How to Transition from a Two-Income Household to One

Downsizing from a two-income household to a one-income household can be necessary for many different life changes. Maybe you and your spouse are starting a family and decide one of you needs to be a stay-at-home parent to take care of the kids. Maybe your family is moving and only one spouse can keep their job. Maybe one of you can no longer work due to illness or injury. Regardless of the situation, it can be a huge and difficult life transition. If you are fortunate enough to have some time before the transition, there are steps you can take to make the switch less stressful and more successful. If this transition is happening sooner than you’re prepared for, these tips can make the financial burden more bearable.

Build a Budget

It goes without saying that everyone should budget no matter their financial situation. But when you’re transitioning from a two-income household to a one-income household, having a budget is crucial. The first thing you need to do, before making any changes to your spending, is track every dollar you spend on a spreadsheet. Every expense, from recurring charges to coffee runs, should be recorded. If possible, do this over a three-month period. Tracking three months of spending will give you quarter-length glimpse of your spending in a year.

Once you know where your dollars go, you can make decisions on what expenses can be cut out. This could be dining out, subscriptions, entertainment, etc. Every household is different so decide based on your own lifestyle preferences. If you look at your spending data and still aren’t sure where to cut back, this next tip will help.

Practice Living on One Salary

Spending habits don’t change overnight; they take time and practice. If you know you will be transitioning to a one-income household, there is no better time than now to practice living with a reduced income. Limit all your spending to the salary your one-income will provide. Commit to spending within that salary. You should be able to cover all the necessities like bills, utilities, groceries, transportation.

Just like any diet or workout routine, start off easy and then make things harder as you go. I recommend giving yourself three-months because, as I mentioned earlier, this is a quarterly snapshot of your yearly spending. You’ll have a better picture of all the expenses in your life. Each month cut out a third of your budget until you reach your target income. You can cut back on small expenses first and then larger expenses later. If you can survive the first month without dipping into the extra income you set aside, you’re off to a good start. If you find yourself needing to use that extra income, take it as a sign to evaluate which expenses are a top priority and which things you can live without. Remember, it will be different for every household.

As you’re living on this self-imposed limit, you can find smart ways to save money. For example, some services offer a discount when you switch to automatic payments. Research your credit card company to see if there are any rewards available for customers like merchant discounts or cash back programs.

Grow Your Emergency Fund

While you practice living on a reduced income, what should you do with the extra income? The smartest thing to do would be to start an emergency fund or make more contributions if you already have one. Emergency funds are a safety net for those bigger expenses you didn’t plan for, such as medical expenses or car repairs. If you find yourself unemployed, an emergency fund can provide a financial cushion until you find a new job. An emergency fund should be separate from a savings account and only used for unexpected but necessary expenses.

How much should you put into an emergency fund? For a single income household, an emergency fund should be able to cover at least two months’ worth of expenses. In the event of unemployment, this will cover your necessities as you conduct your job search and also carry you until you receive your first paycheck, which could be a month after you start your new job.

Eliminate as Much Debt as Possible

When you transition from a two-income household to a one-income household, it’s possible you won’t be able to make debt payments as easily. You likely took on the debt when you had two sources of income or when you expected to have a higher income. If you know you will be living with a reduced income soon, now is the time to prioritize paying down your debt and minimizing the amount of interest you will pay later.

Organize all your debt in order of lowest interest rate. This could include student loans, credit cards, department store cards, gas cards, bank loans, medical debt, etc. Determine how much money you have available to put toward your debt every month. Pay the minimum amount for the loans with the lowest interest rates first. After you pay the low-interest loans, put the rest of your available money toward the loan with the highest interest rate. You want to pay the high-interest loan off as fast as possible.

It will greatly benefit you to pay off as much debt as you can before your income is reduced. Once you’ve transitioned to a single income, develop a payment plan to continue managing your debt. You might want to look into debt forgiveness options, especially for medical debt and student loan debt. Some employers offer loan repayment programs in their benefits package. Incurring debt is inevitable so make reasonable goals for paying it off and consider your financial situation, even possible unforeseeable financial hardships, before deciding to take on more debt.

Contribute More to a 401(k)

Retirement is something everyone should think about early on, but it’s even more time-sensitive for a one-income household. The earlier you start investing in retirement, the more it will pay off later. As you are practicing living with one-income, you will want to contribute some of that extra income to a retirement fund. If you have a 401(k) you regularly put money into, find out the maximum contribution you can make that your company will match. Your company’s matched contribution is essentially free money toward your retirement fund, so you want to make the maximum contribution to your 401(k) if possible.

Understand Medical and Other Benefits

When transitioning from a two-income to one-income household, it is possible your medical and other benefits will change. Your medical coverage might have come from the spouse that is losing their income. You will need to look into medical plans through the other spouse’s employer or through marketplace providers. Having a savings account for medical expenses will be especially important when downsizing to one source of income. If you qualify for medical savings accounts, such as a Health Savings Account, you can be putting your extra income toward it before the transition.

Make Lifestyle Changes

Depending on how much your total income is going to decrease, you will need to make lifestyle changes both large and small. It’s important to discuss your priorities with your partner. Short-term and long-term plans might have to be adjusted, such as purchasing a new car or taking a vacation. If you understand your expenses and priorities, you will be better equipped to make small adjustments to your financial goals and you won’t have to give them up entirely.

Your basic necessities and bills will come first when setting priorities. All other priorities might look different after the transition. Family time might look like cooking a meal together at home rather than eating at a restaurant. Getting a new car might look like buying a fuel-efficient four-seater SUV rather than a sports car. What matters most to you and your household should determine what lifestyle changes come with this transition.

Don’t Rush This Decision

The transition from a two-income household to a one-income household will be difficult, especially if your income is changing drastically. Consider both the short-term and long-term effects of reducing your income. If you have a choice in the matter, discuss how soon you can realistically transition and, alternatively, how long you can wait before transitioning. You should meet somewhere in the middle of those extremes and give yourself time to build up savings and emergency funds and pay off debt.

The best thing you can do to have a successful transition is have serious, meaningful conversations with your spouse or life partner. Ensure that both people understand what each other is gaining and sacrificing from this change. There are many ways to stay in control of your financial success and the more you prepare the better suited you will be for this life change and any future changes that may come your way.

To talk to a trusted financial professional about resources and options for households transitioning from two incomes to one income to learn more about managing your finances, visit PlainsCapital.com.