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

When the Stork is Looming

Credit: digitalart at FreeDigitalPhotos.net

I don’t know about you, but I know a lot of pregnant people right now. Maybe it’s my age and stage in life, maybe there is something in the air, or maybe there is something in the water! I don’t know what it is, but there are going to be some overworked storks in 2015!

If we know one another personally, you probably know that my wife and I just had a child of our own. I'm still working on my swaddling technique and I haven't quite figured out how to shove the “pack and play” back in that tiny little bag, but I have learned a few things over these past several months. For my currently pregnant and maybe one-day pregnant readers out there (and their spouses), here are seven financial tips:

1. If possible, get health coverage where the insurance company will pay 100% of your costs after your deductible and copayments have been met. Call me Captain Obvious, but births are significant health care events, so they are going to have a price tag. If you’re on a plan that covers 100% after you reach your deductible, you have the comfort of being able to back-in to what your birth medical expenses will likely be without having to wonder how much it could cost if there are complications. If you are planning to have children, health insurance is a good thing to address before you are pregnant because you don’t always get an open enrollment period before the baby arrives. You can also go ahead and strategize about whose plan the baby is going to be on if both parents have health insurance.
2. Boost your life insurance or get life insurance if you haven’t already. If Mom is going to stay at home for a while or shift to part-time, Mom needs to have some significant life insurance on Dad should something happen to Dad and his paycheck. If Dad is going to keep working and Mom is going to look after the baby, Dad needs to have some significant life insurance on Mom should something happen to Mom and her child care services. Interchange “Mom” and “Dad” here as needed, but you get the picture. An article I recently read pointed out that going ahead and boosting a woman’s life insurance early in her pregnancy may be a good idea as complications such as gestational diabetes could arise during the pregnancy and obviously, situations could occur at birth. As you would probably expect, it’s cheaper and easier to get life insurance if you have fewer health issues and less treatment history.
3. If Mom is going on maternity leave, there is a good chance she will be drawing short-term disability that will very likely not be 100% of her pay. This means you have a pay cut coming, and you need to plan accordingly! I’d suggest ratcheting up the savings now if Mom is still working so that you can offset your upcoming pay cut when the time comes and not have to significantly change your lifestyle.
4. Many of our friends that are already parents have warned us about looking after “us.” A baby can be a wonderful addition, but he or she takes time and energy, and can subtract from what you can offer your spouse and your friends. In that spirit, I’d also start saving for date nights and friend nights. It’s not just dinner and a movie anymore! It’s going to be dinner, a movie, and a babysitter. Look after the baby, but look after your marriage and your friends, too!
5. Pay off your credit cards! You should do this whether you are having a baby or not, but I can already tell you that you’re going to want to have as much spending power available to you as you can. Baby stuff is expensive! I’m sure you’ll get some gifts (and my wife and I are very appreciative of what we have received), but you’re not going to get all that you need without buying some of the stuff yourself.
6. In the spirit of my comment about baby “stuff” not being terribly cheap, don’t overspend or overbuy baby stuff, either. It makes me sound like an old man, but I can tell you for a fact I wasn’t raised with all the gadgets and gizmos that some of these baby stores tell you that you “have to have.” My wife asked a good friend of hers who was a recent Mom to accompany us as we started considering what we would need for our new family member, and I think that was one of the best ideas we’ve had. My wife may have invited her friend for comfort, support, and wisdom, but every time she told us we didn’t need the premium plus version of that bottle, or the spa edition of the bath apparatus, or the nuclear-powered thermometer, I literally felt money going back into my wallet!
7. Try to figure out what the new normal budget is going to look like. Whether it’s pay cuts, health insurance expense increases, double income households becoming single income households, daycare expenses, or lots and lots and lots of diapers to be purchased, your budget probably won’t look the same after the little one arrives. No matter how cute those little hats and booties are, your financial principles need to stay the same: spend less than you make and live within your means.

I’ve got a feeling I’m going to be writing a lot of posts at strange hours over the next few months…

-Tom

The Others

Credit: marin

There is insurance for almost everything. Ugly Betty’s smile, Troy Polamalu’s hair, Heidi Klum’s legs, and many other wacky animate and inanimate objects are all insured. Smelling abilities, nonrefundable wedding expenses, and even the Loch Ness Monster can all be tied to improbable and unusual insurance policies. Life insurance frequently comes up in this blog, and in an earlier post, “Surviving Mayhem,” we covered several common types of insurance like car insurance, homeowners insurance, and umbrella policies, but there are still a few types of insurance policies that I have been relatively quiet on. Today, I’d like to offer a few thoughts on “the others:” Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance. I know insurance is not always the most exciting topic, but I implore you to read on - I have some tips that I think could be pretty valuable if something unfortunate were to happen to you or someone you care for.

Short Term Disability Insurance
Short Term Disability Insurance is insurance designed to pay benefits for a brief period of time (usually a few months) while someone is disabled. The benefits are usually only a portion of your monthly income, and Short Term Disability Insurance is designed to kick in after a shorter waiting period than Long Term Disability Insurance, usually after just a couple of weeks of being disabled. The value of benefits, the numbers of days before the benefits begin, and the length of time the benefits will last all depend on the specific type of policy you have, but the overall purpose of most Short Term Disability Policies is to get you and your family through a brief period of time when your income is drastically reduced due to illness or injury.

