By Jean Chatzky with Arielle McGowen
September 03, 2009
It's a question every parent has struggled with: Can you afford to stay at home when you have children?
The answer has always been complex, often involving a lot of number crunching and a plain, old-fashioned trial run. But in this economy, things are even more complicated. In July, the unemployment rate stood at 9.4 percent, and 247,000 jobs were lost. The message is clear: Few jobs are truly secure, and the decision to give one up shouldn't be taken lightly. It's entirely possible that you'll submit your resignation, settle into a routine and then find out that your spouse's company is restructuring and his job was one of the casualties.
So not only do you need to consider the change in income and expenses, but you also have to put precautions in place so you're protected in case things don't turn out as planned. Here's how to do both.
Evaluate Your Financial Situation I hate to say it, but if you have a lot of credit card debt —in the thousands, not the hundreds—you're probably better off staying in the workplace, or at least not pulling out completely. It's not smart to give up an income when you're deep in debt, and, on an emotional level, you don't need another thing to worry about. "You really need to get rid of significant credit card debt before you drop down to one income. Especially if it's a big number, it will really drain you," says Jackie Goldstick, a financial planner with Family First Financial Planning in Florida.
Along the same lines, I want you to have at least six to nine months' worth of expenses stashed in a liquid savings account before you even consider giving up your full-time job. Twelve months' worth is even better, particularly because you're dropping down to one income. (One way to easily beef up your emergency fund is to practice living on one income while you're pregnant. Bank the other, and you'll have quite the cash cushion at the end of nine months.)
Finally, try to be as realistic as you can about the job security of the partner who is going to continue to work outside the home. You can never be absolutely sure that your job is secure, but you can certainly look for clues that it might not be, including other lay-offs, a restructuring of departments, a reduced workload or major cuts in the company's spending. If any of these are prevalent at the office, this might not be the time for your family to give up a second income. Do the Math It starts as a fairly simple calculation: You need to figure out what will be going out each month and what needs to come in. So start with your fixed monthly expenses, including the mortgage or rent, your car payments and insurance, your utilities, other insurance payments (life—which you need when you have children—homeowners, disability), savings and any debt repayment, like student loans. Then add in your flexible expenses: things like groceries, entertainment, new baby expenses, including daily childcare (there are a few online calculators that can help you estimate the cost of your new addition. I like this one on BabyCenter.com.) and gas. Add those together, and that's about how much you'll spend each month.
How does that compare to your combined monthly income? Do you have a lot left over? If you do, continue your calculations by subtracting from your monthly expenses what you'll save by one spouse not returning to work. You'll definitely, for instance, spend less on gas. You may even be able to get rid of an extra car. That spouse will no longer need weekly visits to the dry cleaner, or daily visits to the coffee shop, or a few lunches out each week. You may also save on taxes, if the loss of that income means you drop down into a lower tax bracket, says Cathy Pareto, financial planner and president of Cathy Pareto and Associates in Florida. Then, subtract your newly adjusted monthly expenses from the monthly take-home pay of the spouse who will continue to work.
Where do you stand? If you're considerably in the red, you may need to scrap your plan to stay home, or at least consider other options, like staying on with your company part time or working from home a couple days a week. Companies are becoming more and more flexible. If you're close, though, go back through your monthly expenses and see what you can cut out. "The major ones are the ones that can have the biggest impact. So maybe you reduce your vacation to one week, or you stay with friends or relatives," Goldstick says. Look also to your entertainment budget. I'm all for date night—it's important for your sanity and your relationship—but see if you can do it on the cheap. Once you've gone to a movie and dinner, plus paid a baby-sitter, you can easily be out $150. Look at Your Benefits The finances are not the only piece of this puzzle. If you're leaving your job, and it provided health insurance for the family, you need to make sure that your spouse's job can provide comparable benefits. Likewise if you had a flexible spending account at work that saved your family a bundle by allowing you to pay for medical expenses and contact lenses with pretax dollars. And finally, don't forget to save for retirement. As the stay-at-home parent, you're presumably going to be giving up a 401(k) plan at work, and maybe even matching dollars from your employer. But you can still save in a tax-advantaged way through a Spousal IRA. "You can contribute $5,000 in 2009 as long as you file a joint tax return and the working spouse has earned income more than your contribute amount. You can invest that money any way you want," Goldstick says.
Think Ahead You are very likely going to want to go back to work one day, so keep your skills sharp by taking classes when you can, doing volunteer work in your field or staying on top of any changes to the industry. And don't forget to network. Just grabbing a coffee with a former colleague once a month or so will give you an in to reach out when you're ready to go back to work.