Middle class barely treads water - Posted by John V, FL

Posted by Bryan-SactoCA on September 20, 2003 at 17:33:20:

and aren’t coming back. Ever. An Indian programmer takes a salary that’s a fraction of what a nerdy white guy in Silicon Valley would take. Yet housing costs (and all other costs) keep going up and up, while salaries keep going down and down. How do they expect people to pay?

Middle class barely treads water - Posted by John V, FL

Posted by John V, FL on September 17, 2003 at 11:53:44:

Middle class barely treads water
Mon Sep 15, 6:54 AM ET

By Christine Dugas, USA TODAY

Millions of middle-class families can no longer afford to live on two incomes.

A generation ago, a typical American middle-class family lived on the income of a single breadwinner. In recent years it has taken two working spouses to live the modern middle-class dream. Now, it seems even that is not enough to survive the skyrocketing cost of housing, health care and college while saving for retirement and shouldering growing debt loads. (More background: Excerpt from The Two-Income Trap)

Bill and Terry Will of Chesapeake, Va., together earn about $70,000 a year, and yet it’s a struggle to provide for their family and pay off their credit card debt. Terry, 44, is a nurse and Bill, 50, manages a warehouse that ships food and supplies to other countries.

The Wills have five children at home, ages 2 to 17. They budget every penny and have no savings, no college fund, no retirement nest egg.

Like many middle-class families often broadly defined as those earning $25,000 to $99,999 the Wills have little room to maneuver if something unexpected comes up. They barely survived when Bill’s job as an oil company sales manager was eliminated in 1999. They came close to losing their home and nearly ended up in bankruptcy before they went to a non-profit credit counseling agency for help.

What happened to the Wills is being repeated in legions of middle-class homes across the USA. With personal bankruptcy at an all-time high, it’s mostly the middle class that gets trapped: 92% of the record 1.6 million filers in the year ended June 30 were middle class, according to a Harvard University study.

The Wills acknowledge that they didn’t know much about managing money before they went into debt counseling, but they didn’t live beyond their means.

“We didn’t have cable TV before, and we still don’t,” Terry says. “We used credit cards to pay for diapers, food and school stuff.”

It may be hard to believe, but the average family of four spends 21% less on clothes and 22% less on food both at home and in restaurants than a similar family did a generation ago, according to a new book, The Two-Income Trap. And though families may spend more today on things like Internet services, DVDs and airline travel, those increases are offset by declines in other expenditures.

Instead of splurging on gourmet meals and designer clothing, families are spending more on essentials such as day care, housing and health insurance.

“Costs are rising quickly, and benefits that used to be provided by employers now must be provided by workers themselves, including health insurance and retirement,” says Christian Weller, an economist at the Economic Policy Institute.

The average employee contribution toward health insurance premiums is $2,412 for family coverage this year, according to the Kaiser Family Foundation. That’s a 13% increase over 2002.

Housing also is eating up more of the average family’s budget. About 80% of low- and moderate-income homeowners spent more than half of their income on housing in 2001, according to the Center for Housing Policy. Many experts say no more than 36% of gross monthly income should go toward credit card bills, car payments and mortgages combined.

Today, much of a family’s second income goes to paying for a suburban home in a good school district, says Elizabeth Warren, Harvard law professor and co-author of The Two-Income Trap.

“Middle-class families are taking on ruinous mortgages just to find a home in the right ZIP codes,” Warren says.

“The cost of living is crazy in the top-rated school district here,” says Emily Derr, 25, a renter who lives in Houston with her husband, Jeremy, and their 5-month-old daughter, Madison. A house that costs $145,000 in that neighborhood would cost $20,000 less one suburb over, she says.

Using credit to make ends meet

The Derrs can’t afford to buy a house yet. They have struggled since Jeremy got out of college with $16,000 in credit card bills and student loans.

