The Dual Income Credit Trap

Dual-income couples, especially professionals because of their high combined earnings, face a credit trap that can keep them in debt forever. Using credit to leverage their combined incomes gives them tremendous purchasing power, while their monthly salaries provide the means to service a huge amount of debt. The combination of these factors makes it easy to overextend financial resources in pursuit of an elevated standard of living.

The temptation to spend now, earn later

With credit, a dual-income couple can spend their combined income before it is earned. They can enjoy the fruits of their labors now rather than wait until they have actually labored for the money. In our get-it-now, consumption-obsessed culture, this is a temptation that is difficult to resist: Borrowed money is easy to spend, because it hasn’t been earned yet; low interest rates and aggressive financing of big-ticket products by retailers encourage an overcommitment to debt.

Once they are caught in the credit trap, dual-income couples are under pressure to maintain their incomes at all costs and grow them if possible. That may mean staying in an undesirable job because it pays well or taking an undesirable job because it pays more. It may mean passing up an opportunity for interesting and rewarding work if  it doesn’t pay enough to service the debt.

If all goes well, they are able to service the debt and enjoy a higher standard of living sooner than they could have otherwise afforded. At worst, they may have to max-out lines of credit from time to time to cover expenses that exceed their available monthly discretionary income, and that may cause them to delay a purchase now and then. But, for the most part, while they may live close to the edge of financial ruin, they do not cross over it.

Lost opportunity: The hidden cost of the credit trap

These couples may escape severe financial consequences, but they still pay a price for being caught in the credit trap. I’ve already mentioned the loss of opportunity and freedom connected to employment, which are significant. They also forfeit the opportunity to take a break from work to pursue educational opportunities or other interests. The opportunity to achieve financial independence is sacrificed as the money required to service the debt and maintain elevated living standards takes all or nearly all of their monthly income, leaving little, if any, for saving, with the exception of money withheld from their paychecks to fund retirement accounts. Early retirement is out of the question and a delayed retirement is likely given the lack of savings and monumental debt. They will never know the peace of mind that comes from being free of debt.

The big fear: A reduction or loss of income

Dual-income couples caught in the credit trap desperately crave income security. The viability of their finances depends upon it. Unfortunately, income security does not exist.  The Great Recession of 2008 taught us that no job is absolutely secure, not a teaching job, not a federal government job, not a union job—no job, and that high paying  jobs can disappear overnight, leaving those who have lost them with little opportunity to restore their incomes to the levels to which they had become accustomed.

If things do not work out and there is a reduction in income due to a job loss, illness, or injury, the dual-income couple caught in the credit trap faces an immediate financial crisis. To deal with it, they accrue more debt on their credit cards, borrow or withdraw from their retirement accounts, juggle payments, and sell off possessions at a nickel on the dollar. A reduction in income that lasts long enough may result in bankruptcy.

The credit trap can be avoided

The same factors that make dual-income couples susceptible to the credit trap also provide the means of avoiding it. Combined earnings from two jobs allow a dual-income couple to save one income and still live well on the other. Increases in living standards can be paid for out of savings rather financed with debt.  A secure cushion of savings can be accumulated in a relatively short time that will provide tremendous employment flexibility. A standard of living based on one income allows the use of the relay method to take advantage of opportunities that require one or the other to temporarily exit the job market. Financial independence and early retirement are feasible if that is the goal. Dual-income couples never have to experience indebtedness if they don’t want to.

In our consumer culture, the default action is to leverage income with debt—buy now, pay later. To avoid the credit trap, the dual-income couple must make a conscious decision to live on one income and save the other. Such a decision comes from a vision of a financial future that extends beyond the present and encompasses more than the immediate satisfaction of material desires, a vision born from an understanding of the freedom,  independence, and relative financial security that accumulated wealth can produce.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Refurbished Computer Is Economical Solution to Windows XP Upgrade

I was satisfied with my nine-year-old Dell Dimension 8400 computer that came with a Pentium 4 processor, 1gb of DDR2 RAM, and Windows XP.  There was no need to upgrade until Microsoft announced the end of support for the Windows XP operating system.  Yes, I knew that day would eventually arrive, and I am grateful that I got nine years of service out of the Dell Dimension 8400.  In the past, I had upgraded my computer and operating system about every five years.  So I was overdue.  Still, I resisted the idea because I didn’t want to upgrade to Windows 8.1.  For one thing, I would have to upgrade all of my application software to accommodate the 64 bit environment.  Some peripherals such as my scanner and external disk drive were not compatible with Win 8.1 and would have to be replaced, as well.  I did not want to have to adapt to the Win 8.1 user interface, either.

