Going from two incomes to one
✔ 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 has the potential to impact your family’s spending, health and life insurance, retirement savings, and taxes.
Here are six financial steps to help you go from two incomes to one.
|1.||Revise your budget.|
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 one-income 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.”
- Read Viewpoints on Fidelity.com: "50/15/5: a saving and spending rule of thumb."
|2.||Secure health insurance.|
Health insurance is a must these days, especially if you’ve got children. But it’s expensive and you need to compare the total costs you will be expected to pay. Consider that in 2016, the total average annual premiums for employer-sponsored health insurance, including the employer and employee portion, were $6,435 for single coverage and $18,142 for family coverage.1 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.
- Read Viewpoints on Fidelity.com: "Make the most of employee benefits."
|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—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 you are not working, you can 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.
- Read Viewpoints on Fidelity.com: "Seven things you may not know about IRAs."
|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.
- Read Viewpoints on Fidelity.com: “How much house can you afford?"
|5.||Change 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. But, given the tighter cash flow on one income, you may prefer having more income each month rather than one lump sum 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. “Typically, the younger and healthier you are, the less expensive your life insurance will be." To protect your family, consider term life insurance for at least the working spouse.
Also, the working spouse should review his or her disability insurance at his or her workplace, or consider purchasing it on your own if you are not covered through work. This protection could be vital if anything prevents you from working and earning a paycheck for an extended period of time.
- Read Viewpoints on Fidelity.com: "Five 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’s 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 for a stay-at-home spouse or parent, make sure your finances are ready and then enjoy your time with your family.
- Get your financial picture. Try our Financial Checkup.
- Explore different investment strategies that can help you stay on track with our “Planning & Guidance Center.”
- Read Viewpoints on Fidelity.com: “Preparing your finances for a baby.”
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