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Does Your Family Really Need 2 Incomes?

Maryalene LaPonsie

Families with working dads and stay-at-home moms seem to be a trend of the past. However, you can still find plenty of households that fit that traditional mold. In 2017, more than a third of married couples with kids were living on a single income, according to the Bureau of Labor Statistics.

While some couples may choose to have only one income right from the start of their marriage, others give it consideration only after they decide to start a family. "The one life event that triggers this is having a child," says Amin Dabit, director of advisory services for Personal Capital, a company offering free financial tools and apps.

For families who want to shift from two to one income, it can be doable. "But tough decisions are going to have to be made," says Judy Raffa, a certified financial planner and wealth strategy regional director with financial firm PNC Wealth Management.

[Read: How Couples Handle Money at Every State in Their Relationships.]

To determine whether your family really needs to be a dual-income household, you must calculate the cost of your employment. Then, you need to consider the long-term implications of leaving the workforce, like reduced retirement savings. And once you've weighed the benefits and drawbacks, you must decide if you're willing to make lifestyle changes that can include adjusting travel plans or even moving to a cheaper home.

If you think you might want to make the leap to a single-income household, read on for pro tips to help make the financial transition easier.

Consider the extra costs of your job versus child care expenses. Almost every profession comes with related expenses, such as parking fees, commuting costs, dining out and professional clothing. A job could even result in additional taxes if a second income bumps a family into a higher tax bracket.

However, among all the expenses associated with working, none may be higher than child care. "It's extremely expensive, even in our small area," says Laura Stover, CEO of financial advisory firm LS Wealth Management LLC in Bryan, Ohio. "You'll have to make sure whatever your wages are will offset that cost."

Child care prices can vary dramatically across the nation, with infant care being the most expensive. The average annual cost of care for an infant in a child care center in 2017 was $10,926, according to the advocacy group Child Care Aware of America. The group found that the average annual price for infant care in a home setting was $7,961. And in Massachusetts, the least-affordable state when it comes to child care, infant care in a center cost an average of $20,125 in 2017.

Factor in taxes and retirement savings. While families contemplating switching to one income may be largely concerned with covering daily expenses, there are other considerations. "It's going to impact them not only now, but in the future," Raffa says. "Savings is a big thing to consider both for near-term and long-term goals." With one income, it may be difficult to put money aside for items such as saving for your child's college education, a family vacation, an emergency fund or a down payment on a house.

Retirement savings, in particular, may suffer when one parent leaves the workforce. "You're basically reducing [what] you can contribute," Dabit says. That's because federal law allows workers with a 401(k) to contribute up to $18,500 annually to their plan. Many employers will match a portion of that as well.

When a spouse leaves the workforce, he or she is no longer eligible to contribute to a 401(k). The working spouse may be able to open a spousal IRA, but contributions to that are capped at $5,500 per year in 2018 for those younger than age 50 and $6,500 for those age 50 and older. In addition to reduced savings for retirement, a nonworking spouse may have a lower Social Security benefit when retired or, if he or she works less than 40 quarters in a lifetime, not qualify for benefits at all.

Still, there could be tax benefits to having less income. "A one-income family is more likely to get an earned income tax credit or a child tax credit," Stover says. For the 2018 tax year, families can get a maximum of $6,431 with the earned income tax credit, and that money is refundable even if a household doesn't owe any federal taxes. The child tax credit is not refundable, but it is worth $2,000 for each qualifying child.

[Read: For Richer or Poorer: How 5 People Co-Manage Money With a Significant Other.]

Your lifestyle is an essential part of equation. Whether a family can survive on one income is largely related to lifestyle costs, financial experts say. A childless couple with no debt may find it relatively easy to have one spouse stay at home. "Their needs might be very different than someone living in an expensive area with kids going to a private school," says Jeffrey Bush, president of Informed Family Financial Services in Norristown, Pennsylvania.

In that case, parents may need to make significant adjustments to their budget in order to live on a single income. It may involve utilizing public schools, cutting out expensive sports leagues or even moving to a less expensive area. "They will have to think outside the box when it comes to stretching their money," Stover says.

For some families, the sacrifices are worth it, while others may find that they prefer a fuller lifestyle, even if that requires two working parents. Dabit, who recently went through this conversation with his wife after the birth of their child, stresses that it doesn't have to be an all-or-nothing proposition. Some families choose to have one parent working part time, and working from home may be option in some households.

Know how to make a smooth transition. Once a family decides to move to a single income, several issues should be addressed. First, a family will want to pay off any high-interest debt, like debt accumulated on credit cards. Bush adds that, for families to be successful in the long run, they need to change their attitudes about debt.

"Americans like debt," Bush says. "Banks and financial institutions have made money so easy to get." If a family is planning to live on a single income, they shouldn't rely on credit cards to make ends meet. Doing so could make it difficult to accumulate savings and leaves families vulnerable to a financial crisis should the employed spouse become sick or lose his or her job.

Spouses also need to make sure they will have adequate health insurance and life insurance after one partner leaves the workforce. Since these benefits are often provided through a job, families must take care to replace any lost coverage.

Beyond trimming your expenses and staying budget-conscious, families should make sure everyone is on the same page regarding expectations for the future. For instance, dining out may have to be curtailed, vacations may be shortened and extras like online memberships may be eliminated. What's more, even though only one spouse is earning money, both spouses should continue to take an active role in money management. "The person who is giving up the income isn't giving up the autonomy to spend," Dabit says.

[See: 10 Tips for Couples and Young Families to Build Wealth.]

Having one spouse stay home bucks the trend of dual-income households, but many families find an effective way to make it work. Track your expenses, make appropriate spending cuts and keep the lines of communication open to successfully live off a single paycheck.

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