It is a sad truth that it is very rare a family actually has a budget. Most people just check to see if they have money in the bank and then spend it. They don't have a plan. —Will VanderToolen, AAA Fair Credit Foundation
There was no way they could do it.
Jonni McCoy was a senior buyer at Apple Computer and brought in about 55 percent of her and her husband's combined annual income. They were already living frugally — or so they thought. Their San Jose, Calif., home was tiny. Their two used cars were paid for. "We weren't living extravagantly at all," she said.
But McCoy and her husband wanted to cut back from their dual income to a single income. She was going to have a baby.
"The conviction to make raising my son a priority was definitely a God-driven feeling that wouldn't go away," she said. "And that's why I needed to do it."
But the numbers didn't look like they were going to add up.
In today's economy, many households are cutting back from a dual income to a single income — whether by choice like Jonni McCoy or because of economic realities like layoffs. The success of such transitions depends on several common factors and plans.
Will VanderToolen sees the transition from two incomes to one every day. VanderToolen is the director of counseling services at AAA Fair Credit Foundation in Salt Lake City, which provides free financial counseling advice to people trying to get their finances in order. And getting finances in order means overcoming bad habits.
"It's easy for us to expand our spending habits when income goes up," he said. "But when we have a cutback in income, it is much harder for us as individuals to cutback and stop spending as much."
Half and halving
Jonni McCoy tried cutting back on work hours. Then she tried job sharing. "But it didn't satisfy that desire to stay home with my child," she said. "So I told my husband we just have to do it."
He told her the only way it could work out financially would be if they moved way out to farmland where houses are cheaper. But she didn't want to do that.
They gave themselves four months to find an alternative plan.
"I scrambled to find a way to make it work without moving," McCoy said.
Logic seemed to dictate it couldn't work. But she was determined to find a way to make it work.
McCoy compiled a notebook full of ways to save money. That notebook later was rewritten into a book, "Miserly Moms: Living on One Income in a Two-Income Economy," which is now in its fourth printing with a new subtitle as "Living Well on Less in a Tough Economy."
"At the end of the four months I was able to find ways to save enough that we were doing it — we were living on half," she said.
Step one: Inventory
VanderToolen said the first step is to take an inventory of payments and other expenses. "They need to lay every expense on the table," he said. "Where is income coming from? Where is it going?"
It is the only way to begin to distinguish between needs and wants, he said.
In the free counseling VanderToolen does at AAA Fair Credit Foundation, he brings couples through their housing, utilities, food costs and more. And when he says food costs, he means groceries, eating out, school lunches, vending machine snacks, drinks bought on the way to work and so forth. "You have to nail down every expense," he said. "We even look at bank statements to show the expenses."
Just by looking at where money is going, VanderToolen said most families can easily cut 20 percent from their expenses without noticing any significant change in lifestyle. It shows just how much of a family's money is eaten up by little things here and there.
Jonni McCoy had a budget, but she said most people don't spend exactly what their budget tells them to do. The only way to know how a budget is working is by looking at every ATM, every credit card, every receipt. "Then you will have a better understanding of (what) you need to work on," McCoy said.
Step two: Advice
Because spending is so tied to lifestyle and emotion, VanderToolen recommends getting some outside advice to look at the finances. Naturally, he recommends a reputable organization like his foundation — with a warning there are many fraudulent counseling agencies out there. But a person could also go to their bank or credit union and ask to speak with a financial advisor. "You need someone who is not entrenched in your life," he said. "You need hard advice. You need tough love."
Step three: Move quickly
The third thing VanderToolen advises is to move quickly. Not everybody has time like Jonni McCoy did to make plans. If the second income was lost suddenly, changes need to be made as fast as possible. Draining savings and taking money out of a retirement account is not a solution.
People also can't wait for problems such as missed payments to force them into action, VanderToolen said. By then, many options would disappear. If people need to restructure their loans, they need to have good credit. "They think they have time and everything is going to work out," he said. "These days there is no room for give in lending anymore."
Step four: Make a budget
"It is a sad truth that it is very rare a family actually has a budget," he said. "Most people just check to see if they have money in the bank and then spend it. They don't have a plan."
But a family that is downsizing must have a plan.
The budget is built from the information gathered from taking the inventory. Seeing the actual expenses and the actual income makes it easier to cut where needed.
And the cuts keep coming until the budget is balanced. "Cash flow is simple," VanderToolen said. "Money in. Money out. You can't spend more then you make."
Jonni McCoy divided her family's budget into "things we can change" and "things we can't change." For example, the mortgage payment was in the "things we can't change" category. Food was in the "can change" category.
After dividing expenses into these two categories, McCoy said people should list items from the largest to the smallest.
This is how she identified food as the largest changeable item in her budget.
She cut it in half by changing how she shopped and how the food was prepared.
Half of McCoy's book shows the ways she was able to save money — especially in the food category. "That's where we found hundreds of dollars of savings each month," she said. "We used those savings to pay other bills."
In some households, the expenses — the real, must-have expenses — are more than the income. VanderToolen said these situations really do need good counseling — such as HUD-approved counselors — that can help determine if a couple needs to leave their home. He said it is important, in those situations, to know how to exit a home properly to avoid adverse financial impact on credit ratings and the like.
But if a couple has time to plan downsizing to one income, VanderToolen recommends living off only one income immediately. "Take every single dime and put it in savings," he said. "Act like the income does not even exist. It is gone."
He said this is the best way to get ready — not only for changing the way a couple lives and how they spend, but it also helps to take the soon-to-be-lost income and create a healthy emergency fund.
Elsa and Michael Duncan of West Valley City, Utah, didn't have to adjust their lifestyle when Elsa left her job at a mortgage services company a year ago. From the beginning they lived only on Michael's income from the Granite School District's planning and boundaries department. "We didn't want to get used to a lifestyle we couldn't maintain," Elsa said. "We were strict on our budget."
A portion of Elsa's income went into savings — creating an emergency fund that could buffer future problems. A larger portion went to pay down the mortgage on their home. "We get more satisfaction out of saving than out of spending," she said. "It makes us happy having money in the bank."
The cost of working
VanderToolen recommends couples consider having some sort of in-home job or entrepreneurship. It doesn't need to be big, but it could help ease the blow of the income loss as well as the feelings of the person who is no longer working. "It can be very rewarding," he said. "It helps the person feel like they are contributing, even if it is only a little bit."
Chris and Mindy Fidler always planned to live on one income. The Midvale, Utah, couple both worked in college — and when Mindy graduated in 2003, she had the largest income while Chris finished his degree. That switched after he graduated, and as kids came along, Mindy worked less and less. Now, with three small children, Mindy stays at home full time.
Chris began his own portable x-ray business, Mobile MBS Inc., to help people with swallowing disorders. Mindy helps at home with the billing and materials.
McCoy, however, warns people about part-time jobs. She said most of the people she spoke with hadn't evaluated what it was costing them to work. There are child care and transportation costs. But there is also increased food expenses resulting from eating out and not being able to spend time shopping sales or preparing food from scratch. "A lot of people in part-time jobs were only netting about a dollar an hour, or it was actually costing them to work — they weren't bringing home anything," she said. "They hadn't ever added up what they were spending."
Deciding to cut an income drastically is not something McCoy said should be taken lightly. "If you are going to do a drastic budget cut, you are going to give up something that you love," McCoy said. "Are you ready to? Is your reason for doing it more important than your love for the thing you are giving up?"
The most important thing to start with is your attitude, McCoy said. "People don't have to be afraid that life is all over," she said. "It can be a lot of fun."