Avoid the 2-Income Trap

Combining love, lives and laundry is one thing. Combining your money is another. New marrieds who both work do well to think about what to do with two incomes. Here are some pointers.

New couples ask me how to improve their finances. Easy: Start talking about “your money” as “our money” and plan as a couple. Once you marry and support one household with two incomes, shift your thinking.

You don’t bring in two incomes now – you bring in one bigger income that opens financial planning doors.

Early marriage before kids – and their expenses – is the perfect time to use combined income to ramp up retirement contributions, slash debt and build an emergency fund.

Thinking about starting a family in a few years? Children bring expenses would-be parents can’t imagine before they actually become moms and dads. Set up your budget so one spouse’s income between now and then goes for bills and monthly living expenses; allocate the other income toward such financial priorities as paying down debt, building savings and investing for retirement.

The formulas and planning change after kids arrive. One parent stays home, for example, takes extended parental leave or returns to work only part time.

Day care swallows a lot of household income; both parents working full time and paying day care’s rising costs often just break even. Recent reports cite that day care consumes almost a third of one income in a two-income home – and in some places a year of day care costs more than a year of public college.

Remember that living off of all of both your incomes before kids makes any or all of these options impossible.

If having a family stands to change how much time you spend at (paying) work, talk about this with your spouse before children and start planning as a couple. Ask each other:

  • How will things change once we have a baby?
  • What is our ideal scenario?
  • How can we move one step closer to our ideal scenario?

For example, if student loans weigh on you emotionally, figure out how much more you can allocate toward your debt each month. Look into if you qualify for student-loan forgiveness programs, too. Several exist now for certain types of workers.

If having a parent stay at home matters most, focus on saving for retirement now so your retirement assets grow while one parent isn’t working.

Don’t forget spousal individual retirement accounts, which allow a working spouse to contribute up to $5,500 per year (for 2013) to a nonworking spouse’s IRA or Roth IRA. To qualify for spousal IRA contributions, you two must file a joint tax return. Spousal IRAs are also subject to the same annual contribution limits, income limits and catch-up contribution provisions as traditional and Roth IRAs. 

Couples able to live off of one income endure less stress and enjoy more flexibility with their budget. They create options and opportunities for their family situation and taking the time to plan gives them peace of mind.

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Sophia Bera, CFP, is a fee-only financial planner that caters investors in their 20s and 30s. She has been in the financial planning industry since 2007 and is the founder of Gen Y Planning in Minneapolis. She works with clients throughout the U.S. She has been quoted on various websites and publications including Forbes, Business Insider, AOL, Yahoo, Money Magazine, The Fiscal Times, Fox Business, and The Huffington Post Money Under 30 recently named her one of the “Top Financial Advisors for Millenials.”

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