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Why two incomes leaves you broker than one (the real math) · Credit Matters Podcast

• 0:00
  Speaker 1: He earned six figures between them, two careers, two paychecks,
• 0:04
  Speaker 1: and a house the bank was more than happy to approve.
• 0:07
  Speaker 1: They are exactly the kind of household that should be
• 0:09
  Speaker 1: building wealth. Then the water heater gives out, and the
• 0:13
  Speaker 1: repair goes on a credit card. Not because they are careless,
• 0:16
  Speaker 1: because every dollar of both paychecks was already spoken for
• 0:19
  Speaker 1: before the month even began. Josh and Amber watched a
• 0:22
  Speaker 1: video that promised to explain all of this. It added
• 0:25
  Speaker 1: up the taxes, the childcare, and the commute, and it
• 0:29
  Speaker 1: concluded that a full-time second job was earning their family
• 0:32
  Speaker 1: roughly a dollar an hour. So Amber quit. Two couples.
• 0:36
  Speaker 1: The same income. Opposite decisions. One couple kept both paychecks
• 0:41
  Speaker 1: and spent them. The other threw one away. Neither of
• 0:44
  Speaker 1: them ever ran the real numbers. Here is what almost
• 0:48
  Speaker 1: nobody tells you. That second paycheck is worth far more
• 0:51
  Speaker 1: than the viral math claims, and quitting it can cost
• 0:54
  Speaker 1: a family a fortune. But two incomes really can leave
• 0:58
  Speaker 1: you broker than one. Not because of what the second
• 1:01
  Speaker 1: paycheck earns, but because of what you have already promised
• 1:04
  Speaker 1: it to. I know how that sounds. Let me earn it.
• 1:10
  Speaker 1: Amber did not quit on a whim. She quit because
• 1:14
  Speaker 1: the arithmetic looked airtight, and it deserves a fair hearing
• 1:17
  Speaker 1: before we touch it. The version that spread online goes
• 1:21
  Speaker 1: like this. Take a second income of $ 50, 000 a year.
• 1:26
  Speaker 1: Take out tax, which the calculation puts at $ 18, 000. Take
• 1:31
  Speaker 1: out child care for one child, $ 15, 000. Take out the
• 1:35
  Speaker 1: cost of a second commute, $ 8, 000. Then take out what
• 1:39
  Speaker 1: it calls exhaustion spending, the takeout dinners, and paid help
• 1:43
  Speaker 1: and convenience purchases that pile up when both parents come
• 1:46
  Speaker 1: home tired. That is 7,000 more. What is left is $ 2, 000
• 1:51
  Speaker 1: a year. Spread over a working year, that is roughly
• 1:54
  Speaker 1: a dollar an hour. If you have ever sat in
• 1:56
  Speaker 1: a daycare parking lot running that calculation in your head,
• 1:59
  Speaker 1: you know why it lands. Every one of those costs
• 2:02
  Speaker 1: is real. Childcare really is brutal. The commute really costs money.
• 2:09
  Speaker 1: anyone who has ordered dinner at 8 at night because
• 2:11
  Speaker 1: nobody had the energy to cook knows exactly what that
• 2:14
  Speaker 1: last line means. So Josh and Amber looked at the numbers,
• 2:18
  Speaker 1: looked at each other, and decided that a full-time job
• 2:21
  Speaker 1: paying a dollar an hour was not really a job.
• 2:24
  Speaker 1: It was a donation. Amber handed in her notice. Here
• 2:28
  Speaker 1: is the problem. Two of the biggest numbers in that
• 2:30
  Speaker 1: calculation are wrong, and one of the most important facts
• 2:33
  Speaker 1: is missing entirely. First, the tax. The calculation assumed that
• 2:42
  Speaker 1: more than a third of Amber's salary disappears to tax.
• 2:45
  Speaker 1: That is what happens if you imagine her income sitting
• 2:47
  Speaker 1: at the top of a high bracket. It is not
• 2:50
  Speaker 1: what happens to a married couple earning a combined $ 120, 000.