The cost of a new computer

Initially, I came up with two options:  I could purchase a new computer from Dell with Windows 7 loaded on it for $450.00, or I could purchase the same computer with Windows 8.1 for $400.00.  Both computers featured Intel Core i3 4130 processors and 4 gb of DDR3 RAM.  Both were 64 bit machines which would require upgrades to my application software and the replacement of some peripherals that would add another $300 to the cost.  I planned to continue to use the flat-screen monitor that came with the Dimension 8400.  The total cost to upgrade from Windows XP would run between $700 and $750.  That wasn’t bad considering I had spent $1600 on the Dell Dimension 8400, but that price also included the monitor and a lot of application software such as MS Office Basic 2003.

Upgrade the old machine

A friend of mine suggested I do what he did.  He paid someone to install Windows 7 (32 bit) on his old computer.  I considered this option, but if I were to install Windows 7 on the Dell Dimension 8400, I’d want to add at least 2 gb of ram, as well.  The cost of labor, software, and the additional RAM would total about $250-$300.  I’d still have a nine-year-old machine and an outdated processor.  I would avoid having to upgrade my software and peripherals, however.  This option would save me $450 to $500 in the short run.

A middle way:  refurbished

As I was mulling over my three options out loud one day, Rosa asked if I had checked Walmart’s prices for the Dell computers.  I hadn’t and when I went to Walmart.com and searched, I came across refurbished Dell computers priced under $200 with Windows 7 Pro (32 bit) installed on them.  Now here was another option.

There were many configurations of refurbished computers listed on the Walmart.com site.  I checked each one, noting the system specifications.  I found one that had everything I wanted:  a better processor, more RAM, a DVD-RW drive, a 160 gb hard drive, and Windows 7 Pro (32 bit)—all for $161.00.  Shipping was free and it came with a one year warranty.  It also had great reviews.  So I added it to my cart.  When I went to check out, I was notified that it was out of stock.  I was asked if I wanted to leave it in the cart and be notified when it was back in stock.  I accepted but had no hope of it being stocked in the future.

I searched for a comparable refurbished computer in the same price range on the Walmart site, but found none.  Every one I checked lacked something I wanted.  Ebay offers a lot of refurbished computers at reasonable prices with Windows 7 operating systems, but none of those compared to the unit I found on Walmart.com.  For the most part, the eBay machines had slower processors, less RAM, and much smaller hard drives.  Almost all lacked a DVD-RW drive.

The refurbished option appeared to be a dead end.  I went back to my first two options and eventually decided on the Dell Windows 8.1 computer for $399.  If I was going to purchase a new computer, I might as well get the latest operating system and not have to upgrade for a good long time.  I was in no hurry to take the plunge and set the whole business aside for the time being.

About a week after that, I received a notification from Walmart.com that the computer I had tried to purchase earlier was back in stock.  I clicked on the link and double checked the specifications to make sure it was the same system.  It was and I bought it for $ 161.00.

Bare-bones system

It arrived a week later.  I set it up last weekend.  The machine is bare bones with only the operating system, including Internet Explorer, loaded on it.  There were no set up instructions, but I have set up many computers over the years and didn’t have a problem.  I used the Windows Easy Transfer program to pack and transfer my data files using a 32 gb USB drive.  Everything transferred just fine.  I installed all of the software I needed and had no problems with the exception of an old Western Digital external hard drive and a cheap accounting software program that were not compatible.  I tried another external hard drive I had on hand, and it installed and worked fine.  Even the software from my old Canon Lide 35 scanner installed and worked better than it had on the  XP machine.  I installed a free accounting software package (Express Accounts from NCH Software) that suited my little online business.  The best part was the MS Office Basic 2003 software that came with my XP machine installed and ran on the Windows 7 Pro without a hitch.  I didn’t have to invest in any application software or spend money on new peripherals.  The Windows 7 Pro user interface is essentially the same as XP.  This upgrade should last until Microsoft stops support of Windows 7.

Refurbished gave me the best value 

The refurbished computer gave me a hybrid solution that was less of an upgrade than the purchase of a new machine, which I didn’t really need, but more than a mere upgrade of my old Dell Dimension 8400 would have given me and at a lower price than either of those two options would have cost me.  I now have an Intel Dual Core processor running at 2.7 GHz, quadruple the RAM (4 gb DDR3), a hard drive equivalent to the old system (160 gb), and a DVD-RW drive like I had on the old system.  In addition, the new system (Dell Optiplex 380) has a desktop case instead of a mini-tower which takes up less space.  It also uses less electricity running at 235 watts versus 350 watts for the old system.

Time will tell if the refurbished computer is as good a value as it appears.  I have to confess that I had no interest in refurbished electronics until recently, but it is a viable option for me now.  This is the third refurbished electronic product I have purchased.  Previously, I had purchased a refurbished cell phone and cable modem on Ebay.   Both have  given me excellent service, so far.

