reduced income advice (long winded)

[ttuchris]

I'm new to the forum, but have looked around and really appreciate what it offers. I consider myself somewhat financially savvy, and until recently I've felt like I was at least "on track." My wife and I are expecting our first child in April, and my wife plans to take a year off of work. We also have talked that since we plan to have one more child, that we should go ahead and try for the second one relatively soon so there isn't a large gap in their ages. If this is what we decide, then it'll result in approximately 3-4 years of living off one income. I am absolutely thrilled to become a dad, and I want my wife to have time to raise our little infant(s), so I will not pressure her to go back to work before she's ready.

AND I recently had a setback at my job. There was a leadership change at the top, and shortly after there was a company wide "re-organization," and that is a long story in itself, but the end result was my salary being reduced by 24% (66K to 50K). I do not see this being a long-term problem, as I will either find another job paying close to where I was before, or I will outperform the "new" position I was cornered into. But still, for now that's what I've got and what I'm using for budgeting purposes.

My wife and I bought a house last year, but kept the price moderate and put it on a 15 year mortgage. This resulted in having a somewhat large monthly house payment. We have two car payments, but we are going to use the $8K first time home buyer tax credit to pay one off. Our other obligations are relatively normal - student loans, insurance, etc. The bottom line is that when we drop down to one income, with a conservative budget, we will likely run about a $300 defecit each month. I can make lifestyle changes to minimize this, and find ways to keep us from consistently being in the red, but just covering costs is not where I want to be.

I have 15K in cash in an EF, about 5K more in other savings accounts, and we will be getting a lump sum of around $5K for my wife's short term disability. The rational side of my brain is telling me that we will survive and things could be FAR worse, and we'll just be tight for a little while then we'll be back positive when the wife goes back to work. But the business school graduate side of my brain keeps thinking about all the lost saving/investing opportunities and starts to panic. I'm 27, and I understand that because of compound interest/time value of money, NOW is the time to be putting it away to let it grow.

I guess the purpose of all that rambling is to ask if this is a normal reaction, and how did you deal with temporary setbacks such as dropping down to one income or a salary drop (or both, in my case)? My compulsive need to save and invest and NOT live paycheck to paycheck is causing me stress. If anyone's still reading, any insight would be appreciated.

[My English Castle]

I guess my short-term advice would be to scour all your expenses and look for ways to cut back. People so often tend to overspend on first babies--and they don't need half the things the retailers say they do. Is there another way to cut? Sell a car? Do some pt or free-lance work (either of you?) Our expenses dropped a lot when our daughter was born--we really hunkered down and rarely went out. But you need to both be committed to being careful with money.

[cooliemae]

As a new dad myself, I can understand the anxiety of figuring out the finances. My wife and I are in a pretty good position because we work different shifts and our jobs allow us to bring our son to work which allows us to trade him off from me in the morning to her in the afternoon. If we could afford it, I know my wife would love to take off from work, but it just isn't possible. I would suggest that your wife look for a small part time job that would cover the difference at least until you're income increases.

[cicy33]

I think that you are not realizing some of the savings that you will experience right away. I will try to think of all the ones I can.

1. Since you both work right now I am guessing you eat out regularly (not saying you do alot, but most people do) This is an area you could tighten down easily. As your wife will be home she could do a lot more cooking from scratch which will also save money on groceries and kinda ties into the eating out thing. I think when people both work (& we are guilty of it too) sometimes we buy food we normally wouldn't just because we are tired and don't want to cook. this can be a big cost.

2. If your wife is so inclined couponing is a great way to save money. Don't focus on what you can't use coupons for, focus on what you can. I hate it when people say but they don't sell stuff for me. sure they do, toilet paper, dish liquid, shampoo, soap, etc. just focus where you can save and you would be amazed what coupons can do for you.

3. If she hasn't already have her sign up for mypoints.com. it is a great little site where you click on emails that they send you and you earn points and then cash them out for gift cards. It is not like the other crappy sites. I have used them for years and cashed out many times. I am not extremely focused on the site so it takes me a while sometimes to build points. but it can help with little things like a gift card for someones bday or xmas.

4. Your wife will not be worrying about work clothes for a while. baby clothes yes, but these are not as expensive as people think sometimes. Babies do not need hundreds of clothes. so that can be a savings you are not thinking about. Does she eat out at lunch from work? she won't when she is home.

