Author Topic: Two incomes to one income and savings rate  (Read 3528 times)

Palm Stash

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Two incomes to one income and savings rate
« on: January 31, 2017, 10:17:30 PM »
Hi MMM community, first time poster here. I've recently gone from a two income household to a one income household after having our first child. My wife is a stay at home mother for at least the time being, until our child is ready to go to school at the latest.

As a two income household, we saved 100% of my wife's salary (about 50K per year). With a kid in the picture we have increased healthcare premiums and loss of income. Luckily our housing costs are currently very low (renting) for our area, but we'd like to buy a house and have saved over 20% to do so. Our housing costs would go up substantially, though.

How do other Mustachians deal with being a one income household and maintaining a decent savings rate?  I think that we may need to sacrifice our aggressive savings for these few years until she goes back to work. Meantime, she is doing consulting work for extra income and I am attempting to gain more income from my real estate business.

Thanks for any insights or advice.
« Last Edit: February 01, 2017, 02:36:53 PM by Palm Stash »

bigalsmith101

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Re: Two incomes to one income and savings rate
« Reply #1 on: February 01, 2017, 01:08:39 AM »
I think the very obvious thing many people do to maintain their savings rate is to pay for child care and keep the second income. Otherwise, like you said, it's a sacrifice for the next several years until the child is old enough to go to school full time.

Assuming childcare was $1k/mo for your kid, you'd still save $38k/year. Give it 4 years at 7% and you're opportunity cost adds up to $180,528.08

I'd be asking myself some significant questions about this time. Actually it's a dilemma I will be facing in a couple years myself, and we still haven't decided what we'll do.

BallerOnABudget

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Re: Two incomes to one income and savings rate
« Reply #2 on: February 01, 2017, 08:35:24 AM »
I was in a similar situation when my wife and I decided to start having kids. The short answer is, unfortunately, that you just aren't going to keep up the savings during this stretch. I'll list out some tips, but having the mom stay home shouldn't be primarily a financial decision. If you and your wife think it's best that she be with the kids during the early years, you kinda just have to jump in and find what works to mitigate the income loss. Here are my pointers:

-As a one-income, child-having family the tax code will be your friend. Read up and minimize your tax burden
-Eating out is over. It's expensive, yes, but also - taking a kid to a restaurant is a fool's errand.
-Seek out hand-me-down or secondhand clothing for the kids
-When they're young, go easy on the toys. I guarantee you they'll be more interested in the toy's packaging than the toy for at least a couple years.
-Check into online part-time work, if possible. Social media management, personal stylist, survey taker, whatever. Anything extra helps.
-If you haven't already, cut the cord.
-This stage of life is difficult, so cut yourself plenty of slack. You'll be challenged, but you'll be rewarded even more, I promise!

Dezrah

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Re: Two incomes to one income and savings rate
« Reply #3 on: February 01, 2017, 09:53:45 AM »
I think it's mostly a state of mind.  Your high savings rate early has enabled you to slow up without major sacrifice.  Those dollars will keep working for you even if you wife is on hiatus.  Not everyone has the discipline or good fortune to be that position.

I like to think about it like a marathon.  You ran the first few miles at 6 minutes, but now you need to slow down to 9 minutes for a while.  That's fine.  You'll get the chance to pick up to 7 minutes in a few more miles.  Your primary goal is to finish the race (retire with dignity at "standard" age).  Your secondary goal is to get an amazing time (retire early).  My guess is you could probably slow up a lot and still finish.

