Q. My wife and I recently had twins, and we would really like for her to be able to stay home with the baby boys. She is willing to put her career on hold for a few years until they are old enough for pre-school. We will also need a larger apartment once the boys start doing more than lying around and rolling over. This will add an additional $200 to $300 a month to our expenses. We think we can swing it but are a bit frightened by the prospect of her quitting her job and then realizing we can’t live on my income alone. It would be very stressful if this should happen, and she couldn’t get another job right away – which in this economy is very possible. Do you have any suggestions on how we could make a wise decision for her to either quit or remain employed?
A. I would have loved to stay at home with my son when he was a baby but it was not possible in my situation. If you can accomplish this, I think it would be great for your boys. I do have some suggestions that will help you make the decision from a financial perspective, but you also need to consider the more elusive factors, a few of which follow: 1) Leaving the workforce for a period of time could have an adverse impact on the career and future earning potential of a stay-at-home parent. 2) The ability to save now for retirement will be impacted, requiring you to save more in the future. 3) Being on a tight budget can cause stress in a marriage. 4) Being the only source of income for your family can be burdensome. 5) Being a stay-at-home parent isn’t easy, and some people leaving a career to stay at home may have issues with self-esteem.
Back to what I know: finances. Begin by listing all of the expenses you would have if there was a stay-at-home parent. Expenses such as eating out, dry cleaning, clothing, gasoline and child care should be lower if only one of you is working outside the home. Other expenses such as groceries may increase if you are eating out less. Make sure you are both in agreement on the budgeted amount for expenses, especially if there is something you are eliminating like cable. Before one of you quits work and before you take on a higher rent payment, try living on one salary within the new budget plus any expenses that will remain while you are both employed for at least three months. Save the difference in a money market or savings account. This will allow you to see how well you like this lower-income lifestyle before one of you quits your job.
This same strategy can be used for people wanting to retire and wondering whether they could live on less after-tax income in retirement. Since this is often an irreversible decision, they should try living on the lower amount for at least six months while still working.
People thinking of downsizing to reduce expenses can use a similar strategy. Some couples go through the expense and ordeal of selling their current home and moving to a smaller dwelling only to find that they miss the space. They then either spend more money on a second home or move again. Before selling their current home, they should close off rooms, limiting themselves to the square footage to which they anticipate using in retirement.
Same thing if they currently have more than one car and plan to reduce costs by sharing a car in retirement, try using one car for six months.
Unrealistic expense projections can spoil the best family plans, retirement projections and/or marriages.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624