2011 will be an interesting year. At 4:30 p.m. yesterday, my wife and I went from a dual income to a one income household.
Fortunately, neither of us were fired, and no, we’re not having kids. My wife quit her job to start her own business.
This was something we had planned on doing for a long time.
Talking to some of my friends who are married or living with their significant other, the decision to go from a dual to one income household is something a lot of young adults are struggling with. There are two reasons why this conversation comes up:
- One person in the relationship wants to change careers, start their own business, or go back to school
- Kids
The purpose of this post was to take you through my own thought process of making the switch from a dual income to one income household.
Step # 1: We Started to Live Off of One Income
This is the most important step we took.
The decision for my wife to leave her job didn’t come about in one or two weeks. It’s been something we had planned for 18 months.
Every financial decision we made in the last 18 months, was as if we we’re living off of my income only.
When we went to buy a house, we did so knowing that we could afford the payments from just my income. We didn’t buy a new car because we couldn’t afford the payments with just my income.
My advice to you, if you plan on dropping an income in the future, start living off of one income now.
Step # 2: One Year Emergency Fund
Right now, we have just over one year’s of expenses sitting in a high interest savings account. This seems like an awful lot in cash, but I wouldn’t be able to sleep at night with anything less.
Step # 3: We Saved Enough to Max out Roth IRA’s
During our time as a dual income household, we enjoyed saving for our future. Unfortunately, on just my income we couldn’t afford to continue to contribute the maximum to two Roth IRAs.
Knowing that saving for our future was still important, we decided to wait for my wife to quite until we had enough money to max out 2 Roth IRAs. What makes this decision even easier are the flexible withdrawal rules for Roth IRA contributions.
Step # 4: We Defined the Worst Case Scenario
Even far-fetched worse case scenarios aren’t that bad once you define them.
Step # 5: We’re Covering the Gap with Cash
In order to make sure we don’t spend more than we earn each month, we put together a system. I like to think of it as the lazy man’s envelope method.
We started by putting together our average bare bones expenses from January through June of 2010. This included food, mortgage, insurance, gas, giving, etc… it didn’t include eating out, entertainments, etc… (This took about 20 minutes thanks to Mint.)
Then, we subtracted our bare bones monthly costs from my average monthly income from that same time period. This gave us a small gap of about $500.
Next, we decided how we wanted to allocate that $500 gap each month. We decided:
- Each of us gets $150 of guilt free spending
- The remaining $200 goes into a pot for variable expenses gifts, birthday parties, and entertainment
Conclusion
Do I have too big of an emergency fund? Was it necessary to save $10,000 so we can continue to save for retirement? I don’t know and that’s OK.
I do know that I feel comfortable with our plan. At the end of the day, that’s what’s most important.
{ 2 comments… read them below or add one }
Good luck! My wife and I are planning an adventure of me quitting my job, us moving closer to the “main city” where my wife works, which allows me to become a stay at home dad. I like my job, but I love my kid and the freedom of staying home more.
Of course, we need to figure out how to do our IRAs and such, but we have about six months before we have to worry about that. Then again, it could be longer if our house doesn’t sell…..
This is a great plan RJ. I would love to have a year’s worth of expenses in my emergency fund, especially since my fiance and I were out of work between 6 and 8 months. We’re thinking of eventually depending on one income but we’ll see how that goes.