A lot has changed about the workplace over the last three years, and it’s made many Americans rethink what they want from their careers. Some may be looking to move onto a new employer; others may be prepping to take their side gig full time. In fact, according to the 2022 Northwestern Mutual Great Realization survey, 21 percent of people who plan to make major life changes over the next two years say they want to pursue a passion project; 13 percent want to turn their side hustle into a full-time job and 11 percent want to retire early.
of people surveyed say they want to pursue a passion project.
want to turn their side hustle into a full-time job.
want to retire early.
Whatever the reason, if you decide to transition to living on one income, you’ll need to make sure your family is financially prepared. Here are eight financial considerations to keep in mind if you’re going from a dual- to a single-income household.
Beef up your emergency fund
Going from dual incomes to a single income means having less take-home pay to work with. While that's going to require reconfiguring your budget, first make sure you have enough savings to withstand any unexpected expenses, like a surprise medical bill. In fact, you may want to pause other savings goals and focus your efforts on building up a sufficient cushion if you think your transition to a single income is happening soon. Generally, you’ll want enough to cover roughly six months’ worth of expenses to give yourself some peace of mind.
Create a new budget
The next step is to make a monthly budget that factors in your new take-home pay while also ensuring you’re still accounting for your spending and savings goals. While it might feel like you’ll need to stretch your dollars further, remember that you’ll likely recoup savings on things like full-time child care or commuting costs.
Double check your insurance coverage
A loss of income due to illness, injury or death can be particularly detrimental with a single breadwinner. Do you have enough life insurance or disability coverage to protect your family should something unexpected happen? Opt into any insurance benefits an employer may provide through work and consider meeting with an advisor to see if you need supplemental coverage.
Look into health care costs
Determine how much it will cost to add additional family members to a single health care plan, whether you’re using your employer’s insurance or outside coverage. Consider the types of health services you typically use, as well as the cost of premiums and deductibles, to make sure your family’s needs will still be met.
Make a plan for your retirement savings
Working full time often means having access to a 401(k) and/or employer match to help you save for retirement. If you leave your job, you’ll no longer be able to make new contributions to a 401(k). While you may be able to leave the funds where they are, another option is to roll over your 401(k) into an IRA. You won’t be able to make new contributions yourself (since you no longer have earned income), but if you’re married and your partner is still working, they could consider making a spousal IRA contribution on your behalf.
Think about taxes
For the person who is still earning a paycheck, it might make sense to change your withholdings on your W-4 form. If you need more of your money to stay in your take-home pay and you are willing to take a smaller refund come tax season, consider increasing your withholdings. Just make sure to talk to a tax pro first to help you decide what makes sense for your situation — you don’t want to be stuck with a tax bill you can’t afford when it’s time to file your returns. There may also be new tax benefits you qualify for based on the new household income.
Consider a side gig
Taking a break from full-time work doesn’t have to be all or nothing. Not only can a side job help boost your budget, but it can also help keep your skills and business acumen sharp for a future in which you do decide to return to work in a more permanent fashion.
Weigh both short- and long-term implications
While going from two incomes to one might feel worth it today, make sure to fully think through what doing so could mean down the line. For instance, an indefinite pause from the working world could mean forfeiting retirement assets that would otherwise play a crucial role in your financial security. Or, if you do intend to return to work full time, you may find it challenging to secure a job with a comparable salary.
While an unpredictable future shouldn’t dissuade you, taking a thoughtful and holistic approach with the help of a financial advisor can help you make the decision that’s best for you and your family.