It’s been almost five months since my husband took the plunge and returned to school full-time. Since then, our comfy, two-income life has been slashed down to just one, and it’s been a big adjustment.
We, like most North American families, rely on two incomes to meet our financial goals and pay our monthly bills. Now that his income is $0, we’ve had to take evasive action and adapt to this new normal.
If you are part of a partnership that relies on both incomes for financial stability, odds are at some point; you’ll be in this situation too. There are a ton of reasons why you might find yourself living on one income. Here are a few:
- You are offered a job in another city, your partner has to quit their job and can’t claim employment insurance while job hunting.
- You or your partner run a business and don’t qualify for Canada’s partially paid parental leave.
- You partner stays home full-time and stops bringing in a steady paycheque.
- You or your partner may decide to go back to school full-time.
- You or your partner become ill and can’t work.
As I said, there are a ton of reasons why living on one income might be a necessity, so being prepared is just good financial sense. To determine if your finances would be wrecked or just disrupted, you need to make a mock budget.
The Mock Budget
Thriving on one income comes down to one simple equation: money coming in versus money going out. To make it work, you need to maximize the money coming in and minimize the money going out.
It all starts with a mock budget.
I make mock budgets for everything. I made a mock budget before my husband, and I moved to Halifax in 2015. I made a mock budget for our life as homeowners, I had a mock budget prepared before my husband even knew if he was accepted for his current schooling upgrade. Right now I have pregnancy, parental leave, and post parental leave budgets sitting in my money folder – and babies are still a distant dot on my horizon.
While these mock budgets might seem like overkill, they are the only way to know if you can afford a big lifestyle change.
Money Coming In
In these budgets, I include my expected income during the period in question. For this stint of one-income life, I included my full-time income, and nothing else. I don’t include my freelance income because it’s unpredictable.
Say it with me people: you can’t count on freelance income. Keep it out of your mock budget.
So that leaves me with my full-time income, about $3,300 per month after taxes. That’s what we have to live on each month.
Money Going Out
Our monthly expenses equal about $3,555 per month. That includes $1,918 per month in housing costs, $300 per month for car insurance and gas, and money for pets, cell phones, internet, life insurance, entertainment, and groceries. The money coming in versus the money going out leaves a modest shortfall of about $283 per month.
If you are preparing for things like a move or a pregnancy, make sure to consider the categories that might change due to those life events. If you are moving to a city with a higher cost of living, research typical rents in your ideal neighbourhood. If you are having a baby, ask some financially savvy friends what they’re spending on diapers, formula, etc. Always use worst-case scenario costs.
It’s not an accident that our monthly expenses almost perfectly match my income. This small discrepancy was intentional on my part. I’ve always tried to keep our fixed monthly expenses (fixed expenses are things you can’t change like mortgage payments) low because low monthly expenses make you more flexible and able to deal with brief stints of variable income.
Here are three steps I’ve taken to keep my fixed monthly expenses as low as possible.
Paid Off Student Loans
I paid off my $26,000 student loan five years ago. Back then, my minimum monthly payment on that loans was $305, and the payoff term was ten years. In 2013, $305 was a huge chunk of my net income, and I was deathly afraid that I would lose my job and not be able to afford the payments.
Today, taking the time to pay off those student loans means I no longer have to worry about that $305 per month.
Paid Off Car Loan
Last year, when my husband’s return to school wasn’t even yet an idea, I was focused on paying off my car loan. I’d borrowed $18,500 on a line of credit to pay for our 2014 Subaru Crosstrek in January 2017, and spent all of that year paying it off. Paying off that car, again, keeps our fixed monthly expenses as low as possible.
Bought a Small House
We bought our house in 2016 for $270,000. This house is small, with about 700 real square feet of living space, plus a finished attic as a guest room and a finished basement that is our brewing/exercise room. We could have easily spent more money on a bigger house with nicer furnishings, but that would’ve resulted in higher monthly payments. I was dead set on not spending more than 35% of our net income (not including freelance income because it’s variable) on housing.
