How to Determine If You Can Move from Two Incomes to One

A reader left a comment on my post titled Help a Reader: Going to One Income that I thought was especially good and should be shared with everyone. Here it is:

My wife and I are going through this exact thing right now. Here's the approach we took:

1. Compare income vs. childcare costs. In our case, we already had one child in daycare while my wife and I both worked. Adding a second child to daycare (and remember infants cost way more in childcare than a 3 year old) was going to put our childcare bill several hundreds of dollars more than my wife earned. It was an easy decision.

2. Budget - if you don't know where your money is going, you won't be able to predict changes in budget when you eliminate an income.

3. It's easier to make the transition if you're a saver. For the past 4+ years, every raise my wife and I have gotten has gone directly to savings. We have (or had in her case) direct deposit setup such that the first set amount of money from each paycheck went to our checking account, and anything above that amount went to savings. So as we got raises, our checking account income never changed, and the savings account grew and grew.

4. Plan early. If you're basing the change to a single income on the birth of a child, you've got 8-9 months to get ready for the change. Use that time to build up a safety net above and beyond your normal emergency fund. Expect that the first few months of living on one income are going to be an adjustment phase and that you might spend more than you expected at first. Also think about expenses that are going to go up (heat & electricity for example) having people always at-home. Sure, you may not burn as much gasoline driving two cars to jobs every day, but you will need more lighting / heat / etc.

5. Capitalize on equity you already have. For example, my wife and I knew we'd need a larger car when our second child was born (we both had small cars). We looked at both the cars we owned, what condition they were in, etc., and managed to sell the newer of our two cars for enough to pay off the remaining loan on that car, pay off the car we were keeping, and put several thousand dollars down on a slightly larger replacement vehicle. In the end, our insurance went down $50 a month, and our total cash output for car payments went down $115 a month. We looked at other areas we could save too, like reducing cell phone minutes because she won't need one for work or reducing the number of cable channels we have because we're realistically not going to have time between diapers and feedings to enjoy all 800 channels.

6. Treat the stay-at-home duties as a full time job. My wife and I had several conversations about what kinds of things she'd be doing as a stay-at-home mom, so there weren't any unspoken expectations or surprises as we moved into this change. She's got vacation time, she's got planned nights out, and we've setup budget line-items for the at-home stuff she'll want to do with the kids. Clearly identifying her role in the change has been fantastic for us. The end result is that we're working better as a team than we ever have before, and with her handling all the little day-to-day stuff around the house, we're able to spend a lot more time together as a family in the evenings and on the weekends.

It's comments like this that make FMF so much better than if I was the only one giving my thoughts here. Thanks to all of the commenters for helping to make Free Money Finance better!

Comments

[LC]

I especially like the point about budgeting activities for during the day. One benefit of daycare is the variety of activities and other peers. You will want to take your kids to the zoo, do crafts, schedule play dates, all of which will cost a little money that should be accounted for.

[Jeffrey]

I was struck by point 6, "Treat the stay-at-home duties as a full time job." That speaks of respect for the Stay At Home parent. Overall, I find this an impressive, thoughtful plan.

[Mary@SimplyForties]

I'm very impressed that they have nights off and vacation time built into their plan. Nights out aren't too much of a stretch but I wonder how they are going to handle vacation time. More proof of the value of good communication.

[bob]

The real key is whether you bought your house with two incomes or one income. For example, if you make 50,000, your spouse makes 30000, did you base how much you could spend on a house on 50,000 of income or 80000? If it was 80000, you can't afford to live on 1 income.

[Strick]

Point 4 seems to make a big mistake by not taking full advantage of the "8-9 months to get ready" time. Don't spend 8 months getting ready to live on one income, and then the next few coming up just short, Go ahead and start living off of one income. As the post says, the first few months of transition will probably come up short of the goal, but 8 months is enough time to figure it all out in actual practice. Plus the large amount of savings you can gather in these 8 months is not just a nice extra, it is the necessary increase in the emergency fund you'll need (A 3 month emergency fund seems reasonable when the big threats are losing one of two jobs or a big unexpected bill, but the threat of losing the only job in the household requires much much more for me to be able to sleep at night).

[Dave]

As the person who posted the comments originally, I'd like to respond to a couple of the comments:

1. Buying our house - we bought our hosue with two incomes, but I changed jobs shortly thereafter, with a substantial increase in pay. The thing, though, is that when we were shopping for houses, we set our budget a lot lower than what the bank was willing to let us spend on a house (like 20% less). We didn't want to be "house poor", and we're not the type of people who need to live in a huge fancy house. We found a nice modest home that was well within our means, and it's worked out great.

2. In response to the comment about point 4 - during those 8-9 months, we're still paying for daycare for our first child. So we still needed the 2nd income to help cover that cost. If we had to pay our normal bills, plus childcare, while putting every penny of my wife's income into savings, we would have been living far outside our means. Not to mention the additional expenses that pop up during a pregnancy (maternity clothes, baby supplies, etc). We did use this time, though, to cut back on eating out, cut back on unnecessary expenses, replace a car, and get the house ready for baby #2. If the second child had been a little more planned to begin with, perhaps we could have done better. In the face of the surprise that's blessed us, though, we made the best we could with the time we had to prepare.