Downsizing to a single-salary household? Steps to manage sudden money loss
Secret to managing household finances on one salary lies in your spending habits
Dubai: Let’s say you’ve decided it would be better for your family to go from two breadwinners down to one, or considering a transition from multiple salaries in your household to living on a single income.
Before you take the leap to living off one income, consider these steps to join the many who have successfully made the transition with the help of creatively budgeting their expenses and savings.
“Figuring out your new monthly budget can help you make any necessary adjustments before you downsize to one salary or income,” said Dubai-based money coach Mirin Raul.
In-house surveys conducted by global wealth managers indicate that those who have succeeded at saving on one salary or living on only one salary are increasingly disciplined about spending.
“Those disciplined about spending depend on a range of strategies to live on less while they pursue a goal. The bottom line: Substantial investments in your future usually require substantial financial adjustments,” Raul added.
Step #1: Make the transition slowly
If you haven't already leapt to the one-income lifestyle, financial planners recommend doing it in stages. Parthiv Patnaik, a former Dubai-based banker who retired after four decades in the industry, agrees.
“First, adjust your lifestyle and budget so you can live solely on one income. This is an opportunity to see if living on one income is realistic for your family and you,” he explained.
“If you can live on one income while both earning members are still working, this is an opportunity to save money, since you'll be keeping the entirety of one person's income.
“You can use this time to pay off your debt, build a substantial cash cushion, or make massive contributions for retirement.”
Those disciplined about spending depend on a range of strategies to live on less while they pursue a goal
Step #2: Target major expenses first
For many households, Raul further noted that key expenses include a mortgage that is too expensive, car payments, dining out, buying clothing, or credit card debt.
“If you can slash these expenses, you can solve a lot of your money-related stresses and make the transition from two incomes to one a lot smoother,” she added.
“Having breathing room within your budget often comes down to spending less, not earning more. This can be true if you experienced a bit of ‘lifestyle creep’ with dual incomes – adding services and amenities as your household income increased.”
Go over your expenses from the last two to three months looking for things you can reduce or cut altogether to save extra money. As soon as you pare down, you’ll immediately have more wiggle room in your budget.
Step #3: Live on a zero-based budget
“If you want to live on one income and support your family, you need to have complete and total control of your money,” added Patnaik. “In other words, you need to create a specific plan for every dirham of your income.
“From saving to giving to paying for all your various expenses, if you don’t know exactly where your money is going, it will be extremely difficult to live on a single income.
“For that reason, if you’re not yet living on a zero-based budget, financial planners recommend that now is the time to start.”
In case you’re unfamiliar with zero-based budgeting, it involves creating a plan for how you’ll spend each and every dirham at the beginning of each month.
By having a plan for where your money’s going, you’ll ensure you always have enough to cover your expenses. Also, creating a budget will help you identify spending areas where you need to cut back.
Then, categorise your anticipated expenses. You should have a line in your budget for every dirham you plan on spending. Everyone’s spending habits are different, so your expense categories may not be the exact same as someone else’s.
Beyond that, within each category, you should lay out the specific expenses you will need to throughout the month. Then, to make sure you stay on course with your budget, log your expenses daily.
That way, you won’t have to wait until the end of the month to find out if you overspent. In other words, you can make real-time adjustments to your budget to make sure you live within your one-income means.
Step #4: Get out of debt
One of the biggest obstacles to being able to live on one income is consumer debt, said Raul. “After all, the fewer debt payments you have to make, the more financial margin you will have—and the easier your financial situation will be.
“Therefore, even if you only have one income, paying off your debt should remain a high priority. In fact, it should become an even greater priority than when you were living on two incomes.” To get out of debt, both Raul and Patnaik recommend using the debt snowball method.
Then, only make minimum payments on all your debts except for the smallest one. For your smallest debt, pay off as much as you possibly can each month. Then, every time you retire a debt, just roll the payment you were making for that debt into the next largest debt on your list.
Repeat this month after month until all of your debts are paid off. The goal with the debt snowball method is to experience some success on your debt payoff journey to encourage you to keep going.
Just like a snowball rolling down a hill, your debt repayment efforts will grow momentum and speed until you have no debt left. And when you’re out of debt, you’ll be amazed how much easier it is to live on one income.
Step #5: Invest in insurance
Global surveys indicate that many families make the mistake of not getting life insurance for both partners, regardless of who is employed.
“While you definitely need the breadwinner to have a good life insurance policy, many other money planners like me often suggest to add the non-working member as well,” explained Patnaik.
“If the non-working family member suffers from a serious illness or injury, the working member would need to outsource those tasks, which could cost you big.
“That's why it's a smart financial move to have a life insurance policy on both parents in a family with children.”