Living on One Income
Posted by John Draper | Filed under Good ideas, Money Management
I am truly amazed at the number of people who go into parenthood for the first time without a clue about what the implications will to their financial health. So you’re planning to take a year away from your job and live on the pittance that is maternity benefits and you don’t think that’ll cause some financial constraint? Really?
I regularly meet and hear from people who just can’t figure out what they could have done differently. Ditto the people who chose to go back to school, but give no consideration to keeping body and soul together as their minds soar. Or the people who have to move from two incomes to one because of myriad other reasons.
The first thing you should do when you’re considering a step that would see your family income go down is pay off your debts and build up your emergency savings. If you were racking up debt on two incomes, imagine how deep a hole you can dig yourselves on one income if you don’t do some PLANNING.
Stay away from big financial commitments. I can’t believe the people who think a new baby means they have to go out and buy a new car. New parents with their heightened safety awareness are suckers for the hard sell on everything from safety and added space, to “convenience.” People actually whine about why they needed that new van. Hey, I transported two kids in an old Prelude for years, and it didn’t hurt one bit.
And what’s the obsession with NEW. There are plenty of safe, roomy, convenient options in the used car market. If you’re planning on living on one income, you probably can’t afford a new car!
I think the thing that may be hardest for people, is watching what two-income families can afford that they cannot. The temptation is to act like a two-income family while living on one income, using credit to fill the gap. Oooops! Big Mistake.
But it’s not all about what they can’t have. If you’re making the decision to become a one-income family so you can stay home with baby for a year, or for many years, then you have the offsetting benefit of being able to raise your own children. In this day and age, that’s a real privilege since many people simply can’t make that happen. If you’re cutting back on income because you’re going to school, then you know you’re going to have a more fulfilling work experience later on.
One-income success rides on your ability to prioritize your NEEDS and your WANTS. If you let everything you want be a NEED, you’re doomed. If you can clearly distinguish, prioritize and make choices, you can make a success of your one-income experience.
Go over your budget with a fine-tooth comb and differentiate the MUST HAVES from the WANNA HAVES. Will you dispense with your annual vacation? Could you do without a second car? Do you really need 500 channels? And if you have a cell phone, do you also need a landline?
Now, of the MUST HAVES: Are their ways to cut back? Would you be willing to re-amortize your mortgage over a longer period of time so your payments are lower? Would you downsize to a smaller dwelling? Are you prepared to cut back on utility costs by hanging clothes out on the line or turning off lights? Will you buy store-brands and shop with coupons?
You may find that with all your trimming, you still can’t find a way to get to the end of the month before you get to the end of the money. But having trimmed back to the bare ones, you have a good idea of how much you need to bring in. Perhaps, babysitting other children is an option, or working nights or weekends when your partner can be home with the kids. If you’re a student, get a job that complements your school schedule, and perhaps even let’s you do homework. Working as an over-night caregiver a couple of nights a week, doing neighbourhood errands for shut-ins, or tutoring other students could give you just enough to make your plan work.
Of course, there’s no better way to test your plan than to TEST YOUR PLAN. So if you’re going off on mat leave, spend the months leading up to your mat leave living on one income. Use the income that will be eliminated to aggressively pay down debt and build up an emergency fund. Practicing your new economic reality will also give you the opportunity to tweak your budget so you know it will work once you’re actually down to one income.
November 17, 2008 at 10:16 am
It’s so true! I know we are starting to discuss the whole starting a family thing and it would be struggle right now especially with the new house. It def means waiting at least a couple more years.
I do think too that it’s funny that people forget that you can make money on maternity leave – you just need to be creative. When I was born (in the 70s), Mom took a leave from her job as a teller and mat leave benefits weren’t what they are now! So Dad went to work at the Bank during weekdays and Mom worked nights and weekends at Peoples Jewellers to bring in extra cash. They didn’t turn to credit cards – just made more money and cut back. I was cute, healthy and happy – I didn’t need designer anything to make that happen.
