Switching to a Single Salary

Credit: Ambro at FreeDigitalPhotos.net

I’ve had a number of friends and blog readers ask me about switching from a two-income household to a one-income household over the past few weeks, so I can’t help but wonder if this is a topic many more of you may be interested in. Sure, this post is going to be primarily directed towards a family where one spouse has decided to stay at home, but many of the thoughts and tips I’m about to offer can also be applied by a family if one person thinks they are about to be laid off, a family if one of the breadwinners’ health is failing, or even an individual who is going from two jobs to one. Here are some suggestions:

• If you can, experiment before you try it. If Mom is considering staying at home to look after the newborn, agree to stop spending Mom’s current take-home pay for several months to see what it’s like. Except for an absolute emergency, I’d really urge you to hold true to not spending Mom’s take-home pay because lessons you may learn such as not being comfortable with your remaining emergency fund when you had to unexpectedly pay for that new HVAC unit are important lessons that may affect the overall decision and/or timing of going from two incomes to one income.
• Make a painfully detailed budget and see if you can make one income work. If Jane’s career is soaring and John’s career is painful, Jane and John should take a look at what would happen before John tells them to take the job and…, well take the job. There are going to be relatively fixed expenses such as mortgage payments and utility bills, and family revenue will be going down if John quits, so unless Jane makes enough to cover all of the fixed expenses and the discretionary expenses, it’s likely some of the discretionary expenses are going to have to go or at least be trimmed in order to make ends meet. Look to things like shopping, golfing, massages, lattes, unused gym memberships, vacations, and eating out. In happier news, if income is going down, it’s quite possible your taxes will naturally go down, too, so that will at least help a little! This is also a time where it could be beneficial to finish off debts such as student loans or car loans to reduce your fixed expenses and help the math work.
• In some ways, realize up front that you cannot keep up with two-income families. That being said, realize that they cannot keep up with you, either. What I mean is that if one spouse quits working in Family A, it’s possible that Family A’s financial trajectory and spending power may go down when compared to two-income Family B. However, when it comes to the percentage of the family’s time taken up by work, the flexibility of the family, and the amount of time on the weekends the spouses have to spend doing chores around the house, Family B may be a little jealous of single-income Family A. I’m certainly not saying one approach is better than the other. What I am saying is that from the onset, you need to realize there are often pros and cons that can make you different from other families you are close to.
• Put it all out there with your spouse. Going from a two-income household to a one-income household temporarily or permanently is far more than a financial decision. Why are you doing this? Do both of you want this? What if it doesn’t work for the stay-at-home spouse emotionally? What if it ends up not working for the family financially? Do the household chores/responsibilities change? Should they? What will the stay-at-home spouse do for entertainment and social interaction in light of the loss of friendly co-workers? Will the new entertainment and social interactions add to the family expenses? Should they? These are deep questions, and only you and your spouse can hack through them. The hacking does need to be done, though, as I’ve seen some serious resentment and jealousy fester from the employed spouse vs. the non-employed spouse and vice versa.
• Make sure the working spouse is properly insured. There are many careers where once you leave the working world, you become a little “stale” and lose some of your ability to become gainfully employed in the future. With this in mind, the breadwinner’s income stream usually becomes a little more valuable and, accordingly, needs a little more protection. I’d suggest you take a long, hard look at the employed spouse’s life insurance, short-term disability insurance, and long-term disability insurance. Don’t go crazy, just make sure you are adequately protecting the non-employed spouse’s financial well-being should the employed spouse become disabled or meet the proverbial fatal bread truck. If the stay-at-home spouse is providing a service such as looking after children that would still be needed if they were to become disabled or unexpectedly pass away, some additional insurance may also be needed on that spouse to protect the-income generating spouse's financial well-being!

Thank you to those of you who asked me about this topic. I’m always happy to help, but sometimes I can only help if you ask.

 

-Tom

Two Years Down, Many More to Go!

Credit: Stuart Miles

It’s hard to believe almost two years have passed since we dove into the personal finance world together with a crazy story about considering opportunity costs in terms of junior bacon cheeseburgers. I guess time flies when you're having fun. I have enjoyed 2MuchCents, and I hope you have as well. 2MuchCents.com will close out 2013 with almost 14,000 views spread over 14 countries! For that, I thank you.

A lot of bloggers start strong, but run out of ideas. I admit I have some spells where I battle writer’s cramp a bit more than I would like, but I’m definitely not afraid of topics drying up. Between your questions, your friends’ questions, your family members’ questions, new things I learn and experience, and never-ending changes and developments in this crazy world we live in, I think I could probably write forever. I already have plans in 2014 to post about why you need to save now as opposed to later, how you can keep as much of your family’s money in your family as possible, and why I think you should be a “contrary” investor. I also want to take a close look at index funds, offer some tips on buying a car, do another lighting round (where all I do is answer your questions), and write a short series on how I would advise someone to position themselves so they can retire early. (You’re not interested in retiring early are you?) Despite my plans and future posts already in progress, please know I get the most joy out of directly helping people like you by answering your questions; whether it gives me an opportunity to do a blog about your topic or not.

