Can Your Family Afford to Live on One Income? 7 Money Moves to Make First
Giving up a second paycheck can change far more than your monthly budget. Here's what to consider before your family makes the switch.
It's a question that comes up often among new parents and there's surprisingly little information out there to answer it. With the exorbitant cost of daycare, would you be crazy for even considering having one parent quit their job to stay home with the baby?
The idea of willingly giving up an entire second income can feel scary. How do you know whether you're considering all the right factors to feel confident in your decision one way or the other?
"People run the numbers, get an answer they could genuinely live with and still can't decide," David Fisher, Founder and CEO of Summit Income Planning Group, tells Kiplinger. "Because they are waiting for a version of the choice with no downside. That version doesn't exist. Every real option carries a cost."
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How can you accurately estimate the costs and benefits of transitioning to a single income and make the move as seamless as possible if you do decide it's the right one? Here are seven financial moves to make that can help you make the best decision for your family.
1. Figure out the real change in income and spending
The first step in deciding whether a single income is feasible is getting a realistic estimate of how much your actual take home pay will be and exactly how your expenses will change. The real change in your household income and spending is not simply the second income minus childcare costs.
"It's the income minus the costs of things like childcare, commute, meals, and clothes," Fisher says. "The second income is also typically taxed at a higher tax bracket if the household income is high enough."
In other words, you're not just saving on daycare. The income of the parent who continues working will also be taxed less, as your household income will likely fall into a lower tax bracket and you'll be adding a new dependent.
Meanwhile, some expenses will go up. If you're putting the entire family on the working partner's health insurance, for example, expect a higher deduction for that from future paychecks.
Some additional ways you might be able to save by having one parent stay home include:
- Getting rid of the second car if there's a practical way for you to share one car when there's only one commuting parent.
- Canceling or scaling back on a professional cleaning service if you currently pay for one.
- Reduced fuel and maintenance expenses now that only one parent is commuting.
- Reduced spending on dining out if you tended to buy lunch outside while working.
Beyond changing health insurance costs, additional expenses and opportunity costs to consider when giving up one job include:
- The loss of any contributions the non-working partner was making to a 401k or other retirement account.
- The lost 401k matching contributions if the non-working partner was getting those.
- The impact on social security benefits of having fewer earning years in the stay-at-home partner's work history.
Doing the math on the whole picture can help you make a more informed decision and plan ahead for any long-term impacts this decision will have on your finances.
2. Get your life insurance in order now
When moving to a single income, your household no longer has a "backup earner" so getting life insurance to replace that income if anything were to happen becomes more important than ever.
But it's not just the working partner that needs coverage. "Insure the parent who's at home, too," Fisher advises. "People often feel it's unnecessary because there is no income but there absolutely is a cost to replace full-time childcare and household management."
Since you'll need coverage for both, rather than take out two separate policies, you can look into something called survivorship life insurance. Sometimes more bluntly referred to as "first to die" life insurance, this is a single policy that will provide a payout to either spouse in the event that the other passes.
Where to compare: Life insurance
Shopping around can help you compare coverage, policy options and costs. These established life insurance providers are worth considering:
USAA — A strong option for military members, veterans and their families, with term and permanent life insurance options.
New York Life — Offers term, whole and universal life insurance, with policies sold through financial professionals.
Northwestern Mutual — Offers term and permanent coverage, with an emphasis on incorporating life insurance into broader financial planning.
State Farm — Offers term and permanent life insurance, along with the convenience of working with a local agent.
3. Make any moves that require a credit application before the second income is lost
If you're starting a family, you might also be looking to buy your first home or move into a larger one. If not a home purchase, you might be looking into upgrading to a more family-friendly car.
Fisher recommends that couples "do anything that requires a credit application while both incomes are still on the paperwork." The higher household income will help you lock in better rates than you would qualify for on half the income.
4. Do a trial run of your single income budget
"For a few months before anyone resigns, operate the household on the single income and save 100% of the other," Fisher advises. "You'll learn more doing that than any projection."
This means living on the realistic budget you came up with in step one. Although, there will be some differences. For example, if getting rid of a car is part of your plan, you won't be able to eliminate that extra expense just yet. Meanwhile, if you're expecting a new baby, you won't be spending on diapers, clothes and other newborn expenses just yet either.
But try to get as close as you realistically can to the budget you sketched out for a few months before you actually need to make the decision.
Not only will this help you figure out if you can really make it work, but you can also make adjustments based on real world experiences during the trial period.
Even better, you can stack the cash from the second income in savings during the trial period. These savings can help you achieve step five below in a matter of months.
5. Double your emergency fund
The standard recommendation is to save three to six months of income in an emergency fund. When you're relying on a single earner, however, you want a more generous cushion because you won't have a backup income to rely on in the event of a job loss.
Instead of three to six months, aim for six to 12. As mentioned earlier, doing a trial run of your single-income budget while both spouses are still working can help you achieve this new number quickly.
To make it grow even faster, stash those extra savings in a high-yield savings account. You can use the tool below, powered by Bankrate, to find the best rates available right now:
Your goal can be to commit to the trial run for as many months as it will take to double your emergency fund. After that, you can decide whether that budget is sustainable long term.
If you decide it is, you've now got the emergency fund needed to take the leap. If you decide it isn't, you've got a generous chunk of extra savings you can use to offset future childcare costs or put toward other financial goals.
6. Make a "return to work" plan if you want that option
Sometimes, a couple might decide to make the transition temporary. One parent will stay at home during the early childhood years to avoid the daycare costs, but plan to return to work once the child is old enough to go to school.
If the plan is to ultimately return to work later, the stay-at-home partner should be planning for that return before they resign. The best way to do that is to transition to part-time or freelance work during the stay at home period.
"A resume with a reduced hours period reads completely differently than one with a five year blank," Fisher explains. When it comes time to job hunt again, the stay-at-home parent will have an easier time explaining those reduced hours rather than an extended gap.
The cash flow from that freelance or part-time work can also help pad the household budget.
If working reduced hours isn't feasible, at least make sure to maintain any certifications or make time for continuing education and networking during the stay at home period if you want to keep the door open for returning to work later.
7. Talk frankly about the shift in power dynamics that will happen
This isn't purely a financial decision. It will also have an impact on your relationship as one partner becomes fully financially dependent on the working partner.
To avoid the potential for that shift to create tension and conflict in the relationship, you should discuss how money and household work is going to be handled now and put the tools in place to make it feel fair.
For example, the non-working parent shouldn't be expected to be solely responsible for all household labor around the clock. Find ways to make sure that both parents are getting time to rest and relax throughout the week. Moreover, financial decisions should continue to be made as a couple, even though only one person is bringing in the income.
Talk openly now about how you're both going to make sure that happens instead of waiting for imbalances and conflicts to emerge later.
Thinking about giving up a second income?
Before making the change, consider talking with a financial adviser. They can help you model different scenarios, identify financial gaps and build a plan for living on one income without losing sight of your long-term goals.
Use the tool below to connect with a vetted financial professional today:
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