5. she won't be driving every day to work and back. she may still go places but probably not every day.

6. start saving some now that is specifically set aside for post baby life. not your EF, leave that alone.

7. if you guys have a lot of junk, get rid of it on ebay or craigslist, it can provide a little income. not taxable if it is your own stuff.


I hope that gives you a few more ideas.

[hard2figure]

I guess my short-term advice would be to scour all your expenses and look for ways to cut back. People so often tend to overspend on first babies--and they don't need half the things the retailers say they do. Is there another way to cut? Sell a car? Do some pt or free-lance work (either of you?) Our expenses dropped a lot when our daughter was born--we really hunkered down and rarely went out. But you need to both be committed to being careful with money.

I agree with the short-term expense review. And thanks to my 2 little ones, I also know the things we got for the kids and then never used. You sound to be pretty close to the breaking even on the one income, maybe paying off one of those car loans would be enough.

My wife and I did something very similar. Our kids are about 2 years apart and my wife took off as much time as she could from work and then went back part-time. We were doing pretty well with the finances as we did some cut backs after each child was born and we realized what was really important in our lives. I've been unemployed now for just over a year after our company switched CEO's and reorged. My wife was thankfully able to return to full-time and I have been at home with the kids most of the time. Things are getting a little tighter now as I never expected to be out of work for so long. But I know my wife is very surprised that we have been able to adjust so well to this ... challenge. I was disappointed to stop our ROTH IRA contributions but my wife still gets the full match on her 401k. I know that we have lost some opportunities to invest this last year but the time with my kids have been great as well.

As a new dad, it is common to worry about how things are going to change. As time goes on you will have many other choices and frankly the more money option isn't always going to be the one you will choose. The wife and I talk about these options frequently to stay on the same page.

Hey best of luck and enjoy!

[Slug]

I would say your reaction is completely normal. I went through something similar with the birth of my son 4.5 years ago. My wife has yet to return to work (she had also planned to take off 1 year), and I admit it is a source of friction so it's good that you both have a clear plan that you agree to. I will say that babies are not cheap. We make it on 1 income because I am fortunate to have a high paying job. I relieve my saving anxiety by maxing 2 Roth's and my work 401k every year. I still see all the lost tax deferment and compounding and savings and vacations with every year that goes by without her working, and it leaves me queasy. Still, it will be OK, and my son has certainly had a very good existence in these years which you cannot put a price upon. But I digress...

One thing you could consider to increase your liquidity is a re-finance into a 30 year fixed mortgage. You could always continue to pay it like a 15 year, but if you needed to reduce your payment, you would at least have the option. That flexibility can be the financial buffer you need in what will inevitably be a stressful period with 2 small children.

[cicy33]

One thing you could consider to increase your liquidity is a re-finance into a 30 year fixed mortgage. You could always continue to pay it like a 15 year, but if you needed to reduce your payment, you would at least have the option. That flexibility can be the financial buffer you need in what will inevitably be a stressful period with 2 small children.

This is a great idea I think! of course remember that if you do this to state when you pay your payment that the extra goes to principal or they will just put it to a payment.

[snafu]

Please have your 1st healthy, happy baby and enjoy the roller coaster ride of 1st year parenthood. As you acknowledge, running a $300. monthly deficit is too dangerous to consider. The choices are bring in more income or drastically cut spending or a combination of both. Your challenge is to make every single dollar work for you. As mentioned, infants don't need much and you could check out frugalista sites, like Amy Dacyzyn Cheapskate Gazette [available @ library]and this forum's frugal thread. What changes would you be willing to make to get to your goal?

If you are uncomfortable not adding to savings, try taking 5% [sum of choice] off the top to your linked savings account 1st, and do your best to manage on what remains.

[MrPolarZero]

Well, being keen on saving is not a bad one, but you might want to avoid being too much of a savings freak. It would be a good idea to assess your funds first, in order to see how you can make more efficient use for it.

[LuckyRobin]

I've been a stay at home mom for 15 years. When we first started this my husband was only making $23K a year. We got rid of one of our cars. We kept the one that was in the best shape and was bigger and that the car seat fit in better. We didn't need two cars with me not working. On the days your wife might need a car to take the baby to the doctor she could drive you to work and pick you up after. Your insurance will drop with only one car. It might drop with the fact that your wife will no longer be commuting and will not be driving as much. Ours did. Your gas will drop as well.