In case you missed any posts, the five most popular posts of the year were:

1. This Diamond Ring
2. It Happens
3. Last Call
4. The Homemaker Retirement Plan
5. All That Glitters Is Not Gold

I think one more blog post is worth mentioning, My Uncle’s Living Expenses, because I got a lot of in-person comments on that one. After mentioning it again, maybe I’ll get more!

Let me once again thank Mr. Andrew Davis for his tireless edits and content advice. I also need to thank my special lady, Mrs. Lindley Presley, for her continued encouragement, social media guidance, and grammatical expertise. I could not produce 2MuchCents without those two individuals.

Here’s to a healthy, happy, and financially successful 2014!

-Tom

The Homemaker Retirement Plan

Credit: Ambro

There is a lot of financial advice out there for people who are working and for people who are retired. I like to think I’ve helped add to that. However, there is also a pretty sizable group of people who a lot of the best and brightest financial gurus, and your humble blogger here, don’t address nearly often enough: homemakers. A few Google searches and a personal reflection on all of the financial articles, commentaries, and calls I’ve read and listened to over the past several years confirmed my suspicion that financial advice for homemakers is pretty limited, so I hereby dedicate this post to the homemakers of the world. This one’s for you!

“Stay-at-home moms,” “Mr. Moms,” spouses who don’t need to work, spouses who don’t want to work – whatever you want to call them – for a few minutes, let’s call them homemakers. As I mentioned earlier, it's the working spouses who are usually sought after by the lawyers, insurance agents, and brokers of the world, but I believe homemakers, too, have a need for some very important financial planning. So here are three suggestions to help homemakers work toward a successful retirement plan, hopefully just like their employed spouses.

• Insurance- It’s crucial to make sure both the breadwinner’s and the homemaker’s lives are adequately insured.
• It may seem like a no-brainer to have a sizable life insurance policy on the breadwinner, but is it enough? Is the policy large enough to allow the homemaker adequate time to jump into the labor force? Is the policy large enough to allow the homemaker and the rest of the immediate family to maintain their lifestyle if the homemaker’s salary is not going to be as large as the breadwinner’s salary was? If there are young kids involved, is the policy big enough to provide for the additional supervision expenses that will be incurred if the homemaker has to go into the office instead of run the household?
• Some of you may ask why you would want to pay for a life insurance policy on a homemaker. Well, if young kids are involved, is the breadwinner going to quit an income-producing job and run the household if the homemaker has an unfortunate demise? In many cases, that’s probably not a sustainable option, so factoring in the additional supervision expenses that will be incurred by the breadwinner if the homemaker is unable to run the household is a necessary consideration and can probably best be addressed by a relatively small and short-term life insurance policy.

• Spousal IRAs- Not many of those brokers obsessed with only the working spouse cover this, but the non-working spouse can now also make annual IRA contributions ($5,500 per year or $6,500 if over age 50) as long as their working spouse has enough earned income ($11,000 per year or $13,000 if over age 50) to cover both of their contributions. Five or six thousand dollars a year may not sound like a healthy retirement plan right off the bat, but let’s say a homemaker was able to stash $5,000 away in a Spousal IRA every year for the thirty years their spouse worked - that would be $150,000 assuming no stock market growth at all! Isn’t it crazy that by diligently saving and contributing a few thousand dollars a year to a Spousal IRA that a homemaker could end up with a retirement account comparable to many people who are actively employed for their whole working life?

• Managing Expenses- Some homemakers may consider themselves the head of their household, while others might consider their employed spouses the head of their household. Either way, I think it’s probably safe to say that the homemaker has a clearer understanding of the day-to-day operating expenses of the home. Therefore, I think it is crucial for the breadwinner (who probably has a better idea of the future income coming in) and the homemaker to keep each other updated on their financial forecasts. A homemaker’s insights on upcoming expenses and cash flow needs can be valuable information to the breadwinner (and even their financial planner) in making sure the family budget is going to work.

 

I think the three suggestions above should definitely be considered by all homemakers and their spouses, but if I haven’t convinced you, let me try one more way… I hope you will pardon me for being rude, but do you make more than $96,261 per year? You see, I read an article early last year that showed what you would have to pay a chef, house cleaner, driver, laundromat, lawn care provider, and child care provider to do the average tasks done by a homemaker, and $96,261 was the number the article landed on! With that being said, I think it’s safe to say that although a homemaker’s work may not earn the big bucks, a homemaker’s work is often worth the big bucks, and therefore deserves proper financial planning considerations!

 

-Tom