I confess though that I haven't actually gone through this myself, so it's possible I'm full of crap.  In any case, I'm rooting for you.  It's possible we'll be in your position too someday.

catccc

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Re: Two incomes to one income and savings rate
« Reply #4 on: February 01, 2017, 10:31:00 AM »
We did this and came out just fine.  8 Years ago, we went from earning 80K (me) and 22K (DH), to 24K (just DH) after our first kid.  Kept that up for a little over a year.  We basically lived on his income when we were both earning, so it was 'easy.'  I was very, very proud of that year.  After a year, I went back to work, earning 80K, and he became the SAHP.  We had another kid and moved into a bigger place.  (necessary, IMO, we were previously a family of 3 in a 399 sqft apt., 4 would have been way too tight.)  Our expenses crept up, yes, but not unreasonably so.  These days, he is back to work part time, and we try to save about 1/2 of our income.  I haven't calculated actual rates in a long time, and we spend some of what we save in the previous year on fun stuff, so that's a really rough estimate.

So maybe you can't keep up the savings, but just maintain a frugal lifestyle, and it will all be good.  Our net worth was $190K when we had our first kid.  Today, our kids are 8 and 5 and our net worth is $733K.  Not too shabby.  Also, my lost year of 401K contributions when I wasn't working was a bad year to miss - great "sales" on stock in 2009...

SnakeEyes

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Re: Two incomes to one income and savings rate
« Reply #5 on: February 01, 2017, 02:18:23 PM »
One option you may want to consider is having your wife run an in home daycare. She can still stay home with your child and make money at the same time. Also as a benefit you will have additional tax write offs for business use of your home that are pretty nice.

Palm Stash

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Re: Two incomes to one income and savings rate
« Reply #6 on: February 01, 2017, 02:35:35 PM »

Thank you all for the replies, it is really encouraging for me to read how others how managed this situation. We've decided as a family that we want to be able to have my wife home with the kid for at least a couple years. There is certainly opportunity cost, but her job also involved almost 1 hour in the car every day to get to/from work. She is starting to do some side consulting work, which will bring in an extra $10K of income at least, and possibly more. We'll manage savings of at least $15,000 if we stick to our (tight) budget, plus whatever consulting income she brings in. Hopefully we can hit a solid $25,000 of savings in addition to paying down the mortgage if we go with the house purchase.

That said, we are in a high price housing market and we'll be spending about 27% of my gross income (not including any extra income) on PITI if this house works out. That's higher than I'd like, but we are getting an economical smaller 3/2 house in a great walkable neighborhood close to downtown we feel like we could stay in for awhile.


Goldielocks

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Re: Two incomes to one income and savings rate
« Reply #7 on: February 01, 2017, 10:22:51 PM »
Our net savings rate went to 1%.     This includes a total of 11 months of mat leave, two kids, a move to a new home, cars, etc over a 4 year period.

We thought we were better at the time, because our retirement savings increased, but net of the HELOC for the new car (because, baby ), and upgrading the home (because baby) and appliances (because baby diapers need washing  a lot),  and trip back to vancouver (because grandparents) when I ran the numbers over a 4 year period, we were net 1% per year increase in our net worth.

Tuskalusa

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Re: Two incomes to one income and savings rate
« Reply #8 on: February 01, 2017, 11:56:08 PM »
I can still remember how the expenses mounted when we had our son. It was crazy for all the reasons you describe (health insurance, other kid related expenses). I remember that expenses got under control as he got older, and as we got more comfortable being parents. It gets better.  A couple of things to think about.

First, I agree with the person he recommended cutting yourself some slack. Even if you don't save much for a year or two, you still have the benefit of you savings from your Pre baby years. It's won't be like this forever. You will find a way to save again.

Second, I found the pressure for lifestyle inflation to be tough during this time. At the time, I thought we needed a bigger house, a "safer" car, nice family vacations, etc. things started getting easier once I let those ideas go. You kid wants you...they don't really care about the rest.

You will do great. And things will settle out. 😀

Lews Therin

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Re: Two incomes to one income and savings rate
« Reply #9 on: February 01, 2017, 11:59:53 PM »
Good news for you is that if you are living on a single income (and not going into debt), then realistically, you are only pushing your FIRE date by the amount of time it takes for you to go back to dual incomes.

It will change very little on the long term!

