Can Your Family Live On One Salary?

Many couples are presented early in their lives together with the difficult decision of cutting back to only one salary for their family, particularly if there is a new baby on the way and one parent would like to stay home and raise their child. Take a second and think of all the financial challenges that couples should think through before making this important decision.

The decision to go to a single salary might look seemingly doable on paper, but making ends meet between paychecks could be more difficult in practice. You as a couple need to assess how this decision will affect your long-term goals: With this lowering of income and increase in expenses, will that impede your ability to meet investing goals for retirement and college? How about your spouse’s plans for re-entering the workforce in whatever time frame, if any, you come up with?

Below are some of the areas to think about as you do your analysis.

Be Realistic About Budgeting

Running a basic budget is a great first step when determining whether living on one salary is financially feasible. A great way to see if works before the real deal is to do a trial run for a few months to make sure the budget on paper is manage­able in real life, and give you time to tweak it some before showtime.

It’s also important to pad your anticipated expenses to make room for the extra costs of taking care of a new baby, such as health-care expenses, diapers, and clothes, as well as furniture and other gear. The Web is full of calculators, such as babycen­ter.com, that can help you get you really good estimates to get started.

Related: 7 Tips to Organize Your Finances

Make Sure You Have a Safety Net

Two-earner couples have more financial safeguards than do couples living on a single salary: If one spouse should lose his job or become disabled, there’s still another income coming in the door. Because they’re usually more financially fragile, single-income couples need to take additional steps to build a financial safety net. Key components include the following.

A Comfortable Emergency Fund

Conventional wisdom holds that you should have three to six months’ worth of living expenses in cash to tide you through unanticipated expenses or job loss, single-income couples may consider moving that figure closer to a year’s worth of living expenses.

Disability Insurance

Fully one third of people entering the workforce today will become disabled within their lifetimes, according to the Social Security Administration. That statistic accentuates the importance of purchasing disability coverage for the spouse who’s employed outside the home. Many employers offer cost-effective coverage, but be sure to factor this expense into your after-baby-arrives budget.

Life Insurance for Both Partners

It might seem obvious that you’d want to purchase a life insurance policy for the spouse who’s earning a salary. But don’t stop there. Should the nonearning spouse die, hiring an outside provider to pick up child-care responsibilities would be costly indeed. This is yet another set of costs to factor.

Gauge the Impact on Long-Term Financial Goals

In addition to testing the short-term viability of your budget with a single income and troubleshooting unexpected events, it’s also crucial that you consider the impact on long-term financial goals, especially retirement and college savings. A recent T. Rowe Price study found that younger savers who stop retirement-plan contributions for even a short period of time can face a serious financial impact because of lost compounding potential, though ratcheting up their future contribution rates can help make up for the lost savings.

If you haven’t run the numbers recently on whether, how, and when you might able to retire, use a retirement calculator, such as the one on Morningstar Investment Research Center, to see how a reduced retirement-plan contribution rate affects your ability to reach your long-term goals. Many such calculators use a static contribution rate; a financial advisor can help you customize your contribution assumptions based on your own expectations about salary increases and if/when your spouse plans to return to the workforce.

Think Through the Career Impact

More difficult to quantify, but equally worth thinking about, is the long-term career impact your spouse could face by pressing pause on her job. Consider staying on the job, part time or in a different role , in some fields that are difficult to re-enter later on. Another option my wife took was to further her education while home for a year with our son.

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