By Bennett Whitlock, CRPC®, Private Wealth Advisor
Almost one in five American families with children have one parent stay at home, according to an analysis of U.S. Census Bureau data from the Pew Research Center. Some families make a conscious choice to transition to a household with a stay-at-home parent, while others experience a job loss or underemployment. In either case, becoming a one-income household results in a big change in cash flow. If you are making this move, it is vital to understand the financial implications and develop a strategy to adjust spending while still prioritizing your savings goals. Here are five strategies to consider:
1. Adjust your spending to fit your new lifestyle. The “elephant in the room” question is whether you need to make changes to your lifestyle to accommodate the decrease in income. You can expect your spending to go down in some areas – such as childcare or commuting expenses – but keep in mind these savings may be offset by increased entertainment, food or other costs. Unexpected expenses can pop up anytime, so it’s even more important for single-income families to have six-to-nine months’ worth of paychecks set aside in a readily accessible account to meet emergency needs.
2. Update your insurance coverage. Any time you or your spouse experiences a change in employment, it’s important to review and update your insurance coverage. Life and disability insurance are necessities, even for stay-at-home parents. If the stay-at-home parent becomes ill, disabled or passes away, life insurance helps preserve the lifestyle of the living parent and children by covering childcare and other household expenses. As for health insurance, first check the plans offered by the working spouse’s employer to see if there is an option that covers your whole family. If that’s not an option, explore your choices in the insurance marketplace provided by the Affordable Care Act.
3. Adjust your tax strategy. Contact your tax advisor to discuss if your new household income will impact your tax strategy. For starters, if your level of income is reduced, you may move into a lower marginal income tax bracket. If this happens, you may want to:
- Consider how your revised tax rate may affect your investment strategy; and
- Adjust the amount of money withheld from the paycheck of the spouse who will continue to work outside the home. Your tax advisor can provide guidance.
4. Revisit your plans to achieve key goals. Once you make the move to becoming a one-income household, don’t overlook your long-term financial goals. If you’ve been setting money aside for key goals, such as a new home, retirement and building a college fund for your children, it is prudent to keep those plans on track. Even if you need to reduce the amount of your contributions in the near term, remember that even modest amounts add up over years – or even decades – of saving.
5. Talk about if the stay-at-home parent will return to work one day. Many stay-at-home parents choose to re-enter the workforce on a part- or full-time basis once their youngest child is enrolled in kindergarten, able to drive themselves to school or graduates from high school. Discuss each of your wishes now and keep the lines of communication open. If returning to work is an option, the stay-at-home partner should consider keeping up with any required continuing education, licenses and professional association memberships to help ease the transition down the road.
Shifting from two incomes to one is an adjustment, even when you and your partner make the choice consciously. If you want another opinion to assess your current financial situation and consult on what moves to make before or after becoming a one-income household, consult a financial advisor in your area.
Bennett Whitlock, CRPC ®, is a private wealth advisor and managing director with Whitlock Wealth Management, a franchise of Ameriprise Financial Services, Inc. Learn more at WhitlockWealth.com or call 703-492-7732.