(And I think you will increase your savings from pre-child, as doing activities gets severely cut down in the beginning for most parents)

Palm Stash

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Re: Two incomes to one income and savings rate
« Reply #10 on: February 02, 2017, 05:07:13 AM »
Thanks, all, that really helps. I feel better now and that I still am doing ok. All in all, between my wife and I our household net worth is approximately $200K. We are in our mid thirties. We've been frugal with baby and are really not increasing our spending by much monthly other than health insurance premiums. There is no need to spend on clothes, toys, etc when friends and family gladly give her hand me downs and relatives cannot ever buy her enough clothes!

We are a one car family and don't drive much. Zero debt (except a mortgage if we buy this house). Eating out and groceries are our weak spot. We will keep a much closer eye on the grocery bill and eating out, and hope that we can save at least $15K as a one income family. $20-$25 would be great but may not be doable.
« Last Edit: February 02, 2017, 11:48:13 AM by Palm Stash »

Guide2003

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Re: Two incomes to one income and savings rate
« Reply #11 on: February 02, 2017, 10:11:23 AM »
I think it's mostly a state of mind.  Your high savings rate early has enabled you to slow up without major sacrifice.  Those dollars will keep working for you even if you wife is on hiatus.  Not everyone has the discipline or good fortune to be that position.
+1

I was in a similar situation to the OP where we had two incomes in Miami and then I took a decent pay cut and my wife stopped working when we moved to Alabama so she could be home with kids. (Before you come at me with COLA, look up sales tax in Mobile County! We felt the paycut for sure). Fortunately we had been either paying off student loans or investing essentially her whole paycheck, and we had been living sloppily off mine. The pay reduction caused us to really identify our priorities (SAHP was the big one) and we started being a lot more intentional with our money. It was depressing to watch the smaller deposits for all of two months, and then we readjusted to the new normal. It is totally a mindset; just google the average American's personal finance situation and you'll find out you're way better off than they are.

Goldielocks

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Re: Two incomes to one income and savings rate
« Reply #12 on: February 02, 2017, 03:10:23 PM »
I think it's mostly a state of mind.  Your high savings rate early has enabled you to slow up without major sacrifice.  Those dollars will keep working for you even if you wife is on hiatus.  Not everyone has the discipline or good fortune to be that position.
+1

I was in a similar situation to the OP where we had two incomes in Miami and then I took a decent pay cut and my wife stopped working when we moved to Alabama so she could be home with kids. (Before you come at me with COLA, look up sales tax in Mobile County! We felt the paycut for sure). Fortunately we had been either paying off student loans or investing essentially her whole paycheck, and we had been living sloppily off mine. The pay reduction caused us to really identify our priorities (SAHP was the big one) and we started being a lot more intentional with our money. It was depressing to watch the smaller deposits for all of two months, and then we readjusted to the new normal. It is totally a mindset; just google the average American's personal finance situation and you'll find out you're way better off than they are.

I like this response.

Key to the 2 months adjustment period was likely your pre-planning that got you into a lower cost of living (home) to match your new income, right from the start, I bet.     I find it can be difficult when (extended) mat leave does not come with a move to a lower cost home...  for us it was a more of a "painful pause" in finances.

Sweetpotatofries

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Re: Two incomes to one income and savings rate
« Reply #13 on: February 07, 2017, 04:40:47 PM »

Thank you all for the replies, it is really encouraging for me to read how others how managed this situation. We've decided as a family that we want to be able to have my wife home with the kid for at least a couple years. There is certainly opportunity cost, but her job also involved almost 1 hour in the car every day to get to/from work. She is starting to do some side consulting work, which will bring in an extra $10K of income at least, and possibly more. We'll manage savings of at least $15,000 if we stick to our (tight) budget, plus whatever consulting income she brings in. Hopefully we can hit a solid $25,000 of savings in addition to paying down the mortgage if we go with the house purchase.