• 2:54
  Speaker 1: Here is how it actually works. Josh earns $ 70, 000. A
• 2:58
  Speaker 1: married couple filing together gets a standard deduction of $ 32, 200
• 3:00
  Speaker 1: this year. So a large part of Josh's income is
• 3:05
  Speaker 1: never taxed at all, and the rest sits in the
• 3:07
  Speaker 1: low brackets. Amber's $ 50, 000 stacks on top of that. And
• 3:12
  Speaker 1: at this income, every dollar of it lands in the
• 3:15
  Speaker 1: 12% federal bracket. For a married couple, the 22% bracket
• 3:19
  Speaker 1: does not begin until taxable income passes $ 100, 800. Josh and
• 3:24
  Speaker 1: Amber never get there. So Amber's federal income tax is $ 6, 000.
• 3:29
  Speaker 1: Her share of Social Security and Medicare is $ 3, 825. We
• 3:34
  Speaker 1: have put this family in Illinois, which has a flat
• 3:37
  Speaker 1: state income tax. And her state tax comes to $ 2, 475. Altogether,
• 3:41
  Speaker 1: that is $ 12, 300. About a quarter of her salary, not
• 3:44
  Speaker 1: more than a third. The viral version overstated her tax
• 3:53
  Speaker 1: by $ 5, 700. Second, the child care. The calculation used $ 15, 000.
• 3:59
  Speaker 1: The national average price of child care, according to the
• 4:04
  Speaker 1: latest report from Child Care Aware of America, is $ 13, 184
• 4:06
  Speaker 1: a year. And the calculation ignored something almost every working
• 4:09
  Speaker 1: parent paying for care can claim. The federal child and
• 4:17
  Speaker 1: dependent care credit at this family's income gives back 35%
• 4:20
  Speaker 1: of the first $ 3, 000 they spend. That is $ 1, 050 straight
• 4:22
  Speaker 1: off their tax bill. So the real cost of child
• 4:23
  Speaker 1: care for this family is $ 12, 134. Third... And this is
• 4:35
  Speaker 1: the one that changes the whole picture. Full-time daycare does
• 4:38
  Speaker 1: not last forever. Children start school. The expensive years are real,
• 4:42
  Speaker 1: but they are years. They are not a career. The
• 4:45
  Speaker 1: viral math takes the hardest stretch of a family's life
• 4:48
  Speaker 1: and treats it as permanent. Now let us rerun it.
• 4:52
  Speaker 1: And to be fair, we will keep their commute figure
• 4:55
  Speaker 1: of $ 8, 000 and their exhaustion spending of $ 7, 000, even though
• 4:59
  Speaker 1: neither one came with a source. $ 50, 000. $ 50, 000. minus $ 12, 300
• 5:03
  Speaker 1: in tax, minus $ 12, 134 in childcare, minus $ 8, 000 for the commute,
• 5:05
  Speaker 1: minus $ 7, 000 in exhaustion spending. Amber's job was not worth $ 2, 000
• 5:08
  Speaker 1: a year. It was worth $ 10, 566, more than five times
• 5:11
  Speaker 1: what the viral math claimed. Not a dollar an hour,
• 5:13
  Speaker 1: but about $ 5. 28 an hour. and that is during the
• 5:32
  Speaker 1: most expensive years after accepting every other cost they threw
• 5:35
  Speaker 1: at it. We have not even reached the part that
• 5:38
  Speaker 1: cost Amber the most. The viral calculation only looked at
• 5:44
  Speaker 1: what Amber's job cost. It never looked at what her
• 5:47
  Speaker 1: job paid that does not show up in a paycheck.
• 5:51
  Speaker 1: Amber had a retirement plan at work, and her employer
• 5:54
  Speaker 1: matched her contributions. The most typical match, according to Vanguard's
• 5:58
  Speaker 1: How America Saves report, is 50 cents for every dollar
• 6:01
  Speaker 1: an employee saves, up to 6% of pay. On a
• 6:06
  Speaker 1: salary of $ 50, 000, that is $ 1, 500 a year of money
• 6:10
  Speaker 1: she never had to earn. When Amber quit, that disappeared too.
