The great debate – can we afford to live on a single income?

One incomeAJ: I personally LOVE the idea of us being a single income household if that means Kirby works, and I stay home and let my free spirit roam, but I’ve been told that’s an unreasonable lifestyle. :) In all seriousness, many families face this discussion regularly. This is primarily a discussion that occurs in households with children but also occurs in households wherein an elderly family member requires care or other extenuating circumstances call into question the abilities of a multiple income scenario where both individuals are away from home.

AJ & KJ: On the surface the answer to the question “can we afford one less income” may resoundingly seem like “absolutely not!” However, realistically, we can all almost definitely live on a little less. A few things to consider as you approach this topic in your household:

Insurance Benefits
Are benefits tied to the job you are considering leaving? If so, is there a substitute through the other person’s job that would suffice? If not, how much will the alternate benefit selection cost you? With the Affordable Care Act exchanges, maybe you have new possibilities that you didn’t have before, but understanding the coverage and cost differences can make a big diffference.

Is this a permanent or temporary change?
Discuss with your significant other if this is going to be the “new normal.” Thinking about this in advance can help frame how you discuss your goals looking forward and help you prioritize them. If it’s a short-term arrangement, then maybe you can make a few less sacrifices knowing you’ll be back on track in no time. Life can sometimes get in the way and change your course unwittingly anyways, so be aware that certain familiarities in your short-term may become long-term adjustments to your plan. If it’s permanent, how long will the savings you have in place carry you if something happens to the remaining income?

How will your savings change?
Discuss how your savings and goals may change. Maybe you’ll just have to make a few minor adjustments or maybe they will be permanent adjustments to your plan. Will you need to delay your retirement, adjust your expectations for children’s education, or modify your travel plans? You may be able to still save for your goals albeit at a permanently lower amount.

Change your retirement goals
Think about how your goals for retirement or “financial independence” may change. Cutting one income out of the picture doesn’t mean your whole plan is thrown off track, though! If you cut one income but your expenses decrease significantly, it’s still possible to maintain your retirement goals. See our post on living beneath your means for more information on how you can simultaneously reduce your expenses and increase your saving to more easily accomplish your goals.

What’s the contingency plan?
If you go down this path only to realize you can’t live on quite as little as you had hoped, what’s the contingency plan? Think about any part-time opportunities that could serve as supplemental income. Maybe one of your careers is conducive to hourly “as needed” advice that could allow you to pick up some extra money as available. Some at-home options could be leveraged in advance of the tightening budget.

Who is taking the plunge?
Especially in today’s world, there’s very little expectation of who will stay home by “default.” There may not be a clear breadwinner, but think about future career opportunities for both individuals (as well as desire for getting there!), taking into consideration who may be best suited for the full-time home job. Consider who manages your money and who maintains the home currently as you set out on your planning. You’ll need to reduce your expenses across the board in order to make this new scenario work and every financial decision will be important, so it is especially valuable to have shared ownership over how your funds are spent.

Have you forgotten anything?
Whenever you make a plan, isn’t there always something that you forget about and realize you should have planned for? Take some time to plan for the unexpected and give yourself time to think of different scenarios. Are you about to need a new car? Are you about to have to replace your air conditioning? Is some major life event going to occur and derail your ability to enjoy life without that second income?…

What is your goal in reducing one income?
Finally, and most importantly, what do you hope to gain by eliminating one income? This might seem like a ridiculous question, but if you’re talking about limiting the earning potential of a household, it’s one that needs to be considered. It’s essentially the same as asking what the ROI (return on investment) on an expense is, and it’s really the biggest question of all. Carefully considering the alternatives can help you understand what it is you are trying to accomplish. Is it extra time with your family, is it flexibility for you and a loved one to nurture a relationship, or is it the peace-of-mind that your personal lives can stay in order that are motivating you?

Why wait?
Just because you’re not in a situation currently where you will need to live on a single income, why not reduce the risk of job loss or economic crisis by learning to live within one person’s income? Whether one of you has a highly variable income or not, try it out and see how it works for you and your family. You may be surprised how you could live on less simply by being aware!

    Have you and a loved one discussed living off of a single income?
    How did you make the decision?
    Tell us what swayed you.

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Understanding net worth

Monopoly Net Worth
KJ: Part of understanding your personal finances is to understand if you are spending more than you are making. The first most telling sign that there is a problem is if your “net worth” continues to decline. To me, the net worth figure is an entertaining number to watch grow over time – yes, I’m definitely a personal finance geek! Well, what is “net worth” and how do you measure it? Let’s start with an overview before we get any further:

Your net worth is basically a calculation that is:

The value of all of your assets:

    anything that you own – your car, your home, your 401(k) or other retirement value, savings values, checking accounts, brokerage and investment account, annuities, stock options, personal belongings, ownership of a business, etc.
    minus

The value of your liabilities:

    anything that you owe – loan on a home, car, line of credit, credit cards, student loans, your proportion of a business liability, etc.

