Two incomes can set you up for lifestyle creep and less financial stability in the long run!
Our culture and society may change slowly, but they do change. More families today feel less social pressure for both spouses to be employed outside the home. With the cost of childcare climbing ever higher, some begin to see the decision to stay at home as a strategic choice that makes financial sense.
Of course, there are many factors to consider. Is one income going to be enough to meet the needs of the family? Does one spouse genuinely want to focus on the family and step out of the traditional workforce? Will the stay-at-home spouse regret that decision after the kids are grown, or in the event of a divorce?
Those are great questions to ponder. Here’s how we think about it.
Don’t make assumptions
Most people believe that a two-income household is more financially stable than a single-income household – by default.
That is a misconception.
Yes, it is true that in the short run, both spouses working may bring in more money. However, that doesn’t automatically equal greater financial stability. If the family chooses a lifestyle that relies on using both incomes, the loss of any one job can be financially devastating.
That scenario is more common than you might imagine, because two-income households can afford a more expensive lifestyle. A larger home in a better school district, two new cars, exotic vacations, travel-away summer camp for the kids – those choices add up and don’t leave much room for saving money.
Consider a family where both spouses work. Let’s say one of them is making $90,000, the other is making $60,000. The total household budget is $150,000. If the higher earner were to lose the job, the household budget would drop by 60% overnight. For a family that has opted into a $150,000 per year lifestyle, that could be financially untenable.
Consider another family where one spouse earns $90,000. The other spouse stays at home but has the potential to make $60,000 if necessary. If the working spouse were to lose the job, and the stay-at-home spouse had to go to work, their household budget would only drop by 33%. Still a significant drop but more manageable, at least for a short period of time.
How do you make the best out of a two-income household?
Here are some ideas to turn your two-income household into a financial advantage.
Step one, don’t let your combined income inflate your living expenses. This is especially true for big decisions (i.e. mortgage, cars you drive, vacations, etc.) Think about what would happen if one of you were unable to work – then make your choices with that stress-test in mind.
Step two, consider living “as if” you only had one income. Executing this is hard, especially if you have to “downshift” from a lifestyle you are accustomed to. It’s difficult to make a consistent choice in favor of less expensive things and experiences when you have the money in the bank do buy something “nicer”.
If this suggestion made you bristle, it may be more practical to take the small step of tracking your household expenses for 1-2 months and analyzing them to ensure that your spending aligns with your goals and values. Other ideas, like saving your raise and bonus (instead of allowing them to inflate your lifestyle even more) can help, too.
Step three, keep up with both sets of retirement accounts. This is an unquestionable benefit of both spouses working. If you get employer match for your 401(k) contributions, max it out.
Are there any advantages to a single-income household?
Yes, there are!
First off, there is no need to play “as if” you only have one income. That places a natural constraint on your household budget, which can drive financially prudent decisions. We are used to viewing constraints as the opposite of abundance. In reality, they can fuel creative solutions, a greater focus on what matters most, and alignment with personal values.
Two, one spouse working at top capacity can have a higher earning potential than two spouses working at less than full capacity. For example, two auditors working at a national firm may have to cap their efforts at 40 hours per week in order to take care of the family. If one of them were to successfully pursue a partnership track (which would require greater commitment, more hours, and more travel), he or she may earn enough to make up for the other spouse’s lost income. Of course, there are many factors to consider before you make this choice, but long-term earning potential planning is important.
Finally, a single-income household is an opportunity to get a better return on your Social Security dollars. A non-working spouse is entitled to 50% of the working spouse’s Social Security benefit if the two have been married for over 10 years. After the working spouse dies, the non-working spouse gets 100% of the benefit. A family with both spouses working will pay twice as much in Social Security taxes – and will rarely get twice the Social Security benefit.
No matter which path you choose, financial planning is a must!
It is possible to thrive and have a healthy financial situation on one income. It is also possible that your family will struggle, leading to stress and financial pressure. The same is true of a two-income household. So, two incomes are not a magic ticket to financial stability.
Secure retirements don’t happen by accident, so here are four take-aways to help you take care of your family – no matter how many spouses generate income.
One, keep up with your emergency savings. Make sure that your “target” emergency savings balance is calculated correctly (i.e. you must consider your working situation, job security, household budget, the health of everyone in the family, etc.) For some families, 3 months of expenses is enough. Others should plan on 6 months or more as a baseline.
Two, invest in the earning capacity of the non-working spouse. This is especially true if he or she would otherwise have a professional career – or has gone so far as to pursue higher education and earn professional licenses. Maintain those licenses. Invest in continuing education. The non-working spouse is your “emergency life raft”, so you must do the maintenance!
Look into life and disability insurance for both spouses. The last two words are very important. It’s not uncommon for families to skip life and disability insurance for the stay-at-home spouse because of the perception that it would be a waste of money. If the stay-at-home spouse were to die or be incapacitated, the family would need the insurance to pay for additional childcare and household maintenance – all the “invisible” work that gets done when the stay-at-home spouse is healthy.
Finally, give some thought to what would happen to the stay-at-home spouse in the event of a divorce. It’s tough to look at the “what-ifs” that are driven by the possibility of a family falling apart. However, a pre-nuptial or a post-nuptial agreement that severely limits the stay-at-home spouse’s access to alimony could compromise his or her financial stability. In that situation, maintaining an active professional profile would be a better strategy.
If your family is weighing the pros and cons of stay-at-home decisions, know that our team is here to help.