It would have been so easy to buy a bigger, newer, nicer house. Our pre-approval amount was far higher than $270,000, and we’d saved about $27,000, which was enough for a 10% down payment on this home but would’ve satisfied the required 5% down payment on a much larger home.
But we didn’t. Instead, we held back. We bought a home that was small and fit our needs now because I was wary of overextending myself.
These three decisions easily shaved $1,000 per month from our minimum monthly expenses. Between my minimum payments on my student loan ($300) the car payment ($300) and a bigger place ($400), we could’ve been in a budget deficit of $1,300 per month, not $300.
When the money is flowing, living on a lean budget means there is plenty of money left over to put towards goals. When our income is severely restricted, a lean budget means that the budget deficit is much smaller.
How to Handle a Budget Deficit
Even though I took all of these actions keep our budget lean and mean, we still ended up with a deficit:
Income ($3,272) – Expenses ($3,555) = ($283)
This is a budget deficit. Budget deficits are pretty common when living on one income, and just the existence of a budget deficit isn’t an immediate cause for alarm. Having a clear idea of the size of your budget deficit is important because it tells you how much you need to save in advance to offset it.
To determine how much to save, simply multiply your monthly budget deficit by the number of months you expect to live on one income. If you aren’t sure (like in the case of quitting your job, where you can’t be sure exactly when you’ll find another one) take your worst-case scenario and add a few months to that.
For example, when my husband and I moved to Halifax from New Brunswick in 2015, he left behind his business. Since he was a sole proprietor, he didn’t have access to employment insurance, and we were living on one income. I saved enough to cover our budget deficit for 12 months of unemployment. He was unemployed for three months.
In today’s case, I know exactly how long we’ll be living on one income – until August 2019. So, I needed to save enough to cover the budget deficit for 16 months (from May 2018 until August 2019).
$283 x 16 = $4,528
All in, I need to have an extra $4,528 to cover our budget deficit during my husband’s return to school.
Planning for Emergencies
Of course, it isn’t enough to cover the basics. Because life happens, and odds are you’ll be faced with an emergency during your one-income stint. It’s always a good idea to keep a fully stocked emergency fund, but even more when you are earning less. I had a fully stocked emergency fund of $10,000 sitting in a high-interest savings account with EQ Bank. I also had $4,000 stashed in a TFSA, invested.
Planning for Extra Expenses
Finally, whether you are planning a parental leave, a return to school, or a move to a new city, most one income-stints include extra expenses. In my case, it was tuition. I had a plan to pay for my husband’s $20,000 tuition, but if you’re planning on incurring extra expenses during your one-income stint, make sure to give yourself enough time to save for those.
What if there isn’t enough time to save?
Finally, me saying “just save the money in advance” isn’t always practical. Maybe you find yourself unexpectedly pregnant and nine months isn’t enough time to save money and pay off your debts to lower your expenses. Maybe you have to move for work short notice, and you don’t have enough time to save the money to cover your partner’s period of unemployment.
Whatever the reason, if you find yourself with a budget deficit that can’t be covered by savings, take the following three steps:
Limit the Damage
First, go into damage control mode. Cut as much out of your budget as possible to reduce your deficit as much as you can. Quit your gym, cancel your cable, choose the cheaper apartment, make big changes to cut down your budget deficit.
Pump Up Your Income
Second, bulk up your income as much as possible, whatever way you can. Here are some obvious ways that address the scenarios I’ve mentioned:
- Freelancing/side hustling
- Your partner could run a day home while they stay home with the baby
- Your partner could take on short-term, part-time work while looking for the right, long term job
Whatever you can do to earn more money and make that deficit smaller, do it.
Make a Plan to Pay Off the Deficit, Later
Finally, don’t freak out. Short-term budget deficits are not the end of the world. If you find yourself behind a few hundred dollars each month despite your best efforts, that’s ok. Use the lowest interest credit tools you can find (not credit cards). Continue to make your minimum monthly payments so that you don’t damage your credit score.
Living on one income is usually temporary, there is usually an end date. After your family income goes back to normal, you’ll earn enough as a family to pay back the deficit. Then you can take steps to ensure you don’t end up in that situation again.