Emily has a nursing degree. She had hoped that with two incomes they’d be fine. Instead, she says, “We were making a little more than minimum payments, but it didn’t seem like it was going anywhere. I thought it was going to be 40 years before we’d be able to buy a house.”

To economize, they moved into a cheaper apartment and sold one of two cars. But Jeremy made only $12,000 in his first year as a financial adviser for Morgan Stanley Dean Witter, and they paid $500 a month for health insurance. “I felt like I was drowning,” Emily says.

Credit card debt became an albatross. Eventually, the Derrs went to a credit-counseling service for help. Jeremy joined the Army and is now in officer candidate school.

Credit card debt for middle-income families is soaring up 75% to $5,031 between 1989 and 2001, according to a new report by Demos, a non-partisan public policy organization.

“Middle-class families are using credit cards to fill in a gap between their income and costs,” says Tamara Draut, director of the economic opportunity program at Demos. “It’s more about maintaining their standard of living than frivolous consumption.”

At one point, when Bill Will had no income and no health insurance, he still had credit cards and continued to use them. “I did what I had to do for my family,” he says.

Average card debt declined somewhat in 2001, according to Federal Reserve (news - web sites) data. But some experts don’t see much cause for optimism. Many families traded high-interest card debt for lower-rate home equity loans. That lowers debt payments but puts homes at risk. The percentage of homeowners facing foreclosure in the second quarter was 1.12%, down only slightly from the record 1.2% in the first three months of the year, according to the Mortgage Bankers Association of America.

Facing financial failure

As consumers shoulder more debt, bankruptcy filings have exploded. Nearly 90% of families with children who file for bankruptcy cite three reasons: job loss, divorce or medical problems, according to the Consumer Bankruptcy Project at Harvard University, the largest study of consumer bankruptcy in America. About one-third of the families owed an entire year’s salary on their credit cards.

Single parents typically have the hardest time juggling financial obligations. A divorced woman with a child is nearly three times more likely to file for bankruptcy than a single person with no children, Warren says.

Pamela Robbins, 36, is a single mother of three children, ages 5, 11 and 12. Her problems snowballed after she split from the children’s father about 10 years ago. “There were weeks when my groceries went on my credit cards,” says the Mashpee, Mass., resident. “It was a matter of survival. I had to do it to pay the gas bill so it wouldn’t get shut off.”

Her credit card debt grew to $56,000. Creditors were calling. Robbins earned about $30,000 last year working two jobs to try to keep up. She runs a home day care business and works at a grocery store. Like Emily Derr, she says she felt like she was “drowning.”

With bankruptcy looming, Robbins wanted to save her home. She went to Auriton Solutions, a credit-counseling agency. They negotiated with creditors to reduce her interest payments and put her on a repayment plan.

“I am still stretched to the limit,” Robbins says. “But in the last six months I’ve noticed the debt is going down. It’s going to take a few years, but eventually it’s going to get cleared up.”

Putting retirement at risk

Many people like Robbins manage to avoid bankruptcy by going to a credit-counseling agency. Even then, it can take years to climb out of debt. Saving for retirement usually gets put on hold.

“I have no savings account,” Robbins says. “I have no IRA no retirement plan.” And the need to save for college could put retirement further out of reach.

Most workers are on their own when saving for retirement as fewer companies offer traditional pensions. Nearly two-thirds of middle-income families in 2001 had only a 401(k) type of plan at work, according to a recent report by the Employee Benefit Research Institute. The median plan balance for families earning $25,000 to $49,999 was just $7,000.

Though many employers provide a matching contribution to 401(k) plans, during the economic downturn many suspended or reduced contributions.

Recent efforts in Congress to improve retirement programs have focused on increasing the maximum amount that workers can contribute each year to 401(k) plans and IRAs. “But if they can’t afford to put in $2,000, they’re not going to take advantage of the $3,500 limit,” says Cindy Hounsell, executive director of the Women’s Institute for a Secure Retirement.

