From Two Incomes, to One: How to Make Ends Meet

With unemployment sitting at 8.3%, former dual-income families are working to make ends meet with just one salary coming in a tough economic climate.

The shift to a smaller income stream tends to occur suddenly, and experts advise families adjust budgets and spending habits just as quickly to retain control of the financial household.

“As quickly as possible, really look at your budget and assess your new reality,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. “Sitting down, doing the math, and putting it to paper is very important.”

Websites like mint.com or www.merrilledge.com have tools to help you create a budget. For the pen and paper inclined, write your income in one column and expenses in the other. Compare the numbers and identify areas that can be cut out or reduced. Once you’ve identified your income and expenses, you’ll be better prepared for financial issues and can work to stay out of debt.

If your income doesn’t cover all your expenses, it boils down to two things you can do: increase income or cut expenses, says chartered financial analyst Robert Stammers, director of Investor Education for the CFA Institute. But with mortgage and car payments, food and medical bills and other necessary spending, this is easier said than done.

Plan your income. The unemployed partner will likely receive unemployment and severance in the short term, says Stammers. “This gives most professionals a time period to find a job and some income.” Once your severance is finished, your emergency fund can help with monthly expenses. A careful review of your finances can help you find additional money.

“Once you start looking at expenses a lot of couples know where money is going and you start to prioritize,” says Steven Levey, senior principal and chief executive officer at GHP Horwath. By ranking expenses by “need to have,” “nice to have” and “don’t need to have,” it will be easy to identify unnecessary spending. You can’t make any drastic cuts, until you know what you spend first, he says.

Review your tax withholding. Do a tax projection by looking at your income and your withholding now that you’re a single-income household, suggests Levey. If you keep your exemptions the same, you may be claiming too much for your reduced annual income. If you are now in a lower tax bracket, Levey suggest increasing your exemptions to generate additional income.

Consider your 401(k) contribution amount. Since it’s free money, experts suggest that the working partner continue making 401(k) contributions in an amount to receive the company match.

If you need more money to cover expenses, consider whether it makes fiscal sense to contribute above the company match. Even though you save about 35% in taxes, you’re laying 65% out in net cash, according to Levey. For every $1,000 that you contribute, for example, that’s about $650 that could be used to pay bills in the short term.

Tapping into retirement funds could be a mistake in the long term, says Stammers. It’s better to stop making 401(k) contributions than to withdraw this money since you’ll owe taxes and a 10% penalty.

Consider holding off on college funds. If you have children, contribute to their college fund only after you’ve paid your other bills, have six months of expenses in an emergency fund and funded your 401(k), says David Giancola, director for Merrill Edge.  When debating between funding a 529 or retirement plan, “you have to prioritize, and retirement should win that fight every time.”

Don’t overlook part-time employment. For the unemployed partner, part-time employment could be very helpful for your family, financially and psychology, says de Baca. “It makes a difference keeping someone’s spirits up and makes sure they get out of the house, even if it’s not the job they want long term.”

Know your housing options. “If your mortgage was based on two incomes and the burden will put you at risk, call your bank and find out what your options are,” advises de Baca. If you qualify, the Department of Treasury’s and Department of Housing and Urban Development’s Home Affordable Unemployment Program can reduce your mortgage payment down to 31% of your income for 12 months. Other lenders have forbearance programs to help struggling homeowners. 

From a psychological standpoint, a couple will feel better knowing their alternatives before making a change, says de Baca.

Depending on whether you rent or own, downsizing could be an option. The main cost for renters to move would be moving expenses, while homeowners also have to consider commissions and other closing costs, says Stammers.

Pay down your debt. Experts suggest paying down credit cards as soon as possible when a spouse gets laid off. Using consumer debt to make ends meet can be very tempting, but this could compound your problem. “If you’re using your credit as your emergency fund or a way to consume, then you have to find a way to cut your expenses or bring more income in,” details Stammers.

You may not need childcare. “Cut back on childcare or daycare if one parent isn’t working,” says Levey. When the unemployed parent watches the children instead, you can free up cash in your budget.

Private versus public school? Where to send your child to school can be a complicated decision. If you’re unable to afford the private school tuition after trimming your budget, and job prospects are slim, experts suggest considering transitioning to a public school. “It’s better for a child to be in a household where the finances are in good shape,” says de Baca.

Review your benefits. “If you had health care on your benefits for the person who is unemployed, make sure you do the paperwork and you’re still covered,” says de Baca. This may mean transferring benefits to your partner’s plan or enrolling in COBRA. Enrolling in COBRA may create a new $200 to $300 monthly expense to include in your budget, says Levey.

To make this transition, the couple has to work together. “The spouses or two adults in the relationship have to be on the same page and be part of the same team,” says Giancola. “There shouldn’t be any resentment and fights about money. They should help each other as a team and not let money get between you.”