Why Two-Income Couples Should Live With One Paycheck
Living on a Single Income Can Turbo-Charged Savings
Are you part of a two-income couple? If so, one of the easiest ways to create a budget is to live on one person’s income and save the entirety of the other person’s.
Let’s say, for example, you and your spouse are both working outside of the home. One of you earns $40,000 per year, and the other earns $60,000 per year. At this point, you are accustomed to living on both of your incomes. To turbo-charge your finances, consider weaning yourself off of that.
Take the First Step
As your first goal, the two of you should aim to live on the higher of the two incomes. Rather than living on $100,000 a year combined, try living on $60,000 a year. If you can achieve this, you’ve just increased your savings rate substantially. You’re now saving $40,000 annually before taxes.
Take It a Step Further
If you want to become even more ambitious, try living on the lower of the two incomes. After you become accustomed to living on $60,000 a year, start saving the higher of the two incomes and living on the smaller of the two. This will rapidly accelerate your savings rate.
How to Maximize Your Savings
What can you do with the savings? There are plenty of options:
- Accelerate your mortgage pay down. There are some couples who have paid off their entire mortgage in as little as three to five years by living on one spouse’s income and using the entirety of the other income to pay off the mortgage.
- Create a strong emergency fund. Set aside 3 to 6 months (or even 9 months!) of living expenses. Create special sub-savings accounts earmarked for future home and car repairs, health co-pays and deductibles, and vacations.
- Make a car payment to yourself. You can put aside enough money to buy your next cars in cash.
- Max out all of your retirement accounts. It is the easiest way to get on the path to a secure retirement. If your employer offers matching contributions, make sure you take advantage of it. If you’re age 50 or older, you can make "catch-up" contributions.
- Max out your child’s college savings fund. A baby born today will need about $200,000 to attend college in 18 years.
- Save for a big leap. Put aside enough savings so that you are able to start your own business or take some kind of major career or entrepreneurial risk. Or retire as early as age 35 or 40!
How to Start Living on One Income
How can you drop down to saving one person’s income? Begin by closely scrutinizing your budget. Budgeting worksheets will help you get a good look at exactly how much you are saving or spending.
Figure out how to trim your costs in every single category. Start with the categories that will give you the biggest win. Can you chop your mortgage in half — perhaps by downsizing into a smaller home? Could you minimize driving by living in a more pedestrian-friendly location and, therefore, cut back on your gas money?
Cutting your expenses in these big-ticket categories will have the biggest impact, but don’t forget about the smaller categories as well. Giving up chips, soda and other unhealthy foods can help trim your grocery bills substantially.
Lowering your thermostat and making energy-efficient updates to your home can lower your utilities. Taking in a renter or a roommate for your guest bedroom can quickly give you a $500 a month (or more) boost in your savings rate. (That’s $6,000 a year!)
Living on one person’s income and saving the entirety of the other is one of the most effective ways to ramp up your savings and live a more financially free life.