11/23/2010 9:00 AM ET|
How to become a one-income family
It's not easy, but it's not impossible, either. These 5 steps can help make the transition easier -- whether or not the choice was yours.
What happens when a two-career couple becomes a one-income household?
Some downsize willingly -- to stay home with a baby, to go back to school, to start a business. That was the case for Jaime and Matt Tardy, ages 28 and 29, who live near Auburn, Maine.
Jaime deeply disliked the 60-hour workweeks and frequent travel required by her job in the cable TV industry. She rarely saw her husband, and she wanted to work with people rather than with technology. Jaime wanted to change careers, but first she wanted to have a baby and stay home at least one year.
Matt, a comedian, supported her goals. But Jaime's $100,000 salary represented more than two-thirds of their income -- and it was a steady paycheck. Matt earned $30,000 to $40,000 per year but could go through an entire winter without a paying gig. They also had almost $70,000 in debt. Could they manage on Matt's earnings and still start a family?
For others, the change from two incomes to one is involuntary and terrifying. Spicer and Carolina Matthews, ages 28 and 37, respectively, of Portland, Ore., found themselves in that situation. Spicer owned a construction company that was bringing in as much as $250,000 a year (although he reinvested a fair amount into the business). He'd spent several years buying properties and building multi-unit dwellings. Thanks to "easy money" from banks, his condos often would sell before they were even built.
So they weren't worried when Carolina quit her job as a preschool teacher to go to grad school. Her graduate degree from Brazil wasn't accepted in the U.S.; a new master's, they figured, would qualify her to work in public elementary schools. Until then, Spicer's salary would suffice.
Four months later, the economy crashed. Business dried up almost overnight, leaving them with more than $3 million in debt. Spicer never saw the recession coming.
5 steps to one income
Both couples have tips to offer from their successes and their mistakes. Whether you're choosing a major life change or are worried about job loss, you have the option of preparing now or regretting later.
Here are five basic steps to downsize from two incomes to one:
Step 1: Look at your finances -- and look HARD
Both couples tightened their spending, though Spicer and Carolina wished they had done so sooner. Spicer believed the recession was just a "little hiccup" in the economy. So it took a few months for him to sell his fairly new truck to save the $450-a-month payment and buy an old Jeep for less than $1,000 cash. They put their house on the market, but it didn't sell. Spicer says they should have gotten a roommate, which would have brought in $500 a month.
They were living on savings, having gone "from two incomes to no income and college tuition," Spicer says. (They avoided student loans by paying cash as they went; toward the end of Carolina's 20-month program, her family helped out.)
Spicer knows that he should have closed down his company sooner. Not only did he keep paying employees longer than he should have, he also kept trying to refinance his properties. (Eventually they wound up as short sales.)
He spent countless hours calling banks and private investors, seeking money to finish a couple of partially built projects. In late spring 2008, the entrepreneur faced facts: His business was dead, and he and his wife owned properties they could neither develop nor sell.
"Any good entrepreneur should try to save the business, but you should also know when to let go," Spicer says now. "The sooner you accept it and start moving forward, the better."
Jaime and Matt had the luxury of preparing for their change. But because they'd never tracked their spending, they didn't know how much they needed to live on. They didn't know how much debt they were carrying, either. When they did the math, they found:
- $26,000 in student loans.
- $24,500 left on a home equity loan.
- $19,300 on the Honda Civic they'd just bought.
"I felt really stuck," Jaime says. She proposed a lifestyle makeover and an aggressive debt repayment plan.
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