If you end up getting hurt, having a policy is likely best, but as they say, hindsight is 20/20. If you have a highly specialized occupation that would require you to take a substantial reduction in salary to work in a different role, or if you have a very dangerous job (like logging, roofing, or Alaskan King Crab fishing), making sure you have sufficient Short Term Disability Insurance is probably a good idea. That being said, for the Average Joe like me whose greatest daily dangers are my miniature dachshund’s teeth and tripping over my own desk chair, you probably should consider passing on Short Term Disability Insurance IF you have a sufficient rainy day fund. As you may recall, a rainy day fund is supposed to be between at least three and six months’ worth of living expenses that you have set aside in case an emergency occurs or you lose your job… or you are temporarily disabled. A sufficient rainy day fund essentially allows you to self-insure. As you will see below, I’m a much bigger fan of Long Term Disability Insurance than I am of Short Term Disability Insurance, and that is due in large part to how much more comfortable and satisfied many of my clients and I are that they have a sufficient rainy day fund versus relying on (and having to wait for) the insurance company to come through in the event of a temporary injury or sickness. Building up a rainy day fund may not be that much fun or even the easiest thing to do, but after you’ve done it, it won’t be long before it beats paying those Short Term Disability Insurance premiums over and over and over again.

Long Term Disability Insurance
As you might expect, Long Term Disability Insurance is insurance designed to pay benefits for an extended period of time should someone become totally or permanently disabled (or at least disabled for more than a few months). In a nutshell, Long Term Disability Insurance is supposed to pick up where Short Term Disability Insurance (or your rainy day fund) leaves off and get you to where Social Security begins. Because Long Term Disability Insurance could be the only thing protecting you and your family from financial ruin should you become disabled for an extended period of time, it is crucial to make sure you are adequately insured.

There are way too many types of Long Term Disability Insurance policies out there for me to try to cover today, and the truth is, the type of Long Term Disability Insurance you need, if any, will be very specific to you, your job, and your overall financial situation. The key thing I can tell you is that you need to make sure that the benefits of any Long Term Disability Insurance coverage you may have individually or through your employer equates to a standard of living that you are willing to accept should you become disabled for an extended period of time. I can also tell you that if you only have enough money to put towards one type of disability insurance, Long Term Disability Insurance is the way to go. You can get through a few months someway, somehow; getting through a few years or a lifetime with little or no income would be a lot harder.

One final tidbit I can add is directed towards those workers who have the opportunity to choose whether they or their employer pays the Long Term Disability Insurance premiums. Pay the premiums yourself! I know that sounds crazy, but if you end up utilizing your Long Term Disability Insurance and you have paid the premiums, the benefits you receive will be tax-free! If you let your employer pay those same premiums, the benefits you receive will be taxed as ordinary income. Please don’t allow taxes to make your situation worse.

Long Term Care Insurance
Long Term Care Insurance is just like disability insurance in the sense that you might really need it if you somehow know you are going to require health care services for a long period of time, but it can be a complete and utter waste of money if you go out with a bang or quickly and peacefully in your sleep. If you can tell me your “exit strategy,” I can tell you whether or not you need Long Term Care Insurance. You may laugh, but I promise you I’ve had a client look me dead in the eyes and with no hesitation tell me he was going to die in his 84th year. (I’ll let you know how that turns out in 2015!)

Once again, there are all sorts of Long Term Care Insurance policies out there for all sorts of people with different needs, different concerns, and different amounts of money available to throw towards these types of policies, but I can offer a few thoughts.

First, I advise clients who are considering Long Term Care Insurance to think about a baseball bat. Anyone who has ever hit a line drive will tell you that a baseball bat has a sweet spot, and so does Long Term Care Insurance. What I mean is that if the premiums for a Long Term Care Insurance policy would cause substantial strain on your financial situation, you might want to consider passing on coverage that you may never use. If you have a lot of assets and believe you could cover all of your prolonged health care expenses in most all situations, you might want to consider passing on this usually pricey coverage and going with the self-insured approach. If you are at a place where paying premiums won’t be a strain, but you have some concerns about your and your family’s ability to be able to handle the costs of your future health care needs, then you are the sweet spot; you should probably consider Long Term Care Insurance. (Please know that should you or someone you care for need health care services for a long period of time, having a policy is likely best, but you probably already knew that.)

Second, if you are pretty bent on getting this type of coverage, the younger you are the better. You can get more favorable policies at better rates. If you wait until later in life to consider these policies, you will find the cost can be like life insurance - almost unaffordable.

Finally, if you have an annuity and a Long Term Care Insurance policy, there may be a tax savings opportunity for you. If you pay your premiums directly out of your annuity, the distribution could be considered tax-free thanks to the Pension Protection Act of 2006. Please reach out to your investment advisor or CPA if you have any specific questions about this tax break.


I know Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance are not fun to think about, but you’ve got to admit, they are at least worth considering. It is my hope that anyone reading this will never have the opportunity to utilize any of the benefits related to these types of policies. I also hope the few thoughts I have shared above will be of assistance.

-Tom