People in a two-income family may choose to live on only one income due to a parent wanting to stay home with their child, to test out their retirement planning, or just to save the extra money – or they may suddenly find themselves with only one income due to a job loss. Reimagining your life with less income can cause stress, and you may not know where to begin. Here are some things to consider as you move to one income.
In preparation for living on one paycheck
If you have the advantage of planning for living on one paycheck:
Build up the emergency fund… If you’re thinking of getting pregnant or hoping to test drive the retirement plan in six months, start now to create or build up your emergency savings. While you may have the best intentions, life happens. You might leave your job and suddenly your spouse loses her job. Or perhaps your car dies just as you want to test out retirement. A bulked-up emergency fund will help you through the rough times.
…by starting to cut back now. As you review your budget before your upcoming life change, you may notice more items that really don’t matter, things you could easily do without. Instead of waiting until you’re down to one paycheck to cut expenses, why not do without now? You can use the extra money to build up your savings. For couples with healthy savings who are expecting a child, you may use the money to furnish and stock the nursery.
Pay down debt. If you have a little extra, consider using it to pay down high-interest debt. With credit card interest rates ranging from the teens up to 29%, paying off your credit cards can provide outsized returns.
Build up your investments. Some people actually have more money than they know what to do with. Yeah, it irks me too. But if your parents have said they will pay for the nursery and you’ve already started receiving more baby clothes than one infant needs, consider upping your investments (assuming your savings are adequate). Especially if you have two people covered by tax-advantaged retirement plans, increase the contributions to each before one leaves their job.
No preparation time – I lost my job
With a job loss, your needs are more immediate. Before you’re out the door, try to get the largest severance package you can. Immediately apply for unemployment benefits if you’re eligible. If you don’t have a budget, look for low-hanging fruit you can cut (think subscriptions, dinners out, drinks with friends, and other entertainment). Try to cut enough to stabilize your life while you create a budget to help save even more and look for a new source of income. Finally, don’t be bashful. If you can’t pay your debts, contact your lenders and explain the situation. Especially during the COVID pandemic, lenders have been more amenable to providing extra time for payments.
Your new reality
No matter if you’ve planned for this for years or turn around and are suddenly jobless, you need to understand and accept your new reality.
Your new income. Whether you’re depositing one check into long-term investments or no longer receiving that check because of a job loss, it’s important to understand where that leaves you. How much income will you have? This should be a pretty easy exercise – look at the one remaining check to see the after-tax amount you’ll receive each pay period.
How big a hole is created? After you’ve determined your new reality without the second income, what does that do to your monthly balance sheet? Will you be able to squeak by, maybe not investing as much each month but still able to enjoy life as usual? Will you be in a situation where you no longer can afford niceties? Or will the basics (food, shelter) be threatened?
Budget. To get the most accurate picture of where you’ll be, review (or create) your budget. If you’ve had a budget, you might know immediately how bad the situation is – if you’re used to spending $5,200 per month and you now will have an income of $4,800, something needs to give. However, if you haven’t set up a budget, the time is now.
Tweak the budget. Now that you can see what you’re spending each month, what might the future hold? A newborn could increase your spending, especially as you set up a nursery and buy diapers, clothes, and food. Remember that you will be visiting the pediatrician quite often in the first year, so any copay for well-visits will need to be factored in.
Similarly, if you’re about to retire, what do you plan to do? World travel is going to cost more than gardening in a home you’ve paid off. Will you be able to get by on the often-touted 80% of your pre-retirement income? Will you need 120% for the first few years?
Be open to adjusting on the fly. No matter how well you’ve planned, you will discover that reality doesn’t align perfectly with your budget. That’s okay. Don’t fall into the trap of thinking it’s written in stone. If you find that you cut too much and can’t live with the new spartan lifestyle, start adding things back SLOWLY. Similarly, if there’s too much going out every month, look again at your budget. Something that seemed important a few months ago may be an extravagance now.
No matter the reason, going from two incomes to one can be a challenge. Most people will have to make sacrifices if their income is suddenly cut. By working through these steps and being mindful of your spending, you can help stretch your one income more than you might have thought possible.
Photo by Karolina Grabowska