The two income trap is a reality
The two income trap is a reality that a lot of us fall into to and even if you aren’t there yet, make sure you are wiser to the fact prior to it happening.
To Start, what is the two income trap?
The idea of the two income trap is quite simple. A single person is living paycheck to paycheck. Living an already luxurious life with everything that they could need to survive. Then they meet their better half and form a relationship/get married. The better half lives a very similar life to them, saving roughly 5% of their income and spending the rest.
BUT with the new couple starting their lives together, they are also able to share a few things together that end up reducing their total costs. Maybe they share their apartment together, cutting the cost in half. Same with their utilities, cell phone bill and insurance bills. They are actually saving money now because their total expenses are going down living together.
The best part of this of course is that they have extra income to spend invest. With that extra money that they have, they get a 2nd car, move into a larger apartment and go out to each much more often than before. Soon, they are in the exact same financial position that they were when they were individuals, living paycheck to paycheck.
You see, the problem is that when couples get together, they don’t realize that this extra savings can really be used toward investments versus buying additional liabilities. They are blinded with keeping up with the Jones down the street.
They have a bigger house, why shouldn’t we treat ourselves?
We both work very hard and deserve the best, we should go out to eat tonight
Even though our current car is sufficient, we need a better car to drive further to our jobs that we hate
Does this sound familiar? If so, don’t worry, this is all too common. The good news is that once you are aware of it, it is easy to change.
What steps do we take to fix the two income trap?
The first step is to have a conversation together. Sit down with your significant other and bring up the topic of money and finances. This will be the hardest part of the journey but the conversation needs to happen. Most couples share separate bank accounts so that the other spouse won’t judge them. Instead of hiding the bank accounts, or being nervous about judgement, be vulnerable. Be open to having a tough conversation and be open to adjusting your current approach.
This is going to be difficult. But remember, what is more difficult? Working for an additional 20, 30, 40 years of your life? Or having a 20, 30, 40 minute conversation with your significant other about finances?
Remember to be open, be vulnerable and be willing to adjust.
We had the conversation, we are on the same page (somewhat), now what?
Great! The hardest part above happened. It may not be resolved, you may not be exactly on the same page, but it is great that you had the conversation. Now we have to start identifying what to do next.
Start putting together a list of what your fixed expenses are per month:
Rent/mortgage
Debt payments car/student loans
Cable/Internet/Cell Phone
Groceries/Restaurants/Bars/Uber
Clothing/Electronics/Personal Care/etc
Then make sure you are both very transparent with one another about the expenses above.
Once you get that list together, determine some things that you can start to cut back on.
Do you really need to take Ubers to work everyday?
Do you really need cable, HBO, Netflix, Hulu, Youtube+, etc?
Once you start to figure out what you can cut out per month, keep track of how much you can save.
Take that monthly savings, multiply it by 12 months and that is how much extra money you can save/invest per year!
Do you have student loans? Put this extra money directly toward that
Do you have outstanding credit card debt? Put this extra money directly toward that
Are you debt free and want to begin investing? Start looking at index funds or saving for your first rental property
The summary of this story is that the two income trap is a real thing. The first step is to understand that it is real. The second step is to have the difficult conversation with the other. The third step is to start taking action on address this need.
If you are single or not currently sharing your finances with your future partner, keep these ideas in mind moving forward.
Finances are very taboo and secretive for a lot of households. Finances are one of the top reasons why couples get divorced. Finances are why we all work so hard and for so long.
Have the difficult conversations sooner, rather than later. Otherwise, be prepared to be stuck in the two income trap for a long, long time.
