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.
Matt initially saw the plan as "limiting." But Jaime pointed out that once their debts were repaid, she could afford to be a full-time mom for longer.
"Once we talked about what it could mean for our future," Matt says, "I was more gung-ho than she was."
Step 2: Redo your budget
I've written before about how to stage a financial fire drill: Create a "baseline budget" of bare essentials such as food, shelter and utilities. It's a good idea to know how little you could live on if you had to, says CPA Sally Herigstad.
"Once you figure out the baseline budget, you can start adding (items) back to something you can live with," says Herigstad, the author of "Help! I Can't Pay My Bills!" and a regular contributor to MSN Money.
Starting in January 2006, Jaime and Matt allowed $300 a month for groceries and other necessities, plus $25 a month each for fun money. They dropped cable, reduced their phone plan and switched car insurance several times to get the best possible deal.
They sold Matt's beloved 1985 Jeep (he belonged to an off-road-vehicle club) and the almost-new Honda. The couple also sold off a ton of personal property, from musical instruments to a kayak. Matt sought website design jobs to bring in extra cash.
The fact that Jaime got pregnant a few months later lent a sense of purpose to their plans. "Once you're really both committed, it becomes a game," says Matt.
By the time their son Finley was born in December 2006, they'd paid off most of their debts and banked $23,000. Jaime received reduced pay during her three-month maternity leave, and that income also went to debt repayment. She ended her leave by returning to her old job for a little over a month, then gave notice when the last of the student loans was paid off.
If you are downsized involuntarily, implement a baseline budget right away.
Step 3: Live on the single paycheck
Those who plan to leave their jobs have the luxury of a trial run to track how well a single paycheck covers costs. According to Ellie Kay, the author of "Half-Price Living: Secrets to Living Well On One Income" and "The 60-Minute Money Workout," people often forget to factor in small or irregular expenses: oil changes, haircuts, piano lessons, birthday party gifts, auto repairs, class trips.
To build an accurate budget, Kay says, "you need to (scrutinize) your checkbook and your credit card statements -- those don't lie."
If you've lost your job, you have no choice but to live on a single income (plus unemployment, if you qualify). You do, however, have a choice about how you live: griping and feeling sorry for yourself, or framing this as a temporary setback.
"It's just for a season. It's for a very clearly defined goal," Kay says.
Certain expenses will go down. The nonworking spouse won't need a professional wardrobe and can help reduce costs by looking for grocery deals, cooking at home and caring for any children instead of paying for after-school or day care. Two-car couples won't spend as much on insurance if one vehicle isn't being driven to work every day. You might even decide to get rid of one car.
One expense that should be factored in: retirement savings for the nonworking spouse. "That's a big mistake people often make when they get out of the work force. That could really cause problems (later)," says Kimberly Palmer, the author of "Generation Earn: The Young Professional's Guide to Spending, Investing and Giving Back."
Suppose you do manage to live on one paycheck during the trial period. What to do with the second income? Bank it, of course. It becomes your emergency fund. (Already have such a fund? Well, now you have a larger one.)
Step 4: Look for other ways to make money
If you can't get unemployment and nothing's available in your field, consider selling belongings, taking a stopgap job or even creating your own work. Spicer did freelance computer consulting, sold off his company's construction equipment and, over time, short-sold most of the properties. Carolina marketed many of their personal items online, which Spicer now says was a good move because it reduced clutter.
The biggest change, though, was Spicer's creation of SkyLedger, a Web-based accounting system he designed from software he'd previously developed for his own business. SkyLedger has become a full-time job, and he continues to work as a computer consultant.
Jaime did a little freelancing (managing a video project for friends) when Finley was 6 months old. By 2008, she had started in a new field, business coaching. She worked briefly at a local company, but when the hours got too long she decided to work from home. Jaime blogs about successful business and life strategies at Eventual Millionaire, but this does not bring in extra income, as she decided against putting ads on the site.
Step 5: Communicate -- and perhaps reconfigure
This isn't the last step, but rather a continuation of Step 1. It's essential to keep talking about what's going on, both financially and emotionally.
"People assume their partners have the same dreams, or at least expectations. But they seldom do," says Herigstad.
Sometimes those assumptions are internalized. Matt Tardy says that, early on, Jaime sometimes felt bad about being a full-time mom instead of wage-earning one. "I had to say, 'Whoa! That's not why we're doing what we're doing.' It's just hard for the other person to feel like they're contributing if they're not contributing financially."
Personal finance author Kay advises having a weekly money talk -- and to talk about finances only then. If a disagreement comes up, "shelve it until Money Night," Kay says. And if you're either planning to downsize or facing job loss, start your Money Nights now.
How are our two couples doing?
Jaime and Matt currently make between $70,000 and $80,000 a year. They pay extra on the mortgage, fund their own retirements, have zero debt and try to put at least $1,000 a year into college funds for their two kids (daughter Jet was born in May 2009). Recently they paid cash for a used vehicle. They no longer use credit cards.
Spicer and Carolina still have about $1 million in business-related debt. Carolina finished her master's degree in early childhood education in May 2010 but hasn't been able to get a job; she has been substitute-teaching fairly often, though. Spicer works seven days a week, for SkyLedger and as a computer consultant. Between them, they earn about $75,000 per year. Spicer is putting $200 a month into a Roth IRA, but they haven't started one for Carolina yet, having hoped she'd get a teaching job with a decent retirement plan. Financial turmoil has kept them from starting a family.
Sometimes the downsized life is temporary. You live simply while you find a new job, raise kids or make a success of your new business. But once those things happen, some decide they like a simpler lifestyle.
"Yes, we're on a tight budget, but we're making a little bit more every year and that's exciting," Jaime says, "because you can save."
"If you can have a more enjoyable tomorrow because of a little pain today, I'm OK with that."
Save money today
Fee free: The "Do One Thing" series at Bundle wants to save you money. "Never pay another late fee" shows both paper people and e-payers how to organize.
Avoiding temptation: Have a spending problem? "Don't put yourself in these situations" offers a very basic (and funny!) piece of advice.
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