Test Driving The Financial Life You Want

Now that we have a fixed monthly mortgage payment for the foreseeable future, we are looking ahead to our true mid-term goal of living on one income. Specifically, we’d like to live on two half-incomes when we have children. We live in one of the most expensive areas in the country. Can we do it?

Both of our incomes are somewhat comparable, so our plan is to actually pretend that only one of us is working, deposit that person’s paycheck into a checking account, and work only from that checking account. The mortgage note, utilities, food, gas, all expenses will be deducted from that account. A reasonable percentage (15%? 20%?) for retirement will still be taken out. I have no idea what a child will cost, but maybe we’ll take out an extra $500 a month for food and diapers as well? The second person’s income will still be dealt with, but just separately.

This way, we will get as close as we can to simulating living on one income. If the checking account starts to shrink too fast, we’ll have to think of ways to cut expenses further. I think this is an interesting idea that could be applied to anyone who wants to stretch into a new financial goal. You may think you can do it, but failure might be costly.

  1. Buying a new home. Can you afford a mortgage payment that is significantly higher than your rent? You should be sure, otherwise you might be joining the million other people in foreclosure.
  2. Kickstarting your retirement contributions. Maybe you’re afraid of putting too much in a 401(k) or IRA and not being able to take it out. Why not just use savings account and stick your imagined contributions in there for a while? That way you won’t have to deal with penalties.
  3. Increasing your debt payments. Some people are afraid to pay off too much debt in case they need the money for later. An emergency fund would help solve this, but also the “pretend” debt account might be a good temporary solution.
  4. Going back to school, switching careers, etc. Again basically the same idea – how will you react to living on less income?

Comments

  1. Before I started crunching numbers the thought of this used to scare me. Then when I realized that we were putting into savings almost as much as my wife’s salary I felt much better. Just the exercise was helpful.

  2. I commend you on trying to live on one income now, even if it’s a stretch. I’m sad for the families where a parent wants to stay home with their children but they don’t have the resources to be able to.

    I think that the biggest factor for most people is that they get used to living on the two incomes and find a number of things that they just can’t live without when they try to transition to one income. If they had lived on one income before the child came (or in your case tried to prepare by living on one income) they would have found that it certainly is possible, but it just takes practice and some sacrifices.

  3. It is always an excellent idea to test drive a new financial plan. Great post.

    We actually had a plan to live on one income when we had kids so we never lived on the second income. (Put it towards a down payment in expensive land and then towards substantial cash savings, the 3 years or so before kids).

    When we went down to one income and had kids it was a pretty seamless transition. I feel like we stagnated for a few years, but my spouse has been out of work almost 6 years and we are just starting to get at the savings level we did when we both worked (my pay has risen considerably over the years). I didn’t dream I would have such big pay raises and we would be back where we started on one income, so soon. So it has been nice. We used to look at this as rather temporary while the kids were young, but now we see little point in my spouse returning to work. 25% to retirement? Quite a few luxuries? Eh, what’s the point. It’s not that I make that much, but we have always saved my raises and never lived up to the huge we income we had when we both worked. Makes it so much easier.

    But yeah, with newborns I would gather with the other parents who would go on and on how they missed their disposable incomes and such. I just had nothing to identify with there. Not much for us changed financially with kids. It took care and planning. & we practiced for a few years.

    We actually moved out of the Bay Area before we had kids because we could have never afforded it on one income. That was a precarious financial position to be in, so we moved. It was more important for us to be home with our kids. But even if we never had kids? Wouldn’t have gotten such a precarious mortgage. You are certainly in a good spot.

  4. Speaking as the father of a newborn, a baby doesn’t *have* to cost that much if you are into frugal living (I’m not, by any means – but I recognize the opportunities…).

    Avoiding daycare costs is 80% of the battle – which it sounds like you are planning to do. The only costs you can’t really avoid are medical – and that really depends on how good (or bad) your insurance is.

    I suspect that, any medical issues aside, you could keep the additional costs down to $150/month if you were super frugal.

  5. I think testing the water is a great idea. I opened a UPromise account a year ago even though I’m not planning on having a kid anytime soon, and when that becomes a possibility in the picture, I think I’d start a ‘baby fund’ and save a small amount every paycheck so I can get a head start and get used to the new expense. Going back to school maybe more likely to happen for me and I think I may want to start a ‘education fund’. That way, if I end up not going back to school, it is because I don’t want to, not because ‘I can’t because I have no money’.

