10 Steps to Switch to a Single-Income Family
Ever daydream about switching to a single-income household so you or your spouse could stay home with the kids?
It’s not as old-fashioned as it sounds. In fact, more millennial parents (21%) are staying home with their children than Gen-X parents (17%) did when they were the same age, according to a 2018 Pew survey. And the number of millennial dads who stay at home has doubled, further demonstrating that it may be the narrative we tell ourselves about stay-at-home spouses that’s old-fashioned, not the practice itself.
The percentage of stay-at-home parents hit a low point in 2000 at 15% total and 23% for mothers. Since then, more parents have been opting to stay at home — in the 18% to 20% range total and the 27% to 29% range for mothers. Which begs the question: How are they paying for it?
Before deciding to become a stay-at-home parent, consider the following benefits and precisely what it will take financially to get there.
Let’s be honest: No one will raise your children the way you or your spouse will. As a stay-at-home parent, you can instill the structure, discipline, values, and priorities that are most important to you. It’s your show, and you call all the shots. And while some parents love their careers, others feel their calling is as a parent, not a worker.
And the benefits aren’t all family-focused. There are financial perks too, such as saving on child care. For many lower- and middle-income families, child care costs almost as much as one spouse earns.
Even upper-income families often have financial incentives for one spouse to stay home. By the time my father remarried and had another round of children, he was earning a high salary. It turned out that between their tax bracket and the cost of child care, it would have cost my stepmother more to go back to work than to stay home with my half-brothers.
Commuting and transportation costs are also far from trivial, and many working parents spend significant sums every year on work wardrobes to boot.
Before you can map out how to reach a destination, you need to know where you are. Begin with a detailed audit of your expenses for the last year. Start with the easy figures: your fixed monthly expenses such as rent or mortgage, car payments, and any other bills that stay the same every month.
Next, add up all your variable expenses from the last three months. These include any costs you incur every month but that vary from month to month, such as food, entertainment, and gas. Divide the total for each expense by three to get its average monthly cost.
Then, go back an entire year to add up your irregular expenses. These are expenses you don’t pay every month, such as insurance, clothing, car maintenance, home maintenance, and gifts. Average these expenses on a monthly basis and add everything up to get your monthly budget.
Also, does your budget have a line for savings and retirement? It should.
Now, look at your net income. Add up four weeks’ after-tax income from both you and your spouse. Note that on a monthly basis, all you can count on is four weeks’ income, not your annual income divided by 12, so set your monthly revenue at four weeks’ after-tax income.
Before you despair, remember that every expense in this budget has room to shrink. It’s easier to overspend when you have two incomes, and if you’re like most U.S. households, the line between needs, wants, and luxuries isn’t as clear as it could be.
So, how do you start cutting costs and making the numbers work?
Even the expenses you think of as “needs” are not written in stone. Likewise, your fixed monthly expenses have just as much potential for trimming as your variable and irregular expenses.
Your mission is to chop away at as many expenses as possible, starting with the largest expenses in your budget.
Housing accounts for over 35% of the average American’s after-tax income, based on numbers from the Bureau of Labor Statistics (BLS). The BLS lumps federal, state, local, and FICA income taxes together for an estimated rate of 25%; Business Insider estimates taxes even higher, placing the housing proportion at 37% of the average American’s after-tax income. That makes housing the largest expense most families face, and therefore the first expense on the chopping block.
There are plenty of ways to save money on housing costs. Most people assume they have to downsize their home, and this can save you significantly, but it’s far from the only option. When I bought my first home, I rented out a room to a housemate. Not only did she cover nearly three-quarters of my mortgage payment, but we also became close friends.
Don’t want a full-time housemate? You could always rent out rooms on Airbnb when you feel like it. Or you could get more creative. Why not buy a small multifamily property, move into one unit, and rent out the other?
My friend Deni went even further. She and her husband are empty-nesters living in a large suburban home. They weren’t ready to downsize just yet, but their house — and their mortgage payment — felt huge with only the two of them living there. So Deni researched foreign exchange student placement service and found one that pays a substantial monthly stipend. She and her husband are in their second year of hosting Alex, a high school student from China, who has brought life back into their home. And it doesn’t hurt that the placement service covers over half of their mortgage payment.
Transportation is the second largest expense on most Americans’ budgets. According to BLS numbers, it eats up nearly 17% of the average American’s after-tax earnings. As with cutting housing costs, you have plenty of options to save on transportation costs, such as walking, biking, public transportation, ride-sharing and ride-hailing services, and carpools.
But the most effective way to cut your transportation expenses is the one you probably least want to hear: get rid of a car. A 2018 AAA study of car ownership costs puts the average annual cost at nearly $9,000 for each car in a household. With loan payments, insurance, gas, maintenance, parking, and all the other sundry expenses of owning a car, costs add up quickly. You can save a lot by transitioning to a one-car household, or better yet, a no-car household if the working spouse can walk, bike, carpool, or take public transportation to work.
My wife and I are sharing a single car for the first time. She has a 25-minute commute to work, so most days, she takes the car. We intentionally chose a home location where I can walk to a coworking space. I thought not having access to a car during the day would make me feel trapped, but I don’t even notice it. If an emergency arises, I can always take a taxi or an Uber.
Americans spend far, far too much money on food — nearly 14% of their after-tax earnings, according to the BLS. What’s worse, almost half of that is spent on food away from home, which costs more in both dollars and calories. If you need persuading, check out this Johns Hopkins study.
