7 strategies for living on a single income
Thinking of making the transition from multiple paychecks to living off of one income? These tips can help.
Say you’ve decided it would be better for your family to have one adult stay at home, and you are trying to figure out how to live off of one income. Rest assured, you’re joining the many Americans who successfully make the transition every year with the help of budgeting and savings creativity. Here are some steps to take to develop a plan for living on one income.
Build an emergency fund
An emergency fund can help reduce some anxiety about living on one income. It can also help protect you from unforeseen expenses such as medical costs or an unexpected job loss. It’s better to start building your emergency fund while there are two paychecks coming in—at least six months before you plan to leave your job. By directing at least 25 percent of each paycheck into a savings account, you’re also training yourself to live on one salary. In order to do this, you may need to cut your living expenses (see step No. 2), but you’ll be glad you did it well in advance.
Set a new budget
Getting a sense of your new monthly budget before you go down to a single income can help you begin making any necessary adjustments before you downsize to one paycheck. This can help smooth the transition. Be sure to factor in how much you’ll save by cutting out work-related expenses like commuting, dry cleaning and lunches, as well as other expenses you’ll no longer have—including child care. It’s also important to factor your savings plan into your budget. Continue to put money aside for retirement as you make the transition to a single income. Tools like the Merrill Edge retirement calculator can help you determine your retirement savings goal.
Start cutting costs early
Now that you’ve figured out how much you’ll bring home on one paycheck and what you’ll save on work-related expenses, you’ll have a better idea of what spending cuts you’ll need to make. Don’t wait until your last two-income payday to start. Instead, 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 moving.
Pay down debt
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 income-downsizing date 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.
Consider tax withholdings
Another factor to consider in building your budget and planning for the future can be the tax implications of transitioning to a single income. Look at your withholdings to see if they can be adjusted given your smaller annual income. If you move to a lower tax bracket, you may be able to increase your exemptions, which means you’ll have less money withheld from your remaining paycheck each month. If you aren’t sure if your withholdings will need to be adjusted, you can consult with a tax professional or contact the IRS directly. Be sure to adjust your budget accordingly if withholding changes impact your net income.
Spend time, not money
While you won’t have as much money moving forward, one thing you will have more of is time—including time for 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 you were busy with your job, that may no longer be possible or necessary.
Determine how you’re going to manage finances
There are several options for managing your finances while living on one income. Some families decide that the spouse with more time should be the one to 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. Whatever system works best for you, it’s important that the nonworking spouse have access to funds.
Once you’ve followed these seven steps, you’ll have a much better picture of what it will be like living on one income. Remember: While the transition to living on a single income can be intimidating, you may be amazed by what’s possible with preparation and the right plan.