    On a side note, recently I started a “A Dollar A Day” challenge/experiment to see how little I can live on from day to day to cover expenses for upcoming trip, and hope to get some new insights as to how I should re-align my budget and goals.

  6. I’ll second Tim’s comments. Avoiding daycare saves you a lot. I’ve paid between $800-$1000/mo on daycare. You will probably see an increase in utilities, you’ll be doing more dishes/laundry/up at night needing light etc.

    The joy of parenthood…

  7. John/Tim – do you guys have kids? $150 a month?

    Try more like $1000 per month if you have a healthy kid, not including day care.

    Even with a healthy kid they have to see a doctor about once a month which can add up if you have co-pays.

    Just off the top of my head: formula, nursery (furniture, paint), toys, clothing, highchair, changing tables, strollers.

    Before we had children I remember telling my wife “Oh yeah, it should be a couple of hundred extra per month.” Man, was I wrong! On top of that, my daughter had some health issues so our monthly expenses turned out to be quite a bit higher.

    -Wes

  8. Even with no kids, I know $1k a month without daycare is silly.
    How could anyone afford kids unless you bought one on ebay?
    I know people who make 35k a year with multiple kids. With this kind of math they’d have to eat bugs to survive.
    Come on.

    saladdin

  9. Cashmere Addict says:

    We are doing exactly what you are doing… and yes, it works. You immediately see where you can cut back. The one thing to think about in terms of kids (we don’t have any, yet)… here in So Cal you will most likely be looking at private school… unless you went for a higher mortgage to be in a good school district. So, for the first 5 years, from what I can see with friends… you can be very frugal and cut your costs a lot… if you’re not buying toys every day, getting them ridiculous amounts of stuff that just ends up sitting around and are cost conscious on the daily needs (diapers, formula, food). I can’t believe the amount of money I see wasted on things that just aren’t necessary for kids (seriously… my nephews end up playing with the box the toy came in more than the toy!).

    One other question I have (because we’re thinking about this one a lot) is around health care. What is your plan when you go to part-time jobs between the two of you? How much do you plan on spending? I think for an average couple with one kid it can run around $500-700/month if you aren’t covered through your employer. Curious to see what others are doing/thinking about in this area.

  10. Dariaclone says:

    I have a hard time putting this logistically into practice. Our taxes are much higher now than they would be on one income. And we take advantage of whoever has the best benefits in a certain area. But overall, we do save the equivalent of my husband’s income. Ultimately, we may both go part-time, so for us, focusing on the overall savings and spending rather than “saving” a particular person’s income makes the most sense.

  11. BTW, that’s not actually ironic :).

  12. Well, it can be done!
    My life during last 13 years is a test-drive that keeps on driving:

    Came to US with $0 in my pockets, wife and one 6-year old child.
    Went working delivering food in my $500 clanker.
    2nd child born.
    Went studing to community college and graduated 2-year program in 14 months while working 2 jobs.
    Went working for $22k/year with no experience.
    3rd child born
    Bought new 224k house in 2001 with %23 downpayment
    Wife went to community college, I babysit while she’s in classes.
    Paid if off in 6.5 years
    Currently Debt-free.
    Wife have never worked and still does not work.

    How did we do it?

    1) Very low profile lifestyle: hand-me-down clothes, toys, wal-mart, food only on sale etc
    2) Only used cars paid with cash
    3) Cook at home, went out maybe 13 times all these years to celebrate something.
    4) We still spend bare minimum, cutting our own lawn
    5) Saving is a game in the family with kids participating
    6) Everybody is very supportive and is as tight-knit as you can imagine

    Help from relatives $0
    Welfare $0
    Credit $0
    Inheritances $0

    Child expenses all that time – not significant,
    new things being only store brand diapers which went away with early potty training (highly recommended).
    Childcare costs – $0
    Tax breaks and lack of punishment from IRS for having two incomes.