November 17, 2008 at 12:56 pm
Frugal graduate – Depending on how young you are you might be trading in something that you don’t even know you’re trading in.
I waited until I was 32 to have my first child. Very common these days. And he came so easy that I was fooled into thinking that it’s okay to postpone the second child which I dearly wish for until the first is out of daycare. I am now 35 and I am discovering some things about my fertility that are very unsettling. You can postpone some things, but some other things cannot be gambled with. Money comes and goes, and it’s always very good to be frugal when having children, but I really wish I didn’t imagine that I can schedule pregnancies with the ease I schedule a lunch appointment. It doesn’t work like that. There’s nothing more that I want right now than to be able to give my little one a sibling or two. And I would give my rrsp and my house in exchange.
November 17, 2008 at 1:08 pm
I am 31 so a little younger than you… while I wonder whether it will be too late in 2-4 years, I also I know that even 2 years ago we were not ready emotionally and financially (plain and simple). We are also still not decided whether we really want kids so that also impact things. If we end up with one child or we adopt I am at peace with that. If we don’t have children, I will have to make peace with that and be the best Aunt I can.
November 17, 2008 at 1:31 pm
As I am considering leaving my job to start my own business, we will definitely need to look more closely at our budget and see how we could manage the change. Thanks for the reminder, Gail.
One comment I wanted to make was about the need for a “new” car. I bought a used car for $5500. Admittedly it was about 10 years old, but it is an excellent model – built for safety, luxury, and performance. The reason it was so cheap was because it is not a sexy car. My sister calls it a grandfather car. But I don’t care! I paid for it in cash and get to enjoy its roomy, leather seats, superior sound system and engine and I feel very safe while driving it. I’ve had it for over a year and so far have had no problems. This idea that “new is always better” or the decision to buy a vehicle to make a fashion statement can trick people into making unwise financial decisions. I can’t imagine taking on a $25,000 debt just to buy new.
November 17, 2008 at 1:52 pm
I’m on maternity leave right now (for the second time) and it does take some planning. Luckily my company offers supplemental benefits for the first 3 months. While I was receiving those, we put them into savings. It took a lot of discipline to not spend that money on cute baby things. It was worth it though because it underscored that we can survive on my husband’s income and my maternity benefits, and we padded our emergency fund even more.
I feel really good about that because our roof just sprung a leak, and so we’re facing an unplanned expense during my leave. Now I won’t have to go back to work, and we won’t have to take on debt to keep our house livable. If we hadn’t planned, it would be a different story.
November 17, 2008 at 2:19 pm
As a single person, I sometimes envy those I know with two incomes. However, I’ve noticed that having someone else mucking around with the money is stressful and often leads to less net income (after expenses) than my single income – especially if kids are involved.
Saver Queen, I’m curious to know what car you bought! I’m a bit scared of used cars, but don’t want to waste money on a new one. I’m hoping the current one, bought from my parents, lasts forever…
November 17, 2008 at 3:04 pm
My husband and I did not plan financially for either of the two children we have and because of that it has taken us 6 years to pay off all the extra debt we accumulated while I was on maternity leave. We just kept spending as if I was still making the same and then there was the shock of finding out what daycare was going to cost. When I had my second child it was going to cost me more for daycare and parking for work then I earned so it was either find a better paying job or stay home with the kids. I was lucky to find a job that paid me 12K more a year and they hired me while I was pregnant I just had to take a shortened mat leave (only two months).
November 17, 2008 at 3:19 pm
Very interesting and timely messages here. Hubby retires next summer, I have no pension, so we will in essence be living on his pension and govt. monies. I’m dancing as fast as I can following all the suggestions here and Gail’s show (cards will be paid off this month, I’m using every coupon I can find, using the jar system, putting $$ in savings and RSP’s). I’m a work in progress. You ‘youngsters’ don’t know how lucky you are to be so much further ahead of the game – hindsight is a wonderful thing. I did make my son promise 14 years ago to put $$ into RSP’s and leave it be and he has. They are expecting their first babe at Easter and I know they will be just fine – they are very well organized and frugal. I’ll work as long as I can….but we may move to where our son and DIL live to take care of our grandbaby – we’re thrilled!
