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The Risks and Rewards of Living on One Income

Is it possible for families to shift from two incomes to one?

It’s something most households with two working parents and young children at home have contemplated at some point. More than 60 percent of families with children under age 18 had both parents employed outside the home in 2005-2006, according to the Bureau of Labor Statistics. That compares to less than a third of mothers in 1975.

You see lots of articles discussing ways to eliminate the second income — things like clipping coupons, buying second-hand clothes, and cutting out vacations and cable television.

But ultimately, paring those expenses isn’t going to cover the gap for most middle-class families, because those aren’t the costs that drive them to the economic edge. The real problems are what Harvard Law professor Elizabeth Warren calls “the big five” — housing, health insurance, child care, a second automobile, and taxes.

Warren, co-author of “The Two-Income Trap,” is an expert on family bankruptcy. She has found that married couples with children are more than twice as likely to file for bankruptcy as childless couples. (More children live in homes that will file for bankruptcy this year than live in homes that will file for divorce.)

Moreover, income volatility has increased sharply among families with children. According to Jacob Hacker, author of “The Great Risk Shift,” the volatility in family incomes doubled between 1969 and 2004. Moreover, Americans with at least four years of college experienced a larger increase in family income instability than those with only a high school education over the past generation, with most of the rise occurring in the last 15 years.

The single-income family with two children in the early 1970s earned about $32,000 in inflation-adjusted dollars, compared to $73,000 for the dual-income family in the early 2000s. Despite the higher income, today’s families save less and carry more debt: In 1970, the one-income family saved 11 percent of its take-home pay and allocated 1.4 percent of its annual income to pay revolving debt, such as credit cards. In 2005, the two-income family saved nothing, and allocated 15 percent of its annual income to revolving debt, according to Warren.

In other words, the two-income family spends everything — the second income, all of its annual savings — and has piled on debt. Where does the money go? Despite the sticker-shock that goes with buying a gallon of milk these days, they didn’t spend it on food, clothing, appliances, electronics, or automobiles — on an inflation-adjusted basis, those costs actually went down.
 
Warren found two-earner families today spend three-quarters of their household incomes on five categories (which consumed only half the income of single-earner families a generation ago):
Housing: The cost for families with children has risen 100 percent in inflation-adjusted dollars since 1970.

Health Insurance: For a healthy family that has an employer-sponsored insurance plan, costs have risen 74 percent in inflation-adjusted dollars since 1970. In that year, the demographic group most likely to lack health insurance was a 23-year-old unmarried man with no children; today it’s a person age 35 who is married with children.

Cars: Families today spend 52 percent more on automobiles than in 1970, on an inflation-adjusted basis, Warren found. While the inflation-adjusted price of automobiles has dropped since 1970, families are still spending more on this category because they typically need two cars to get to work.

Taxes: The first dollar that the second earner earns is taxed after the last dollar of the first earner, Warren notes. This means that the tax rate for the family unit has risen by about 25 percent between 1970 and today.

Child Care: In 2007, fees in licensed centers ranged from $10,920 a year for 4-year-old children to $14,647 a year for infants, according to a study by the National Association of Child Care Resources and Referral Agencies (NACCRRA). In every region of the United States, annual costs of child care surpass the cost of food.

A sixth major expense is education — both preschool and college — which most families in 1970 didn’t view as necessary to launch their child into the middle class.

The number of children who attend preschool has risen to 45 percent of all 3- and 4-year-olds from about 20 percent in 1970, according to the Census Bureau. On average, parents pay $7,000 a year, according to NACCRRA.

Finally, there’s the challenge of saving for retirement. In the late 1970s, 62 percent of workers were covered solely by defined benefit plans, paid for by their employers; in 2005, the number was 10 percent, according to data from the Employee Benefits Research Institute.

Making It on One Income

So is it possible to downscale to one income? It may be, for couples who are willing to make bold changes with their money and in their attitudes, says Judy Lawrence, a financial coach and author of “The Budget Kit.”

“You have to be willing to do some soul-searching about the things you’re going to change and let go of,” Lawrence says, adding that the stay-at-home parent takes on the additional job of planning ahead and investing the time to get the best deal. It’sgoing back to your true priorities, values and goals and saying ‘it’s the best choice for me, my family, and our future’ — not ‘we’ll be locked into a life of drudgery and we can’t do what we want to do.’”

Jonni McCoy, a Colorado writer and founder of Miserly Moms, agrees. When she left her job as a buyer for Apple Computer in 1992 to stay home with her two children, she was earning more than half the family income. “Make sure you’re really clear why you are doing it, because there will be days when this is the last thing on the planet you want to do,” she says, drawing an analogy to nutrition: “The average diet lasts 72 hours, but if you have a medical reason, it will stick.”

Find a community of like-minded savers, says McCoy. “You have to have people who share your values, who say ‘no, I can’t afford that,’ ” she says. “The beginning is so tough, because when you’re leaving the working world you may not have that community established.”

Bankrate.com offers a calculator to help figure out what a second income is really worth on an after-tax basis, without all the work-related expenses. You need to track your monthly expenses for child care, commuting, work clothes, lunches and coffee breaks, dry cleaning, cash for coworkers’ birthdays and other celebrations, and money spent on take-out meals and restaurants because you don’t have time to shop and cook. Also consider savings on cleaning and other services the stay-at-home partner could take on, and the possibility of eliminating or downsizing a second car.

Start to tackle grocery expenses before you quit. “Food is the largest unfixed expense in most household budgets, so there’s a tremendous amount of money in there,” says McCoy. “We tweaked our budget in every way, but the majority of extra money came out of groceries.” Basing weekly menus specifically on sale items can cut 30 percent off a grocery bill, McCoy says.

Lawrence, whose budgeting guide was first published in the 1980s, says it’s harder to live on one income today because a number of innovations — such as Internet access and certain prescription drugs — have become necessities. But just as important, there’s so much more choice in luxuries than there used to be — that is, so much more stuff to say “no” to.

“Children and adults are bombarded unconsciously with media showing them how life is supposed to be; you’re unconsciously saying ‘no, no, no’ all the time — and that takes energy,” Lawrence says. “It’s much more of an emotional challenge than it used to be.”

(Adapted from my Yahoo!Finance Column)

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