  13. we’ve been living off one income since we got married two years ago, so we are in good shape for no lifestyle change really, other than a rapid increase in net worth. unfortunately we are the great minority as i dont know anyone else this day in age willing to sacrifice the second income. i’ve been meaning to read the ‘two income trap’ book- basically that the second income doesnt go very far with daycare costs and such. her income is over 80k though so i think it would be financially better for her to work, but we’re more comfortable actually ‘raising’ the kid.

    agree with many of the comments, minus wes. come on, 1000 mo without daycare? those other costs you list are basically ‘startup costs’. unless you dont pay off your credit card, i wouldnt lump a one-time crib cost as a monthly cost. plus the cost diminishes with more than one kid as you can re-use a lot of the startup costs, (similar to my thinking on dogs, but we talked ourselves out of another dog).

    another note is many of the startup costs are given to you at a baby shower or the sort. we dont have many friends in our area so we dont plan on having a big baby shower, even still my wife’s mom and grandma already agreed to pay for the carseat and glider. maybe them knowing we’re going down to one income has them worried? ha

    our biggest cost so far has been a new car as my wife had a 2 door coupe, which some make do with, but hers was having problems anyway, but without a kid on the way we would have just bit the bullet with the repairs

  14. Thanks for the ride down Albrecht lane. That’s a great example that you can achieve it if you really want to.

    I hear you about the early potty, my first daughter was potty trained by 9 months, and we just started training my second daughter at 7 months. not having to buy diapers from age 1 to 2 1/2 saves us a bundle! Funny thing is that it’s actually easier to train them at this age than it is when they turn 2.

  15. I live in the Boston suburbs and daycare for our 5-month old is $1300 a month alone. My wife would certainly prefer to be at home but not only does she carry the health insurance but she has a 401k that matches dollar for dollar up to 6 percent. She can take out $5000 a year pre-tax in a flexible spending account that can be used for daycare. All of those things just about balance out the cost of daycare (along with the deductibility of the daycare itself). Without that salary we couldn’t max both of our Roths or have a budding 529 plan. Sometimes you have to do what you have to do.

  16. My husband and I are also hoping to live on one income when we have kids. I’m an obsessive planner and was very excited when I stumbled across the USDA’s Expenditures on Children by Families. Obviously, it only provides rough estimates but it’s still better than nothing.

  17. My wife has the better health insurance amongst us as well – the premiums are 100% covered no matter how big our family gets. Definitely would love to keep that! On mine, I think it’s a few hundred dollars per month extra. Unsubsidized, I wonder that the full cost would be…

    Having kids sounds like an entire set of frugal challenges. Clothes that last a few months before being outgrown, toys, beds, strollers, car seats. I think those kiddie consignments stores where you trade in your old used clothes for “new” used clothes are a brilliant idea.

  18. Jonathan one thing to keep in mind with the 2 half-time jobs ideas is medical insurance. You may lose this along with 401(k) options, depending on how progressive your companies are.

  19. Cashmere Addict says:

    Jonathan… from what I’ve seen when in between jobs and using COBRA (which is somewhat subsidized, but not a lot), it’s really expensive when not subsidized, unless you’re willing to take the highest deductible and coverage that is for the bare minimum (meaning, bad accident covered, routine check-up, not covered). But, I’m only basing this on my COBRA days, so am definitely curious if others have found good health care for a reasonable price.

  20. Buying a house today is too risky to future financial health. Big time money pit. From today’s Yahoo: LOS ANGELES – Median home prices plunged in many of California’s most populous counties in February, with Southern California leading the slide with an overall drop of 17.9 percent compared to a year earlier, according to new housing data released Thursday. The drops reflect a deepening housing crisis in the state, which saw home values soar during the housing boom then decline sharply in most areas. Median home prices fell this year in 15 major counties, DataQuick Information Systems said.

    The median price in a six-county area of Southern California fell to $408,000 — the lowest level since October 2004, when it was $402,500. That median is 19.2 percent below the region’s peak price of $505,000 last summer, and it’s 1.7 percent below January’s median, the firm said.

    In the nine counties of the San Francisco Bay Area, the median price fell 11.6 percent to $548,000 compared to a year earlier and 17.6 percent from the region’s peak median price of $665,000 last summer. Bay Area prices were essentially flat from January.

  21. If you have good savings and good health, a high deductible plan could easily be a better alternative than a high premium health plan.

    Last year we paid over $300/month for family coverage provided by her employer. After she gave birth (a delivery that, unfortunately, included a 6-day hospital stay for mom) we owed close to $5,000 in hospital fees. Chalk it up to poor foresight when choosing our plan.
    Point is, with a high deductible plan you can save on what you’d pay in premiums and if you go a few years with no major unforeseen medical incidents, you’d probably spend less over a few years with the high deductible. I was surprised to find out how inexpensive a regular check-up with my internist or a visit with my daughter’s pediatrician really is.

  22. Truthfully, when I had my son, the money we saved by eating all our meals at home was far more than we spent on clothes, food and toys combined for our son. I bet this is true for a lot of couples that eat out a lot (like we did).

