One Income Family

From: Growing Family on One Income
By John Waggoner, USA TODAY  10/20/06

With every new arrival in your family come lots of dizzying choices. Cloth or plastic diapers? Pink or blue layette? But the toughest decision is whether one of you should leave your job to care for your child.
If one spouse stops working, can you live with a lower income and, if possible, continue to stash money into a retirement account? It's often not easy. But if you're willing to cut your budget, staying home with your child might not be as financially painful as you think.

The Big Question
If you want to stay home with your baby, are you willing to put your career on hold? The question isn't hard if you don't like your job, or if you can take time off easily and return five years later. If you're on the brink of rediscovering Atlantis or if you simply love your job, the choice is much harder.

Even if you hate your job, you will suffer some financial setbacks by leaving it. You stop accruing credits toward Social Security benefits, for example. You forgo several years' work experience — years that generally translate into higher pay over time. And you lose pension benefits, as well as the opportunity to contribute to a corporate 401(k) savings plan.
The impact of losing one income might not be as huge as you imagine. "There's a myth out there about how much income a second job is producing," says James David Ashby, a financial planner in Magnolia, Ark.

There are also downsides to dual incomes. A second job might lift your family into a higher tax bracket. If you commute a long distance, the cost of gas and car repair can be considerable. A daily coffee at Starbucks on the way to work will set you back $60 a month.

And if you continue to work, you'll have to pay for day care. The average cost of infant day care is 10.6% of household income, according to the National Association of Child Care Resource and Referral Agencies, a trade group.

For low-income families, that can soar to nearly a quarter of household income.

The cost of child care depends on where you live. In New York state, the average cost of putting a 4-year-old in full-time preschool is $8,530 a year, or 11.5% of the median income of two-parent families in the state. (Median means half are higher, half lower.)

And even if you live in an area with low-cost day care, you might still have to pay a big chunk of the family income for child care. In Mississippi, for example, you can expect to pay an average of $3,904 a year for day care. But that's still 27% of the median single-parent income in the state.

Of course, the more money you make, the less trouble you'll have paying for day care.

And if one spouse makes a great deal more money than the other, then losing the smaller income is less of a problem.

Getting Ready
In theory, you have several months to prepare for losing an income. You can do a lot in that time.

•Make a budget. "It's time-consuming. It's not fun. It's not sexy," Keeler says. But you'd be surprised how much money you can find.

Keeler and his wife, J.J., were making about $50,000 a year and saving for a new house when they made their first budget. They found they were spending about $1,000 a month that they couldn't account for.

•Pay down your credit cards. You'll get a double benefit. Not only will you reduce your expenses; you'll also have money available to borrow in a pinch. f you don't have a home equity line, this would be a good time to get one in case of a financial emergency.

•Check your life insurance. You'll need life insurance — lots of it — when your child is born. Term life insurance costs have fallen considerably in the past few years, Keeler says.

If you bought term insurance five years ago, you might be able to get the same coverage more cheaply now — even though you're five years older.

•Consider part-time work. You'll need time to adjust to life with baby. But you may be able to work part time for your old company or do part-time work elsewhere.

But don't try to boost your income by stopping your 401(k) contributions, Ashby says.

"You're giving up retirement savings, tax benefits and, in some cases, the employer's match," he says. "I'd look for other places to cut first." Even if you do decide to cut back your retirement contribution, contribute enough to get your employer's match. It's never a good idea to pass up free money.

Many parents want to open a college savings account for their child — and if your budget can accommodate it, that's a fine idea. Your best bet is a 529 college savings plan, which allows you to save money tax-free for college.

You can't deduct your contributions from your income taxes, but your earnings are tax-free if used for higher education costs. Your state may also offer tax breaks or matching funds to use its plan. For more information on 529 plans, go to savingforcollege.com.

No matter how much you budget and plan, losing one income means a big adjustment.
Laura Roy of Cincinnati decided to leave her job teaching high school four years ago, when her son, Ryan, was born. "We lost about 20% of our income," says her husband, Mani Roy. That's not the kind of reduction in income that you can fix by boycotting Starbucks — although that's not a bad idea.

"The first year is hard," Mani says. "You lose disposable income and can't get some of the things you want."

For the Roys, having Laura at home meant postponing new windows on their home and passing on the kind of vacations they enjoyed when they had no children.

It's worth it, Mani says. "You have to be cognizant of the things that matter to you."