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 Lifestyle, Double-Dome Publications, 224 pages