• 6:15
  Speaker 1: So the true value of Amber's job, even in the
• 6:17
  Speaker 1: most expensive daycare years, was $ 12, 066 a year. Now let
• 6:20
  Speaker 1: us be generous to the decision. Say Amber was 32
• 6:22
  Speaker 1: when she left. And say she went back to work
• 6:29
  Speaker 1: the moment her child started school four years later. Four
• 6:33
  Speaker 1: years out. That is all. If those four years of
• 6:36
  Speaker 1: value had been saved and invested at 7%, by the
• 6:38
  Speaker 1: time Amber turns 65, they would have grown to $ 381, 127.
• 6:40
  Speaker 1: That is the real price of the dollar an hour job.
• 6:42
  Speaker 1: Not a rounding error. close to $ 400, 000 of retirement for
• 6:54
  Speaker 1: a four-year break. And that figure is the gentle one.
• 6:58
  Speaker 1: It assumes Amber walks straight back into a job at
• 7:00
  Speaker 1: the same pay. Research suggests that is not usually how
• 7:04
  Speaker 1: it goes. People returning after a career gap often come
• 7:07
  Speaker 1: back at lower pay, and the gap can follow them
• 7:10
  Speaker 1: for years. We have left that out completely because the
• 7:13
  Speaker 1: number is already big enough to make the point. Amber
• 7:15
  Speaker 1: did not make a stupid decision. She made a 30-year
• 7:18
  Speaker 1: decision using a five-year view. And that is a very
• 7:21
  Speaker 1: easy mistake to make when the five years in question
• 7:23
  Speaker 1: are the hardest five years of your life. Which brings
• 7:29
  Speaker 1: us back to Jake and Kelsey. They never fell for
• 7:31
  Speaker 1: the viral math. They kept both jobs. And by everything
• 7:35
  Speaker 1: we have just worked out, keeping both jobs was the
• 7:38
  Speaker 1: right call. So why is the water heater going on
• 7:40
  Speaker 1: a credit card? The answer is not in how much
• 7:42
  Speaker 1: the second paycheck earns. It is in what happened to
• 7:45
  Speaker 1: it before it ever arrived. When Jake and Kelsey went
• 7:48
  Speaker 1: to buy their house, the lender did not look at
• 7:50
  Speaker 1: Jake's income. It looked at both incomes added together. $ 120, 000
• 7:54
  Speaker 1: a year is $ 10, 000 a month before tax. And the
• 7:55
  Speaker 1: lender's question was simple. How much of that $ 10, 000 can
• 7:57
  Speaker 1: go to debt payments? Fannie Mae, which buys a huge
• 8:06
  Speaker 1: share of American mortgages, has rules for exactly that. For
• 8:11
  Speaker 1: a manually underwritten loan, its limit is 36% of gross
• 8:15
  Speaker 1: monthly income for all debt payments combined. Through its automated
• 8:19
  Speaker 1: underwriting system, it can go as high as 50%. Jake
• 8:23
  Speaker 1: and Kelsey did not even push it. They stayed at
• 8:25
  Speaker 1: the cautious 36%. That gave them $ 3, 600 a month for
• 8:27
  Speaker 1: the mortgage and two car payments together. sensible by every
• 8:34
  Speaker 1: rule the bank uses. Now add the rest. Child care
• 8:38
  Speaker 1: is $ 1, 099 a month. Then the essentials that never go away, groceries, utilities, insurance, phones,
• 8:46
  Speaker 1: and gas. We will call that $ 2, 500. Their fixed bills
• 8:49
  Speaker 1: come to $ 7, 199 a month. After tax and after the
• 8:54
  Speaker 1: credits we have already talked about, Jake and Kelsey take
• 8:57
  Speaker 1: home $ 8, 210 a month. That leaves $ 1, 012. before a single
• 9:04
  Speaker 1: dinner out, a birthday present, a holiday, or a broken
• 9:07
  Speaker 1: water heater. That is how a six-figure household ends up
• 9:11
  Speaker 1: feeling broke, not through recklessness. Through a series of reasonable decisions,
• 9:16
  Speaker 1: each one approved by somebody whose job is to approve things,
• 9:19
  Speaker 1: and each one sized to two paychecks that were assumed
• 9:22
  Speaker 1: to keep arriving forever. There is a bigger story underneath this,
• 9:28
  Speaker 1: and it was laid out by a bankruptcy researcher long
• 9:31
  Speaker 1: before she was famous for anything else. Before Elizabeth Warren
• 9:35
  Speaker 1: was a senator, she was a law professor studying why
• 9:38
  Speaker 1: middle-class families went broke. With her daughter, Amelia Warren Tyagi,
• 9:42
  Speaker 1: she wrote a book called The Two-Income Trap. Their argument
• 9:46
  Speaker 1: was uncomfortable, and it has aged well. When the second
• 9:50
  Speaker 1: paycheck became normal, it did not stay extra for long.
