Jamie Dorsey, 34, had long planned to home-school her two young kids. However, as they neared school age, she knew it was a dream that wouldn’t happen without a major change in their family.
The Charleston, South Carolina, resident was a high school teacher in Michigan three years ago. Her husband was a server at a nearby restaurant. “I brought home two-thirds of the income and all the benefits,” Dorsey says. It was a tall order for her to quit her job, but once the Affordable Care Act offered access to health insurance, it seemed like the time was right.
[See: 10 Tips for Couples and Young Families to Build Wealth.]
While her husband was able to pick up some extra shifts, the family’s income dropped by roughly half. Despite earning only $36,000 that first year on one income, Dorsey says it wasn’t that hard.
“It ended up being a lot easier than I anticipated,” she explains. While they didn’t dine out much and skipped movie theaters, the family’s quality of life remained roughly the same. She is also quick to add that other than buying health insurance on the government marketplace, her family doesn’t get any government assistance. “I don’t know if maybe we could, but we were determined to make it work on our own.”
If you, too, want to make the leap from being a dual-income to a single-income household, here are six steps to making it happen.
Step 1: Pay off as much debt as possible. Couples who have time to plan and prepare should focus on paying down their debt. Dorsey credits part of their smooth transition to the fact that she and her husband have never had car payments and they purchased their house with only one income in mind.
However, there is a caveat to paying down debt. “If there is cash enough to retire debt, be careful not to pay off debt that it may serve you to keep,” says John Neyland, president of JCN Financial & Tax Planning Group and author of “How to Live the Life You’ve Yet to Dream.” In particular, he notes a mortgage may be worth keeping since current rates are so low and interest can be deducted on itemized returns.
Step 2: Have a plan for health insurance and other benefits. Paul Jacobs, a certified financial planner with Palisades Hudson Financial Group in Atlanta, has also gone from being a two-income to a one-income family. His wife, formerly a teacher, now stays home with the couple’s two young kids. Before making the transition, Jacobs says couples should discuss how they will replace any benefits they lose when a spouse leaves his or her job. “Sometimes it can be a rude awakening to go from having an employer pay for health insurance to paying for it yourself,” he says. Retirement funds are another area to consider. Even a non-working spouse should be saving money for the future. So long as one spouse has a job, Jacobs says a spousal IRA can be opened for the non-earning partner.
[Read: Retirement Planning for Stay-at-Home Moms.]
Step 3: Prepare a budget based on a single income. Before anyone quits a job, couples need to sit down and create a realistic budget based on only one income. While it may seem like a daunting task, couples could be surprised at how easy it is to pare down their expenses. “Many people find that they had been spending money unnecessarily,” Neyland says.
Dorsey says she was surprised how much money her family had been spending on convenience foods while she was working. Once she quit her job, it was relatively easy to cook from scratch and cut those pricey items out of the food budget. What’s more, she and her husband were able to eliminate all the costs associated with her job, such as day care and gas for commuting, which had previously put a significant dent in their budget.
Step 4: Be willing to make sacrifices. While some people may find they can easily make the switch to one income, there are often sacrifices involved. Dorsey and her husband dropped to one vehicle for some time while making the transition. Not only did it mean savings on insurance and maintenance, but it also meant the family was more likely to stay close to home and spend less. “I know if I had a vehicle, I would have been driving all over and wasting gas,” Dorsey says. Giving up a car — or even downsizing a house — can be difficult, but Neyland says couples shouldn’t dismiss the idea. “Examine what money means to each of you,” he says. “For many people, what’s most important can’t be bought. Time is our most precious asset.”
Step 5: Review withholdings. While transitioning to a single income means making due with less, there is one way it could pay off financially. Lower income may mean a lower tax bracket. Plus, couples may find they can claim tax credits for which their previous income made them ineligible. Jacobs encourages couples to investigate how their tax liability will change and adjust the withholdings on the working spouse’s paycheck accordingly.
[Read: 7 Tax Breaks Every Parent Should Know About.]
Step 6: Keep the lines of communication open. Switching to one income isn’t only a financial change, but a lifestyle and emotional one as well. Partners need to be open and honest with each other regarding their expectations. “Is it going to be three years or five years or 10 years? Or maybe your partner never plans to go back,” Jacobs says. Understanding this in advance and checking in with one another regularly can ensure that not only the family finances are in order, but that both spouses are content with the situation as well.
It can be intimidating to make the leap from two incomes to one, but Dorsey says she has no regrets. The kids will only be young once, and having the opportunity to spend her days with them is more valuable in her eyes than any paycheck.
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6 Steps for Going From 2 Incomes to 1 originally appeared on usnews.com
