By Peter Mastrantuono
The decision to go from two incomes to one can be frightening. With some careful planning, however, the shift to one income is within the reach of many Americans. Here are 10 tips for a successful transition:
- Prepare a Budget on One Income: Creating a budget based on a single income will be important foundational work to help you understand whether such a decision is practical and what financial goals may have to be delayed. (Remember to account for any appropriate savings, e.g., commuting, childcare, clothing, etc.)
- Identify Necessary Lifestyle Changes: Most two-income households have adopted a lifestyle that reflects their dual income. It will take sacrifices to make ends meet once you move to a single income, so have that conversation now with your partner to ensure you are in agreement as to where those sacrifices will come from and if they’re enough to make a single income work.
- Consider Health Insurance: Health insurance is not a luxury. If it is the earner with health insurance that is contemplating staying at home, you will need to think about the expense of replacing that coverage.
- Test Run a One-Income Life: Before you make the decision to go to one income, try living on one income. A trial run can help you determine if you’ve overlooked financial or lifestyle issues that bear on your decision-making.
- Take a Baby Step: There is no rule that says you need to move to one income all at once. If an employer is agreeable, consider having the earner who will be staying home first transition to part-time. This will allow a more gradual easing into a one-income future. (If the reason for stopping work is a new child, ask the grandparents for help with childcare. They would likely very much welcome it, and their rates are very reasonable!)
- Retire Debt: Debt servicing will be substantially more difficult with one income. Try to pay off as much debt as you can before becoming a single-income household.
- Start Living on a Single Income as Soon as the Decision is Made: Once you and your partner have made the decision to live on one income, begin living on that single income. Use the second income during this time to pay off debt or build savings.
- Raise Your Emergency Fund: Without a second income to fall back on, you should raise the amount of emergency savings you currently have to protect against any income interruption.
- Think About a Side Hustle: There are many reasons that individuals decide to quit their job. Whether it’s a new child or to pursue an education, think about a side hustle that can generate income, e.g., selling items online or using your skill set for consultative services.
- Review Payroll Withholdings: Due to the household’s lower income the single-income earner may want to review his or her payroll withholdings to ensure that tax withholdings are in line with the new financial circumstances. A proper withholding designation may improve monthly cash flow through lower tax withholdings.
Finally, stay in communication—with your partner and your financial advisor. Your financial advisor can be a great source throughout the process of making the decision to transition to one income. And, because financial stress can spill over into human relationships, you and your partner should commit to talk as frequently as necessary to find a way to navigate together the challenges that lie ahead.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.