As you can see, the assets and liabilities can take many forms, and the goal is to continue to increase the “net” number to the side of having more assets than liabilities. If your house increases in value and you continue to pay down your mortgage over time, then this is one such example of how your net worth can naturally increase over time.

All “net” numbers are not created equally
Someone who builds up their net worth via cash, savings, or investment accounts is likely to have a much different picture than the previous example where a person built up their net worth in their home. With a savings account, it’s much more flexible how you can access that net worth and utilize it to help fund your goals (a la children’s education or retirement). With a house, your ability to access the equity may be a bit more limited. So, keep this in mind as you build your “buckets” of net worth with cash, savings, house(s), and retirement.

View in a different light
Try breaking out your different categories based on ownership (his, hers, ours), goal categories (children’s education, retirement, vacation), liquidity (cash, bonds, stocks, home, private investments). Find the analysis that best fits what you need to see each time you review your finances in whole.

Leverage the use of technology
Programs like Mint.com, Quicken, and Yodlee.com are examples of software that can help you keep up with this regularly, or you can always use the spreadsheet method (my preferred method). Depending on who you speak with and what you’re looking to do, you may hear the term “balance sheet” as well that has a very similar function. For us personally, we review our balance sheet/net worth statement in our quarterly presentations – yes, you read that correctly…I prepare a quarterly presentation for us :) – to make sure we’re trending positively. The format we enjoy shows the history of prior quarters in separate columns, so we can see the trend over several quarters and years. Some quarters (as may potentially be true for entire years), with house, car, and stock market fluctuations, you can see your net worth contract despite making progress on saving toward the accounts or paying down your home. Such is the reality of investing, and the sooner you recognize that all these values fluctuate and that you’re focusing on the long-term (i.e. 5, 10, 15, 20+ years), short-term declines can be but a blip on the radar.
With the average net worth of an American being $70,000, how do you compare?

Go ahead and try a spreadsheet on for size to see where you fall. See the link below for a sample Excel file where you can begin to create your own net worth statement. Choose from two options: a report where you view a snapshot at one point in time or a report that shows a trend over time if that is more your speed.

Net Worth Spreadsheet – build your own!

Net Worth Snapshot
Net Worth Over Time

    Do you track your net worth? Why or why not?
    Does the bank require you to submit a personal net worth statement to support a debt?
    Tell us if you feel your net worth is healthy or not.

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Retirement savings calculator

Retirement Savings Calculator Graph

Calculating what you need for retirement
KJ: We’re on a bit of a kick with regards to looking at what we need to save for the future, and the age old question of Am I on track?. Do you know what you need to be saving?

Okay, so no, we did not spend countless hours and thousands of dollars on building our own retirement planning calculator, but why bother? With lots of free tools available to help (some much better than others), we wanted to share one we stumbled across that has a decent amount of options:

MSN Money Retirement Calculator

Don’t Get Discouraged: Find a Way to Get on Track
Sure, especially for a young person, there can be a number of items that don’t pan out like planned (maybe you have to make a career choice – or two – to make less in order to do something more fulfilling or less stressful). Maybe your children end up costing you a little more than planned and you can’t quite save what you had hoped. No system is perfect, but periodically stopping to do a gut check on your current situation is always a good idea. Plug in the numbers and see if you’re where you need to be. If not, figure out how to get there by cutting your expenses and increasing your savings. Not only does cutting your expenses reduce the need later on, but you’re also simultaneously increasing your savings by nature of having fewer expenses – so learn to live beneath your means – win-win!

Don’t Count on Social Security
For those of us with a long time horizon, when plugging in the numbers, see about excluding Social Security. If (and that’s a big if) it’s still there by the time we get to retirement, it’s likely to be quite a bit different than it is today, so the last thing you should do is plan for that uncertain piece as a requirement for your goals to succeed.

Not a substitute for solid advice
These free charts are not a substitute for good, sound advice, but they at least help you start to “what-if” until your heart is content. Also, these charts can be lacking in that it just does a simple calculation of return each year (i.e. the investment return numbers you use are used year after year – an impossibility!). In fact, you’re likely to experience quite varied returns each year +5%, -5%, +8%, +6%, -2%, etc. to actually achieve your “target” return. However, this simple calculation is better than not planning ahead, so start clicking around and see what your results come up with. If it predicts doomsday scenarios, then look at what you can do to cut those expenses even further and right the ship now – the sooner the better! If it seems like you’re too far off track or maybe you are on track, but need help managing what you’ve built, then consider visiting the Financial Planning Association (FPA) planner search tool to find someone in your area that can help.

