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BAM Intelligence

One Income

There’s a financial crossroads you may have encountered in your life, especially if you have kids. It can basically be summed up with this question: “Is it better for our family to have a parent not working outside the house (who is therefore at home to raise children) or to have both parents working?”

For many young families, answering this question means trying to weigh the financial impact of one spouse leaving the working world, and its accompanying paycheck, against the potential benefits of having a stay-at-home parent.

For my wife and me, the financial part of this decision was easy. The income she earned would have been less than the cost of daycare for our coming twins. In the end, that made for a pretty short discussion.

But in its wake, this decision created a whole host of new challenges. Now that we knew what we were going to do, we had to figure out how, exactly, we were going to reduce our income by 30 percent, increase our spending to accommodate two new mouths and not go so far into debt that we’d be paying it off until we were 80. It seemed like a daunting, and sometimes impossible, task.

But, as I dug deeper and deeper into the numbers, I realized we weren’t truly losing 30 percent of our net income. By having two more dependents, our income taxes would be reduced, so we’d be able to use more of what we made. Additionally, by not having to fund two work commutes, we would be saving on gas, maintenance and other transportation costs. That being said, with our living expenses at the time, we weren’t going to be able to pay our bills with just my income, even if we cut out all retirement savings.

We understood that updating our budget to fit our changing circumstances was a natural part of living out the financial plan we’d created to map our future. We needed to compare our goals with our resources, and see if our plan would work. If not, we then needed to determine what was required to get us there.

So here is what we did. Our first step was to look at our budget and lifestyle and decide what could be cut out, or reduced, without sacrificing the basic necessities of life. The extent of these sacrifices will vary from family to family of course, and depend on the size of the remaining income. For us, cable TV was the first to go, which resulted in a nice bit of savings every month. We also trimmed the amount of our budget earmarked for dining out, which means I take my lunch to work every day as opposed to buying it. Entertainment expenses and other activities that we weren’t likely to continue after our children were born, such as late-night concerts or certain vacations, were easy targets to eliminate in our new proposed budget. Since it was unlikely my wife would be making it to the gym regularly, we cancelled her membership. There were also other items we cut, but they were some of the recurring monthly expenses we could remove without much pain or effort.

Step two was actually a step backwards. As we were going through expenses for items we’d no longer need or use, we realized there would be additional costs we hadn’t yet accounted for. If we added in everything we wanted to have, we would have ended up over our former budget, so we had to prioritize. While perhaps not entirely necessary, having diapers, wipes, creams and similar items on hand is highly recommended for newborns. After completing a needs analysis to determine how much life insurance we both required, we determined we were underinsured. Getting the proper amount of coverage was extremely important to us, so that had a place in the budget. While we wanted to start some college savings for the kiddos, there simply wasn’t room for that to start.

Step three was to examine, and then reduce, our more regular types of expenses. Instead of the $20 bottle of wine, we opted for the less expensive bottle from Trader Joe’s. Instead of filet mignon we ate New York strips. Instead of name-brand clothes, we went with lower-priced items or shopped less frequently. I think you get the picture.

Step four was perhaps the most difficult—it was to stop just considering these steps and actually do something about them. The plan was to start cutting things from out budget at six to seven months before our twins arrived. Some of our expenses, such as the gym membership and cable TV, had contracts and couldn’t be stopped immediately. Even so, if the fee for breaking a contract was less than the cost of completing it, we did.

There were three reasons for starting our spending cuts so early. First, it gave us time to screw up and do something we shouldn’t without feeling too bad about it. Going cold turkey was not easy for everything, but given time all of it was doable. Second, we used the extra bit of cash we were saving to build up our emergency funds and pay off some additional debt. In our case, we still had a year left on a car loan. We were able to pay it off before the babies came, freeing up a larger chunk of money for monthly expenses. Finally, we were able to spend dollars we didn’t think we had for all those necessary baby items we didn’t already own.

If you are serious about going from two incomes to one, it can be done. You don’t have to revisit your college days and eat macaroni and cheese or ramen noodles for every meal. You don’t have to become an extreme couponer. You don’t even have to sell blood, plasma or non-vital organs on the black market.

What does have to happen is a reexamination of how new goals, values or circumstances impact your overall financial plan, and a commitment to doing what’s necessary to accommodate life’s changes—even if it means drinking Three Buck Chuck.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2014, The BAM ALLIANCE

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Brad Jenkins, CFP®, ChFC, CLU is a wealth advisor at Buckingham, an independent member of the BAM ALLIANCE. He has helped his clients achieve their financial goals by concentrating on the big picture and applying a comprehensive approach to wealth management. As a CERTIFIED FINANCIAL PLANNERTM professional, he has demonstrated proficiency in the areas of insurance and risk management, employee benefits, investments, income tax, retirement and estate planning.

He joined Buckingham in 2006. Prior to joining that, Brad held the position of financial consultant at A.G. Edwards & Sons, Inc. and was a financial representative for the Northwestern Mutual Financial Network.

Brad holds a bachelor’s degree from Illinois State University in Normal.

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