“Workers not only have to save for retirement, but they have to make wise financial decisions,” Weller, the economist, notes. The nearly three-year stock market downturn underscored the potential for investment losses in nest eggs.

And during the mortgage refinancing boom, many families depleted their biggest asset: home equity. Last year alone, about $200 billion of home equity was cashed out as homeowners refinanced, according to economist Mark Zandi.

“The large mortgage payments will prevent many middle-income workers from retiring when they want,” says Steve Brobeck, executive director of the Consumer Federation of America.

Despite their financial woes, middle-class families are often in a Catch-22 situation. They typically make too much to qualify for federal aid programs, and yet they don’t earn enough to benefit much from expanded retirement plan limits, tax cuts on dividend income, capital gains and the like, consumer advocates say.

Bill and Terry Will, meanwhile, are doing the best that they can to remain positive. It will take the couple another three to five years to get rid of their debts.

They also have to think about college for their son, Michael, who is a senior in high school. And they have no retirement savings. Terry does not contribute to her 401(k) plan at work now because all their money is going to paying off their debt.

“If we worried about all of this we’d be physically sick,” Terry says. “We just have to trust in God to help us.”

Another conclusion I got was… - Posted by Fred Jaxon

Posted by Fred Jaxon on September 18, 2003 at 16:16:07:

the plug for credit counseling services. Not planning ahead gets you into these problems.

Re: Middle class barely treads water - Posted by Stu Harnden

Posted by Stu Harnden on September 17, 2003 at 21:41:40:

Whats the point, I thought this was a REI site not a political soapbox.

Re: Middle class barely treads water - Posted by Linda Simms

Posted by Linda Simms on September 17, 2003 at 17:27:39:

Horse Manure! Many of the middle class are doing very well. Those that are not are those who never learned to manage money or ones who must have it all now! Baring catastrophic illness, there is no reason why anyone with enough horse sense to go along with the manure, cannot exist on a "middle class income. Geezee, the people who wrote this article need to go visit some third world countries.

Re: Middle class barely treads water - Posted by Rob FL

Posted by Rob FL on September 17, 2003 at 16:49:24:

Yes, there is some truth to this article. I definitely think health care costs and income taxes are much higher than previous generations. I also know that the pension system was a heck of alot different. But I also think that the “minimum” standard of living of most of the middle class has probably double or tripled compared to what it was 30 or 40 years ago.

I look at the housing standards during that time. Plenty of 1200 sq.ft. 1 car carport houses with window AC. It used to be that 2-car households were a luxury. Dad mowed his own lawn. Cable TV, cell phones, internet access, DVD players, Playstation, the latest designer clothes and shoes, vacations to exotic places, etc. were all luxury items. Maybe I was deprived, but I don’t remember my parents having to schedule me for a different activity (i.e. soccer, volleyball, karate, etc.) every day after school. I also don’t remember sitting in a darn daycare center all day long.

Certainly there a single-parent households and such that didn’t barely exist 2 generations ago, but that is a different topic on responsibility and society that I would rather not discuss.

Alot of the middle class needs to come back down to Planet Earth and live realistically unless they can afford otherwise. Just my opinions.

I can relate - Posted by Darin

Posted by Darin on September 17, 2003 at 16:28:25:

My wife and I earn a combined $60K and are struggling to make ends meet. We’ve recently put ourselves on a budget so we can see where the money is going and plan our spending. We have a newer house, nothing spectacular, just a $125K 1350 SF split level. She has a 98 Honda and I have a 97 Dodge. Luckily we both have inexpensive health care through our jobs. Our biggest mistake? Credit cards used frivolously in college. We aren’t saving for retirement but instead are putting every extra dollar toward debt elimination following John Cummuta’s plan. It’s a shame to see so much of our money going toward debt service, but at least the bleeding has stopped and there are better days ahead. I’m getting a pt job to finance my RE activities.

