Trying to decide whether or not it makes sense for you or your partner to become a stay-at-home parent? We know this is not an easy decision to make for most families. While there are numerous benefits to having one parent stay home with the children, there are also financial adjustments that need to be taken into consideration. Families need to have a financial plan to help mitigate any financial challenges created by the loss of income. In order to help your family make the best decision, here are a few helpful steps you can take to help determine the financial feasibility of one parent staying at home.
Parents need to know how their family is currently performing financially to make an informed decision about one parent staying home. Track your family finances to see where the money is being spent, which expenses can be eliminated and where there are opportunities to save. Parents.com has a Stay at Home Calculator that can be helpful for this exercise.
Create a streamlined budget, adding any additional future expenses (i.e. anticipated expenses due to family additions) and removing expenses you’ll no longer have (commuting, office wardrobe, etc.). Don’t forget to factor in childcare if you have been paying for it. How do those savings affect your budget? Be sure to talk to your financial advisor about changes in daycare expenses (especially if you have been deducting those expenses on taxes) and whether or not you should make changes to your tax withholding status.
Perform a test drive. Live off a single-income budget prior to making it official. Trying out your new budget allows you to determine the best structure for your family while working out any kinks.
You may determine during your trial run that your family cannot afford the complete loss of the second income. In which case, you may want to consider one parent working from home or working part time. One of those options may provide your family with the flexibility you need for one parent to stay at home (even part time) with the children.
It is crucial that the stay at home parent continues to save for their retirement if possible. This is important in the event the working parent becomes disabled, if there is a divorce or a death. Married couples are allowed to open a spousal IRA if one parent is staying at home and not earning an income. Consulting with a financial advisor can ensure both partners are on track for their retirement goals.
A common mistake many stay-at-home parents make is not having life insurance (or not having enough). Many think since the stay at home parent isn’t making a salary that they don’t need insurance to cover their loss of income if they died. The issue is there is value in everything a stay-at-home parent does (cleaning, shopping, child care, cooking, etc.). The living spouse would have to hire someone to complete all of those tasks. As you can see, life insurance is essential for both partners.
The decision for one parent to stay home can provide a benefit to the family, but it can also create significant financial consequences. Work with your financial advisor to create a solid financial plan that will ensure a successful transition to a single-income lifestyle while still planning for your long-term retirement goals.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.