Planning to Stay at Home -- How to Manage on One Income
As a new mother, Amy Roe found herself in a new role at home and at work. She was promoted to a position recently opened by another worker's departure. It seemed that she now had two new and demanding jobs: "I felt that I couldn't meet my expectations for both, and that I wasn't measuring up ... and the stress was unbearable." After coming home one night, Amy decided it "was time to fire myself at work. We would sort it all out, and somehow make it all work."
After running the numbers on their household expenses, Amy and her husband looked at how the finances would work if they were to live on one income. What they discovered was that they could make ends meet on just one income. Amy says that, and her supportive husband, gave her to confidence to take the leap. Also, she's confident that she can stay connected and maintain her job skills so that when she decides to later re-enter the workforce outside the home she will be ready to do so. What gives her this optimism? The person she is training to take over her job is a mom who, after several years at home raising the kids, she has decided to return to work.
A growing number of parents have quit their paying jobs to stay at home full-time to raise their children. The percentage of stay-at-home moms -- or SAHMs, as some refer to themselves -- has risen steadily during the past decade.
If you've considered having one parent stay at home as the primary caregiver of your children, but figured that you couldn't afford to do it, think again. With some careful planning and a close look at the true cost of working, you just may find that this can be an option for you.
Are You Wired to Stay at Home?
Clearly, many families feel both parents need to work just to make ends meet. With rising food and energy costs and bigger mortgages, a second income can be the difference between getting by and coming up short financially. But the money really isn't the most important thing; the bigger question is what you need to do that's best for the well-being of you and your family.
Shifting down from a dual-income to a single-income household requires more than just a financial adjustment. Some who do it find it's just as challenging being the stay-at-home caregiver. Then there is the pressure on the working parent to make career decisions that are more about money than job satisfaction. One parent put it this way: "I am not wired to be a stay-at-home mom. Been there, done that. I went crazy without the routine of a job and interaction with other working adults!"
The decision to stay at home also has to be based on a number of financial considerations, including the impact on the family's finances. Working couples who do it are often surprised by what they find.
The first question to ask is: Can your family live on one income? To get the answer, you need to do the math -- compare the after-tax amount of the single income to the costs that you'll pay when one spouse stays at home. When you get into this, what you may find is that the costs you are paying so that both parents can work can eat up most of the second income, making the financial decision to stop working easier. The saying "it costs money to make money" is never truer than when used in the context of working parents who have young children. When both parents work, the additional costs often include additional income taxes, childcare, work-related expenses, and additional household expenses.
Some specific examples:
Many of these expenses are fixed and do not vary based on the income level of the parents. This means that if one spouse's income is lower, it may actually cost them money to work outside the home.
For example, say a working parent earns $35,000 annual gross pay, and incurs $29,880 of additional costs as a result of going to work as opposed to staying at home. In this example, the net income is $427 per month, or $5,120 per year, and if you work 2,000 hours per year, that works out to about $2.50 per hour! If you decide to run the numbers for your situation, you could use online calculators, such as the "Stay at Home Calculator" at Parents.com.
Live Off One Income Before You Leave Your Job
If you're not convinced that the numbers will work for you, then give it a try in real life -- try living on one income before you leave your job. Use the income from the second income to pay off debt (credit cards and car loans), then build an emergency fund. You may also be able to reduce monthly debt payments by refinancing a mortgage or consolidating student loans. Also take the time to review all your expenses to see where cost savings can be had. Remember, a dollar saved is better than a dollar earned, because you keep every cent of the money you save, but pay taxes on each dollar of earnings.
Keep Saving for Retirement
Remember that, when you exit the workforce, you will no longer be able to save in a 401(k) plan and will no longer accrue Social Security retirement benefits based on your earnings history. But whether you are a SAHM or just taking a break from working, you should not take a break from savings for retirement. For this reason, it is very important to open and contribute to a Spousal IRA, where the nonworking spouse can make an IRA contribution of up to $4,000 for 2007 ($5,000 if age 50 or older as of Dec. 31, 2007), as long as the couple files a joint return, and the working spouse has enough earned income to cover the contribution. Also, some or all of the contribution to a Spousal IRA may be deductible, depending on the income of the couple.