Many of us are starting 2011 with every intention of reaching big financial milestones such as getting out of debt, saving up for a house, or getting serious about retirement. For many couples, however, it might be hard to reach your goals if you’re depending on two incomes to support your lifestyle.
It is possible to reach your goals, but it will take some sacrifice. If you’re really intent on meeting your goals, you may want to change your family’s financial habits and learn to live on one income instead of two. This post is geared towards two-income families who are looking to simplify their finances and give themselves some breathing room so they put their second income toward achieving their financial goals.
Creating a timeline
While it would be wonderful to just start living off one income in a day, it generally takes some time and planning to make it happen. If your expenses are greater than the larger of the two incomes, you’ll need to start trimming your expenses. Depending on the size of the gap, it might take awhile to get your spending in check. In general, you should shoot for six months and adjust accordingly.
Your first step should be to look closely at EVERY expense and ask yourself if it’s really necessary. If an expense isn’t required and doesn’t add appreciably to your enjoyment of life, then reduce or eliminate it. Don’t get rid of all your kids’ extracurricular activities, but do look for areas to cut back.
Dining out is another big expense that can often be reduced or eliminated. Sure, it might provide you with some family bonding time but, in most cases, it’s little more than an expensive habit.
You should also examine recurring expenses like your cell phone plan. Believe it or not, you may be able to stay with the same provider and get a better deal by doing nothing more than checking for discounts related to your employer. For example, my mom checked last month and ended up getting 20% off her plan.
Wisely use your second income
Here’s the best part of the one-income living plan: once you free it up, you can use the entire second income to accelerate progress on your financial goals and put your family in a much better position. Don’t waste the opportunity by spending your newfound savings on frivolous stuff. Make the sacrifice now and your discipline will pay off in dividends.
Eliminate your debts
My recommendation is using the debt snowball plan to get started and stay focused on debt repayment. Simply tackle your debts from smallest to largest. Even if your second income stream is from part-time income, it can make a HUGE difference on how quickly your debt is paid off.
Avoid new debts with a savings plan
Automated savings is your best friend when it comes to avoiding new debt. An emergency fund isn’t exciting, but every family needs one. Keep it in a high yield savings account so you’ll have easy access in times of need.
When planning an upcoming trip, be sure to consider all the major and typical expenses for budgeting. Here’s a general list we use to budget for vacations.
- Food (you might want to overestimate this expense)
- Local activities
- Miscellaneous (emergencies/buffer)
With the right amount of planning and an automated savings plan, you can have a debt free vacation. Simply transfer a small amount to a dedicated savings account each and every month. You won’t even notice that it’s gone.
Car replacement fund
Buying new cars can really set you back if you’re doing it to keep up with your neighbors. That being said, it’s definitely possible to have a safe and reliable car at all times without breaking the bank as long as you’re serious about building a car replacement fund.
Simply commit yourself to a set monthly payment (to yourself!) based on your expected timeframe for replacing your car. This is an important goal, but should probably be secondary to things like debt reduction. If your car suddenly breaks down while you’re paying down debt, you can quickly redirect cash from your second income and emergency fund to get a cheap replacement in the mean time.
How long should you live on one income?
The answer to this question really depends on your goals. According to Dave Ramsey’s “Total Money Makeover,” if a family is fully committed to the process, they can get their finances on track within an average of 18-24 months.
In the long run, of course, your goal might be to drop down to one income so one of you can stay home with the kids. In that case, this exercise lets you get your ducks in a row while also preparing your for the eventual loss of that second income.
Your thought on living on a single income
Do you have one or two incomes in your household? If you have two, are you spending them both? If you only have one, was this a conscious choice? Do you have any tips or tricks for making it work?