It’s important for those who are used to living on two incomes to do some prep work in advance of making this kind of major financial transition. Here are four tips for making the transition seamless.
Try Living on One Income Before You Quit Your Job
Take one-income living for a test drive if you’re not sure you’ll be able to live comfortably on just one. Direct-deposit one partner’s income into a separate savings account and don’t touch that money even for emergencies. But don’t just save money. Keep records (or a journal) to gauge how easy or hard it is. Do you have to make more cutbacks than expected? This exercise has the added benefit of allowing you to sock away one person’s entire income for several months, so you’ll amass a significant savings cushion. But don’t let the extra cash go to your head. It will deplete your savings and defeat the purpose of the exercise if you splurge it on a new car.
Talk to a Tax Advisor
The good news is that you’ll likely pay less taxes now that you’re a one-income household because you might fall into a new—and lower—tax bracket. You might also qualify for the federal Earned Income Tax Credit if you are a low- to a moderate-income couple. Downsizing from two incomes to one will have tax consequences, and, in some cases, these consequences could be significant. You might have to enlist the help of a tax professional to figure out ways to alter your tax strategy to your new circumstances. There might also be new deductions for which you’ve become eligible. It’s a good time to learn how to budget for your taxes.
Re-Think Retirement
You’re never too young to start planning for retirement, and now that you’re a one-income family, you’ll have to rethink your retirement goals. After all, one person’s salary will have to accommodate two people’s retirement. On the plus side, you might have more retirement saving avenues available now that you’re a one-income family. For example, you might be eligible to contribute to a Roth IRA if you weren’t before.
Find Side Income
Of course, the partner who’s leaving their full-time job doesn’t have to have an income of zero. The stay-at-home partner could earn side income through freelancing, consulting, or taking on small side jobs. Just bringing in an extra $100 a week (or $5,200 a year) goes a long way toward the family budget, retirement fund, or emergency fund. You’ll have $15,600 if you squirrel away $100 a week for three years, enough to buy a car with cash.