Exercise due diligence when purchasing refurbished electronics

If you want to save some money on electronics, try the refurbished market.  You will need to do your homework:   Read the product specifications carefully to make certain you understand what you may be purchasing; use customer reviews to determine the reliability of the product and vendor and make sure there is a product warranty of some kind.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Refrigerated Air Conditioning, the Electric Bill, and Panic in the Streets

Last February, Rosa and I decided to replace our 38-year-old furnace with a new, more efficient one.  It was the perfect time to add a central  refrigerated air conditioning unit to replace the four window air conditioning units with which we had been cooling the house.  The furnace and air conditioning unit use the same blower and ducts to distribute either heated or cooled air.  We’d save money by having both installed at the same time.

Our frugal instincts were challenged

Adding central refrigerated air was a big deal for us, because it went against all of our frugal instincts.  We’ve lived our lives trying to cut expenses, especially utilities, and extend the useful lives of appliances in order to maximize the money we could add to our savings.  Now here we were willfully spending money we didn’t need to spend on a central refrigerated air conditioning unit that was guaranteed to increase our monthly electric bills.

Window units vs central air conditioning

Using the window units to cool the house essentially confined us to the  main living area, the kitchen, and a bedroom with an attached office.  We closed off the rest of the house to save on electricity.  When we wanted to use one of the rooms that had been closed, we’d have to run the window unit for 20 or 30 minutes to cool it down.  In addition to the inconvenience, the window units didn’t do a great job of cooling.  Central air would cool more effectively and allow us to use the whole house.

Coming to terms with the additional cost of electricity

The trade-off was cost, of course.  It wasn’t the cost to acquire central air conditioning that concerned us; we knew exactly how much we would be spending on the equipment and installation.  Amortized over 20 years, the equipment and installation would cost us a little over a dollar a day during the summer months.  It was the ongoing cost for electricity to run the central air conditioner that troubled us, because it was an unknown variable.  We estimated central air conditioning would double our normal summer electric bill at current rates.  We could handle that now, but what about in the years to come?  Electric rates were bound to go up.  How much?  Nobody knew, and that was our problem.  To help quell our fears, we projected the increased cost of electricity by applying a conservative rate of inflation.  The results reassured us.  We felt comfortable that we could afford the additional cost of electricity in the long run.

A time to spend on a high priority

At our age, physical comfort is a high priority.  We can’t do much to mitigate the aches and pains that come with aging or the varied negative side effects of medications taken for chronic health conditions.  We do, however, have control over the room temperature if we choose to exercise it.  Rosa and I decided it was worth the cost to experience increased comfort in this way.  Besides, after years of saving to secure our financial independence, there comes a time to spend.  We saved the money so we could spend it at some time in the future.  We’re over 60 years old; if not now, then when?  So we bought the central air conditioning unit and had it installed along with the furnace.

Panic in the streets

In February, it’s easy to accept a doubling of the electric bill in June when it is still several months away.  Well, June has arrived and with it eight consecutive days of 100 plus degree temperatures, including four consecutive days of high temperatures ranging from 107 degrees to 109 degrees, record-breaking heat.

After the first few days when the air conditioner ran almost constantly, Rosa and I began to get a little nervous about our consumption of electricity.  We read the electric meter to determine how much electricity we had used since the last reading taken for our May bill.  According to our calculations, we had used 1,315 kw of electricity in just 15 days.  We only used used 340 kw for the whole month of May (30 days).  Yikes!  At that rate, we’d rack up $400 in electricity usage for the month of June.  Panic began to set in.

After a couple of additional days of 100 degree heat, we read the meter again.  The air conditioner appeared to be costing us $15 per day by our calculations.  We were in full panic mode by this time.  Our highest electric bill last summer was in the $100 range.  Suddenly, we were faced with spending in excess of four times that amount to operate our central air conditioning unit and that was with the thermostat set at 80 degrees.

Rosa contacted her friends that had central air.  None of them reported having received electric bills even close to the amount we were anticipating, and they kept their thermostats in the mid-70′s.  They also lived in larger houses than ours.

Never mind

We took another reading of the electric meter.  The hands on the dials had advanced enough to reveal that we had misread a 2 for a 3 on one of the dials the previous two times.  Our electric usage was 1,000 kw less  than we had originally thought, which translated into a revised cost of under $3 per day to operate the air conditioner, but that included a week of much cooler temperatures that had required the air conditioner to run less often.

Our electric bill will probably total between $150 and $200 this month.  That’s in line with our original projection.  Once we receive an actual bill, we will have a clearer picture of the additional cost.  Then, who knows?  If it is lower than expected, we might just drop that thermostat to 78 degrees.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages