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How To Survive When Two Incomes Become One

Shelly K. Schwartz,|Special to CNBC.com
Monday, 8 Feb 2010 | 9:48 AM ET

Your spouse just got laid off. One of you quit to play full-time parent. Or your wife is paying the bills while you head back to school. Whatever the reason, making the switch from two incomes to one can test the mettle of even the most financially fit families.

Indeed, according to Larry Ginsburg, a certified financial planner with Ginsburg Financial Advisors in Oakland, Calif., surviving on a single salary, after you’ve built a life on two, takes planning, discipline and above all else, a willingness to make tough choices.

“The first thing you need to do is acknowledge that things are going to be different,” he says. “Many people make the mistake of thinking this will only last a short time so they don’t need to make changes and they get deeper and deeper into debt.”

Whether the loss of one income was planned or unexpected, you’ll want to begin by answering the basic question: Do I make enough to get by?

Add up your fixed expenses (mortgage, utilities, insurance, car loans) to determine whether you’re able to meet those payments with a single salary.

“Don’t just look at your monthly living expenses,” says Ginsburg, noting it’s important to factor in bills you pay once or twice a year as well, including auto insurance, taxes, life insurance and
homeowner’s association fees.

“If you’re paying large expenses a few times a year you need to look at the annual cost, divide that by 12, and add it into your monthly expenses to get a true sense of what you
really spend per month.”

Cost-Cutting Guide

If the income from the working spouse falls short of your financial needs, you’ll have to tap into your savings, or, better yet, cut your discretionary costs.

That includes premium cable channels, your gym membership, BlackBerry fees, dinners out, or your pricey latte addiction.

Chances are, you won’t have to give up all of life’s little extras, but you will have to scale back enough to bridge the gap.

If the reduction in your household income is likely to be long-term—perhaps your spouse is quitting to start his own business or you plan to pursue a lower paying line of work—you’ll have to think bigger.

Try trading in your brand name sports car for something less flashy or downsizing your home, which is generally your biggest living expense.

“Your first priority is to preserve your financial health at any cost because that opens up other decisions like being able to take another job you wouldn’t otherwise be able to accept [because it pays less],” says Ginsburg. “The better you are at controlling your costs, the more
flexibility you will have.”

The process of reviewing your expenses in the face of financial hardship, in fact, is often an eye-opening experience for married couples, says Bob Adams, a certified financial planner with Armstrong Retirement Planning in Cupertino, Calif.

“Most people really don’t have a good handle on their fixed and variable expenses so this exercise is actually very helpful,” he says.

“They usually say, “Wow! I didn’t’ know I was spending this much a month on discretionary items.’”

Once you know where your money is going, he says, it’s easier to identify opportunities to save.

The other bright side to losing an income? You may owe less to Uncle Sam.

“Your reduced income may have a favorable impact on the amount of taxes you owe,” says Ginsburg, who advises couples to speak with their tax advisor to determine whether the working spouse can adjust her withholding and take home more in every paycheck.

Remember The Future

Unfortunately, if one of you is out of work, you’re not only losing an income, but also the value of any contributions and employer matches the non-working spouse would have made to his retirement account—which can amount to huge bucks over time.

The working spouse should continue funding his own 401(k), of course. But to keep your family’s long-term savings goals on track, you’ll need to tuck away a little extra into a retirement account as well, like an IRA.

Ginsburg admits that’s a tall order when your household income gets cut in half, but he urges couples to avoid halting contributions altogether.

“We would encourage people to continue to fully fund their retirement plans,” he says. “If the job loss was unexpected, and you’re in survival mode, you can give yourself a temporary break, but it should be the last thing that gets cut.”

By all means, reduce contributions to your children’s college fund first, since no one’s going to give you a scholarship to retire.

On the other hand, though it’s tempting to slash your life insurance when times are tight, Adams says couples should resist the urge—especially if they have kids.

“If one spouse is unemployed, it’s still important for both to have insurance,” he says. “The one at home may requite less coverage, but eliminating a policy altogether is a bad idea in the short-term and the long-term.”

Should something happen to the non-working spouse, he notes, the surviving spouse would need extra money to pay for child care.

Plus, he notes, the spouse for whom life insurance was cancelled may not be able to obtain coverage later on. “If they get diagnosed with diabetes, for example, they may not be able to get coverage back again,” says Adams.

Plan Ahead

If you anticipate a layoff down the road, or expect to leave your job for any reason, you have time on your side. Use it to your advantage.

Try living on one income for several months to see what it takes—and be sure to save that second salary during those months into an emergency fund, says Adams.

Regardless of their financial position, all couples should have an emergency fund worth three to six months of living expenses set aside in a liquid, interest-bearing account like a money market fund, says Adams, but given the uncertainty in the job market couples today should aim higher.

“In today’s economy, everyone should have nine to 12 months of expenses set aside so if something happens they can maintain their lifestyle,” he says.

A home equity line of credit, used only in case of emergencies, can help provide peace of mind.

As you evaluate your financial picture, look, too, to reduce or restructure your debt.

If you’re paying multiple car loans, can you pay off one before your income drops? Can you refinance your mortgage loan or college loan to lower your monthly payments?

“Debt and interest payments can suck the energy out of your budget,” says Adams.

Whether you’ve lost an income unexpectedly or had years to plan the transition, the key keeping a roof over your head is to take control of your finances as quickly as possible.

“Usually people wait until the event occurs and then react emotionally,” says Ginsburg. “The single best decision people can make is to begin with logical financial planning, because that will lower their anxiety and help them develop a higher level of confidence about whatever decisions they eventually make and implement