That said, we are in a high price housing market and we'll be spending about 27% of my gross income (not including any extra income) on PITI if this house works out. That's higher than I'd like, but we are getting an economical smaller 3/2 house in a great walkable neighborhood close to downtown we feel like we could stay in for awhile.

I don't know if you saw my recent post (One Income Family of 3) but we're in a very similar situation to you - we currently bank my entire salary, which is about 2/3 of my husband's, and if we have me stay home with the baby our savings rate will drop tremendously. In large part because PITI on our condo in a walkable neighborhood of a desirable NYC suburb (which is one block from the local Metro North Stop), and also has a relatively high HOA charge, is literally almost half his take home pay. We chose a 15-year mortgage with lower interest which means payments are significantly higher than the typical 30-year but it's still a huge housing cost allocation. A lot of responders to my post were very stuck on this fixed cost. I think in the end though, if housing prices are relatively stable (which they are in our market, even during the crash when everywhere was down, NYC and the "best" suburbs were a little less down) it will be worth it. You may find the same calculus is true for you.

Prairie Stash

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Re: Two incomes to one income and savings rate
« Reply #14 on: February 08, 2017, 12:34:39 PM »
I think your view needs to shift to realize this is what FIRE is for. When my wife stayed at home for 2 years (2 kids) the amount available for savings decreased. Obviously our FIRE date also shifted. But then I thought about it more, really she was taking a sabbatical, a year off from work to do something unique. What's the point of FIRE if it isn't to take time off from work? Perhaps consider this as a taste of FIRE, its pretty great.

I dealt with it by realizing a year now is the same as a year later. I also take advantage of time by compounding our current savings over a longer period. In some ways there's advantages to alternating work years. Both parties can take years off at a time and compound savings can fill in the gap.

In your case you use to save $50k/year. Now its $15+7% of 200K, meaning net worth should still grow $30k/year. Did you consider that part?

tooqk4u22

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Re: Two incomes to one income and savings rate
« Reply #15 on: February 08, 2017, 01:15:46 PM »
Luckily our housing costs are currently very low (renting) for our area, but we'd like to buy a house and have saved over 20% to do so. Our housing costs would go up substantially, though.

I would skip the house for the time being, babies-toddlers don't need much space, so if you have low housing costs it would be best to maintain that for as long as possible....at the very least to ease into the transition of having less income. 

Here are my pointers:

-As a one-income, child-having family the tax code will be your friend. Read up and minimize your tax burden  Not sure this made a difference or not for us
-Eating out is over. It's expensive, yes, but also - taking a kid to a restaurant is a fool's errand.  No question, and was a reset of priorities
-Seek out hand-me-down or secondhand clothing for the kids Did this, huge deal.
-When they're young, go easy on the toys. I guarantee you they'll be more interested in the toy's packaging than the toy for at least a couple years. Yup, not only that but also applies to baby gear and clothes - babies/toddlers really don't need much
-Check into online part-time work, if possible. Social media management, personal stylist, survey taker, whatever. Anything extra helps.
-If you haven't already, cut the cord.  DW loved the surveys, it was her fun money
-This stage of life is difficult, so cut yourself plenty of slack. You'll be challenged, but you'll be rewarded even more, I promise!  Also enjoy it.

I think it's mostly a state of mind.  Your high savings rate early has enabled you to slow up without major sacrifice.  Those dollars will keep working for you even if you wife is on hiatus.  Not everyone has the discipline or good fortune to be that position.
+1

I was in a similar situation to the OP where we had two incomes in Miami and then I took a decent pay cut and my wife stopped working when we moved to Alabama so she could be home with kids. (Before you come at me with COLA, look up sales tax in Mobile County! We felt the paycut for sure). Fortunately we had been either paying off student loans or investing essentially her whole paycheck, and we had been living sloppily off mine. The pay reduction caused us to really identify our priorities (SAHP was the big one) and we started being a lot more intentional with our money. It was depressing to watch the smaller deposits for all of two months, and then we readjusted to the new normal. It is totally a mindset; just google the average American's personal finance situation and you'll find out you're way better off than they are.

This is the key and thinking this way makes all the difference.  Another less tangible thing to think about, often times your income can rise faster because as a team one can focus on the work income and the other can focus on the homefront.  When my DW stayed home this is what happened with us - during the week I worked a lot outside of the home and she worked a lot inside of the home....during the weekends we had shared efforts - it worked great.

boarder42

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Re: Two incomes to one income and savings rate
« Reply #16 on: February 08, 2017, 01:21:51 PM »
I think your view needs to shift to realize this is what FIRE is for. When my wife stayed at home for 2 years (2 kids) the amount available for savings decreased. Obviously our FIRE date also shifted. But then I thought about it more, really she was taking a sabbatical, a year off from work to do something unique. What's the point of FIRE if it isn't to take time off from work? Perhaps consider this as a taste of FIRE, its pretty great.

I dealt with it by realizing a year now is the same as a year later. I also take advantage of time by compounding our current savings over a longer period. In some ways there's advantages to alternating work years. Both parties can take years off at a time and compound savings can fill in the gap.

In your case you use to save $50k/year. Now its $15+7% of 200K, meaning net worth should still grow $30k/year. Did you consider that part?

this is a very incorrect statement.  a couple at say 22 having a child and losing an income for 2 years is not the same as waiting til 30 to have a child and being FIRE.  or even waiting til 30 and still not being FIRE and then dropping to 1 income b/c of all the compounding youre missing.  1 dollar saved today is worth 2 dollars saved in 10 years.  so a year off today is more detrimental than any subsequent year taken off until you reach FIRE.

Prairie Stash

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Re: Two incomes to one income and savings rate
« Reply #17 on: February 13, 2017, 09:39:50 AM »
I think your view needs to shift to realize this is what FIRE is for. When my wife stayed at home for 2 years (2 kids) the amount available for savings decreased. Obviously our FIRE date also shifted. But then I thought about it more, really she was taking a sabbatical, a year off from work to do something unique. What's the point of FIRE if it isn't to take time off from work? Perhaps consider this as a taste of FIRE, its pretty great.

I dealt with it by realizing a year now is the same as a year later. I also take advantage of time by compounding our current savings over a longer period. In some ways there's advantages to alternating work years. Both parties can take years off at a time and compound savings can fill in the gap.

In your case you use to save $50k/year. Now its $15+7% of 200K, meaning net worth should still grow $30k/year. Did you consider that part?

this is a very incorrect statement.  a couple at say 22 having a child and losing an income for 2 years is not the same as waiting til 30 to have a child and being FIRE.  or even waiting til 30 and still not being FIRE and then dropping to 1 income b/c of all the compounding youre missing.  1 dollar saved today is worth 2 dollars saved in 10 years.  so a year off today is more detrimental than any subsequent year taken off until you reach FIRE.
In my case its true. When my wife took a year off our savings continued to grow. When I hit my original retirement date she could continue to work for one year, to compensate for the year off (a year now=a year later). She will support us that year which will allow the savings to grow for one more year. Both of us will work exactly the same amount of years as originally planned, we're offsetting the time frame. In practice she'll actually need to work less than a year.

Its not a year off for both that makes the difference, its a year off for one being supported by the second so the savings continue to grow. If both partners take time off and the savings shrink, then its problematic. There's lots of scenarios where this works or doesn't work, its case specific.

You have to add up total hours of work/lifetime to grasp this concept. Its irrelevant the ages, all that matters is how many hours over your lifetime, a 50% savings rate at any age will take 17 years to hit FIRE, even if you never worked till 30. One couple might be younger when they FIRE, it doesn't mean they worked fewer hours. My wife and I both need the equivalent of 17 years of work at 50% savings, or 34,000 hours of work total at 2000 hours/year. For the last 3 years before FIRE we have a choice of working 3 years full time or 5 years at half time, its a tough choice.