Many family budgets are fed by two incomes these days, so it can be a difficult adjustment when a family must squeak by on just one income; for instance, when a working parent returns to school full time, starts a business or takes time off to have a baby. Or, in a less rosy scenario, a family may have to adjust to a single paycheck when one breadwinner is laid off from work.
Financial planners have no magic words for financially strapped families who find themselves with one income after getting used to two. "It's going to be tough," said Bernard Ribordy, regional vice president for Waddell & Reed, a financial planning company in St. Petersburg, Fla. "They're going to have to get used to a different lifestyle."To ease the transition from two incomes to one, planners say, you should use a two-step plan: pay down debt, especially high-interest credit-card debt, and increase the family's savings in case of an emergency. You should begin working toward these goals before you lose that income, if possible, but keep them in mind even if you've been thrown into financial straits unexpectedly.
You should begin adjusting your budget as soon as you know your income will drop and get used to living on one income before it becomes necessary, planners advise. To get an accurate picture of how much you're losing in income, subtract taxes. Also, be sure to include the cost of benefits you may now have to purchase such as health insurance when drawing up the new budget.
Credit-card debt should be paid off first because the interest paid on personal debt is no longer fully tax deductible; this year the deduction is only 40 percent, and next year that will drop to 20 percent.
Saving the 18 percent interest you are now paying on your credit cards is the same as investing it for a 18 percent return, and that kind of income is impossible to find without taking a maximum amount of risk, planners say.
If you cannot eliminate all of your personal debt, then you should get rid of the smaller balances first. Even smaller balances have relatively high minimum monthly payments, and by paying them off before you lose one income you will have more cash on hand each month when you really need it. Bilello said you should continue to make the monthly minimum payments on the large balances until those are paid off as well.
When the debt is under control, you should start concentrating on building up an emergency fund. An adequate cash reserve, when faced with the prospect of losing one income, is six months' worth of expenses. That amount is necessary because your family likely will stretch its one income as far as possible, so unexpected expenses must come out of savings.
"I constantly find that most people don't have an adequate cash reserve," Ribordy said. "The more you are going from a high income to a lower income, the higher that reserve should be."
Bilello has a client whose wife was expecting their first child at the beginning of August. In the two weeks before the baby was due they rang up $1,300 in emergency car repairs, he said. They had the money, fortunately, in their emergency fund.
"Most people find their unexpected expenses that much more critical on the one income," Bilello said.
For many, living within their means on two incomes is challenging enough; living on one income seems impossible.
Financial planners suggest that you take the following additional steps to prepare for your new lifestyle:
-Draft a detailed budget that includes all expenses, even coffee you buy at the convenience store. Then find places in the budget where you can cut back; some likely categories are entertainment, recreation and dining out.
-Make sure you and your spouse agree on the cuts you'll make, Bilello said. After all, you both will have to live with them.
-Suspend contributions to your investment accounts if you have to, but do not dip into your savings to meet daily living expenses.
Some costs may rise, despite your cuts. They include:
-Insurance coverage. Your family will probably lose insurance benefits when one spouse leaves work. Life, medical and disability insurance should be replaced with individual policies.
-School tuition and books, or baby formula and diapers; in other words, costs related to the reason for leaving work. If you're starting a new business, you should not count on earning any income from the venture for at least the first year and usually longer. If you've been laid off, tally up your job-hunting expenses. Some of these expenses are tax deductible; check the tax reference books available at the public library.
Also, be aware that if you stop contributing to a tax-deferred account, such as a 401(k), you will have to pay taxes on the income you're taking home.
Generally, Bilello said, when a client loses one of the family's two incomes, "it's a decision they're making; they're not forced. They'll at least have the motivation to give up what needs to be given up based on the rewards."