Q. We have a 2-year-old and are expecting our second child this summer. We'd really like for my wife to be able to stay home with our children; we just aren't sure if this is financially possible. We don't have debt other than our mortgage but we don't save much, either. I make about $70,000 and she makes $30,000. We've looked into a program that would provide guidance and even a personal coach to help us stay on a budget to live on one salary, but it is pretty expensive, more than $3,000. Would it be better to meet with a fee-only financial adviser in our area to help us with this decision?
I suggest you save your money and use some of the great budgeting tools available on the Internet. The National Foundation of Credit Counseling website has many excellent tools and links to other resources. If you still need some guidance, a few hours with a fee-only planner could be helpful.
The simplest way to budget is one of the oldest: Pay yourself first and spend less than you make. Few people develop a budget, and only a small percentage of those that do are able to remain on a budget. Start keeping track of your family spending now and see if you two can live on your salary.
The envelope system has helped many people. Use a notebook, a software program (mvelopes.com looks pretty neat), your check register or anything that works for you to track your expenses. Analyze your spending patterns and categorize your expenditures such as groceries, eating out, entertainment, etc.
Separate the categories into Fixed and Variable expenses. Fixed expenses are things like mortgage, property taxes, insurance, etc. Variable expenses are those over which you have control, such as groceries, eating out, clothing.
Add up all your monthly expenses in each category and write down the totals. Arrive at a total for both fixed and variable expenses. Take your after-tax income for the month and subtract the fixed expenses. The result is what you have left to spend on variable expenses. These are the expenses you must trim. You may want to create another envelope for "fun" or "vacations" in which surplus funds can be added.
Determining the net amount your wife's income provides also will be helpful. Begin with her gross income and subtract federal, state and payroll taxes. Her income actually puts you in the 25 percent tax bracket, so I'd use the 25 percent federal tax rate. After deducting the other taxes, her net income is probably around $18,000.
Add up all the extra costs associated with working outside the home. These would include child care, professional clothing, dry cleaning, parking, auto fuel and maintenance, lunches out, dinners out and any other miscellaneous work-related expenses. Subtract this amount from the net income above and you will know the financial benefit of her continued employment.
According to the U.S. Department of Labor, the national average child care cost is $611 per month per child. With two children in day care, that expense alone leaves you with a net of $3,336. Many two-income families eat out more often because of being too tired to cook. If you usually spend $65 eating out each week and eliminate this expense, you'll break even financially without your wife's income.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.
