Image: Checkbook
Shutterstock
Careful financial planning is important when planning for a child, but there is no one-size-fits-all solution.
By
updated 6/21/2007 12:36:19 PM ET 2007-06-21T16:36:19

When changing work arrangements due to parenthood, there is no single approach that will work, psychologically and financially, for all families. Parents without partners must either find the best acceptable child care that fits their budgets, or arrange more flexible work situations that minimize that need for outside care.

Couples, though, sometimes have more choices when one spouse has a much higher paying job or more work-situation flexibility, or if they've previously lived indulgent lifestyles that can be easily pared back to accommodate newer and tighter budgets. Some "parental care is best" advocates claim almost any couple can afford to live on one income, because child care and other expenses associated with work often wipe out the second income. This 1950s family vision is enticing, but before buying in, closely examine the full financial and lifestyle implications of your choices, and make sure to consider the plethora of relevant factors.

"Oh, baby" versus "oy, baby" budgets
In planning for children, many couples can find substantial savings possibilities in expenditures for dining out, travel and entertainment, recreation, gifts for each other and personal-care indulgences. Furthermore, when one spouse stays at home, many work-related expenditures evaporate, and other savings and earnings opportunities materialize.

Here are just a few opportunities for you to save money on:

Child Care: $600 to over $1,000 per month for adequate day care or in-home child care takes a big chunk out of second paychecks.

Wardrobe: Even in a "business/casual dress" office, you need work clothing and possible dry cleaning.

Commuting: One spouse at home frees the other to take public transportation or use ride sharing, possibly requiring only one car between the two. Some employers make the IRS Section 132 public-transit commuting benefit available, which offsets up to $105 monthly. But even with two cars, eliminating one commute generates major gas and maintenance savings, and replacing a sporty car with a family car can help you save on insurance.

Food: Most couples can reduce dining out and, with good planning, cut take-out food bills as well. Furthermore, careful, coupon-laden grocery shopping might yield huge savings. Don't forget that one spouse will no longer eat out for lunch at work – nor grab premium coffees on the way. That change alone can up the savings by $5 to $25 a day.

Taxes: Second incomes usually push part of the joint incomes into a higher tax bracket. The extra income is also eaten into by FICA withholding, and might also wipe out credits and deductions available when AGI maximums are no longer exceeded. So, your actual reduction in disposable income will likely be substantially less than the gross second income.


Home Upkeep: Parenting babies is a full-time job, yet you might cut hired-out housecleaning costs due to a combination of squeezing in some yourself and focusing on hygiene rather than spotless appearance.

Home-Based Income: Through a combination of spousal help, part-time child care or nursery school, and older kids starting public school, many stay-at-home spouses start home-based jobs or businesses that bring in significant extra income without the commuting and office-lifestyle costs. There are also others who manage to continue in their current jobs by telecommuting.

Simple-Life Savings: If you use your family transition as an opportunity to overhaul your entire lifestyle, you might save a lot more through simple living, dollar-stretching and other philosophies that emphasize second-hand shopping, spending less on personal wants and choosing functional, energy-efficient housing over size, amenities and over-priced neighborhoods.

Save (less) now, pay (more) later
The most zealous new-parent couples can actually improve their monthly budget situations on one income, but they're the exception. Furthermore, the vitality in many relationships might depend on the career involvement of both spouses, even without net economic gain from the second income.

Most importantly, though, it's easy to overstate the savings when using online one-income calculators, which also don't factor in these potential future adverse economic effects of current savings.

When it may be better to work:

Budget-Resistant Budgets: If you're already thrifty, your main savings items when dropping one income will be limited to child care and taxes.

Baby-Busted Budget: Children usually cost more than most parents expect.

Grandparents: Today's grandparents are much farther away and busier than in previous generations. Some grandparents may even still be working out of necessity to provide for their own retirement, so they cannot be relied on for assistance. However, there are still a few who are able, eager and within close enough proximity to provide child care, making work more financially attractive for the stay-at-home parent.

Child Care Tax Benefits: Flexible spending (dependent-care) accounts offered by many employers allow employees to set aside up to $5,000 of income before taxes annually to pay for child care. Higher-bracket couples can save up to $150 monthly in federal and local income tax and FICA deductions versus paying with after-tax funds. Even without such accounts, the federal child care credit can save (per child, up to two children) higher-income families about $50 per month and lower-income families up to $1,050 annually. Note: You can choose only one of these two methods each year.

Mortgage Qualification: Although it's usually a mistake to stretch for a mortgage that fully requires both incomes to qualify, the second income can make it much easier to qualify for an otherwise borderline loan.

Retirement Income: Forgoing years worth of tax-deferred employer contributions and their growth in 401(k) and other employer-qualified retirement plans, and failing to tally 35 solid income years of work, can separately (or in combination) drastically reduce cumulative nest eggs and Social Security benefits, respectively

Employability and Market Value: Leaving the workforce means falling off the salary-growth curve associated with a good career trajectory. Not only will stay-at-home parents who decide to return to work in 10 years be way behind where they'd have been in both responsibility and compensation if they'd stayed working, they'll likely no longer even qualify for the type of job they had before leaving.

Health Insurance: As premiums rise an average more than 10 percent annually — while the benefits shrink — open enrollment each fall gives couples who both work a chance to reevaluate which plan will work best financially (sometimes dividing coverage to have Spouse A in one plan and Spouse B plus children in the other). This option is most critical when both work for smaller employers who often chase the lowest plan price tag and change plans every year. Note: Check for coverage of pre-existing conditions when considering change.



Job-Loss Hedge: Harvard Law professor Elizabeth Warren points out in her book "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" that today's typical home-owning, middle-class two-income couples would likely face bankruptcy despite scrimping and saving if one income were lost. Ideally, unless the spouses both have careers that practically guarantee instant employment (for example, accounting and nursing), they should strive to save as much of second incomes as possible. Thus, should one lose a job, they're not forced to dig too deeply into their savings during a long employment search. This also ensures that they use the employed spouse's health insurance rather than paying much more for the other's post-termination COBRA continuation policy.

Divorce: Today's 50 percent divorce rate makes it almost mandatory that both spouses avoid taking significant time off from developing careers for two major reasons. First, the arguments for living as well on one income as on two disintegrate when a family splits into two households. Each household can, on average, cost 30 percent more than a shared accommodation. The support-payer, receiver or children could all fall short financially. Second, unless it's a long-term marriage, support will be relatively short-term, so spouses who've fallen off the career track and are forced to return to work will be hard pressed to compensate for their monetary shortfall.

Two (or three) financial plans versus one
Unfortunately, most couples don't grow old together. So, in deciding on two incomes versus one, consider not only the effects on joint long-term finances, but also on potential long-term effects on each partner. Although a man deciding to become a stay-at-home parent is becoming more common, the mother's income is still the one that is usually sacrificed, so women should be aware of the particular financial challenges they face.

© 2012 Forbes.com

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.71%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.70%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.14%
17.14%
Source: Bankrate.com