November 17, 2008 at 3:23 pm
while getting ready for our first, we lived on ‘mat leave’ while dedicating my income to eliminating all of our non-mortgage debt. so 4 months before she was born we were debt free minus mortgage. i went back part time after my year and make now what i made from EI. it’s not hard. kids are not that expensive, we welcome all kinds of hand me downs and feel we have saved thousands in doing so, while contributing to savings and RESPs.
we do not eat out or go to movies (once in a blue moon) or splurge here and there like before, but we don’t miss it.
we plan but we don’t really miss out on anything important.
don’t go into parenthood with debt. it’s hard enough, and there are many sleepless nights…..when you add worrying about money into the mix, it’s a recipe for disaster.
November 17, 2008 at 4:09 pm
The best advice I ever read on this topic was to base your housing costs only on 1 income. If you bought, you qualified for a mortgage on 1 income. If you rented, then your rent per month was affordable according to 1 income. That way if you were going to be at home, the loss of 1 income didn’t affect your ability to afford housing, which can be the biggest amount that goes out of your paycheque. If more money is needed the person at home can be available to fit in some working hours. Of course this takes a bit of planning ahead, but isn’t limited to staying home with children.
November 17, 2008 at 4:12 pm
It all makes sense in THEORY… but the reality is so much harder sometimes! I feel for people that have the best intentions and still can’t make their plans work.
I have a thirty-something friend trying to better himself. He quit his long time job (that he loathed) to enter into an apprenticeship to have a real career! We were all proud of him for doing it, but the financial reality was painful as his hours were WAY less and the pay was less too as a starter apprentice. To make it worse, he doesn’t have the money to enroll in the classes that are part of moving forward in the apprenticeship! He has 3 kids and a wife, and she has had to not only work FULL time, but took on a second job too to make up for his lower pay. Their young kids are very resentful that mommy is never home… a bad side effect of temporary finacial crisis.
November 17, 2008 at 4:24 pm
I am starting Maternity leave for my first baby on December 4th! Hurray! I have to admit, we did buy a new car for all the reasons Gail talked about (space, safety etc.) however, we planned in advance, paid off all our other debt (except the mortgage) and worked the new payment into the budget. I am also blessed to work for an employer who pays 100% of my salary for the entire year of Mat leave, so thank heavens we don’t have to sweat it too much. But during my year off, we plan to save the first years day care expenses (about 6 thousand dollars), so that it will be easier when we have to start paying day care costs when I go back.
November 17, 2008 at 7:26 pm
Funny to read these new car stories. I met my husband at 17 he bought a new red pickup. Weve now been married for 26 years and have 3 teenage daughters and have never ever bought another new car. Every car(a rabbit, a station wagon and a van) were all under 10,000. some even under 3000.00 We just recentley bought a 2004 honda odyessy for 17,000.
we plan to have it pd off by 2010. I have never missed having a new car. They say you loose as soon as you drive it off the lot and thats enough for me to say no. I worked fulltime after my first child, part time after the second and quit after the third. Could not afford the transportation clothing and daycare for 3 kids under the age of 6. For the past 15 years ive been doing daycare out of my house which i think is the best of both worlds. Im home and im making money.
November 17, 2008 at 8:11 pm
Jay – it’s a Buick Regal (and it’s purple.) The only caveat is that it does consume a lot of gas – but I don’t do a lot of driving and it would take me a long time to buy enough gas to make up for the cheap price I paid for it. My benefit is that my uncle owns the dealership – so i obviously trusted his advice over a run of the mill car salesman.
November 17, 2008 at 8:45 pm
I’ve posted previously about Gail’s brill advice on putting yourself on the mat leave budget before you actually go on mat leave. It was a great move for us and means that we should have a much easier first year with baby.
Frugal Graduate – you can earn some money on mat leave, but not much. Mat leave is essentially a form of EI and you can only earn up to $50/week before you start having the cash deducted dollar for dollar from your benefit cheque.