The first rule of food savings is to stop eating out. Make it a treat for special occasions, and you’ll be shocked at how much less you spend on food every month. This includes your social life; stop meeting your friends at restaurants and bars, and start finding ways to hang out on a budget.
It also means bringing your own lunch to work every day. You’ll be amazed at how much money this saves. Brown-bagging a good, old-fashioned sandwich and apple is one option, or you can cook enough at dinner to take leftovers for lunch the next day.
And, of course, find ways to save money on groceries. Start by going to lower-cost grocery stores for most of your shopping and only buying critical items at the overpriced, fancy grocery store that draws you in like a moth to the flame.
Before cutting the cord on your household’s second income, aim to pay off your credit card debt completely. Credit card debt is costly, with interest rates often north of 20%. Carrying a credit card balance is a surefire way to stay broke and never reach your financial goals.
Use a proven plan to pay off your credit card debt fast. The faster you can put credit card debt behind you, the sooner you can start putting your money where it will build wealth for you, such as in retirement investments.
If you switch to a single-income household, that one income will need to fund both partners’ retirement accounts. Fortunately, non-working spouses can still set money aside tax-free in a spousal IRA. Read up on eligibility rules for a spousal IRA and set one up when one partner stops working.
You can also funnel more money into the working partner’s 401k if their employer offers one. Bear in mind that 401ks have far higher contribution limits than IRAs do.
Health insurance is an enormous expense for many American families. In an ideal scenario, the working partner’s employer provides health insurance for the entire family. If that’s not the case, the working partner should explore new job opportunities with better health insurance benefits.
Granted, not every career choice is known for its strong health care benefits. If adequate health insurance coverage for the family is unlikely from the working partner’s employer, another option is for one partner to pick up a part-time job that offers health insurance.
In a worst-case scenario, you can buy health insurance on an exchange. However you do it, as you move toward one spouse quitting their job, keep health insurance in mind as an expense to cover.
When one spouse stops working and stays at home full-time, what happens if the working spouse suddenly loses their ability to earn an income?
No one likes to think about it, but you or your spouse could be hit by a bus tomorrow. If the working spouse dies or suffers some long-term disability, how will the family pay their bills?
Look at life insurance policies and options to decide if it’s worth the cost for your family. Also, review long-term disability insurance as another form of coverage that may help you sleep better at night.
Staying at home with the kids can be rewarding. It can also be painstakingly boring. And what do bored people do? They spend money.
I’ve seen it happen time and time again. My wife works at a school and has two months off every summer. Her spending quadruples in those months. Several stay-at-home moms I know grow obsessed with home improvement projects. Spending all day, every day in the house, they think to themselves, “You know what would make this house more valuable: If this room had more natural light!” or “I would have written that book by now if I just had a home office. We should add a home office!”
Where boredom meets rationalization, expensive things happen. I have routinely seen these projects grow from “one little upgrade” to $50,000-or-more home expansion and renovation projects.
The trick is to cultivate hobbies that are free or low-cost. A home vegetable garden is a perfect example. You could also raise a few chickens, take up hiking, or start a blog. Look for ways you can introduce a social element to the hobby to stay connected to the world around you. For example, you can create a community garden with your neighbors. In an ideal case, you can even make some money from your new hobbies.
Raising children, cooking meals, and other household activities will take up plenty of your time, but they won’t take up every minute of every day. Besides, your brain needs stimulation. You need a challenge in your life beyond mastering a new meal.
There are plenty of ways you can make money from home. You could tutor children in the afternoons or on weekends, or offer child care services to neighborhood parents since you’re staying home with your kids anyway. You could pursue freelance work or, if you have a blog, turn it into an online business.
My stepmother addressed her ennui by turning to equities trading and investing. She even joined an investment club, which meets every month to discuss their investment choices and jointly invest in funds and ventures.
Just because you quit your full-time job doesn’t mean you should quit your ambitions. Don’t let your brain go to rust like an unused tool in the garage.
Trying to go from a two-income budget to one overnight is like slamming the brakes on the freeway. If your goal is for one spouse to stop working, then start by implementing the budget cuts above one line item at a time. Start spending less long before one spouse actually quits their job.
It can help to go down to part-time work at your current job before cutting the cord entirely. Not only will this make the financial shift more gradual, but it will also help you adjust to spending more time at home with your kids and less time at work with other adults.
By the time one spouse finally quits, your budget should be comfortably humming along on a single income.
Your current two-income budget is square one in transitioning to one partner staying at home. After going through it with a red pen, how comfortable are you with your target one-income budget?
Remember, it may take several in-between budgets to get there. Work gradually to trim your spending, and if you need a series of increasingly smaller budgets to help the transition, treat this shift as a journey, not just a destination. Once you’ve grown used to living on a single-income budget, any new income you start earning again becomes “bonus income,” which you can put towards retirement, your children’s education, or perhaps even your next dream vacation.
Also, remember that staying at home as a parent is not a permanent decision. If you don’t like it after six months or a year, you can always go back to work. Even if you love staying home, eventually your kids won’t need as much of your time as they do now.
Have you ever tried living on one partner’s income? What are your best tips for other one-income households?
Updated: October 31, 2018
Categories: Budgeting, Family & Home, Money Management, Spending and Saving
G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.
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