Surviving on a single income used to be a central component of the American Dream. The cost of living has increased substantially in recent decades, making single income households a lot more rare than they once were. But you can learn how to live on one income if you are motivated to do so. Here’s how.
Decide which spouse should stay home?
This is the first issue that needs to be addressed. On the surface, it may seem obvious that the spouse with the lower income should stay at home while the higher earner continues to work, but it’s not always that simple.
Long-term, the spouse with the greater future income potential will probably be the better choice, even if he or she is currently earning less than the other. If you have a young family, your expenses will grow steadily as the years pass, and the income you will be relying on will need to grow at least as quickly.
Another consideration is benefits—which spouse has the superior benefits package? For example, if both spouses have health insurance benefits at work, but one has a 70% employer subsidy, while the other has no subsidy, the stress on the household budget will be less if the spouse with the generous subsidy remains employed.
The benefits package should be a consideration, but not the ultimate deciding factor. Benefits packages can change, especially with a change in employment.
Once you decide which spouse will drop out of the workforce, the rest will be a matter of deciding how to make it work financially.
Look for income opportunities for the stay at home spouse
Unless the working spouse earns an exceptionally high income, there may be times when money is tight. The non-working spouse may want to consider having some means of earning money in the event that happens, or if the breadwinner experiences a job loss.
Work-at-home alternatives within the non-working spouse’s line of work are one alternative. If this is done on a part-time basis, and only temporarily, it could enable to non-working spouse to keep his or her work skills current as well as to earn some money.
Another possibility is a home based business. The internet has opened up opportunities for home-based self-employment that didn’t exist even a decade ago. A small, part-time venture could be established that could be expanded into something more substantial, should the need arise.
Arranging your expenses
Living on a single paycheck will make living cost containment a necessity. Some of that will involve strategically arranging your lifestyle and living expenses in order to keep costs at a minimum. That will involve advance planning.
Buying your home. This will probably be the single biggest cost consideration if you plan to live on a single income. Make sure you can afford the home you want to buy based on the working spouse’s income only. This will be a necessary trade off in order to gain the benefit of living on a single income.
Car loans and other debt. Debt is one of the major reasons that more households can’t afford to live on a single income. It’s hard enough to pay for current living expenses, let alone yesterdays too. And that’s what debt is—yesterday’s expenses. Credit cards are usually the biggest problem, and for that reason they should be avoided.
Car loans are another single income killer. You shouldn’t have two car loans if you only have one income. A combination of a late model car with a modest payment (or none at all) and an older one owned debt-free will free-up a lot of budget space.
Cut out non-essential spending. There are tangible financial benefits to having a non-working spouse—commuting, workday lunches and dry cleaning expenses won’t exist. Childcare is another big one that disappears. But over and above saving on work related expenses, there are other expenses that can be cut.
A non-working spouse has more time to prepare home cooked meals (saving on expensive restaurant meals), to look for bargains and clip coupons. A single income arrangement can also eliminate stress related expenses common in two income households, such as recreational shopping, weekend trips and expensive vacations. Many of these may need to be sacrificed in order to maintain the single income lifestyle.
Arranging your savings
Since there won’t be a steady income to back up the couple’s primary means of support, there will be a need for savings to even out the ups and downs in the budget.
Savings. A two income couple may be able to get by without an emergency savings account since they can rely on the other’s paycheck in a crunch. But a single income household won’t have that luxury. An emergency fund with enough to cover three to six months worth of living expenses will be an absolute necessity, especially if the couple have children.
Retirement planning. When a household is living on one paycheck—and that paycheck is being stretched to pay current living expenses—there may be a temptation to go light on retirement preparation. While that may be a necessity when you have young children, you may have some catching up to do as they get older and money isn’t so tight.
The couple should look into supplementing an employer sponsored retirement plan with either a traditional IRA or a Roth IRA as soon as they can afford to. It will be especially important to set up a spousal IRA for the non-working spouse, since he or she won’t be covered under a plan. The contributions may be deducible, depending on the working spouse’s income.
Life insurance. Everyone needs to have life insurance, but it’s even more important in a single income household. The bread winner should have coverage equal to at least 20 times earnings to insure that the family’s lifestyle can continue once the income is gone.
That kind of coverage is extremely expensive and would favor the purchase of term life insurance over whole life.
Term life costs much less, so you can afford more coverage when your children are young and you have the greatest need for coverage.
Living on a single income is still doable, but it will take some rearranging of your finances—and more than a few sacrifices—to make it work smoothly.