Are You Ready to Switch to a Single Income?

Editor's Note: Please welcome XYPN member Matt Becker to the blog today! Matt's sharing his advice for parents who want to switch to a single income. 

Want to get more money tips for new parents? Matt is the founder of Mom and Dad Money, a fee-only financial planning practice dedicated to helping new parents build happy families by making money simple. His free time is spent jumping on beds and building block towers with his two awesome boys.

Switch to Single Income

 

One of the big questions that almost all parents face is whether one of them should stay home with the kids.

There's a big lifestyle component to this question. Some people love their job and don't want to leave. Others love the idea of being with their kids full-time. And plenty of people fall somewhere in between.

But assuming that you're at least somewhat interested in the idea of being a stay-at-home-parent, there's a big financial question to answer: are you ready to switch to a single income?

It's a tough question with a lot to consider, and in this post we're going to give you some specific steps to help you answer it. We'll help you run the numbers AND get some real-world experience so that you can know what it's like BEFORE actually making the decision.

Let's get into it!

Step 1: Know Your Current Monthly Budget

Understanding where you are now is the first step towards understanding if you can get where you want to go. There are two main questions you need to answer here:

  1. How much money are you bringing in?
  2. How much money are you spending and saving?

If you already have a budget, you probably already know these answers. If not, you could start tracking your spending yourself or sign up for a free program like Mint.com that will automatically pull in all of your bank statements and help you categorize your expenses.

Step 2: Estimate Your Monthly Budget on a Single Income

Next you'll want to make your best guess at what your budget would look like once you switched to a single income.

On the income side of things, this is pretty simple. You can simply subtract out the income being earned by the parent who would stay home.

Estimating your new expenses can be a little trickier, and there are three big changes you'll want to consider:

  1. New expenses: If the switch to a single income would coincide with the addition of a baby, you'll have to consider the new expenses that baby will bring. Babycenter has some good calculators that can help you figure out how much this will actually be (here and here).
  2. Decreased expenses: Some expenses might decrease or even go away with a parent staying home. Gas is a good example of an expense that might decrease with the elimination of one commute. Childcare is an expense that might go away altogether.
  3. Taxes: With less income you'll likely owe less in taxes, which means the working parent will end up with more take-home pay. You can use a tool like this Paycheck Calculator or TurboTax's Taxcaster to estimate how your taxes might change.

Step 3: Calculate the Total Change

Start with the change in income. Add your new expenses to that, and then subtract out any decrease in expenses and decrease in taxes.

The result is the total change in your monthly budget. In other words, this is how much less money you would actually have on a monthly basis if you switched to a single income.

Step 4: Test Drive the Single Income

Okay, so now you've run the numbers. But can you actually handle the change? Here's how you can answer that question BEFORE you actually commit one way or the other.

Right now, while you still have both incomes, take that number from Step 3 and start putting it into a savings account each month. Automate that savings if you can.

This helps you in two big ways:

  1. It allows you to figure out whether you're able to handle this new budget before BEFORE actually making the decision. You can see how it feels, work out the kinks, and make a more informed decision.
  2. It builds up a savings cushion so that if you DO make the switch, you have some cash on hand to make the transition a little easier and less stressful.

Step 5: Consider the Long-Term

Those first four steps will help you figure out whether you can handle the immediate financial consequences of switching to a single income. But there are some longer-term variables that should factor into the decision as well.

Long-term career options - The truth is that being out of the workforce for an extended period of time can make it harder to get back in later on. If you're worried about this, some options to consider would be working part-time, starting your own side business, or keeping up with your training and staying in touch with contacts in your industry.

Long-term savings - How will the reduced income affect your ability to save for the things that matter most to you? Not just now, but years down the road (considering the long-term career implications above). You might need to delay some other goals, so make sure to consider the trade-off there.

What if you don't like it? - The idea of being home with the kids might be incredibly appealing now, but you may not love it as much once you're doing it. Consider what your options would be at that point. The more you can keep open, the better.

Step 6: Make an Informed Decision That Makes You Happy

Clearly, there are some important financial aspects to think through when it comes to switching to a single income.

But if staying home with the kids is something you really want, and if the financial side of things looks doable (even if it's tight), don't let fear hold you back. After all, personal finance is really about enabling the life you want, not accumulating as much money as fast as possible.

So take a good look at the financial side of things and make sure it's doable. Then, make whatever decision makes you most happy.

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