Earn Two Incomes, Live Like You’re On One
I was reading a friend’s blog and she was discussing how she plans to revamp her entire financial life, pay down debt, increase her income, become more organized with her financial records, etc. These are very admirable goals and then I realized that not all that long ago, they were my goals. I’m sure many of you can relate to these goals, as well.
Sometime between 2001, when my husband and I both lost our jobs for many months, and now, I feel like they went from lofty, unachievable goals to a lifestyle.
Once we were working again, I set into motion an aggressive plan to pay off our high credit card debt, make an emergency fund with 6 months of living expenses and cut our expenses. Being unemployed also made me paranoid. No matter how great a job seemed, how great an employer is doing, you can’t predict job stability. Also, my spouse and I are in the same field, IT. This proved to be twice as dangerous. When the market is in the mood to cut IT jobs because they aren’t income generating, we’re both at risk. This set into motion my fourth and most important goal: be able to live on the lower of our two incomes.
With our debt as high as it was, my fourth goal was a long-range goal. I had to accomplish the first three before I could accomplish the fourth. One of our problems was that with two incomes, we ended up in a higher tax bracket and always owing money to the IRS.
We cut our phone bills to about $20 a month, diligently used coupons, set our thermostat lower in the winter/higher in the summer, cut out most unnecessary spending like dining out, among other things. Everyone has dozens of suggestions for cutting expenses and saving money. The biggest contributors to reducing our expenses, though, were aggressively paying down our debts (all spare money went to the credit cards or savings), improving our credit scores and buying a home. Improving our credit enabled us to get better rates on our car insurance and mortgage, a very often overlooked way of saving lots of money; paying down our debts gave us more money per month to save; and buying a home helped with our taxes. Everything had a purpose. I had even figured out that based on our old rent and the new tax benefit we’d be getting by owning a home, we really were breaking even so despite our mortgage being higher than our rent, we made up the difference and home ownership and equity came as a bonus.
As we paid off debt, the gap between my income, the lower of our two, and our monthly expenses closed until we reached the point where I could now pay our expenses on my own. Getting to this point meant paying down credit cards to nothing as well as paying off student loans. To bring our expenses down to a reasonable level and still keep our home in case of job loss, the student loan debt had to go.
Now, I’m not saying that you can’t enjoy the benefit of having two incomes, but that your monthly expenses are best kept to what the lower of your two incomes can afford. I’m talking about things like your mortgage, utilities, car payments, student loans and credit cards (if you don’t pay them in full each month). Since we’re talking a loss of income scenario, I exclude expenses that are easy to ditch, such as cable. Dire circumstances call for drastic actions and cable TV certainly will not help you find a job or pay your bills.
If you’d like to go on a family vacation; it simply means that you save up the money to go before you go or that you can pay that bill within a short period of time such as 1-2 months. I wouldn’t go on that family vacation, though, if you don’t have an emergency fund in case you aren’t given 1-2 months to pay off those bills.
One of the biggest mistakes I’ve seen have even and committed is the adjustment of lifestyle upwards as income increases with no easy way to adjust the lifestyle downward should the income decrease. You get trapped with the big mortgage, big car payment or the high credit card debt to support the things that won’t help you if money suddenly becomes an issue.
Always have a plan and know how you will make ends meet should your income go away. In our case now, but not in 2001, if my job or my husband’s job went away, we have the other income that we can live on. Unemployment benefits would be extra money and go into savings. If both of our jobs went away and we both qualified for unemployment, we’d be able to cover our expenses for the 6 months of benefits without touching our savings. When the 6 months of benefits are up, then we’d go to our 6+ months of savings in our emergency fund. At that point, we’re at least a year out. If it looks like nothing is coming our way, then we’re in a bad place and would have to consider selling the house or dipping into our retirement accounts, a not-recommended solution. After taxes and penalties, the retirement accounts would give us probably another year of survival. At some interval in time, I’m sure our families would take pity on us and let us sleep in their back yards and rake leaves for food.
The point of all of this is planning. Sure, you can’t plan for every catastrophic event, but I really think that a loss or decrease in family income is one that you should plan for. A two-income lifestyle is easy to get used to, but you should prepare yourself for the possibility that one of those incomes may give way at any time. Don’t over commit yourself to debts and don’t be content in just making ends meet. That’s the easiest way I know to keep yourself out of trouble.
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