We gave up cable TV altogether. Some might say that is a hardship, but we had the cheapie netflix and there was plenty to watch for far less money. If you have cable internet most programs can be watched a day later on the networks internet sites anyway.

I did internet surveys and managed to make $50 a month on average. Also someone above mentioned mypoints which is also a great way to get gift cards to places that sell baby items like diapers. I don't think we paid actual money for diapers the whole first year of my daughter's life. Sign up for the diaper coupons at the diaper sites. Also the formula coupons at the formula sites if nursing isn't in the cards.

Cook meals at home. Yes, your wife will be exhausted from the new baby and the urge to eat out will be strong. But throwing a roast or a chicken in the crockpot early in the day takes almost no effort, nor does making up baked potatoes and opening a can of veggies. The cost savings for dinner will be pretty high. Brown bag your lunch. Eat breakfast at home. It takes five minutes to scramble eggs and make toast. It takes ten to fifteen minutes to make it through a busy drive-thru line. Don't let time be an excuse. Plan your meals ahead of time. Sit down and figure out your menues for the week. Not having a plan is the surest way of ignoring a new cooking regimen.

Ask friends and relatives for hand me down baby clothes, bottles (you can buy new nipples), high chair, stroller, playpen and crib. Babies grow so fast the year they are born they don't have time to destroy clothes and most of them are in excellent condition, barring a few spit up stains. If someone is throwing your wife a shower for the baby and asks what she needs ask for diapers in size one and two, not newborn. He or she won't be in newborns for long and you don't want a bunch of diapers you can't use. If more well off relatives want to buy something special ask for a good car seat. Don't buy what you don't need, like a changing table. Baby can easily be changed on a changing pad on the floor or bed or ottoman.

These are just off the top of my head, but I'm sure there are lots of other little things you can do to cut your expenses. It is completely possible to do this on 50K.

[littleroc02us]

What are your debts specifically? Incoming and outgoing each month... Then I can better suggest a solution.

[MonkeyMama]

Before I give my advice, let my preface with my own story. We made the decision for my spouse to stop working when I was making $50k per year. Our situation was very similar (we wanted kids very close together and wanted to be home at least one year, etc., etc. Age 26 when our first was born). We made the decision to live very tightly in order to do so. Fast forward 9 years. My spouse is STILL home. My pay has increased 50% (most the increase was the first few years after my spouse stopped working). We have always been rather financially savvy, but over the years we have learned to be even more efficient with our money.

We literally made the decision to forget retirement and stop adding to savings so that my spouse could stay home just a year or two. I completely understand why most people would not choose to do so, but in the end we have put away minimum 10% to retirement every single year. We are not nearly as aggressive in savings as we were before kids, but I wouldn't change a thing. Having time for our kids means more than anything money can buy.

I was just telling my spouse yesterday that I have friends our age (35 now) who have a net worth of $500k, and just can't to seem to slow down at all. They are miserable! I Was just telling him that maybe we are the stupid ones, but we seem to have more than we need plus the time to slow down and enjoy. Now that both kids are in school my spouse will be pursuing more work. Since there is no rush, he is taking one more year before he starts looking. So, will be 10 years home.

There are some other things at play here.

1 - Before kids we were very aggressive on our mortgage. Living tight, we have gone down to a 30 year mortgage (from 15 years). Is there any way you can refi? This will give you more flexibility. I will personally never go back to a 15-year mortgage. Pay the minimum in low income years, pay more in good times. (Our mortgage is our only debt and we expect to pay off in 10 years, with dh's income returning to work).

2 - Have you considered your income tax situation? Going down to one income and having a child will likely SIGNIFICANTLY decrease your taxes. When my spouse stopped working we lost $2500/month take-home, BUT my paycheck went up about $600 per month. I changed my withholding and our income tax bill dropped to $0. Today I take home as much on $75k income as we used to on $100k gross salary (all the tax breaks with the 2 kids).

This is actually why my spouse decided to stay home so long. After figuring taxes and daycare, we figured he might net $10k per year from his job. We decided to work FULL TIME to net $10k was just not worth the effort. If money was tighter there are plenty of other ways to net $10k with a lot less time and effort. Over the years, things have changed (daycare gets less expensive every single year), but then it's just a function of time. If you are doing well without the second income, time with your kids is priceless.

