The majority of households in the United States have two working adults, but there are a host of situations where it makes sense for one spouse to leave the workforce.
If your family is deciding whether to go from two incomes to one, you need to consider how a reduced income will affect your finances.
“Make sure you stop and consider all the details,” said Judy Raffa, CFP, wealth strategy regional director at PNC Wealth Management. “Do not take this decision lightly, because families in this situation need to understand the short- and long-term personal and financial impacts.”
Before one spouse drops out of the workforce, Raffa recommends taking the following steps to decide if becoming a one-income household will work for you.
1. Look at your budget.
Review your current budget to understand your regular expenses and bills.
“Don’t forget to look at things that you might not pay monthly or daily,” Raffa advised. “For instance, you might pay some utilities quarterly or even biannually, but when those expenses pop up, you don’t want your one-income family to be in a precarious situation.”
After you thoroughly review of your budget, look for expenses you can cut out. You might be able to reduce discretionary expenses like entertainment so you can continue to build your savings. On the flip side, there are expenses – commuting costs, work attire, etc. – that might be eliminated when one spouse stops working.
2. Think about your future.
If both of you are working, you have more opportunities to save for retirement and other future goals.
“Some employers offer a 401(k) plan with a match, but if you have one spouse who is not working, you will only be participating in one retirement plan instead of two,” Raffa explained.
If your family becomes a one-income household, both spouses should know where their retirement savings will come from.
“You might be able to manage your regular expenses with one income, but what about funding your future goals?” Raffa said. “You should put a plan in place to fund things like your retirement, children’s education and any big purchases you anticipate.”
3. Prepare for a smooth transition.
It’s important to have a solid understanding of the benefits of the spouse who is planning to stop working. If he or she carries the health insurance, you should be prepared to switch to the other spouse’s benefits or find an alternative, and that might come at a cost.
“You want to make sure you have the timing right so there are no gaps in your insurance coverage,” Raffa said.
She also recommended taking a look at your family’s tax withholdings to see how you will be impacted by becoming a one-income household.
Lastly, Raffa suggested that one-income households look at life and disability insurance that would protect them in case something unexpected happens to the working spouse.
4. Pad your emergency fund.
An emergency fund is an important part of any family’s financial plan, but it’s even more critical for one-income households.
“With only one income, you don’t have that extra cash flow to lean on in an emergency,” Raffa said.
In the past, you may have been able handle an unexpected, large expense, but in the future, that might need to come out of your family’s emergency fund. While both spouses are still working, try to pad your emergency fund as much as possible.
5. Keep your priorities top of mind.
“There is a mental aspect associated with one spouse no longer working,” Raffa said. “It’s part of the tradeoff, but there are quality-of-life benefits that your family will reap by one spouse staying home.”
Raffa suggested that both spouses understand each other’s priorities and the reasons why one will no longer be in the workforce.
“Maybe it’s to stay home with the kids, care for a relative or there’s an unsustainable commute – there will be non-financial benefits to becoming a one-income household,” Raffa explained. “There also likely will be some financial sacrifices, but as long as you value the positive benefits, you have a greater chance of success. Going from two incomes to one ultimately becomes a prioritization exercise.”
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