• 9:53
  Speaker 1: families used it to compete for the same things families
• 9:56
  Speaker 1: had always wanted. A safe neighborhood, a decent school, a
• 10:00
  Speaker 1: house with a yard. And when the families bidding for
• 10:02
  Speaker 1: those things have two incomes, the price rises to meet
• 10:06
  Speaker 1: two incomes. Their research suggested something even more striking. Families
• 10:11
  Speaker 1: with children, the households you would expect to be most careful,
• 10:14
  Speaker 1: were among the most exposed to financial collapse. Not because
• 10:17
  Speaker 1: they were spending on luxuries, because their fixed costs had
• 10:21
  Speaker 1: risen to swallow everything they earned. Think about what that
• 10:24
  Speaker 1: means for a house in a good school district. If
• 10:26
  Speaker 1: most of the buyers competing for it have two incomes,
• 10:29
  Speaker 1: the seller does not price it for one. At that point,
• 10:31
  Speaker 1: the second income is not a bonus anymore. It is
• 10:33
  Speaker 1: the entry fee. And that is not something Jake and
• 10:36
  Speaker 1: Kelsey can opt out of on their own. They did
• 10:39
  Speaker 1: not set the price of the houses in their school district.
• 10:41
  Speaker 1: They just paid it. What they could control was how
• 10:44
  Speaker 1: much of the rest of their life they built on
• 10:46
  Speaker 1: top of it. And here is the trap inside the trap.
• 10:50
  Speaker 1: A household built on two paychecks sick, two careers that
• 10:56
  Speaker 1: can stall, two chances every year for something to break.
• 11:00
  Speaker 1: Two incomes that you spend do not double your safety.
• 11:03
  Speaker 1: They double the number of ways it can fail. So
• 11:05
  Speaker 1: let us test it. The test is simple. Take one
• 11:11
  Speaker 1: paycheck away for six months, keep the bills where they are,
• 11:15
  Speaker 1: and see what happens. We will run it on two
• 11:18
  Speaker 1: households with exactly the same income. One is Jake and Kelsey.
• 11:22
  Speaker 1: The other built its budget differently, and we will call
• 11:24
  Speaker 1: it the one paycheck budget. Same jobs, same salaries, same child.
• 11:29
  Speaker 1: The only difference is the size of the commitments. The
• 11:32
  Speaker 1: one paycheck budget follows one rule. Every bill that exists,
• 11:35
  Speaker 1: whether or not the second parent works, has to fit
• 11:37
  Speaker 1: inside the larger paycheck. So when this household bought its
• 11:40
  Speaker 1: house and its car, it used the same cautious 36% limit,
• 11:43
  Speaker 1: but applied it to the larger salary alone, $ 70, 000. That
• 11:45
  Speaker 1: gave it $ 2, 100 a month for the mortgage and the
• 11:47
  Speaker 1: car instead of $ 3, 600. Add the same $ 2, 500 for essentials
• 11:49
  Speaker 1: and the bills that exist no matter what come to $ 4, 600
• 11:50
  Speaker 1: a month. The larger paycheck on its own takes home $ 4, 981.
