Tips for Couples Transitioning from Two Incomes to One
How to Make the Switch to a One-Income Household
Two-income households make the transition from living on two incomes to one for a variety of reasons. A wife gets pregnant and decides to become a stay-at-home mom, or a husband decides to go back to school and is too busy to work. Whatever the reason, going from a dual-household income to a solo-income household can be daunting.
For those used to living on two incomes, it's important to do some prep work in advance of making this kind of major financial transition. Here are four tips for making the transition seamless.
Try Living on One Income Before You Quit Your Job
If you're not sure you'll be able to live comfortably on one income after the baby is born, take one-income living for a test drive. Direct-deposit one spouses' income into separate savings accounts and don't touch that money even for emergencies. But don't just save money; keep records (or a journal) to gauge how easy or hard it is. Do you have to make more cutbacks than expected?
This exercise has the added benefit of allowing you to sock away one person's entire income for several months, allowing you to amass a significant savings cushion. But don't let the extra cash go to your head. If you splurge on a new car, it will deplete your savings and defeat the purpose of the exercise.
Talk to a Tax Advisor
The good news is that you'll likely pay fewer taxes now that you're a one-income household because you may be in a new—and lower—tax bracket. Also, if you are a low- to a moderate-income couple, you may qualify for the federal Earned Income Tax Credit.
Downsizing from two incomes to one will have tax consequences, and, in some cases, these consequences could be significant. If you don't have a tax professional, then you need to find one to figure out ways to alter your tax strategy to your new circumstances. There may also be new deductions for which you're eligible. It is a good time to learn how to budget for your taxes.
You're never too young to start planning for retirement, and now that you're a one-income family, you'll have to rethink your retirement goals. After all, one person's salary needs to accommodate two people's retirement.
On the plus side, you might have more retirement saving avenues available now that you're a one-income family. For example, you may be eligible to contribute to a Roth IRA if you weren't before.
Find Side Income
Of course, the spouse who's leaving their full-time job doesn't need to have an income of zero. The stay-at-home spouse could earn side income through freelancing, consulting, or taking on small side jobs.
Just bringing in an extra $100 a week (or $5,200 a year) goes a long way towards the family budget, retirement fund or emergency fund. If you squirrel away $100 a week for three years, you'll have $15,600, enough to buy a car in cash.