- Revise your budget and review options for health insurance.
- Revisit retirement savings and evaluate your mortgage.
- Change your withholding taxes and protect what you have.
Few people look at their household income and decide they would be better off if they made less money. Yet that's the reality for many families when one parent takes time off from a career to care for children. Making the move to one income will obviously impact your household income and will almost certainly affect your family's spending, health and life insurance, retirement savings, and taxes.
Here are 6 financial steps to help you go from two incomes to one.
1. Test drive your budget on one income
There's no doubt about it, it is harder to pay the bills on one salary versus two. So you have to make some choices. Go through your monthly expenses and categorize them based on needs (essential) and wants (discretionary). Once you've established your budget, try living on it for a couple of months before giving up that second income.
"Think of it as a trial run and a chance to give you the real experience before making such a dramatic change in your finances," says Ann Dowd, CFP, vice president at Fidelity. "You'll get a chance to track your spending, see where you need to cut back, and even use the income you're not spending to pay down debt or build your emergency fund, prior to the transition."
To see if your expenses will be manageable, try this exercise. Compare your monthly essential expenses to your total take-home pay for the month. Some expenses simply aren't optional—you need to eat, and you need a place to live. Consider allocating no more than 50% of take-home pay to "must-have" expenses, such as:
- Housing: Mortgage, rent, property tax, utilities (like electricity), homeowners/renters insurance, and condo/home association fees
- Food: Groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
- Health care: Health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
- Transportation: Car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
- Child care: Day care, tuition, and fees
- Debt payments and other obligations: Credit card payments, student loan payments, child support, alimony, and life insurance
Keeping essential expenses at or below 50% of your income for the month can help make sure that you have money to save for the future plus some left over for fun.
2. Secure health insurance
Health insurance is expensive these days, especially if you have children, so it's beneficial to compare the total costs of your different options for family coverage. Consider that in 2018, the total average annual premiums for employer-sponsored health insurance, including the employer and employee portion, were $5,547 for single coverage and $19,616 for family coverage.* So, if you have to switch health care plans when you transition to one income, compare the old health care plan and the new one very carefully to see if your out-of-pocket costs will be higher once you switch. If you find they will increase, be sure to work these additional costs into your budget.
Even if you don't need to switch health insurance plans, it can be a good idea to evaluate your out-of-pocket health care costs in light of your new budget. Can you continue to afford your existing health coverage or do you need to consider other options?
3. Revisit your retirement savings
Though it may seem like the easiest thing to cut when you're short on cash, cutting back on retirement savings is typically not a good idea.
"Don't derail your retirement savings just because you're down to one income," Dowd says. "Look at what you can realistically afford to save—even if it's less than what you were saving on two incomes." If you stop saving, you'll lose the advantage of possible tax-deferred growth over many years.
And if one of you is not working, you can still save with a spousal IRA. "A spousal IRA can help make up any savings opportunities you may lose through an employer-sponsored retirement plan when you leave work," says Dowd. This type of IRA allows non-wage earning spouses to contribute to their own Roth IRA or traditional IRA, provided the other spouse is working, earns more than the amount of contributions to any IRAs made on behalf of both spouses, and the couple files a joint federal income tax return.
Read about Retirement and IRAs on Fidelity.com.
4. Match your mortgage to one income
If you're planning to buy a home in the near future, you should strongly consider applying for a mortgage based on one income. This strategy may help you avoid buying more of a house than you can afford. For those with an existing mortgage, look carefully at the possible benefits of refinancing. Is there a mortgage product available that would improve your cash flow? For example, you might have gotten a great rate on a 15- or 20-year mortgage, hoping to pay your house off sooner. But if a 30-year fixed loan would cut your monthly housing costs, particularly given current low interest rates, it may be worth refinancing to help you make ends meet. Of course, that will increase the amount of interest you pay over the life of the loan. So while you will free up cash in the short term, over time it will be more expensive. It's important to understand the trade-offs before making a decision.
Read Viewpoints on Fidelity.com: How much house can I afford?
5. Revisit your withholding taxes
You may want to consider adjusting your W-4 withholding to increase your take-home pay once you are living on one income. This may mean you trade a refund at tax time for more cash in every paycheck. Given the tighter cash flow on one income, you may prefer having more income each month rather than receiving a big refund during tax-return season.
Use the IRS Withholding Calculator on IRS.gov to determine your federal income tax withholding.
6. Protect what you have
"When someone else is depending on your income, there's generally a need for life insurance," says Tom Ewanich, a Fidelity vice president and actuary. "It's also important to have life insurance for the spouse that is staying home to care for children because the caregiver's unexpected death would likely impact the working spouse's ability to continue to earn the same living." To protect your family, consider term life insurance as it's a low-cost way to put life insurance coverage in place.
Also, the working spouse should review their disability insurance at work, or consider purchasing it if they are not adequately covered through work. This protection could be vital if anything prevents them from working and earning a paycheck for an extended period of time.
Read Viewpoints on Fidelity.com: 5 ways to protect what's yours
Explore all of your options
Of course, quality of life isn't just about money—especially when it comes to raising a family. Still, if you do find that one income creates too much of a cash pinch, there are always the options of working part time or going back to work full time once the children are older. If you do decide to trade an income to be a stay-at-home spouse or parent, make sure your finances are ready and then enjoy your time with your family.
Next steps to consider
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