If you are considering becoming a stay-at-home mom or dad, one big issue you have to deal with is a loss of income. Here’s a question I received the other day from Mark:
I’m a 25 year old young professional, who is currently renting. If I had to guess, I will probably rent until I get married, and I will likely have 20% saved up for a down payment on a house, a good credit score, and a stable income. My question is dealing with the monthly income relative to the mortgage payments.
Obviously with a working spouse, we’d be able to afford a much larger mortgage payment, but I assume that we’d have kids in the future. I’d hope that with promotions and raises that we would be able to afford the payments on one income for multiple years, but I wouldn’t want to stretch myself too thin. How would you advise young clients planning to buy, who could easily afford the mortgage payments with a dual income, but may have difficulty on just one income in the future if they were to start a family?
I love this question because it actually includes many important financial issues. There are a few issues that Mark raises (unintentionally) that I’d like to address before we get to his main question.
First, Mark is projecting pretty far into the future. Let’s assume that he is able to save the 20% for the down payment and he has a good credit score and a stable and rising income. He won’t find it that tough to get a mortgage. But while his question is really important – I don’t see how it’s relevant to Mark right now.
Mark is really thinking about the future (which is great), but there are too many variables. I’d like to know what Mark’s fiancée has to say. Has this couple had “the money talk“? I have no idea if he or she plans on becoming a stay-at-home mom or dad or not. I don’t know how many kids they are interested in having. Will they open a home based business? We don’t have the answers to these questions.
This “living in the future” is not a minor issue. It can torpedo the financial partnership a couple has. Stay present. Keep saving money and advancing in your career. Mark, once you get married, pick a place to live and decide about children with your wife. Decide what you want your lives to look like and then tackle the other questions.
Stay at Home Mom/Dad – How It’s Done
In order to answer this question, it will be easier if we make some assumptions about Mark and Mrs. Mark’s income. Let’s assume Mark brings home $5,000 and his wife brings home $7,000 a month. Let’s also assume that the couple agrees that one of them should stay at home once the children are born. Since Mark’s wife brings home more money, Mark agrees to stay at home with the children once they arrive. With this plan in place, what’s the best approach when it comes to thinking about a mortgage?
There is really no question about it. This couple has to plan on being able to afford a mortgage on a family income of $7,000. I think now you understand why I was rather adamant on not making decisions without having all the information.
Sometimes, you don’t have all the information. That’s OK. And sometimes, there is no way you can have all the information right now – just like Mark. That being the case, don’t make any decisions, but continue doing your best to prepare for your financial future.
Mark, if you get married and you and your spouse aren’t sure about having children, this raises another question. At that point, you need to decide about a mortgage, and you really don’t know what you’ll be able to afford because you really don’t know what your family income is going to be. If that describes your situation, I would personally default to the answer I provided above. Nobody ever went bankrupt by having a mortgage that was too small. Plan for the worst and hope for the best. This is a formula I’ve seen followed by most of my successful clients. Live below your means. I’m a huge fan of this approach.
I must tell you that one of my most successful clients followed the exact opposite of this advice. He and his wife always bought a bigger home than they could afford. That forced him to work harder and advance faster. He’s extremely successful right now, and he’s a cool customer. I don’t think the stress ever got to him. But it wouldn’t work for me.
What would your advice be to Mark?
Amy says
January 19, 2014 at 6:15 AMI agree that thinking too far ahead can complicate the issues in hand. Also, it is very important what your partner thinks. You cannot make plans on your own for the future of the family. In many cases you have to find a happy medium.
Neal Frankle, CFP ® says
January 19, 2014 at 6:18 AMI agree Amy. Thanks!
Jeff Voudrie says
January 16, 2014 at 8:30 AMOne thing that I didn’t see discussed is the concept of working from home instead of completely giving up one spouse’s income. I made the decision back in 2006 to forgo my nice office in the bank building for a nice home office. I was in the position that my client-base is nationwide so the local office wasn’t as important anymore.
It has been a tremendously rewarding experience for us. I still work just as hard, but it is different. I believe it allows me to be a better advisor, a better husband and a better father.
Many companies are beginning to recognize the value of virtual employees and are even giving traditional employees the option of working from home.
Keep up the great work!
Neal Frankle, CFP ® says
January 18, 2014 at 11:19 AMThanks Jeff. I have had a home office at different times and I agree with you. With the constant advance of technology it is much easier to do and very effective. I really appreciate you making this point. It’s a good one sir. Thanks!
Bret @ Hope to Prosper says
October 1, 2011 at 11:45 AMIt sounds like Mark has a lot of things figured out at an early age. That is pretty admirable for a guy who is only 25.
My advice is to definitely try to get a house you can afford on a single income. If your future wife wants to stay at home, she can. If you want to put your kids in private school you can. And, if you both continue to work, you can pay it off early and enjoy your life. It’s all about the freedom of choice and debt limits that.
We live on a single income and are still paying off our house early. It’s the only way to go in my opinion. Why be tied to huge debts, if you don’t have to.
JS says
September 27, 2011 at 6:33 PMThe fundamental issue is that “Mark”, like so many others, is thinking ‘budget’ as in ‘what can I spend to the limit’. They need to think minimizing and living below your means. Buy a house that the lowest earning spouse can cover alone.
Also “Mark” should set up a spreadsheet and calculate interest on investing monthly dollars from 25-35 (and stopping) and then the same monthly allotment from 35-65 and see how compound interest changes the retirement amount.
Mark says
September 26, 2011 at 7:56 AMThanks for writing the article so quickly Neal! Your advice is much appreciated.
I know that I still have several years before I will realistically be interested in buying, but as you said, I am a big planner (for better or for worse)! I think you’re right that it’s best to wait until we’ve talked about all the issues, but I was looking at prices and wondering what areas and house sizes we would be able to afford a few years down the line. I’ll be sure to take a conservative approach to ensure our other priorities (saving for kids college & early retirement) would be within our reach. Thanks again!