Want to become a stay-at-home parent but afraid that your household budget wouldn't withstand the loss of income? CNBC personal finance correspondent Sharon Epperson visited “Weekend Today” to offer tips on how you and your family can survive on one salary.
Michelle Cole, a 31-year-old former university administrator, began preparing for the financial impact of becoming a stay-at-home mom nearly three years before giving birth to 3-month-old Matthew. Weeks after their 2002 wedding, she and her husband, Tom, an information technology consultant, decided they would try to live solely on his income. Before Michelle quit her $45,000 a year job earlier this summer, the Chicago couple’s combined income totaled nearly $120,000. Yet, even while she was working, the Coles lived on less than two-thirds of that sum. “We banked her paychecks,” says Tom, 32. “We were able to pretty much save her salary for three years.” Saving Michelle’s net income allowed the couple to build an emergency reserve, while Tom’s paychecks covered the mortgage, car payments, and other household expenses. Says Tom: “If you’re a saver, it’s easy to make it work.”
For many couples, the idea of living off one income may seem impossible. But it’s important to try to do it. Whether you are a two-income family, sole breadwinner or single parent, ideally, you should live on less than you earn. If your budget is set — or maxed out — on your combined income, what happens if you get sick or lose your job? How long would you be able to afford your mortgage, rent or other bills? What if you have a baby? Even if your company offers some paid maternity or paternity leave, what if you want to stay at home longer? Two-income couples that base their budget for essential monthly expenses on one income — or even one and a half of their combined earnings — are more likely to have enough money to cover difficult periods. Plus, not relying on that second income will allow you to enjoy that “extra” money when you have it and not miss it when you don’t. Follow these steps to see if you could live on one income.
Step 1: Tally expensesFirst, you need to get a handle on your expenses. A good way to see how much money is coming in to your household and how much is going out is to bank online. Have your paychecks directly deposited into your checking account. Use the Internet to pay bills from that account. And save a percentage of your earnings by having automatic monthly deductions from your checking account into a savings or brokerage account. Banking online will help you keep a running tally of what you are spending and saving.
Step 2: Reduce costs
Living on one income requires commitment and communication, says financial planner Patti Brennan of Key Financial in West Chester, Pa. You may have to change your lifestyle a little. Talk about your values and what you can live with and without. How much would you save if one parent stayed at home and you didn’t have to pay for child care, commuting, and clothing? What other costs could you cut now by buying a used car, sharing a babysitter with friends or neighbors, or grocery shopping at a wholesale club or online?
Step 3: Transition slowlyAlthough an unexpected job loss may force you to have to live on one income, most couples will want to make the transition slowly. Instead of spending two paychecks down to the last dime each month, stash away 5 percent of your combined income, then 10 percent, 20 percent and so on until you can eventually put the entire net pay of one spouse in the bank. (Make sure you’re saving enough for retirement. Max out your 401(k) or other employer-sponsored plans and/or contribute to a Roth IRA.) Then develop a “breakeven budget” based on one income, says Mark Berg, a fee-only planner with Timothy Financial Counsel in Wheaton, Ill. But don’t skimp on savings, especially for emergencies. If you get a raise, save that extra sum or at least a portion of it, Berg suggests.
By living on one income, you can use the other income to fulfill other dreams and goals: staying at home with your children, going back to school or starting a business. The best part is, if you never need to dip into the second income, you’ll have amassed a huge savings that could help you whittle down your children’s pending college bills and build a huge nest egg for your retirement.