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Dear Dollar Stretcher,
I have been very interested in gathering information on living on one income. Although others have helped me with suggestions on saving and even investing, I still haven't come across methods to calculate actual costs of working. Could you please advise me on ways to determine these costs?
Thanks!
Karen J.
Karen is not the only one asking this question. A lot of families are wondering if they could make a go of it on one income. And it's not just moms who are electing to stay at home. More dads are getting into the act, too. But one of the key questions for these families is 'can we live on one income?'. Let's see if we can't help them create a framework to make a decision.
The first step is not surprising. You'll need to know your current income and expenses by category. If you use a budget you probably have the required info. Otherwise, you'll need to set aside some time to go through your check registers, credit card statements and your earning statement from work that shows your income and deductions. Figure out your income and expenses for the year. That will be your starting point.
What we're going to try to do is to take your current income and expenses and make adjustments to both that would occur with the loss of one income. Once you've done that, you can see if you have enough income to cover expenses. If possible use a one year period. That way you won't forget annual expenses like property taxes.
Let's start with the income. That's the easiest. We'll be reducing income by the gross income of the stay-at-home partner. The key here is to remember that we'll be using gross pay. That's your pay before taxes and the other deductions have been taken. We'll consider those deductions in a moment.
Next we'll get into the meat of Karen's question. How much will expenses go down? Naturally that will depend on your family. So we'll try to give you tools to estimate the answer for your family.
The first expense that will be lower is your taxes. The most exact way to calculate how much lower is to work through an income tax return at your new income level. I know that most of you won't want to do that. The next best thing is to take the amount of money that was withheld from your pay for the 'retiring' person during the year. Unless you had to write a big check or got a large refund in April, that will be a reasonable approximation.
The next expense is the trickiest one. That's insurance. You will save any money that had been deducted from your paycheck. So count any money deducted from your salary as a reduced expense.
But you'll be losing any coverage you had. So decide whether you'll be adding 'family' coverage to your spouse's plan, finding a separate plan or paying the bills yourself. You might need to shop around to check out competitive rates. You'll need to add that cost to your current expenses. It's possible that insurance could cost you more than it does now.
What about auto expenses? At the very least you'll use less gas if you're not driving to work every day. You might get a low mileage discount on your insurance. If only one person is leaving the house each day, you might even be able to survive with one auto. Or if that's not feasible, could you get by with one car that's older to avoid a car payment. The things to consider with your auto are the payments, gasoline, maintenance, insurance, and parking/tolls. Remember, even if you don't have a car you might still have savings by eliminating bus fares or contributions to carpools.
Daycare is an obvious area of savings if children are involved. And it's not just the check you write to the daycare provider. They might require disposable diapers whereas you'd be willing to use the lower cost cloth ones. You'll need to think about your daycare situation and to recognize the areas of savings.
Grocery expense will almost certainly change. But it can be difficult to estimate by how much. If you eat out often to save time you'll want to keep track of what you spend that way. As a rule of thumb it costs only about half as much to eat similar foods at home. So if you spend $20 per week ($1,040 yearly) in restaurant food, you should be able to save about $500 when you have the time to cook at home.
Even if you do cook all your own meals, you're likely to find some savings. The time to use coupons and shop sales can save you 15% on your food bills.
You could save money on clothing. Even if you don't 'dress up' for work, you'll probably still save some. It's not uncommon to the stay-at-home partner to save 50% of what they've been spending on clothes.
You might also be able to save on dry cleaning and laundry service. Obviously, this will vary widely depending on your lifestyle. And any outside laundry services are likely to be eliminated.
Lunches at work are another expense that will be reduced. For those who bring lunch the savings might be fairly small. Perhaps just the cost of a daily drink or break-time coffee. Even a dollar a day is about $250 a year in savings. For those eat in the company cafeteria or a local restaurant the saving can be significant. Just $5 a day for fifty weeks a year totals $1,250.
Another, often overlooked area is the amount spent on workplace gifts, cards and cakes. In many workplaces, it's not uncommon to be asked to contribute on a frequent basis. Think of the requests during the last month and you'll begin to get an idea of how much you can save in a year.
Finally, you'll want to look for savings that could be unique to your family. Some children are especially prone to colds they pick up in daycare. Avoiding those doctor bills would provide savings. Another family might be prone to 'treat' themselves for surviving their busy schedule. Perhaps with a slower family pace those treats wouldn't be purchased.
At this point you should be able to adjust your current income and expenses with the changes. You might be surprised at the results. Many families find that the second income is all but consumed with expenses that come with a second job. But the only way to know for sure is to work through your own income and expenses.
Ultimately, Karen will find that there's more than just income and expenses to making this type of decision. But, whether her family decides to try to live on one income or not, it's foolish to make a decision without considering what would happen to the family budget. We hope Karen finds the answer that's right for her family.
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.
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