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September 16, 2008

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Since there are low childcare options in lots of areas, one way would be to watch a couple of kids for other parents in your home so that you can stay home with your child. It makes your child grow up with a need to be social and supports your income, usually a win-win.

We had our first baby in May and I'm now staying at home with him. We're 26 and got married right out of college. Since we've gotten married, we've always tried to live on just my husband's income. (We then used mine to pay off debt, build an emergency fund of 10 months of living expenses, put 20% down on our house, etc.)

The key for us was not to inflate our lifestyle as our incomes grew. Our incomes more than doubled since our first jobs out of college, but since the increase went basically towards our savings and not towards more payments and better "stuff," it has been virtually no transition in lifestyle going down to one income. Now we still maintain the same standard of living we always have, we just don't see our savings account growing as rapidly.

Having children will affect their tax situation which they certainly should consider when budgeting. They should also evaluate whether it would be feasible to own only one vehicle in their new situation because that would save a lot of money for them.

On the other hand, increased insurance needs (life, disability) should be looked at.

Check out the book "The Two-Income Trap" by Elizabeth Warren, Amelia Warren Tyagi.

We tried living off only my income in anticipation of having our first son. There were so many questions and variables - her loss of health insurance, day care, etc - that this seemed like our best real-life option.

We had been aggressively paying down or 2nd mortgage, but instead just banked my wife's paychecks in case she decided to stay home. Ultimately, she decided to work part time and we haven't skipped a beat. Still saving her entire paychecks (for the most part) and she's enjoying spending 2 days a week at home with our son.

I think FMF's suggestions of dual budgets are good, but too often budgets get thrown out the window when real world issues come up. Or the budgets are too conservative.

My sister and her husband did this a few years ago. They have two children and she wanted to home school them. They figured out their income/expenses both ways, as you suggest and discovered that, with her staying home, they were only going to be short something like $200 a month. She cleans two houses every Thursday (her husband takes that day off to stay with the kids) and that made up the shortfall. It has worked perfectly for them and, though I'm sure money is tight, they have never regretted making this move.

I am actually going through this. My wife and I just had a baby 1 month ago. This is how we went into it.

First of all, we made sure that my income was enough to cover all our expenses - yes I know this is captain obvious stuff but hear me out. We did without a lot of things that we realized weren't a necessity, we found cheaper car insurance on both of our cars, she refinanced her car loan to a lower rate, found a way to fix our entertainment (trust me you need entertainment). The savings in gas with her not having to drive to work is another nice feature.

Anyways, take it with a grain of salt. These are the things that helped me make that transition.

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.

Good Luck!

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