• 11:52
  Speaker 1: It fits. Child care is the exception, and deliberately so.
• 12:09
  Speaker 1: Childcare only exists because the second parent works, so the
• 12:13
  Speaker 1: second paycheck pays for it. On a normal month, the
• 12:17
  Speaker 1: one paycheck household has $ 2, 512 left over. Jake and Kelsey
• 12:22
  Speaker 1: have $ 1, 012, same income, and one household has about two
• 12:26
  Speaker 1: and a half times the breathing room. Now the shock.
• 12:29
  Speaker 1: Kelsey has to stop working for six months to care
• 12:31
  Speaker 1: for a parent who is seriously ill. She is home,
• 12:34
  Speaker 1: so daycare is paused. One honest note before the numbers.
• 12:39
  Speaker 1: If this were a layoff, unemployment benefits would soften the
• 12:42
  Speaker 1: blow for a while. But they replace only part of
• 12:45
  Speaker 1: a paycheck, and they do not cover every shock. Caring
• 12:48
  Speaker 1: for a sick parent, a long illness, burnout. Those come
• 12:52
  Speaker 1: with no benefit check at all. Jake and Kelsey are
• 12:56
  Speaker 1: now living on Jake's paycheck, $ 4, 981 a month. Even without daycare,
• 13:02
  Speaker 1: their bills are $ 6, 100. Every month, they come up $ 1, 119 short.
• 13:09
  Speaker 1: After six months, they are $ 6, 713 in the hole. And
• 13:13
  Speaker 1: with only $ 1, 012 of spare room each month before this started,
• 13:17
  Speaker 1: there was never much of a cushion to fall back on.
• 13:20
  Speaker 1: It goes on the credit card. The one paycheck household
• 13:22
  Speaker 1: loses exactly the same paycheck, and it is still $ 381
• 13:25
  Speaker 1: a month ahead. It is still saving. Same jobs, same salaries,
• 13:30
  Speaker 1: same shock. One family goes into debt, the other keeps saving,
• 13:34
  Speaker 1: now flip it. Say it is the larger earner who
• 13:37
  Speaker 1: stops working, Kelsey's paycheck on its own takes home $ 3, 713
• 13:40
  Speaker 1: a month. Jake and Kelsey now fall $ 2, 387 short every month,
• 13:42
  Speaker 1: which is $ 14, 323 over six months. The one paycheck household
• 13:45
  Speaker 1: falls short two this time. by $ 887 a month, or $ 5, 323
• 14:02
  Speaker 1: over six months. But that household has been putting away $ 2, 512
• 14:06
  Speaker 1: in every normal month. A shock like this costs it
• 14:10
  Speaker 1: about two months of savings. For Jake and Kelsey, it
• 14:14
  Speaker 1: is a crisis. This is what the title actually means.
• 14:17
  Speaker 1: Two incomes do not leave you with less money on payday.
• 14:21
  Speaker 1: They leave you broker on the day something goes wrong,
• 14:23
  Speaker 1: and sooner or later, something always does. Look at what
• 14:29
  Speaker 1: that does to both couples. Jake and Kelsey were right
• 14:32
  Speaker 1: that the second paycheck was worth keeping. Where they went
• 14:35
  Speaker 1: wrong was letting the bank decide how much of it
• 14:37
  Speaker 1: to spend. Every limit they hit was a limit somebody
• 14:41
  Speaker 1: else set, and every one of those limits assumed both
• 14:44
  Speaker 1: paychecks would last forever. Josh and Amber were right that
• 14:48
  Speaker 1: something was off. Two people working full-time and still feeling
• 14:52
  Speaker 1: broke is a real warning sign. Where they went wrong
• 14:55
  Speaker 1: was the diagnosis. They blamed the second paycheck for being
• 14:59
  Speaker 1: too small when its size was never the problem. So
• 15:02
  Speaker 1: they gave up a job worth more than five times
• 15:05
  Speaker 1: what they were told and a retirement worth close to $ 400, 000.
