Transitioning from two household incomes to one
Life is full of twists and turns, making it impossible to always know what will happen next—especially when it comes to finances. Whether it’s a member of your household staying home to care for kids or older family members, unexpected job loss, a relationship change, early or planned retirement, or other life event, transitioning from two incomes to one is a significant change.
However, the good news is that whether the change is planned or not, there are actions you can take to help set yourself up for financial success.
First things first, take some time to evaluate your budget, particularly wants versus needs. Start by identifying expenses you can temporarily or permanently cut (the want category) like cable and streaming services, eating out, and social memberships. Making intentional changes in a few of these categories can quickly add to your bottom line.
Next evaluate your needs, which are typically also your larger expenses, like housing and transportation to determine if these are still the right fit for you. If you haven’t done so recently, you may want to consider refinancing your mortgage so you have a lower monthly payment. On the flip side downsizing to a smaller home or selling and then renting, may be attractive options as well. The key is to understand what works best for you and your family, while still providing the financial flexibility you may need.
In addition, a less expensive car might help you save some money in both the short- and long-term in the form of cheaper car payments, insurance and property taxes. However, before making any decisions, if your vehicle isn’t paid off, evaluate your equity and potential sales price to ensure you’re still in positive standing for a sale.
Before you make the transition, look at your full debt picture. Account for credit card balances, student loans, car loans, medical bills and other areas to see where you may have opportunities to pay off items. Start by paying off the smallest balance first and then work your way up to the largest debt.
Remember not all debt is bad debt, but if you have credit card debt or a loan with a high interest rate, you will want to pay that off first to save you some money every month.
Remember Retirement and Taxes
It is important to ensure your retirement savings goals can still be achieved after you transition from two incomes to one. Talk with your financial advisor to see what percentage of your income you will need to save to cover your future expenses in retirement. It’s important to keep your long-term goals in mind.
Also, talk to your financial advisor about which tax bracket you will fall into because of your decreased income. You will want to see if your tax withholdings need to be adjusted or if there are different tax breaks you can file for because of your income change.
Planned Versus Unplanned Change Considerations
For some households, the transition from two incomes to one is a planned or known event‡. If you are in this boat, review your leaner budget and next step plans and test run them for a few months. This trial run period will give you a chance to see if you can sustain your preferred standard of living before you make the changes permanent. Consider putting the money from the second income that will soon be eliminated into savings to establish a nice cushion before the transition starts.
For those whose change from two incomes to one is unexpected, there may be other items to consider. Alimony, child support, social security benefits, life insurance, COBRA and legal fees, are just a few of the new areas you may need to learn about and factor in. A financial advisor can help you review your entire financial picture and give you a third-party perspective if emotions are running high and money is a sensitive subject for you.
Regardless of how you go from two incomes to one, know there are steps you can take to positively position yourself. Create your plan, or work with a financial advisor to do so, and feel confident that putting it into action will both ease stress and set you up for success.
Learn how to better manage your money to build a stronger financial future for you and your loved ones through the Family Finances playlist on the UMB Financial Education Center.
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