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The Two Income Trap


Middle income America is made-up of two income households. Two car payments, two kids, vacation plans, house or rent payments, college savings plans and dumping 15% of their income into their 401k for retirement. We speak with them every day, but only after they have seen a bankruptcy attorney and they are contemplating bankruptcy. Too bad we didn’t get to them earlier, before they received poor financial planning advice.


The two income household often times has stable income for many years. They work hard and play hard. They’re told to make retirement savings their priority and put into their retirement as much as they can afford. This narrative is sold, pushed, published and talked about via the media and finance industry daily.


Unfortunately many in the finance industry believe this information promoted and pushed by their companies as honorable and truly helping people. Most in the finance industry are not allowed to promote proper priorities due to their company or certifications. Some know better, but it’s the bottom line profits that dictates their advice. Many are only allowed to promote their companies stance based on what brings in revenues.


The Two Income Trap is where the household feels financially safe and secure because they are doing what the finance industry has told them. Maxing out their retirement investments annually with three months expenses in an emergency fund. We speak with them daily, households that followed this flawed financial plan. Many had to liquidate their retirement portfolios in an emergency and have hefty penalties to pay. Many are in disbelief of how wrong their plan was, and that they felt financially secure because their financial advisor told them they were fine. They were never told about the Cost of the Emergency, how to plan for it, how much or where to save. Their advisor may not know themselves.


The top financial savings priority (as we have stated in previous commentaries) should be your emergency savings account. This is Not a retirement account, or investment account, not a Roth IRA, TSP, 401k are not your emergency fund. Your goal, for most W-2 employees should six months gross income, not based on expenses but income in an FDIC insured high interest savings account. If you lose a job you lost income, not expenses, so why would you base your emergency fund on expenses, you didn’t lose them. Where the finance industry fails people is their three (3) months expenses advice which only covers your expenses, it doesn’t consider the Cost of the Emergency.


Whala, we just gave you a clue to one area the finance industry fails with lack of forethought and real planning.  The additional cost of the emergency is never factored into their half thought-out advice. What do we mean by the “Cost of the Emergency” If income is lost, the income that covers the healthcare premium each month, that is from their gross paycheck automatically deducted and not part of your monthly budget expenses. A medical emergency where you lose income and must cover a high medical deductible which is not part of your monthly budget expenses. We can give a hundred examples of “Cost of Emergency” that is not factored into the finance industries poor advice.


An Emergency fund should be the top savings priority before Retirement investing. Retirement is actually third on the list.


·         Emergency Savings

·         Revolving Savings

·         Retirement

·         College

·         Next Vehicle

·         Vacation


Examples of proper savings priorities. We provide details for each priority in our other articles.


If we offended anyone, good! People need real financial advice, not advice based on your financial advisors company’s bottom line sales revenues. They don’t make money when it’s sitting in an FDIC insured savings account earning higher interest than their money market account.  






Phillip Day, President

Academy of Financial Literacy, Inc


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