Deciding whether one parent should quit their job is obviously a personal one and depends on a host of factors, some financial but many others not. The fact remains, however, that if the numbers don’t add up, there’s no way one parent can quit their job to stay home with the kids. But how do you figure out what’s possible? To help⏤ and address other financial implications to living off one income ⏤ we tapped Matt Becker, a Florida-based CFP and the founder of Mom and Dad Money. He offered six steps anyone trying to determine whether a single-income household is the right move needs to consider.
1. Ask Yourself: What Do You Want to Do? What’s The Goal?
Before you even crunch the numbers, you have to ask yourself why you’re considering quitting. Is it because you hate your job? Has the stress of two parents working full time become too much on your family or marriage? Or do you simply want to stay home with the kids? There are costs associated with both working in an office and working raising kids, so it’s important to determine what the end goal is before making any rash decisions. Can your situation be remedied by scaling back hours, switching to a part time job, or moving your child to a cheaper daycare? And what’s going to put more stress on your family: trying to cut costs each month in order to live on a single income or having both parents frazzled from trying to balance work and day care pickup? “What do you want to do?” says Becker. “Do you want to be working or do you want to be at home with your children? The financial implications of either decision matter and should be taken seriously, but the end goal is to build a life that you want that makes you happy.”
2. Calculate How Much Your Income Will Drop
Assuming the goal is for one parent to stay home, the process for running the numbers is pretty straightforward. It starts by calculating your new income and comparing it to your expenses. “If you drop down to one income, your net take home pay pay may actually increase because you now fall into in a lower tax bracket,” says Becker. As a result, fewer taxes will be withheld from each paycheck, leaving you more money than you might have expected each month. Becker recommends using a site like Paycheckcity.com to estimate your new monthly take home pay. Similarly, he suggests using a tool like Turbo Tax’s TaxCaster to estimate how much your federal taxes will go down. Obviously, if you do your own taxes, you can spend the time filling out a mock tax return for next year, but guesstimating based on your new, lower tax bracket won’t work. “Because we have a progressive tax code and you pass through multiple tax brackets,” Becker says. “You can’t just use your tax bracket to figure it out. You also need to factor in a child tax credit and deductions like that. You really need some kind of tool if you want to be accurate about it.” Two final things to consider when calculating your new take home pay: health insurance and retirement savings. Were you covered by your employer’s medical insurance before quitting? If so, you may have to switch to a family plan, which will cost more per month and reduce your take-home income. Similarly, does the working partner increase their 401k contribution in order to help offset the loss contribution or match from the other job. If so, again, that means less take-home pay.
3. Add Up ALL of Your Expenses
The only way to gain a clear picture as to whether you can afford to live on a single income is to figure out where all of your money goes each month. If you’re lucky, you already track expenses in Quicken. If not, you’ll need to do a little bit of leg work. The next step, says Becker, is to add up all of your expenses ⏤ fixed, variable, irregular, and emergency ⏤ and see where you come out. While the biggest expense you’re likely to shed is child care, don’t forget that working costs you money: food, clothing, commuting (gasoline, parking, train fare), coffee, dry cleaning, car maintenance, it all adds up ⏤ and it’s all money that goes back into your pocket. “Include bills like property taxes, life and homeowners insurance premiums and any annual or irregular expenses, like home maintenance, car repairs, gifts, travel, anything you know is going to come up but you don’t necessarily know when is something to factor in.” Becker adds. And, he stresses not to forget to pay yourself first both in terms of retirement savings and your rainy day fund. While Becker acknowledges that the standard emergency fund is 3-6 months’ worth of expenses, it needs to increase. “You’re adding in risk here because if that one person loses his or her job, then you have no income.” Also be careful to use actual expense numbers rather than pie-in-the-sky budgeting targets of what you will spend on eating out, travel, or clothing moving forward when you only have one income. Some people forget — or don’t want to — add up their current expenses as much as what they plan to spend, and as anyone who’s budgeted knows, that doesn’t always work out. “I would be careful about assuming that you can just cut out a lot of that stuff, like eating out and travel,” Becker says, “I would focus on the expenses that will definitely change, things like child care, commuting costs, dry cleaning, your wardrobe.” Finally, add in new expenses like your family plan health coverage and long-term disability, which Becker says is another big piece of protection that you can have if there’s only going to be one income. “If you’re the sole income earner for a family, long-term disability insurance is really valuable protection,” Becker adds “it ensures you have income coming in even if medical issues kept you out of work for an extended period of time.” The first place you should look for coverage should be to your employer, but individual coverage you get on your own is often stronger. Not surprisingly, it’s also more expensive and more difficult to get.
4. Compare the Numbers
So, how do the numbers look? What’s the net difference between your change in income and change in expenses? Are you net positive or a net negative? “If it’s a net positive, in other words, you’re income is decreasing by less than your expenses are decreasing and quitting your job is something you want to do, you should be free to do it,” Becker says. He adds: “In most situations you’re probably going to be in the scenario though where the drop in income is greater than the drop in expenses.” In which case, you’ll have to figure out what that difference is and figure out ways to make changes in your expenses. That doesn’t mean it’s not possible, just that you’ll need to make some cutbacks.
5. Do a Test Run
Becker recommends trying out living on one income for a few months before actually quitting your job. He suggests taking the difference between your change in income and expenses and putting it directly in savings, essentially pretending like it doesn’t exist. For example, if the difference between your income and expenses is now $500 a month, start socking it away and practice living off the new lower income. In addition to simply proving that you can handle the new lifestyle, it’, per Becker, is going to build up some savings that you can use to help manage the transition. Once you know how much less money you’ll be making each month, it’s easier to start figuring out where to make changes in your budget, whether it’s eating out less, cutting down on travel, etc. “Start working on those changes now before you actually have to make them, and while you still have this extra income,” Becker says. “If you can do it, then great, you can feel comfortable making that job switch. If you can’t do it, if it’s really a struggle, then maybe you’re not quite ready to quit yet.”
6. Don’t Forget to Think Long Term
It’s easy to lose sight of the future when you’re struggling with the day-to-day grind of full-time parenting and two full-time jobs. But it’s important to step back and consider the long term. Keep in mind that a family’s budget is tightest when kids are under the age of 5-years-old, and while things might be tough now, it won’t always be that way. “It’s certainly possible that depending on the salary and cost of childcare and other associated expenses, at least one for one of you, your job is costing you more than it’s making you right now,” Becker says, “But it’s also possible that may only last for a couple of years.” The assumption being that your income will rise as you advance in your career and your kids will graduate out of child care into free public schools. Still, it’s important to consider but not necessarily be beholden to things like the loss of future earnings potential and raises, matching money not contributed to a 401k, and a smaller social security benefit upon retirement. “There have been a lot of studies that show women in particular sacrifice a lot in career earnings and advancement from staying home with their children,” Becker says. “If that’s what you want to do, certainly you should do that whether you’re a mother or a father. But there is a reality that if you leave the workforce now, there’s at least a good chance that it’s going to lead to lower earnings and more difficult career advancement later on. If those are things that are important to you, then it might be worth sticking it out now ⏤ even if it’s a financial loss right now.” Still, Becker concludes, it all comes back to your original intentions. “Could you potentially retire earlier or with more money if you kept working rather than staying home with your kids, even if that’s not what you want to do? Sure. But that’s not the point of all this. The goal is to do what you want to do and be happy.”
