Learn to live on one income

Amid the barrage of bad news we hear everyday about the out-of-control economy, there is a powerful lesson, one that is difficult to hear and even more difficult to live by.  In fact, it is a lesson that skittish banks are learning the hard way as they scramble to find ways to solvency –just like many of us.  The lesson is only two important words: minimize risk. 

However, unlike the banks, we should not wait until dire circumstances threaten our livelihood to minimize risk; it must be an ongoing exercise of caution. Unlike the banks, we aren’t minimizing risk to manage profits; instead, we are minimizing risk to ensure a stable home for our children, to retire at a reasonable age, etc.  The reality is many of us don’t have a TARP, a trust fund, mom and dad’s benevolence, an emergency fund with hundreds of thousands of dollars, or an unused credit card, especially now. Our personal finances are far more urgent.  

For many people, minimizing risk means minimizing wants, those pretentious desires that can easily impair our ability to make wise financial decisions.  Being able to distinguish wants from needs is a crucial step in minimizing risk. 

A common problem among families on the verge of financial disaster is living beyond their means and not taking into account the possibility that one or both household incomes could be wiped out.  Many families have maxed out or surpassed their purchasing power to the point where the slightest negative adjustment to income will wreak havoc not only on their finances, but also on their self-esteem.  Often, the demotion of status caused by financial pruning is the most threatening reality to people. 

To offset this risk, I recommend that families learn to live on one income.  It may sound frightening as you quickly realize this could mean a smaller house, no private school for the children, a Honda instead of a Mercedes, or a state school instead of an Ivy League school, but this approach forces you to better manage risk.  Applying this rule makes you less susceptible to the adverse effects of a shrinking economy or a sudden emergency and creates positive cash flow during more stable times. 

What suggestions do you have to minimize risk?

Comments

[Monroe on a Budget]

I've run the numbers for a sample budget in Monroe MI. The median income here of 52k is possible to earn on one income but given the job market and pay scale these days it is more likely to be two wage earners. This income bracket on the sample budget I wrote for my blog in 2008 and updated twice since is a two bedroom rental, one car payment and a grocery budget that is a bit lower than USDA thrifty. Can it be done? Yes, people do it. But there is very little wiggle room to drop one of those paychecks.

[Linda]

I live on one income, drive a car that is paid off, vacations are to visit relatives, and have a small home. Aside from cost of living expenses, I still struggle. There are the unexpected expenses that occur before you get one paid off...car repairs, home repairs, dental work, medical bills, personal property taxes, etc. Just this past year the cost of gas was out of control. Like everyone my 401k was hit hard. Groceries are going up. Constantly tapping into the savings instead of charging leaves no safety net. If we are unable to pay over time for some of the expenses, we are in trouble. Credit card companies are taking advantage of the working person by jacking up interest rates and penalizing folks who hit rough spots but still are trying to do the right thing (pay even if they are late or miss a payment). Then they claim they need to be bailed out. What is their penalty? Junkets for their senior management?????

[Kumar]

I would agree with you that to live within one's means is really practical advise and I wholeheartedly agree with that - However, let me think out loud for a second - if everyone was stretching the dollar or being a penny pincher does that help the economy expand? - let's say we live on one income - I am assuming you are saying the income of one individual in the family - for the average Joe, the income of one individual does give the financial freedom to go on vacations, go to theater shows, or even do some moderate to major renovations on the house - then what would happen to those industries? I have visited certain touristy areas around the world and lot of the merchants/store vendors are complaining that the low business (less tourists) is threatening their livelihood, which in turn is affecting the airline industry and lot of folks who depend on these jobs (folks who make the airplanes, and their suppliers) etc... Does anyone know of a sustainable economic paradigm that is easy on our mind, soul and our pocket book? :)

[Kevin D. Johnson]

Yes. However, it is more practical if you do this early in your financial lifetime. You replace your larger income by cutting expenses. You pull out the spreadsheet and cut certain expenses until the budget is balanced. A long-term appreciating asset such as a house that you already have would not be a priority, but could be a deadweight and therefore need to be sold possibly at a loss. You can search for frivolous and superfluous expenses to balance the budget, or at least get closer to a balance. Yes. All classes are suffering currently. The amount is relative to your debt and income, and a lesson can be learned at all income levels. As a final note, the large contrast in expenses I listed is for effect, not necessarily your reality. The principal works regardless of your personal situation.

[Chandler Hill]

Good advice, but practical? How does one, for example, replace their larger home for a smaller one? By selling the larger one at a tremendous loss? State school vs. Ivy League? Dump the Mercedes? Who is this advice intended for? Are the big-home living, Mercedes driving, Ivy Leaguers really the class that is suffering? How about addressing the middle-class since they are the ones feeling the brunt of this?