For many families, wondering whether one or both spouses need to be working is an important question.
Unfortunately, most dual income couples feel that both of them have to work in order to meet their expenses and maintain their lifestyle… even if one spouse or partner wants to stay at home.
If you evaluate your situation financially — factoring in the cost of working and the amount of taxes that you pay while both of you are working — you may find that you do have a choice.
One of you may be able to stay at home without seriously affecting your cash flow. Evaluating your financial situations will enable you to make more informed financial decisions.
Things to Consider
When one spouse stays at home, you will not have to worry about certain work-related expenses, especially if you have young children and are paying for child care. Most people are aware of child care expenses because they are so obvious, but you need to take into account many other hidden expenses when you consider staying home.
In many cases, not only do you save money by not incurring those expenses, but you also may be able to save a great deal of money by making some small changes in your lifestyle.
Here is what you need to consider:
- Impact of the loss of second income
- Cost of earning the second income
- Hidden benefits
- Long-term cost of not working
- Lifestyle changes
Let’s look at each of these a bit closer.
Impact of the Loss of Second Income
Frequently, the real impact of eliminating a second income is not equal to the income itself. In fact, the real impact is often much less that the total income.
It is easy to think that if you are making $70,000 a year, your loss would be $70,000. However, if you calculate the taxes, the extra cost of working, and other expenses, the real impact may be far less, depending upon where and how you live.
Cost of Earning the Second Income
Yes that’s right: there are costs associated with working, despite the fact that you’re earning an income.
Look at your spending diary and identify how many expenses are related to both of you working. Make a list of how much you can save by not incurring those expenses.
Here is a list of some typical expenses that you need to consider before making the decision to continue earning a second income or not.
Child Care
For most working couples with children, child care is the expense with the most impact on your decision.
Depending upon how young your children are, the kind of child care arrangement you prefer, and the number of children, the cost will vary.
When you calculate child care expenses, make sure that you add related expenses such as driving to and from the child care center, payroll taxes that you may be paying for your nanny, the type of child care, etc.
Commuting
Without a commute, you won’t have commuting expenses. Reduced commuting expenses can really add up, not only in terms of gasoline and oil changes, but also wear and tear on your car and auto insurance.
You also won’t have to pay for parking, train tickets, ridesharing services, or public transportation, which is another expense that can be significantly reduced if one spouse stops working.
Eating Out
When you are working outside the home, the seemingly small expense of lunches, coffees, and work happy hours adds up over time.
When considering whether you or your spouse should stay home, you should take into account the amount spent on food during the work week.
Clothing and Dry Cleaning
Depending upon where you and your partner work, you may be spending a sizable portion of your income to buy work clothes. Suits, professional tops, shoes, and uniforms can get expensive. You’ll also need to pay for dry cleaning and upkeep of these clothes, which can also be expensive.
When one of you stops working, you will not be spending this money on clothes and related expenses.
Take Out Dinners
With two of you working, you are probably spending a sizable amount of money on take out dinners. We’ve all been there and sometimes a large pizza is what you need after a long day at work.
However, if you are able to have your dinners at home, you reduce the need for expensive take out meals. You may also save on groceries, since you will have more time to shop carefully, and may find many items on sale.
You’ll have much more time for cooking and grocery shopping with one spouse at home.
House Cleaning and Maintenance Services
When both of you work, you may be paying to have your house cleaned, things repaired, laundry done, the dog walked, etc.
Add up those expenses and see if taking care of those things yourself would save you some money.
Hidden Benefits of a One Income Household
There may be some hidden savings when you switch from a two-income to a one-income household.
For example, you may be able to save on taxes. Often, your joint income puts you into a higher tax bracket and you wind up paying a good portion of one spouse’s income on taxes.
If you are filing a joint return, calculate the impact of the second income on your taxes.
Long-Term Cost of Not Working
Although the picture in the short-term may look promising for one spouse to stay at home, you also need to consider some long-term implications of that decision.
Consider the long-term effect on your 401(k) plan, for example.
If you or your spouse remain in the workforce, 401(k) plans not only give you an immediate tax break, but they can also grow to make a larger retirement nest egg. Your 401(k) is funded more when you are working because you are contributing (and your employer may also make contributions).
Consider when, if at all, you or your spouse is planning to re-enter the workforce and the effect that could have on future earnings. When one of you re-enters the workforce, your earning power is likely to be diminished.
Some individuals who re-enter the workforce find that they are not getting paid their former salary while doing a similar job. Also, you may have to climb the career ladder once again since there may not be the opportunity to start where you left off.
Also, be sure to remember that now you are more exposed to the risks of the economy because you are entirely dependent on one income. You are more vulnerable to economic downturns and company downsizing.
So, if the working spouse loses their job, it will have a more devastating effect on the family’s finances.
Keep in mind that as your children grow, your child care expenses (one of the biggest expenses in a young family’s budget) will decrease considerably. As a result, you will save less from having one of you stay home as your children get older.
Lifestyle Changes
In order to make a stay-at-home spouse situation work for your family, you may need to make some lifestyle changes. In fact, making some changes in your present lifestyle might even allow one of you to stay home.
Here is how you can do it.
Make Two Lists: Need List and Want List
In your need list, include all the bills that you have to pay, expenses that can’t be negotiated, etc.
In your want list, include entertainment, travel, music and dance lessons, books, toys, and gifts.
For many, the need list is probably all you can handle with one income. Don’t panic, though. You can take steps to have at least some items from your want list once you’ve paid the “need list” off for the week or month.
Reduce Expenses
You can make both big and small changes that will reduce your expenses. Examine each of the items we went over earlier and see where you can reduce those expenses.
And remember: little changes add up to big amounts over time.
By making small changes such as turning off lights when not needed, drying clothes on racks instead of using the dryer, eating out only once per week instead of two or three times, you not only save money, but you also instill in your children how to be mindful with money.
Make Things Instead of Buying Them
Frequently, your creativity gets a big boost when you have a little more time to yourself.
Take that time to save a considerable amount of money by making things you would normally buy. This could include birthday cards, holiday gifts, baked goods, food, household cleaners, etc.
The personalized attention given to each item makes them extra special, and the feeling of joy when you have created something yourself is an awesome one.
Find Alternatives
Finding cheaper alternatives to your current choices is a great way to maintain your lifestyle for much less money.
For example, if you work out at a health club, find out if you can join a nearby YMCA or a less expensive health club instead. Instead of renting a hotel room at a fancy resort, find out if you can rent a cabin in a national park or a room through AirBnB.
Even food swaps from the name brand to the generic can be helpful in reducing your expenses.
Find Out If You Can Make Money Working at Home
Just because a spouse is no longer “working” doesn’t mean they have to stop working altogether. You can also make money by staying home.
Find alternative employment such as a part-time, evening, temporary, or a work-from-home position to earn a little extra income on the side.
Talk to a Professional
Do not quit your job without planning. If you plan ahead, you can pay off a loan to save monthly installments, secure a part-time or remote job, or start implementing other lifestyle changes to reduce the impact when your second income stops.
It’s never too early to start this dialog. Speaking with a professional can help you organize and understand your finances and help you make this big decision.
If you’d like to schedule an initial consultation with a financial advisor with years of experience, I’d love to help you out.
Whether you want to talk about budgeting or any other financial goals you have, no matter how simple or complex, please reach out to me at scott.nelson@lpl.com. It would be my pleasure to connect with you.
