Coping with a lost generation of income

coins on a scale weightThe typical American family makes less than it did in 1989, according to a recent Washington Post analysis of Census Bureau data.

Although some pundits seem to have completely missed the point—one even argued that we’re better off now because electronics are cheaper—most people instinctively understand how not-good this actually is.

It’s a reversal of trend when family incomes rose pretty much across the board between the end of World War II and the 1970s. Add in the skyrocketing costs of health care and education—a college education costs twice what it did in 1980, in inflation-adjusted terms—and you have a real squeeze going on.

What income growth there has been since 1991 has gone to households headed by someone with a college degree. Furthermore, most of the job losses during the latest recession were in middle-income occupations. The growth since then has been in low-wage jobs.

That’s actually been the trend for at least the last decade: Mid-wage jobs got clobbered in the 2001 recession and never really recovered before getting whacked again. Meanwhile, the vast majority of the income and wealth gains have gone to the wealthiest Americans.

Even without these economic headwinds, you can’t necessarily count on your income heading steadily skyward. People who lose jobs, especially during or after a recession, can have a tough time finding the next one and may have to take a pay cut to get it. Illness or accident can reduce your ability to work. Employers can decide to contain costs by reducing your hours or even outsourcing your job.

Stuff, you know, happens.

And no one is charging to the rescue. Congress can’t even agree to pay its own bills, let alone help you figure out how to pay yours. Even the easier stuff—making college more affordable and closing tax loopholes that favor the rich—is beyond our lawmakers’ abilities.

So it’s important to be as nimble financially as you can be. You’ll want to be in the best position to adapt to changing circumstances, because change is the pretty much the only thing you can count on.

That means:

Keep your nut small. Your “nut” consists of your basic expenses, the bills you have to pay to avoid serious consequences such as eviction, repossession, credit score damage, job loss and ill health. These must-haves include shelter, utilities, food, transportation, insurance, child care and minimum loan payments. Keeping these costs to half or less of your current after-tax income will help you weather job loss or other income interruptions.

Buy less house than you can afford. As I wrote in “The 10 Commandments of Money,” the old advice that you should stretch to buy a home is seriously out of date, and often downright dangerous. In the old days, you count on rising incomes to make a big house payment more manageable over time. That’s no longer the case, and shelter payments that exceed 25% of your current income can make it tough to make ends meet.

Create multiple income streams. One or two paychecks may not be enough. Having a side hustle of some kind can help you pay the bills if your main gig disappears.

Save prodigiously. The old advice was to save 10% of your income. These days 20% is the number to shoot for. You not only want to make sure you’re taking full advantage of retirement savings plans, but you also need a sizeable emergency fund to get you through income disruptions. If even 10% feels like a stretch, start just by saving something and kick up your contribution rate a little at a time.

Beware debt. I’m not among those who think all debt is evil. Moderate amounts of the right kinds of debt can help you get ahead. If it’s a choice between no college degree and $20,000 in student loans, by all means, sign up for the student loans. But don’t overdose. Six-figure loans for an undergraduate degree make no sense. Neither does carrying credit card debt or agreeing to a crushing car payment. If you can’t pay cash for a car, at least make a sizeable down payment (20% or better) and limit your loan term to four years. Then hang on to the car for another 5 or 6 years while you save cash to buy the next one. Avoid the temptation to have more than one car payment at a time; few households can afford that luxury in good times, and those payments can really trap you when your income drops.

Get educated (and get your kids educated). The future is looking grim for those without a college degree. Some kind of post-secondary training is going to be a virtual necessity for staying in the middle class.