    What do your results show?
    Are you on track or have you side-stepped a little bit?
    Tell us about how you see that you are on track.

Retirement savings calculator is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Making your interest earn you interest!

Growing Interest IncomeKJ: The compounding effect of wealth over time is quite significant – especially with a longer time horizon – so the sooner (and more) you begin to save, the better your long-term financial picture will be. Hopefully this post is not too dry – I mean, who wouldn’t like more money!

The effects of compounding interest over time is quite probably the best invention since, well, sliced bread!

Basically, the way that you make your interest earn you interest is that you let your savings grow and reinvest over time. Let’s look at a simple example (assuming a low interest rate of 3% – which is not all that low by today’s standards!):

Year 1: You deposit $1,000 in a savings account. You earn $30 in interest ($1,000 X 3%).
Year 2: You start the year with $1,030 ($1,000 + $30). You earn interest in the amount of $30.90. (i.e. your interest earns the extra $0.90 in income).
Year 3: You start the year with $1,060.90. You earn interest of $31.83.
Year 4: You start the year with $1,092.73. You earn interest of $32.78.
Year 5: You start the year with $1,125.51. You earn interest of $33.77.

Year 15: You start the year with $1,512.59. You earn interest of $45.38.

Year 30: You start the year with $2,356.57. You earn interest of $70.70, so your ending value would be $2,427.27.

So, while the numbers reflected above are quite small, you can see the impact of your $1,000 (without even accounting for any future contributions) over a long period of time – especially if you let the income reinvest!

If you had instead spent the income each year (or received what is called “simple interest” wherein your interest earned does not earn interest), you would end up after 30 years still only receiving $30 of interest, with a cumulative value of $900 in interest and $1,000 of principal (so $1,900). Compare this to the $2,427.27 figure, and you’re 28% lower than the alternative, and that’s for EACH $1,000 you deposit into your account. That adds up to HUGE differences over time.

The difference between the compounding versus non-compounding scenarios are exponentially higher with a longer time horizon and with higher return expectations. Consider our same example, but with a 6% return. With compounding of your interest, you would end up with $5,418.39 after thirty yeas versus a non-compounded 6% calculation that would yield only $2,800 – that’s a value of almost 94% higher and much more of a difference than our 28% calculation when we were looking at 3%!

AJ: There have been so many times where we have sat down to figure out how we can either reduce our expenses or increase our income to help advance our goals. This is an incredibly intelligent way to make your money work harder for you without having to reduce spending or increasing the amount you are contributing directly to savings. Appropriately investing your money is just as important as making the money and not overlooking incremental opportunities to grow your investments means getting ahead more quickly with the same contribution level.

Finding ways to just eek out an extra $10 in savings now means you’re potentially giving yourself the opportunity to have $54 later. It really makes you think about the true “cost” of everything today. Sure you know the sticker price listed today, but what does it potentially translate to the foregone future value? As with everything we preach, there’s definitely a delicate balance between the here-and-now versus always delaying for future consumption, but this perspective helps us differentiate between those “needs” and “wants” of ours.

    Is your interest paying you interest?
    What are you doing to invest early to benefit from having time on your side?
    Tell us how you save.

Making your interest earn you interest! is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Am I on track?

KJ: Similar to our post regarding the Fidelity study on savings targets to reach throughout your life, I came across an interesting JP Morgan chart that outlines what you should have saved at various checkpoints and salary levels. Basically, you find your current salary and current age, and find where they intersect. If the value is “1.5,” then that means you should have savings equal to one and a half times your salary. Without any more introduction, how do your savings compare?

Retirement Savings Milestones

This study focuses on your income (and not your expenses per se), but it’s equally important to focus on the expense side of things. Maybe you’re fortunate enough to be on the upper end of the chart, but if you’re living at an expense level well below your income, then chances are your target may be different. No chart or study is a substitute for good professional advice, and of course there are some limitations (in that just because you make a certain amount doesn’t mean you spend most (or all) of it…hopefully!), but it’s always interesting to do a status check and see if you seem to be on track and heading in the right direction. For those of us twenty-somethings, we’re kind of stuck using the minimum age, but it also just shows you may be ahead of the game if you’re planning so proactively to achieve these targets! If you’re not on track, what are you doing to get there?

    Are you on track?
    What can you do to get (or stay) on track?
    Tell us about what works for you.

Am I on track? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.