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The Short Answer

Can You Afford to Live on One Salary?

In addition to making ends meet, be sure you don't give short shrift to your long-term goals.

Question: My wife and I are expecting our first child early next year, and my wife would like to quit her current job and take care of the baby when he/she arrives. We think we can make it work, but we want to make sure we're thinking through all of the financial implications of living on one salary. Any tips?

Answer: First, congratulations on your impending arrival, and kudos to you both for thinking through all of the implications of this important decision. As with any budget question, the decision to go down to a single salary might look eminently doable on paper, but making ends meet on one paycheck could be more difficult in practice. You also need to assess how this decision will affect your long-term goals: If just one spouse is earning a paycheck, will that impede your ability to sock money away for retirement and college? How about your spouse's prospects for re-entering the workforce at a later time? 

Here are some of the key things to think about as you conduct this analysis.

Be Realistic About Budgeting
Running a basic budget is a great first step when determining whether living on one salary is financially feasible. A good follow-up to that exercise, however, is to do a trial run during the next few months to make sure that a budget that looks good on paper is manageable in real life.

It's also essential that you pad your anticipated expenses to make room for the extra costs of taking care of a new baby, such as health-care expenses (including any delivery-related amounts that won't be covered by insurance), diapers, and clothes, as well as furniture and other gear. The Web is full of calculators, such as this one, that can help you get your arms around the true costs of parenthood. 

Make Sure You Have a Safety Net
Two-earner couples have more financial safeguards than do couples living on a single salary: If one spouse should lose his job or become disabled, there's still another income coming in the door. Because they're usually more financially fragile, single-income couples need to take additional steps to build a financial safety net. Key components include the following.

A Comfortable Emergency Fund
Although conventional wisdom holds that you should have three to six months' worth of living expenses in cash to tide you through unanticipated expenses or job loss, single-income couples will want to nudge that figure closer to a year's worth of living expenses. (Rather than holding so much in cash that's earning next to nil, such couples might consider employing a two-part emergency fund, the logistics of which I discuss in this article.) If that sounds like an alarming amount of money, plan to build up your emergency fund before the baby arrives, and at the same time, practice living on one income.

Disability Isurance
Fully one third of people entering the workforce today will become disabled within their lifetimes, according to the Social Security Administration. That statistic accentuates the importance of purchasing disability coverage for the spouse who's employed outside the home. Many employers offer cost-effective coverage, but be sure to factor this expense into your after-baby-arrives budget. Sign up to pay for the coverage using aftertax dollars, meaning that your benefits will be tax-free. (Unfortunately, you can't purchase disability insurance for the nonearning spouse, because she doesn't have earned income.)

Life Insurance for Both Partners
It might seem obvious that you'd want to purchase a life insurance policy for the spouse who's earning a salary. But don't stop there. Should the nonearning spouse die, hiring an outside provider to pick up child-care responsibilities would be costly indeed. This is another set of costs to factor into your post-baby budget. 

Gauge the Impact on Long-Term Financial Goals
In addition to testing the short-term viability of your budget with a single income and troubleshooting unexpected events, it's also crucial that you consider the impact on long-term financial goals, especially retirement and college savings. After all, fewer dollars coming in the door means that you'll have fewer dollars to direct to your long-term savings plan. A recent T. Rowe Price study found that younger savers who stop retirement-plan contributions for even a short period of time can face a serious financial impact because of lost compounding potential, though ratcheting up their future contribution rates can help make up for the lost savings.

If you haven't run the numbers recently on whether, how, and when you might able to retire, use a retirement calculator, such as the one from T. Rowe Price or Fidelity, to see how a reduced retirement-plan contribution rate affects your ability to reach your long-term goals. Many such calculators use a static contribution rate; a financial advisor can help you customize your contribution assumptions based on your own expectations about salary increases and if/when your spouse plans to return to the workforce.

Secondly (because you should always prioritize investing for your own retirement over college savings), consider the impact that a smaller discretionary income stream will have for your child's college savings. Use a college calculator such as this one to see how much you'll need to pay for school. The alarming cost of paying for college might look like a clear vote for your spouse to stay in the workforce. Bear in mind, however, that if your family has a lower income and smaller college-savings kitty when it comes time to matriculate, that can actually work in your favor if it turns out that your child needs to apply for financial aid or loans.

Think Through the Career Impact 
More difficult to quantify, but equally worth thinking about, is the long-term career impact your spouse could face by pressing pause on her job. Does she work in a fast-changing field that could be difficult to re-enter after a few years away? (It's tough to think of fields where that's not the case, isn't it?) If so, that's a good reason to consider staying on the job--or at least working part-time or in a consultative capacity--rather than hanging it up altogether.


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