Not a whole lot of extra cash there, but it could buy some groceries, pay a utility bill, etc, so it’s something to consider.
Lots of people joining the new parents club very soon it seems! Good luck to everyone!
I just got the news today that my baby is measuring big and that I might have “a 10-lber”, as the doctor cheerfully put it. And I am worried about finances?!!!
Gail – I have a new parents question: I have saved up a decent chunk of change for an RESP and I haven’t got a clue what to do with it, as it seems like the entire market is in meltdown. But a GIC or CSB isn’t going to generate the kind of compound interest needed to make this money work hard for Babykins. What’s a girl to do? Is it best to just stick it somewhere as high interest and as safe as possible and hope that things calm down in a year or two? I’m not sure I agree that stocks are on sale right now. I feel like the whole playing field is changing very rapidly and that risk is enormous right now. I know you can’t recommend stocks or funds or anything specific. I’m just looking for some general thoughts on the matter, if you get a chance.
Cheers!
November 17, 2008 at 8:54 pm
Hi Mountain Girl.
Dont worry about the size. My girls were 8.8lb 10lbs and the last one was 11.3 lbs. Big at delivery but much easier once they are born. The only downfall is that people think your newborn is 2-3 months old and you will never need newborn diapers or newborn clothes,
Congrats to all who are pregnant. Its a hard job but worth every second of it.
November 17, 2008 at 9:25 pm
Cheers, Sandra!
Very good to hear!
I’m quite tall and I have the proverbial childbearing hips, so I am just trusting that baby will fit!
I am so glad that we showed serious restraint in the baby clothes department. Almost everything we have for baby is from consignment shops or hand-me-downs from friends, and we don’t actually have all that many newborn-sized things. I was warned that it’s a dicey size!
On the topic of having kids and living on one income, I have been warned that childcare costs in my part of the country can be in the $1500/month range. So, even when I do go back to work next year, my income will be only marginally better than EI. And if I have baby #2 the following year, I will be facing a two-year period in which I will literally be working for childcare alone. At that point, I will probably just stay home and freelance enough to bring in an EI-range income.
Our household income is well above the national average. If my family is looking at some lean years, I can’t imagine how hard it is for lower-income families and single parents. Huge respect. It’s certainly not easy.
November 17, 2008 at 10:10 pm
I am currently on mat leave and I am lucky enough that I work for the Ontario government and I recieve a 93% top up for the first 8 months of my leave. Once I am strickly on EI, it will be tighter but we will be ok. This is my second (and last) child, I am taking advantage of the opportunity with my employer to take an additional 6 months off after my maternity year is up as unpaid leave. I planned for this unpaid leave by socking away money a year prior to my son being born (on top of my savings) and because I have done so, I will enjoy a stress free 6 months knowing that there is money in the bank for the bills!
November 17, 2008 at 11:23 pm
We just had a baby 3 months ago, and my husband is taking the parental leave. For the past 3 months he has been getting a top up from his job, but it is about to run out. Since the minute I found out I was pregnant, I started saving so that we would have enough in the bank to cover the top up once it runs out. My husband worked a tonne of overtime too, that made the top up higher than a regular paycheck. I have been taking the top up and paying off debt with it..therefore we have been getting used to living off the EI.
Even though I run a home daycare and work 55 hours a week at it, I took a job serving at the local bar and he got a job at MEC (he loves camping, but never had time to do a fun job). It’s been a crazy 3 months but well worth it. We are paying down debt, a second set of hands in the daycare and two fun jobs to cover the difference in pay.
ps: It also helps that my baby has been sleeping 12 hour nights for the past month and a half
yeah!
November 18, 2008 at 12:43 am
Thanks, Saver Queen! I need to tell one of my relatives to get a dealership!
I have trust issues with all things automobile. (If I can’t fix it myself, I don’t trust it…)
November 18, 2008 at 1:08 am
Wow, congrats to all the new and expecting parents out there! Parenthood is so wonderful! It’s a lot of work but it’s worth it. My little one is almost 8 months old — she’s happy, healthy, and not caring at all about all the hand-me-down clothes and toys.
