`Two-Income Trap' has financial advice for a struggling middle class

Remember the Monkees' hit song "Pleasant Valley Sunday"? It was a cotton-candy satire of a middle-class neighborhood whose pursuits were Sunday barbecues, trimmed lawns, and multiple TVs.

There was no verse about families going broke from this comfortable, ordinary lifestyle. That's because the song debuted in 1967, not 2003.

Today, many middle-class families can only dream about a suburban neighborhood that offers solid schools, affordable homes, and time on the weekends to take care of the yard. For many parents, it's not only beyond the reach of one income, it's beyond the reach of two.

How can so many families be in financial trouble if they're living on twice the income of previous generations?

The easy answer is profligate parents -- those immoral debtors who overspend on designer baby clothes and high-tech gadgets and then pull equity of out their homes for exotic vacations.

The truer answer is more complex, and mother and daughter authors Elizabeth Warren and Amelia Warren Tyagi have gone after it in "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke." They have analyzed numerous case studies on barely-making-it parents, debt-ridden parents, and bankrupt parents. They have concluded that in today's economy, having children has become the dividing line between the solvent and the insolvent -- that today's parents are working harder than ever and falling desperately behind even with two incomes.

Unlike the authors of other financial advice books, they do not accuse an entire generation of forgetting how to save money. Instead, they build a case against four institutional offenders: (1) crumbling school systems, which caused (2) out-of-control real estate prices in strong school districts; (3) a credit card industry allowed to charge exorbitant interest and hidden fees; and (4) health benefits that have all but disappeared at most companies.

What emerges is a bleak portrait of an economic landscape that in one generation has changed in fundamental, disastrous ways. To measure the depth of that change, picture the American middle class in the three decades after the second World War. Companies provided pensions and full health coverage. House payments in reliable school districts required a small percentage of a family's single income. Mothers were at home to take care of the daily household and family tasks. Banks and credit card companies followed conservative lending rules. There was no need for preschool, daycare, 401(k) plans, regular takeout dinners, or individual health-care contributions.

In 1973, on one income, a family of four could own a comfortable home in an adequate school district. After taxes, mortgage payments, and other fixed expenses, this family would have almost half of that single income to spend on flexible items such as food and clothing.

In adjusted dollars, that same family today, on two incomes, makes 75 percent more total income but has about $800 per year less discretionary income than the 1973 single-income family.

Where does the money go? Almost half of it goes directly to the mortgage for the high-priced house in the decent school district. Additional money is paid to private mortgage insurance, since it's difficult to afford a 20 percent down payment for today's real estate. Another large chunk pays for health insurance. If the family happens to fall behind on just one credit card payment, the credit card company will increase the interest, sometimes as high as 25 percent, making it nearly impossible to pay off the balance.

Toiling under these conditions, many middle-class families today operate with no retirement fund and no money in the bank if one spouse loses a job.

There's the trap of the title: For many families, two incomes are needed just to stay in today's middle class.

A new economic world requires new advice, and Warren and Tyagi's recommendations are a blend of the traditional and the innovative. Warren, a professor at Harvard Law School and an expert on bankruptcy law, warns against refinancing your home to pay down other debt, noting that if you're in financial trouble, you'll be steered toward a high-cost, subprime mortgage, making any gains illusory -- and you'll be jeopardizing the roof over your family's head.

Free of right- or left-leaning politics, they give detailed advice on how to take a hard look at your finances to see if it really is possible to have one spouse stop working or work part time.

Sometimes the advice is conflicting. They do not recommend purchasing a home so expensive that both spouses must work but acknowledge that downsizing your home usually means moving to an inferior school district, something most parents want to avoid.

Contradicting most traditional financial planners, they do not insist that families give up dinners out or deluxe lattes. Saving money is always helpful, but here it can miss the larger point. When the biggest problem is the huge fixed expenses, giving up a few bakery scones is not going to radically alter your future.

The authors stress that families cannot protect themselves alone. They urge parents to lobby Congress for changes in credit card practices and health coverage, and school boards for educational improvements.

Agree or disagree with the bleak image, "The Two-Income Trap" is a rare financial book that sidesteps accusations of individual wastefulness to focus on institutional changes. At a time when many middle-class families are just an accident or an illness away from financial disaster, this book provides a well-researched road map of where we are, as well as viable escape routes.