Cutting Back from Two Incomes to One
Whether you’ve made a conscious choice to switch from a dual-income to single-income household or you have found yourself in this position suddenly as the result of a job loss, Texas CPAs say there are steps you can take to minimize the financial impact.
Step #1: The net worth statement
Start by calculating your net worth. It’s important to know exactly where you stand so that you can adjust to your new financial circumstances. Create a net worth statement by adding up all your assets (what you own) and all your liabilities (what you owe). To calculate your assets, write down the current balances in your savings, checking, and other bank accounts as well as the market value of any stocks, bonds, and mutual funds you own. If you have an insurance policy with a cash value, you should include that amount, as well as the value of your home, and other real estate and personal property you own.
Step #2: A list of your debts
Next, you need to turn your attention toward your liabilities. Make a list of all debts, including the balance of your mortgage loan; the total balances due on any credit cards; any outstanding car, personal, and student loans; and any money owed on taxes and major unpaid bills. Finally, subtract your total liabilities from your total assets to arrive at your net worth.
Step #3: How much money you’ll have coming in
Once you know your net worth, you will have an accurate idea of your personal financial situation. Next, determine how much income you will have to work with in the coming year.
Include the amount of take-home pay of the working spouse, unemployment benefits from the non-working spouse if appropriate, and investment income from stocks, bonds, and other investments. Divide the total by twelve to arrive at your estimated total monthly income.
Step #4: Look at your expenses
Take a serious look at expenses. Divide your expenses into those that are fixed and those that are flexible. Fixed expenses include your mortgage or rent payments, utility charges, real estate taxes, loan or credit card payments, insurance premiums, and other bills you are obligated to pay. Flexible expenses like groceries, clothing, eating out, entertainment and personal care are more difficult to estimate but easier to scale back on.
Step #5: Do the math
Subtract your monthly expenses from your income to see where you stand. If you’re “in the red,” you’ll need to increase income, reduce expenses, or some combination of the two. You may even need to put your college savings or retirement plan funding on hold temporarily and perhaps even tap your savings occasionally to meet expenses.
To increase income, you may consider taking on a part-time job or using a skill such as baking, gardening, or childcare to bring in needed cash. Another option for raising cash might be to sell property you no longer want or need.
Step #6: Don’t forget about taxes
Finally, be sure to focus on how your reduction in income will impact your tax bill. With lower income and higher expenses for things like medical expenses, you may discover that you qualify for more tax deductions. A CPA can help you claim the deductions you deserve.
Reviewed and edited by Nina Perez, CPA, Briggs & Veselka Co.
Copyright, The American Institute of Certified Public Accountants