Re: Middle class barely treads water - Posted by Barry (GA)

Posted by Barry (GA) on September 17, 2003 at 15:10:07:


I too saw this article. A buddy at work printed it out and gave to me to read. What did you think of it? I am curious as to how some of these people live. Where and what type of house, cars, “toys”, etc. I know this gets a lot of people in trouble. I know of several couples who are using the 2 incomes to get the really nice house, cars, boat, etc. and are not trying to save a dime. They are probably 90 days from BK. there is even someone who makes $50k+ a year but whines that he can’t afford a house and is still living in a single wide. Just sold their Yukon and bought a brand new Avalanche though!

Also buying groceries and diapers on credit is a big no-no. I know these things because I have “been there-done that” and I was definitely not given the t-shirt :wink: . It is still sometimes hard for me to drop the buy now, pay later attitude. I realize that these things are not always the case but it is with a lot of the people I know.


Add to that… - Posted by Bryan-SactoCA

Posted by Bryan-SactoCA on September 18, 2003 at 20:05:03:

the fact that most people have no idea how money works, and you have disaster. But it is true that the US is losing jobs that will never be replaced. Soon you’ll have lots of people with no hope of finding jobs ever. Then you end up like Argentina.

Re: Middle class barely treads water - Posted by Brad Crouch

Posted by Brad Crouch on September 18, 2003 at 02:08:56:


I gather that you got nothing out of this article. Did you notice this:

> As consumers shoulder more debt, bankruptcy filings
> have exploded. Nearly 90% of families with children
> who file for bankruptcy cite three reasons: job loss,
> divorce or medical problems, according to the
> Consumer Bankruptcy Project at Harvard University,
> the largest study of consumer bankruptcy in America.

Do you think this has nothing to do with Real Estate investing? Doesn’t it give you any ideas about where might be a good direction to target your marketing efforts?

You may have just been given a gift . . . only good if you can recognize it.


Re: Middle class barely treads water - Posted by John V, FL

Posted by John V, FL on September 17, 2003 at 23:07:16:

The point is this does impact real estate investors but so few of us seem to even care or notice as we desperately cut profit margins in a very cut throat business of stock market refugees and long term successful investors trying to keep the money out of the .006% money market accounts. Our economy is sick under way too much debt, we are in a rolling depression and the middle class is taking a step down in their lifestyle as we speak. My thoughts are own lower end condos not upper middle class homes for longer term investing and be very careful unless your exit strategy is very short term. But what do I know. Hey 2K net worth to 1.3M in 12 years from investing means very little these days.

Re: Middle class barely treads water - Posted by Houserookie

Posted by Houserookie on September 21, 2003 at 11:10:33:


You’re right once again!!!

I know people that have held stable 9-5 jobs, work
in factories and earning $15-30 an hour. They’re doing fine, with 401ks, savings, and living in 400K homes with 5-7% annual appreciation.

Then, I know people that are so entuned with trying to make the big bucks that they never make it.

Being in business for yourself isn’t as good as knowing how to beat the guy next to you with money.


Re: Middle class barely treads water - Posted by Carrie

Posted by Carrie on September 17, 2003 at 21:03:26:

I agree!

This just drives the point in harder that you have to make sacrifices early on to better yourself later. These people never learned this. I have to deal with this everyday from my soon to be inlaws so forgive me if I seem hostile. When you are 19 and hear from your mother in law that “you two our the only people I could think of to ask for money because you guys are so lucky”- you’d understand. Lucky my A**! (We are kids - shes forty something, geez!) Ok I’m just kinda thinkin out loud here, sorry.
Anyway sometimes you gotta lay off the beer, cancer sticks, and junk food. Live below your means and someday you can live as luxorious as you desire ( though most millionares will still habitually live humbly) And remember “do what others will not for a while then do what they cannot for the rest of your life”

~ Livin’ on dreams and spagetti o’s~

Re: Middle class barely treads water - Posted by eric-fl

Posted by eric-fl on September 18, 2003 at 16:14:42:

While much of the stuff in this thread will be beat to death, there is one thing you mention here I doubt others will catch on - the multiple activities, like karate, soccer, etc. We had all those things when I was a kid, but typically, you only did one, maybe two things at a time. I know parents all over the place, who’s kids are in no less than 5 activities at a time, plus school.