• 15:10
  Speaker 1: Both couples were asking the same question. What is the
• 15:12
  Speaker 1: second paycheck worth? That was the wrong question. The one
• 15:16
  Speaker 1: that matters is this. What has the second paycheck already
• 15:20
  Speaker 1: been promised to? Jake and Kelsey promised all of it
• 15:24
  Speaker 1: to fixed bills. Josh and Amber promised it to nothing
• 15:28
  Speaker 1: by giving it up. Neither of them promised it to the...
• 15:31
  Speaker 1: would actually have made them safe. So here's the third path.
• 15:38
  Speaker 1: It is not complicated... And it does not require anyone
• 15:41
  Speaker 1: to quit. Both partners keep working. But the household is
• 15:44
  Speaker 1: built as if only the larger paycheck exists. The second
• 15:47
  Speaker 1: paycheck then has three jobs in this order. First, it
• 15:51
  Speaker 1: pays for the costs that only exist because the second
• 15:53
  Speaker 1: parent works. Child care and the extra commute. Second, it
• 15:59
  Speaker 1: builds an emergency fund, not a token one. A real one,
• 16:04
  Speaker 1: big enough that six months on one paycheck is an
• 16:06
  Speaker 1: inconvenience instead of a catastrophe. Third, everything left over gets invested.
• 16:11
  Speaker 1: Retirement first, especially anything with an employer match, and then
• 16:15
  Speaker 1: everything else. What does that look like over time? Go
• 16:18
  Speaker 1: back to the two households. The one paycheck budget spends $ 1, 500
• 16:23
  Speaker 1: a month less on its mortgage and cars than Jake
• 16:26
  Speaker 1: and Kelsey do. If that difference is invested at 7% instead,
• 16:31
  Speaker 1: after 10 years, it grows to $ 259, 627 from $ 180, 000 put in.
• 16:40
  Speaker 1: Same jobs, same income, same child, a quarter of a
• 16:44
  Speaker 1: million dollars apart after a decade. And one of them
• 16:48
  Speaker 1: can survive losing a paycheck while the other cannot. Now,
• 16:52
  Speaker 1: if you are already in Jake and Kelsey's position with
• 16:55
  Speaker 1: a mortgage sized for $ 2, 000, You cannot undo the house tomorrow.
• 17:00
  Speaker 1: But you can apply the rule to every decision that
• 17:02
  Speaker 1: comes next. First, the next car. Second, the next raise,
• 17:07
  Speaker 1: which goes to the second paycheck's three jobs instead of
• 17:10
  Speaker 1: to new fixed bills. Third, the next move, when you
• 17:15
  Speaker 1: decide what the larger paycheck alone can carry. A household
• 17:18
  Speaker 1: does not get trapped by one decision. It gets trapped
• 17:22
  Speaker 1: by a series of them, and it gets out the
• 17:24
  Speaker 1: same way. Three honest limits, because this analysis does not
• 17:31
  Speaker 1: describe every family. First, everything here uses one child. If
• 17:36
  Speaker 1: you have two or more children in full-time daycare at
• 17:38
  Speaker 1: the same time, especially somewhere expensive, the second paycheck really
• 17:42
  Speaker 1: can come close to zero for a few years. Even then,
• 17:45
  Speaker 1: those years end, and the employer match and the career
• 17:47
  Speaker 1: do not have to. Second, sometimes staying home is not
• 17:51
  Speaker 1: a money decision at all. A child with extra needs,
• 17:55
  Speaker 1: a parent who needs care, a health problem— In those cases,
• 17:58
  Speaker 1: the math still matters, but it should not be the
• 18:01
  Speaker 1: deciding factor, and nobody should feel judged for that. Third,
• 18:05
  Speaker 1: some families simply want one parent at home, and they
• 18:08
  Speaker 1: are willing to pay for it. That is a values decision,
• 18:12
  Speaker 1: and it is a legitimate one. This video does not
• 18:14
  Speaker 1: argue against it. It only puts a price on it
• 18:17
  Speaker 1: so that if you make that choice, you make it
• 18:19
  Speaker 1: with the real number in front of you instead of
• 18:21
  Speaker 1: $ 1 an hour.