In more than half (58%) of American families with children, both parents work1, but there are still many that manage on just one income. Some make a conscious choice to transition to a household with a stay-at-home parent while others experience a job loss or under-employment. In either case, households that rely on one paycheck need to take extra care to protect their financial security. Here are eight strategies for single income families to help maximize every dollar they earn.
Make a budget and stick to it. To live comfortably on one salary, it’s important to create a realistic budget based on your income and expenses. An emergency fund is even more crucial for families in these circumstances as it can help you avert a financial disaster in the event of a change – expected or unexpected – in the breadwinner’s career or earning status. Step back periodically to make sure you are making smart financial decisions and living within your means. As your family grows or circumstances change, you may need to adjust your expectations. It’s especially important to make changes if your income doesn’t align with your expenses.
Plan for the future. In addition to setting money aside for emergencies, your family needs to save for retirement for both spouses. If one spouse has the opportunity to contribute to a 401(k) plan at work, maximize those contributions as much as possible. The stay-at-home spouse can start a spousal IRA with help from the income-earning spouse, though the deductibility of contributions to a spousal IRA is subject to guidelines. Consider working with a financial advisor to determine how both spouses can save for retirement, possibly utilizing a Roth or traditional IRA.
Protect the roles of both parents. If something were to prevent the stay-at-home parent from performing his or her duties like childcare and maintaining the household, your family may have to hire help which could create a financial strain. Disability and life insurance provide important protection for both spouses and can preserve the ability of your family to continue your lifestyle should one of you become ill or disabled. The spouse who works outside the home may be able to purchase these types of insurance through their employer.
Keep skills and contacts current. Parents who choose to stay at home may want to stay connected to their field of employment to improve their chances of finding a position should they wish to return to the workforce in the future. He or she should renew licenses if applicable, keep memberships in professional organizations active and attend seminars or conferences to stay in the loop.
Keep lines of communications open. Set up time to talk about the way each person feels about their current roles and what their hopes and dreams are for the future. Opting out of full-time work to stay home and raise children, care for an elderly parent or pursue other dreams and goals can be very rewarding, but these circumstances can put a strain on finances and relationships. Being honest with one another is important for you and your spouse to continue working toward shared financial and lifestyle goals and ensure that both are satisfied.
Consider alternative earning opportunities if supplemental income is needed. The stay-at-home spouse may choose to find a part-time job or take on occasional consulting or freelance work to contribute to cash flow into the household. For those who wish to supplement the household income, other options might be in-home day care, eBay sales or other entrepreneurial efforts.
Sometimes an objective third party can help facilitate money conversations between spouses, and can also help identify and track your progress towards short- and long-term financial goals. Consider working with a financial advisor as you plan your family’s financial future.
1 April 2012 Bureau of Labor Statistics report, http://www.bls.gov/news.release/famee.nr0.htm
Jeff Mushen, MSF, CFP, ChFC, is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner ™ with Ameriprise Financial Services, Inc. in Edmonds, WA. He specializes in fee-based financial planning and asset management strategies and has been in practice for six years. To contact him, go to his website at www.ameripriseadvisors.com/jeffrey.m.mushen.
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