Where's My Trust Fund?

I am at an age where many of my friends are having babies.  Some of them have always known they want to be stay-at-home moms after having children, and for some it is never a consideration.  There are also a group who waffle back and forth, unsure of what to do.  I wish I was confidently in one of those camps, I have been a waffler.  A good friend of mine wrote to me recently that his wife is thinking about staying home, at least for a year or two, with their little boy who was born last year and he wanted to know how to think through the process.  Here are a few things to think about if you are considering going down to one income:

Track Expenses

If you are thinking of going down to one income, start by tracking your expenses.  Knowing where every penny is going well help you find ways to make cuts in your budget.  There will be some things that will be obvious cuts, childcare, or work clothes for the spouse that is going to be staying at home.  Depending on the salary of the working spouse, you may have to cut deeper.  Can you go down to one car?  Cut your eating out budget?  Tracking your expenses will help guide you through this process.

One  couple that I know who went from from two incomes to one so the wife could go back to school, were shocked by how much their spending went down ‘naturally’ when they dropped to one income.  They found they were more relaxed and had more time to cook and did not need to spend as much on entertainment or work clothes and other work related expenses.  However, it could go the other way for your household.  The spouse who is staying at home, may spend more to get out of the house on a regular basis.

Housing

Housing costs are the biggest expense for most people.  If you have an inkling that you would like to be a one income household at some point in the future, keep this in mind when buying your house.  Be sure to buy a house that is easily affordable on one income.  If you are going through this decision making process after buying a house, think about ways you can decrease your housing expense.  Can you refinance your mortgage? If you have tracked your expense and are having a hard time figuring out where to make cuts, can you move to a less expensive house?  I know the current housing market is terrible, many people are under water and for them this may not be an option, but it is something to consider.

Do A Trial Run

Try doing a trial run of living on just one salary.  Childcare costs can still be covered by the other salary, but everything else should be covered by what will soon be the only salary. The longer you have to give your lifestyle a test run, the better.  You can use the second salary to pay down debt, or increase your emergency fund.

Also do a trial run of having the spouse who plans to quit at home alone with the child for a week or two.  This can be done during a maternity leave or using a week or two of vacation time.  This will help you get a better idea of how you will spend your days.  Do you want to be at home full time or still work a few days a week?  Now that you are at home more are there new expenses that you didn’t have before such as classes with the kids?

Re-entering the workforce

If you plan to only be out of the workforce for a year or two, think about what you can do during this time to keep your network active and your skills up to date.  Spending a little bit of time on a weekly or monthly basis will make the transition back into the working world easier.  Even if you hope to stay-at-home for the remainder of your career, there is no guarantee that you won’t have to work again at some point so it is wise to keep your network and skills as fresh as possible.

When thinking of long term financial plans and goals, keep in mind that if you do re-enter the work force after a year or two at home, you will likely take a hit on the salary front.  It make take a few years to get up to the salary you were making before you left the workforce.

Other Areas Of You Financial Life Will Change

You will likely need to have a larger emergency fund as a one income household.

Your life insurance needs may change.  While you still need life insurance for the at-home spouse to pay for childcare costs should something happen, you probably need less.  However,  you will likely need more now for the working spouse.  This is also a good time to make sure the working spouse has disability insurance, something that is necessary for everyone who is working!

Retirement savings for the at-home spouse will take a hit.  Look at whether the working spouse can save more, or if there are other ways you can save as a couple.

A Few Things To Think About If You Are Going Down To One Income For Financial Reasons

Childcare is shockingly expensive.  I know sometimes quitting your job seems like the obvious choice if your salary is not enough to cover the full cost of childcare.  Keep in mind that after taking a few years off, you will most likely go back to a lower paying job.  In addition, there will be several years where you are not contributing to a retirement account.  If your primary reason for quitting your job is that your salary does not cover childcare, and you can cover all your household expenses on two incomes, consider these other long-term costs before quitting.

Remember No Decision Is 100% Permanent

If you are nervous about taking the plunge, remember that no decision is permanent.  Enjoy the time at home with your kids and if things change for any reason, you can always reevaluate your options.

While this is something I have thought about and researched a lot, we are still a two income household.  If anyone has experience with this issue, please share your words of wisdom!