Anyway, I Would do it, but I would come up with a plan to figure out that short fall, and make sure I was considering every possible expense. The flip side of my post is that I wouldn't want you to make the jump without carefully considering your options and making sure you are projecting your expenses accurately. Living tightly has its risks. I just think it probably won't be so bad as you think, and that you have a lot of options. Good Luck!

[MonkeyMama]

P.S. 2 cars with one working spouse is definitely a luxury. It's one luxury we have been able to keep, but we are well aware that it is a luxury and have discussed not replacing the older car (when it's time comes) as long as we live on one income. I was reading Lucky Robin's advice and it was good. Home cooking has also saved us a fortune.

[LivingAlmostLarge]

Coupon for diaper. I stockpiled diapers before our baby and I think in her first year I've spent maybe $20 for diapers and I have another 300 left still. Yeah cloth is cheaper for more kids, but truth is that I don't like washing clothes so much. As is I already wash 5-6 loads a week.

Also I have some cloth, BUT another issue is cloth diapers All-In-Ones fit differently. I found that my daughter who was 99% weight and 20% height did not fit well in many different cloth diapers. I was lucky to borrow from neighbors the ones they tried that did not fit their daughter who was 99% height and 50% weight. So cloth can be a big up front investment that may not work long term, as my daughter at 1 year is now 20% weight and 20% height. So the ones I bought don't work again now.

But I digress, seriously calculate taxes! And daycare/nanny. I have a friend earning $80k/year and she'll be lucky to net $10k after nanny, taxes, and expenses. What you say? Well she works 8 hours a day and 2 hours commuting, her husband the same. Paying the nanny $15/hr for 40 hours and then the extra 15 hours/week @ 22.50/hr (time and half) means that they they are forking over almost $950/week. She grosses $1500/week so she's grossing $500/week before taxes. I guarantee that with her husband earning $130k/year their taxes are at least 30% of her gross, so that would be what she makes after paying the nanny. Then add in the cost of commuting, eating out more, paying for everything full price, etc? Yeah that's why she says she's not making money working, but it is good for her mental health.

Honestly I think it's nuts. No way am I paying to work, I may not always like staying at home, there are times I want mental stimulation, but it seems crazy to pay someone to watch my kid while I kill myself working.

[ttuchris]

Thanks to everyone for the responses! My nerves have calmed from last week, I think I just had one of those extra panicky days.

Monkey Mama - Good point about taxes - I hadn't considered that previously. That should definitely help out. As for the point about having two cars...I've been thinking about that, and dropping down to one is definitely an option, but it's one I'd like to avoid if possible. My wife has a lot of family and friends in the area, and many of them also have young children and gather frequently. Also, I work a good distance from home and often work 10+ hours, so my wife would be without transportation ALL day. One option I've also considered, if times do get as tight as the pessimist in me fears, I could sell my car (2009 Nissan Altima) and buy an old civic or corolla for maybe 3-4K and pocket the remaining proceeds on my car.


littleroc02us, my debts are:

Mortgage - $1400
Wife's car - $350
Student loans - $300 for both of us
TOTAL - $2050/month

Other obligations:
-electrcity - ~$100
-tv/internet - $150 (this will be one of the first cuts)
-gas and tolls - ~$250 (25 mile commute on a tollway to work, with no alternative except maybe riding the feeder)
-gas/water/trash - $100
-cell phone - $70
-car insurance - $150
TOTAL - $825

GRAND TOTAL - 2875/month. My new and not-improved paycheck is roughly $1430 every two weeks, so most months I will have $2860 coming in. The above figures do not account for groceries, baby supplies, or ANY other potential costs. Oh, and when the child is born, he will be added to my work health insurance, so the paycheck will drop again at that point. And I'm in the process of researching life insurance plans, which will likely add another $50 or so to the monthly expneses.

We will make cuts to drop expenses to the extent possible (again, thanks for all the advice and ideas), and my wife has even been researching potential opportunities to do some minor part-time work to close the gap. Also, after about two straight months of bad work-related news, I might have some good news coming up. I wrote to a very well-connected contact I have at another company regarding their open positions and was invited to lunch with their executive team to discuss potential opportunities . I'm trying not to get my hopes up, but I'm still excited. Fingers crossed!