How you can cope with ‘middle-class crunch’

Laura T. Coffey • Profile • E-mail

Do you consistently feel as though you’re barely scraping by even though your family’s income level looks pretty good on paper? If so, you’re not alone.

Thousands of middle-class families across the country are experiencing the sense of being squeezed, despite the fact that their annual incomes are far above the U.S. median household income of $48,201. Even families making double that amount may struggle at times to cover their expenses, let alone save anything after all their bills are paid.

How can this be? In their book “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke,” Elizabeth Warren and Amelia Warren Tyagi report that the average two-income family “earns far more today than did the single-breadwinner family of a generation ago. And yet, once they have paid the mortgage, the car payments, the taxes, the health insurance, and the day-care bills, today’s dual-income families have less discretionary income — and less money to put away for a rainy day — than the single-income family of a generation ago.”

That’s right, folks — you’re not imagining it. Your parents had an easier time making ends meet than you are. Especially if you live in an expensive area of the country, and even more especially if you have children, it can be shockingly easy to watch your discretionary income evaporate before you even know what happened to it.

Can you do anything to combat this punishing trend? Yes, you can. The following tips may not resolve all your money worries, but hopefully they will give you some practical ideas for lightening your load.

1. Recognize when you’re in the danger zone. If you’re part of a two-income household, how strapped are you? To be more specific: If anything at all were to go wrong — say, a job loss, a divorce or an illness that prevented one of you from working for a time — could all of your bills be covered by just one income instead of two? If your answer to this question is no, it’s time to start reflecting on how much money you have in savings. Most of us know that we should have an emergency fund stashed away that could cover six months of living expenses — and most of us haven’t gotten around to doing that. The psychological benefits of having this cushion cannot be overstated, however. The easiest way to start building such an emergency fund is to view the amount you stash away as another monthly bill. Could you realistically handle one more $50 bill? How about a $150 bill? Immediately start squirreling away a regular chunk of change for yourself.

2. Think about your housing costs. Have you and your partner stretched yourself to buy a house that you only could afford by becoming “house poor” and dedicating big chunks of both incomes to the cause? This can be a very dangerous practice. (Review tip No. 1 to understand why.) Many people get themselves into this pickle, though, because they want to live in a neighborhood in a good public school district. Parents are often willing to do almost anything to help their children get a good start in life education-wise. That said, you won’t be doing your kids any favors if you spread yourself too thin with this crucial investment. Heck, you actually could lose the roof over your heads if a single thing goes wrong in your lives, even temporarily. So what should you do? You could rent for another year or two or three in that same neighborhood with the good schools before buying a home. Or, as inconvenient as this may be, you could buy a home that’s much smaller than the home you want. The main objective is to make sure that your house or rent payment can easily be covered by just one income. If you’ve already taken on the monster mortgage and you feel yourselves sinking, consider simplifying your lives by downsizing if you possibly can.

3. Reflect on your wheels. It can be easy to ridicule Americans who drive around in gleaming, large vehicles and saddle themselves with whopping car payments in the process. Frankly, it’s risky to do this, especially if you’re already feeling squeezed — but families with children often take on this added expense for reasons that are anything but frivolous. Newer vehicles tend to have the highest safety ratings — and who doesn’t want to keep their kids safe? Also, depending on how many children you have, you may opt for a larger vehicle so you have enough room for those legally mandated car seats and booster seats. All of that said, here are some ideas to help you save money in this area:

• Have just one car payment instead of two. One of your cars could be the family vehicle, and the other one could be a much-less-expensive-but-dependable used car that doesn’t require a car payment and hopefully relies on much less gasoline. Keep driving the used car as long as you can, even if it’s held together with duct tape.
• Own just one car instead of two. It goes without saying that a car isn’t a luxury in many pedestrian-unfriendly parts of the country — and if you both work, it’s easy to see why you each may need your own car. But is it remotely possible for one of you to commute to work in a different way? Walking, riding a bike, taking public transportation, carpooling or tapping into a car-sharing program could help you save thousands of dollars a year.
• Qualify for independent financing for that family vehicle. It’s a common mistake to think that the dealership needs to arrange your car loan for you. Be aware that such financing is a key source of profits for car dealerships, and it’s quite likely that you could find a loan with a better interest rate elsewhere.

4. Increase your deductibles. Deductibles are the sums of money you have to fork over before your insurance policies come to the rescue. You could save a bundle by contacting all of your insurers — for your home, automobiles and health and disability plans — and bumping your deductibles up by a few hundred dollars apiece. Rick Brooks, a financial planner from Solana Beach, Calif., pointed out why this approach often makes sense. “Few people will file a claim with an insurance company for a $500 repair because of the effect it will have on (their) insurance rates,” Brooks said. “Yet many policy deductibles are set at just that amount. I suggest that people think about what they would be willing to pay out of pocket. If that’s $1,000, then set the deductible at $1,000. This can have a huge impact on the cost of insurance for a family.”

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