My husband and I lived on just my income while he went back to school and as luck would have it, I went on mat leave at the same time that he graduated — so we’re back to one income! No big loss there for us.
@ Mountain Girl: As for RESPs, I take the long view. Markets go up and markets go down. But in the long run, they go up. So in 18 years when my daughter needs to use her RESP, I am confident that what we’ve put away for her will still be there for her with interest. This attitude may not work for everyone, but it works for me and my husband.
November 18, 2008 at 5:50 am
Mountain Girl: This is exactly the time to be getting into the markets because the markets are down and your money is going to buy more now than before. Find a mutual fund that has given a stead return over the past 10 years… never mind the last year or so… you want to look at year-over-year numbers. In other words, you don’t want the “average” you want to see the return for each year for the past ten years to see how consistently the fund performed. You could go straight equities because Babykins won’t need the money for 10 years +. If that’s too scary, look for a “balanced” fund that gives you some equity exposure, but keeps some money in more traditional fixed income investments. g
November 18, 2008 at 10:17 am
MG – CanadianCapitalist.com and milliondollaryjourney.com are good Canadian blogs that have talked extensively on RESPs. I think you might be looking for a guaranteed investment which I don’t think exists.
I’m deeply jealous of parents who’s employers give them a top up. My wife received $0 from her employer when she went on mat leave for a year. We had saved and planned for it but it was still tight and our ‘burn money’ as I called it went through quickly. For our next child (knock on wood) I think we’ll only be able to do 6 months and then I’ll take my 6 weeks paid leave on top of that + some vacation to stretch it out a bit. I hate the idea of taking a young baby to daycare but I can’t see any other way without real financial strain.
November 18, 2008 at 10:33 am
Mountain Girl – We’re in the exact same boat. I was paying 1700 for my son during his first year in daycare. Now that he’s a toddler it dropped to a more affordable (??) 1365$ but it’s a big strain… but at least I know he’s taken care of.. comes home with new songs every day and is a smarty pants 2 year old..
November 18, 2008 at 11:40 am
Thanks, Gail, Geoff, and Kathleen!
But I needed a good pep talk! Thanks!
I know that getting in to a balanced mutual fund is a good idea in theory, and that historically, the markets will go back up (most likely, anyway…gulp). And for the record, I’ve left our retirement investment in its balanced fund even as the markets are tanking and mutual fund holders are bailing all around us. (I think the markets just dumped another few billion in mutual funds for the second month in a row, according to a news article I read yesterday.)
It’s just having the guts to put money back in to the scary scary market right now that’s hard.
Geoff, a guaranteed investment is up there with unicorns and flying pigs, I’m afraid! I’m well aware that risk is part and parcel of investing and money management. I just feel very apprehensive right now. Like the old rules of risk management are gone and everyone is just thrashing around in uncharted waters, hoping they find something to hang onto.
As I said earlier, sticking the RESP money in a savings account is not a solution. The risk of that money not even keeping up with inflation is very real.
I have just taken a quick look at the Canadian Capitalist site – I will go back and search out the RESP stuff more thoroughly. Thank you for that!
By the way, I share your envy of the top-up crowd. I work for a small not-for-profit, so there was no way such a benefit would be available, but boy would it be nice if we weren’t punished financially for having kids, eh?
ioana – I feel your pain! I’m afraid that if I try to find something cheap to cover the childcare costs, baby will be plonked in front of a TV all day long. As long as the facility and program meet my standards, I’ll suck it up and pay. Some things are more important than $.
November 18, 2008 at 12:56 pm
I am in my 6th month of mat leave, not being topped up. It is HARD. I wish we had either managed to save more or pay off more debt but at 33 waiting longer for a baby wasn’t a good idea. We barely get by every month and have no spending money whatsoever but thankfully we bought a small business a year ago and have that little bit of extra income. I do not know how anyone can afford 2 kids in day care, we are super stressed about 1. Wish I could find a way not to go back to work, but with Dh working full time and taking classes at night, even an evening job isn’t a good option. Still, I would not trade this financial stress for not having my son! He is worth it.