    - Gavin

  23. i agree with saladin. People are talking crap.

    Diapers cost $25 for like 100 diapers…assume u need 2 boxes a month, thats $50. Milk formula is $25 and you only need one can a week. so thats another $100. The rest is up to you. How u clothe them etc.

    We just bought tons of kids clothes for next winter now marked down from $40 to $2.99 (my son is 2 years old and we bought tons of 3 and 4 year old clothes)

    I spend $1000 a month on daycare for my kid, but thats because it generates $11K a month for my wife and $9K a month for me. We both earn quite well, and live WAY below our standards. We could feed 2 more families just on one income.

    I dont think my kid (apart from the daycare costs) cost me more than $250 a month. people who say it costs them $1000 are the type of people who dont even know where their money goes. There is no way unless u included daycare costs which u shouldnt because ur making money because of that.

    We are both consultants, therefore buy our own health insurance. We purchased a high $10,000 deductible insurance with $30 co pay visits from a name brand health insurance company for $200 a month. Why? Because if something major happens, we can pay the $10K.

    as opposed to paying $700 a month for health insurance with $500 deductible. check it out on http://www.ehealthinsurance.com

    Again….i always say this….its not what u earn, its how u choose to live smartly. As much as we make, our circle of friends have no clue at all. the moment we open our big mouths, thats when people will tell u their sob stories and borrow money from u and try to get u to live above ur means by saying things like….come on dude, u guys make so much….u should drive xyz car!!

    This is life. Make money, live smart and even having 10 kids wont bother u.

  24. My wife is pregnant now and she’s quitting her job to be a stay-at-home mom for the first few months of our child’s life so living on 1 income is about to become a reality for us but we should be fine if we don’t eat out so much :)

  25. Harrington Brooks says:

    I’ve just discovered this blog and look forward to watching you reach that $1million dollar goal.

    Good luck with the journey, and just wanted to add that you have a great writing style.

  26. Ok, I’ve got 6 kids and we manage to get by on one income. If we hadn’t gone into so much debt being really stupid the first 10 years we’d be VERY well off right now. We manage to live on $5k/mo just fine, and that’s with half of that going to our mortgage/creditors. (actual numbers posted on my site) 1k/mo per kid just sounds like someone’s getting more than they really need.

  27. Don’t forget about starting the college fund. Depending on what type of school (private vs. public)/how much you want to pay/how many years you plan on paying/how much you want the kid to borrow etc., it could be up to $500-1000/month for a 529 plan.

  28. Someone posted “startup” costs for having kids. I am definitely including the startup cost in my 1000 per month estimate, amortizing it over the first year. I’m also including in my estimate a monthly college savings contribution. Or are you guys hoping for a football scholarship?

    Doing a quick google on the topic I get a pretty wide variation of results. The US Government estimates about $2450 per month, on average, up until the age of 17. Several university studies estimated around $700 to $800 per month per kid, under age 5, middle class.

    Are you guys including housing costs? You should unless the kid will sleep in your bedroom, in your bed until they are 18.

    Of course, on a blog about money and frugality, you will find the outliers that are very efficient in everything including child-rearing.

    -Wes

  29. I agree with Saladin. Kids are cheap. I know for sure that 1 kid is cheap as that is what I have.
    Assuming you have decent health insurance, the most expensive outlays will be formula, if you use it, then diapers and possibly clothes if you let the wife go wild.
    Even the big scary items like crib, car seat, high chair, stroller, etc. are one time expenses that will total less than a few grand, if bought new, as long as you are rational and you avoid the oh so trendy and, I’ve found, less useful brands (e.g. Maclaren, Bugaboo and friends).
    We live very comfortably on a single six figure income in the Bay Area and still manage to save quite a bit.

  30. please dont tell me u save for ur kids college because every person I know seems to have tons of college loans….this means parents DID NOT save for their kids. i dont know what happens to the fund u start for ur kid, but somehow when they do go to college, they dont have any $$.

  31. I started a 529 for my daughter before she was born. My reasoning is that if I was a billionaire, would I expect her to take out student loans for college? No of course not, because I can afford her tuition. By that same reasoning why should I be so selfish at my current salary as to not give her a headstart? That’s why people like you and I read blogs like this – we understand the power of budgeting, investing, and compounding.

    acoward – have you looked at the prices of kids clothing? Even in 2nd hand stores? They are just as expensive as adult clothing and are outgrown pretty quickly.

