one percent and more frequently than not, was at zero or even negative.
7. In 1970, approximately 50% of a households income was spent on "the big five"...housing, healthcare, automobiles, taxes and child care. Today, these same five categories are approximately 75% of a household's income.
8. A single income family in the 1970's had more disposable income, on an inflation adjusted basis, than a two income family today.
Numerous references indicate, and the data above show that two income households spend more, consume more, borrow more and save less than their single income household counterparts. One thing to keep in mind is that the increase in spending seen with two income households is not a function of the purchase of food, clothing or other basic necessities. In fact, on an inflation adjusted basis, food and clothing have actually remained relatively flat or in some cases have even decreased since the 1970's (thank you Super Walmart). The biggest hitters regarding the increased spending for two income households (other than housing, which I will address later, and healthcare, which has increased for everyone) are child care, taxes and transportation.
Let's first look at taxes. There is an interesting dynamic within a two income household as it relates to taxes. The dynamic is that first dollar of the second income is taxed after the last dollar of the first income. See, every dollar that we earn is not taxed at the same rate. The first dollar is generally taxed at a lower rate than the last dollar. So, the second income in a two income household is taxed after the last dollar of the first, meaning that, the second income begins being taxed at the tax rate of the last dollar of the first income, effectively "missing out", if you will, on the lower tax brackets for the first portion of the second earners income. The net effect of this, to return to my 1970's comparison to today, is that a two income household today pays about 25% higher taxes than a single earner household in the 1970's. And, just in case you are curious, the tax rates in the 1970's we're much higher than today. The bottom tax bracket in the 1970's was 14% versus 10% today, and the top tax bracket was 70%, versus 35% today.
Now let's look at child care...this is an easy one. With a stay at home parent, the need to shell out thousands annually for child care just goes away. In 2007, on average a family would spend about $7,000 per year for one child to be in day care.
Transportation is an interesting one, particularly for my wife and I given that we just, within the last year, bought a second car. Part of the reason for a second car was that our other vehicle was too small to handle our growing family. However, the other reason was the realization that as our children are getting older, we need to "divide and conquer" and frequently need to have different children in different places at the same time. The reason I mention this is merely to point out that I am not necessarily saying that a family with a stay at home parent can get by with only one car. I recognize and see the value of needing two cars, if one can afford it. However, the statistics about transportation are interesting, and speak very strongly to priorities and choices we, as consumers (and parents), make. Today, on an inflation adjusted basis, two income families spend 50% more annually on automobile expenses than in the 1970's. Some of this increase can be attributed to insurance and maintenance on two cars as opposed to one, but I would submit a larger portion is attributable to fuel consumption and vehicle choice. With both parents working, the "mandatory" fuel expense is arguably double that of a single income family. Additionally, with the decision and tendency to purchase bigger, fancier cars with "all the options", people are choosing to buy more expensive vehicles that translate to higher monthly payment obligations, despite the fact that, on average, the average cost of cars on an inflation adjusted basis has decreased from 1970 to today. Additionally, the move to larger homes (I will touch on this in the next paragraph) is effectively pushing people into suburbs of cities and has increased the average daily miles traveled, further exacerbating automobile expenses.
As far as housing is concerned, prior to the real estate bubble we experienced in the most recent recession, housing costs had grown exponentially since the 1970's on an inflation adjusted basis...in many cases well over 100%. Today, with housing prices having fallen substantially (put aside the fact that real estate prices are highly localized), on an inflation adjusted basis, housing is actually comparably priced to that of the late 1970's. However, prior to the recession, and despite the materially higher housing prices, what the price inflation does not take into account is the increase in square footage and amenities of the average house over the last 40 years. In 1970, the average size of a home was 1,400 square feet, compared to roughly 2,700 square feet in 2009. Thus, when comparing costs of housing on a per square foot basis, the cost of housing has actually remained quite flat. The main difference is that we are buying bigger homes, regardless of the need for the space, which are more expensive to insure, heat, cool, maintain etc...
So, where am I going with all of the above? What am I getting at? That can be boiled down to the following three conclusions...
1. The dual income household with children is an unsuccessful model to achieving financial security. Dual income households with children (and again, my focus here is specifically households with children under the age of 5), despite making significantly more money than single family households compared to a generation ago, spend more, consume more, borrow more and save far less (on average) than their single income household brethren. These same households also have a far higher likelihood of filing for bankruptcy than their single income household counterparts. The primary drivers for the increase in spending, and subsequently the reduction of financial stability, are a combination of the paradigm of consumption, which I addressed in an earlier blog post, as well as a function of increases in taxes, transportation and child care, all of which are a direct result of the decision to have a dual income household. Additionally, I would also submit that the two income household is less able to respond to the loss of the primary earner's income, since a single income family essentially keeps half it's earning potential "in reserve" for a "rainy day". A dual income family does not tend to have this option.
2. Dual income households with children are contributing negatively to unemployment. As previously discussed, there are 5 million dual income households with children under 5. That is 5 million people in the workforce, that were they to be stay at home parents, would free up, theoretically, 5 million jobs immediately, potentially reducing the current unemployment numbers from 14 million to as low as 9 million (this would put the effective unemployment rate at 6%). However, on an ongoing basis, there are 4 million births per year. If we assume that 50% of these births are to households with a stay at home parent, with at least one child under the age of 5 already, and 50% are to dual income households with older or no children, there would be an additional 2 million jobs per year that would be immediately available (and 2 million fewer people in the labor force) on a sustained basis, if that later 50% chose to have a stay at home parent. This would further reduce unemployment, all things being equal, to a sustained rate of 5%.
3. A return to the single income family household with children would have a net effect of raising the financial discipline of families with children, increasing, as opposed to decreasing the number of households actually achieving the financial security that dual income households are trying to achieve in vain.
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