Thinking of trading in your briefcase for a diaper bag? Here's how to figure out whether you can manage on one income.
Over the past decade, a growing number of parents have quit their paying jobs to stay home and raise their children full-time. The percentage of stay-at-home moms has risen steadily since 1995, from 34 percent to 37 percent, according to the U.S. Census Bureau. (The number of stay-at-home dads has gone up too, but Dad is still the primary caregiver in less than 1 percent of families.)
If you've ever thought of joining their ranks-but figured that you couldn't afford to-think again. The option may be more realistic than it initially seems. Here's what you need to consider.
The Cost of Working
After taxes and child care, pumps and pantyhose, some moms take home a lot less than they think. Together, state, federal, and Social Security taxes can eat up 20 percent to 40 percent or more of your pay. And at $100 to $200 per week per child, on average, day care can consume most or all of the rest.
A mom earning $30,000 a year could easily have 70 percent of her paycheck going toward taxes and child care, says Patricia Konetzny, a financial planner in Maynard, Massachusetts. Add in a work wardrobe, dry cleaning, commuting costs, lunches out, and take-out dinners (because you're too tired to cook), and the amount you really bring home can be downright skimpy.
When calculating if you can get by on a single paycheck, you need to factor in how much less you might be paying in taxes if only one of you worked. If the family income would fall from the 25 percent to the 15 percent tax bracket, for instance, the working parent would not need to withhold as much in payroll taxes and so would be bringing home a bigger paycheck. (To find out how much tax you'd need to withhold from a single salary, use the IRS's calculator at irs.gov. Enter "withholding calculator" into the search box.) Another consideration: If you just had a baby, that tax deduction and child credit will cut your taxes further.
Living on One Income
If you're not convinced you can live on one income, give it a try-either on paper or in real life. On paper, the first step is to write down every dollar that you're spending now. (Three months' worth of bank statements and bills will help with this part.) Next, see whether you can trim any of those expenses to a level of spending that matches a single income.
Need encouragement? Remember that a dollar saved is more valuable than a dollar earned because you get to keep every cent of it rather than giving a portion to Uncle Sam. The most common expenses that can be cut back include eating out, entertainment, clothes, shoes, vacations, cosmetics, household furnishings, renovation projects, electronics, cable TV, and toys.
Fixed expenses like your mortgage and other loan payments are tougher to cut, but some families find savings there too. Refinancing a mortgage or consolidating student loans to take advantage of low interest rates can cut monthly payments significantly. Plenty of one-income families buy used cars or drive their cars long enough to enjoy several payment-free years. And you may be able to reduce other bills by shopping around for less expensive insurance or a cheaper phone plan.
Still not sure whether you can swing it? Try living on one income for several months while you're both still working, suggests Rick Epple, a certified financial planner in Minnetrista, Minnesota.
A few caveats: One essential item that often gets shortchanged when families cut expenses is saving for college and retirement. But this is something you should not overlook. Financial planners encourage their one-income clients to keep putting something away for retirement, especially if they get a 401(k) match. Even if it's as little as $25 a month, save whatever you can right now and resolve to boost the amount when you return to work or whenever your spouse gets a raise.
If you have to choose between the two, college savings can go on the back burner. "There are other ways to pay for college, such as work-study programs and student loans," Epple says. "You can't borrow your way through retirement." However, one retirement account that can do double duty is the Roth IRA. You may be able to withdraw from that without penalties to pay tuition bills.
A Mental Makeover
As anyone who's gone from full-time work to full-time child-rearing knows, quitting a job requires more than just a financial adjustment. Many stay-at-home parents say they initially find it difficult to adjust to the round-the-clock demands of kids. Some say they miss the structure and predictability of the workplace, as well as regular interaction with other adults. Others worry about whether they'll be able to reenter the job market at the same level. And sometimes, there's pressure on the working parent to make career moves that are more about money than job satisfaction.
But there are ways to ease those concerns. Stay-at-home parents can look for other adults to befriend when they bring their kids to the playground or library, or they can join a playgroup. Some use the break from their career to retrain for work that is more satisfying or that will allow them a flexible schedule once the kids are in school. Other parents opt for part-time work (or working from home) to bring in extra income.
Meanwhile, stay-at-home parents enjoy benefits that can't be measured in dollars: a more relaxed pace of life and the satisfaction of knowing your children are getting your full-time attention.
Can you make it on one income? Use our worksheet to find out.
Copyright © 2005. Reprinted with permission from the April 2005 issue of Parents magazine.