November 18, 2008 at 3:35 pm
When I had my first daughter 7 years ago, I took the full year maternity leave, and was on EI. Yes, it was tight, but we managed. I went back to work, and then when I had our second daughter 4 years ago, I took 9 months off, and my husband the rest of the time. I went back to work again, however, I did some math too. I found that paying for daycare, gas for the 2nd car, clothes, and food, that we weren’t making much with me at work! So, we figured out if I wasn’t working, what the difference would be (and included Income Tax in that figure), and found that if I was to stay home, we would be better off. So, that is what I am doing now. My youngest just started JK this year, ever other day, so I am starting to look at going back to work next year again. I also found that working full time, around my husbands shifts, picking the girls up from daycare, rushing to get dinner fixed, and trying to find time to spend with the girls, wasn’t worth the minimal I was getting from working. I found that I was less stressed emotionally. Take the time to figure out monetarily if working after having kids is worth it. You can go to Chatelaine’s website (chatelaine.com) and they have a Stay At Home Calculator under the Money section that you can use to figure it out. Very eye-opening! Good luck to all those parents-to-be!
November 18, 2008 at 3:36 pm
Christine – It’s true it’s hard but in some ways it’s also empowering to know that you can cut the fat and can do it. And it will show you exactly how much you could save after your baby is out of daycare.. all that could be put away afterwards into savings… amazing…
November 18, 2008 at 3:39 pm
While I agree that on paper you should really look at the numbers before you have a child, sometimes you need the child to really convince you. fo example, we used to spend a lot on restaurants. Easy enough to give that up with an irritable baby. Same thing with expensive evenings out. Now all I want is sleep.
but what do you do if having a child makes no economic sense? We are considering our third. I would have to switch to part-time during my pregnancy (for medical reasons) with the subsequent 50% drop in income. I would have to take a short mat leave – 3 months max- bc I am part of a small business group/self-employed. And I am the higher income earner. My husband would take paternity leave but he is technically a subcontractor, and his office would just fail to renew his contract.
Our solution, such as it is, is to not-try-but-not-prevent for a year, and if it happens great, if not, oh well. And pay down as much of our mortgage as possible bc once child number 3 comes, we are officially broke. Oh, and I’m telling everyone that “we’ve decided to stay local” for vacations for the next ?5 ?10 years.
November 18, 2008 at 11:33 pm
Mountain Girl:
Please take the time to find daycare that fits with your values. Most caregivers want to be treated professionally and have worked in daycare centres. But like you said daycare is expensive, so most of us that are qualified don’t want to pay for something that we can do ourselves. I know many, many caregivers who do not let the children watch television, we take them to preschool programs, and feed them very healthy meals. What we want for our children, we want for your children. Don’t be scared just do your homework
November 18, 2008 at 11:50 pm
No worries, Erin!
I was being flippant in my comments earlier. I know that most caregivers are excellent and I didn’t mean to sound disrespectful of the whole profession. It’s easy to get frustrated at the cost, but I have no intention of skimping on something that important.
Cheers!
November 20, 2008 at 2:31 pm
Chloe – not even one child makes sense economically
They’re a pain in the behind, but my husband and I converted from dinks (double income no kids) the moment I had my son and in my wildest dreams I hope for a twins in the next pregnancy.
January 21, 2010 at 9:10 pm
Ioana is right, children do not make sense financially. Luckily, this is not why we have them. It can always be done and it’s usually a good story to tell later.
When my uncle was born my grandparents had just imigrated from Europe and my grandfather had a job and not much else. The hospital called him at work to tell him his wife was in labour and he just started running. He got noticed by the milk delivery man who asked where the fire was. When my grandfather told him, the delivery man tossed him the keys to the truck and said “go, and return the truck to me at this address tomorrow”.