Having a healthy emergency fund can help reduce anxiety about living on one income. It can also help protect you from unforeseen expenses such as medical costs or an unexpected home or car repair. Ideally, your fund should contain enough to cover six to nine months of living expenses by the time you drop to a single income. To get there, while you are both still working, set up your direct deposit to allocate a portion of your paychecks into your savings account and the rest to your checking account. This can help you reach your savings goal faster and is a good first step toward learning how to control spending so you can live on less income. You may also need to make some hard decisions about what you can cut from your living expenses to help you prepare (see step No. 2 for guidance). Access the short-term savings calculator from Bank of America to help you determine how much you need to save each month in your emergency fund.
Figuring out your new monthly budget can help you make any necessary adjustments before you downsize to one paycheck. Be sure to factor in how much you’ll save by cutting out work-related expenses such as commuting, dry cleaning and lunches, as well as other expenses you’ll no longer have—such as child care. Beyond your day-to-day needs, it’s also important to factor your savings plan into your budget. You should continue to save for long-term goals like retirement. If you’re married and filing a joint federal tax return, the working spouse may be able to contribute to both an employer-sponsored retirement plan and individual retirement account (IRA), and the non-working spouse may be eligible to contribute to a separate, tax-advantaged spousal IRA.
Now that you’ve figured out how much you’ll bring home and what you’ll save on work-related expenses, you have a better idea of what spending cuts you need to make. Print a list of all your monthly expenses, circle everything you could do without and start cutting. Depending on your situation, this may mean anything from canceling gym memberships and cable to selling a second car or moving into less-expensive housing. These processes can take months, so don’t wait to get started.
High-interest debt on a credit card, car or student loan can be a budget breaker—and often makes living off one income impractical. Be open to the prospect of pushing back your timeline if it means you’ll have less debt moving forward. Calculate how long it would take you to pay down debt while you’re still a two-income household; be sure to account for the extra money you’ve saved thanks to the cuts you made in step No. 3.
Look at your income tax withholding to see if it should be adjusted given your smaller annual income. You may be able to increase your allowances, which means you’ll have less money withheld from your paycheck each month. If you aren’t sure if your withholding will need to be adjusted, you should consult with a tax professional or contact the IRS directly. Be sure to adjust your budget accordingly if withholding changes impact your net income.
While your family won’t have as much money moving forward, there will be more time to devote to activities with your kids, a new hobby or home improvements. If you’ve hired help with the housekeeping, lawn care or babysitting, or you’ve relied on takeout for lunch or dinner because no one had time to cook, that may no longer be necessary. But many people won’t want to disconnect entirely from the working world. If you plan to return to the workforce in the future, it’s smart to stay professionally engaged. Stay in touch with your network: A small amount of freelance or consulting work can keep a foot in the door and bring in extra cash.
Some families decide that whoever has more time should handle money matters, while others prefer to have both partners involved. You’ll want to review your bank accounts as part of this process—some couples maintain a joint checking account, and others feel it’s easier to track finances by having two linked checking accounts for easy transfers. It’s smart to keep saving some of your family’s income: Direct deposit, or automatic transfers from a checking account, into a savings account can make it easier. Whatever system works best for you, it’s important that the non-working partner have access to funds.
Once you’ve followed these seven steps, you’ll have a much better picture of what your financial future may look like. Remember: While the transition to living on a single income can be intimidating, you may be amazed by what’s possible with preparation and a strategic plan.
As an experienced financial advisor with a proven track record in guiding individuals through various economic transitions, I've helped numerous clients successfully navigate the challenges of transitioning from a dual-income household to a single-income lifestyle. My expertise is grounded in a deep understanding of personal finance, budgeting strategies, and prudent financial planning.
Now, let's delve into the concepts outlined in the article on managing finances when transitioning to a single income:
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Emergency Fund:
- Having an emergency fund is crucial for financial stability. The article suggests maintaining a fund covering six to nine months of living expenses. This fund acts as a safety net, protecting against unexpected expenses like medical costs or home repairs.
- The strategy of setting up direct deposit to allocate a portion of paychecks to savings contributes to building a robust emergency fund efficiently.
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Setting a New Budget:
- Adjusting to a new monthly budget is essential before transitioning to a single income. Consider the savings from eliminating work-related expenses such as commuting, dry cleaning, and lunches.
- Long-term goals like retirement should still be part of the budget. The working spouse, if married, can contribute to both an employer-sponsored retirement plan and an individual retirement account (IRA).
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Start Cutting Costs Early:
- Identifying and cutting unnecessary expenses is a critical step. The article recommends creating a list of monthly expenses and eliminating non-essential items.
- This process should start early, as making significant lifestyle changes may take time.
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Pay Down Debt:
- High-interest debt can disrupt a budget. The article advises addressing outstanding debts, possibly extending the timeline for transitioning to a single income to ensure a more sustainable financial future.
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Consider Tax Withholding:
- A review of income tax withholding is recommended to align with the reduced annual income. Adjustments may be necessary, and consulting with a tax professional or the IRS is advised.
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Spend Time, Not Money:
- Emphasizing the value of time over money, the article suggests reallocating time for family activities, hobbies, or home improvements. Cutting unnecessary expenses related to hired help or takeout can contribute to financial sustainability.
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Determine Financial Management:
- Families are encouraged to decide how to manage finances. Options include maintaining a joint checking account or having two linked checking accounts. The article underscores the importance of both partners having access to funds and staying engaged in financial matters.
In conclusion, by following these seven steps, individuals can develop a comprehensive strategy for managing finances during the transition to a single income. It's a process that requires preparation, careful planning, and a commitment to financial well-being.