What’s not being said though, by anyone, is why. When prompted, a lot of people surmise that it’s expanded range of consumer choices, keeping up with the Joneses, wanting to expose their kids to as many things as possible, keeps the kids off drugs, etc. And there’s probably some truth to all of those. But I think they overlook the fundamental issue here. The issue of safety.

Looking back, when I was a kid, when it wasn’t soccer season or whatever, what did I do? I went outside. The only video games in the house was an Atari 2600, and that only took you so far. T.V.? In the afternoons? Soap operas. I remember, frequently, riding my bike INTO THE NEXT CITY, to go to the bowling alley, just to play video games. I was probably about 12 or 13 at the time. Can you even imagine now, a middle class parent, allowing such a young kid to travel that far, or be outside that long, unsupervised? Look around your own neighborhood. How many kids, of any age, play outside anywhere, except maybe right in front of their own house? Middle class parents just don’t seem to allow their kids to wander, and for good reason - there’s too many nut jobs out there. It doesn’t take too many horrific tales of kidnapping and abuse for parents to clamp down, and I think it’s something that’s permeated through society so gradually, most people don’t even realize it.

Re: Middle class barely treads water - Posted by Randall

Posted by Randall on September 17, 2003 at 15:47:46:

I feel for the people who have had bad fortune. But I don’t feel for those that complain all the time yet they’re driving around in the largest SUV they can find. Almost everybody I work with goes to lunch everyday. Hey it might just be to McDonald’s, but that’s still $4-5 a pop, which is $80-100 a month. I bring my own lunch and drive an economy car. I’m the sole earner for my wife and 2 daughters, but we still manage to put a little money away every month on less than $50k a year. Hopefully we will soon be investing in Real Estate and look forward to posting a success story here. Cheers

Wall Street has been decimated… - Posted by Ben (NJ)

Posted by Ben (NJ) on September 18, 2003 at 21:03:42:

I know many brokers/traders who have been out of work for so long that they have given up on finding a job in their chosen profession. Some are now doing handyman type work for a living. Pretty rough!

Re: Middle class barely treads water - Posted by Bryan-SactoCA

Posted by Bryan-SactoCA on September 20, 2003 at 17:35:46:

Yes, but how would you get lists? Divorce you can go down to the courthouse, but what about job loss and medical problems?

Re: Middle class barely treads water - Posted by Bryan-SactoCA

Posted by Bryan-SactoCA on September 18, 2003 at 20:07:58:

The money is made at each end of the spectrum. That’s why apartment buildings are built for the upper class and go down to cheap after 20 years.

Re: Middle class barely treads water - Posted by Darin

Posted by Darin on September 19, 2003 at 16:11:01:

Eric, it sounds like we had similar upbringings. I was outside everyday playing football, baseball, soccer or riding my bike on BMX trails. No joke, my sister and I rode our bikes across the St Croix River from Minnesota to Wisconisin to attend a parochial school 5 miles away unless the snow was flying. We rode everywhere and had a blast. Too many kids today are fat from all the junk food and sitting hypnotized in front of the TV and video games.

Perhaps the American spirit isn’t - Posted by Houserookie

Posted by Houserookie on September 20, 2003 at 22:35:04:

moving as quickly as our fight for capitalism. Capitalism rewards entrepreneurs and takes from mediocrity.

This is an exciting time in history to witness how the participants of capitalism control their future.

Capitalism is about free enterprise and free market. If you don’t compete you don’t last.

I wonder if most Americans understand that concept.