    -Wes

  32. wes, ur buying at the wrong places at the wrong time.

    my kid wears Gap, childrens place, gymboree..all expensive clothes but none of the pieces have been more than $10.

    Buy winter clothes NOW on clearance for the next winter and buy summer clothes when winter is near.

  33. I shop at all those places. Spend 20-25 sometimes on just a shirt. 20-30 for nice GAP jeans for my 4 year old. Why not? I don’t live in CA paralized by a huge mortgage, sinking property value, 50% tax rate, 4.50 gas, etc. I live in TX where I get to enjoy the dollars we make and spend on anything I want.

  34. Although some people are ripping into the whole idea of $1k/month I’ll present a few scenarios where it could become reality: you buy a new house for the extra bedroom for child, you buy a new car for the extra room for child, you pay for huge medical expenses for NICU or mother’s care (US birthing problems are larger than in other first-world contries), you are self-employed and add baby to health insurance, you buy life-insurance for yourself whereas you didn’t need it before, etc. The house and car may not come now but may be needed in the future with additional kids. I am not saying that these will apply to everyone but just some things to think about.

    Additionally, my husband and I saved up 3 months of salary so we could both stay home when baby #2 arrived. We knew we wouldn’t survive the newborn stage otherwise (no family or friends nearby). He wound up taking over a year off work since my consulting income was enough to cover everything. Honestly, for a newborn it is time that is a precious commodity for most rather than money! Having a partner to give baby to while you sleep is just about the greatest thing ever those first few months! It’ll be all about survival. Then when they get older you’ll spend all kinds of dough for things like preschool spanish classes, piano lessons, new piano, soccer camp, etc. ;)

    One more thing: people often increase their incomes considerably when a baby arrives. Why? Probably because work and money take on a whole new meaning.

    my 2cents.

  35. We are doing this now because I had to quit my job to finish up my internship this year. The main things we have to cut back on are eating out, watching our utility usage especially the land line and a few others things. Ou plan has always been to live off one income and invest the other but until I graduate we are doing it solo for now.

  36. This is a great idea that I am going to try to implement in my own life. My wife and I are in a situation where we’d like to be able to get rid of our day jobs and focus on our home businesses. Doing that would hopefully allow us more time with our son and the potential baby that we’re trying for.

    I’m going to start organizing it, thanks!

  37. By opening 529 account you’re closing doors to many scholarship options that would otherwise be open for your child in the future. Every coin has two sides.

  38. Vlad -

    1) Don’t put the 529 in your kids name until you really need. If the 529 is in your name as opposed to your child’s name the money will not effect their financial aid/loan options. Also if the kid decides not to go to college you can choose what to do with it as long as it’s in your name.

    2) Merit based scholarships do NOT consider 529 accounts.

    3) The main reason I have a 529 is so that my kids don’t have to have financial aid or student loans. I don’t want them to have debt. On the other hand, if they can get a merit scholarship, then it’s all the more money that goes to them to get started in life.

    -Wes

  39. smurfett says:

    Before I had my kid last year, I saved up $10k, based on some research of how much it costs to raise a child from government websites.

    After I had the kid, I realized that 10k was not enough. I’ve only spent about $500 in 6 months for my child. But when we put her in daycare, it’ll be $18k a year.

    I didn’t realize how little money newborns cost you, if you:

    1. don’t buy a bigger house to fit your child. We stayed in the same 2 bedroom apartment. The kid sleeps in the living room. She hasn’t complained about not having her own bedroom.

    2. don’t buy a new car. We’re still in our little Honda Civic coupe. Yes, it’s not as easy as having a 4 door, but we don’t drive much and instead take her around on our ergo carrier.

    3. get stuff from other people. We have not had to buy any clothes. Ask relatives to NOT give you the 0-3 months stuff. We got way too many 0-3 months clothes. Once the novelty of a new baby wears off, you get far fewer gifts. So take advantage of all the gift giving when you’re pregnant and get bigger clothes! We also got seldom used infant carseat from a friend.

    I think we do frugal living in general. The only big purchases we made were, carrier, carseat, and playpen for sleeping. You could really go out and buy a lot of stuff, esp when you’re a first time parent. But I think it’s a good idea to research on the things you *would* buy if you needed it (stroller, swing, sling, etc), decide on the exact brand and everything, but hold off on it until you really need it. every kid is different, you could buy that bassinet and then it turns out your kid won’t sleep anywhere except with you in your bed

  40. Good tips! Actually, that sounds a bit like my parents.

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