Best ways to manage with single income
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Asabbatical for enhancing skills, time off for raising a family, or just the inconveniences associated with both spouses stepping out each day, may be triggers for a family to make the decision to move from a double-income household to a single-income one. Or, the loss of a job may make it necessary for a family, however unwilling, to manage with a single income. Either way, it is a big change. If you are lucky, the shift in income may be a planned one and the family may have time to adjust to the new circumstances. Even otherwise, you will still deal with the changes better if you have some checks and balances in place on your spending and saving habits.
Cut to fit
Living on one income, when you have had the luxury of two, is never going to be easy. A budget is your aid here. You need to first provide for mandatory obligations such as loan repayments and essential living expenses before other expenses. Try out the budget for a few months before you actually migrate to being a single-income household. This will help fine-tune the allocations to various expenses so that there are no shocks in store. If you have been in the habit of living off both incomes expansively, then you may have to make significant lifestyle changes, such as moving to a less expensive neighbourhood and putting your interest in fancy cars and the latest electronics on the back burner, to adapt to the single income. “There is a need to create an emergency corpus upfront. Hence, you need to rejig your cash flow. To identify the changes, go back and get your net income details and expenses. If it is positive, there is nothing to worry about. But if it’s negative, you need to cut back on expenses,” said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd.
Take a holistic approach. “When you move to one income from double incomes, ensure that it doesn’t affect savings,” said Surya Bhatia, a Delhi-based financial planner.
Deal with debt
Try to reduce the amount of debt as far as possible before making the transition to a single income. Pay off any outstanding balance on credit cards and other consumer debt so that it does not drain the already constrained income. If there is a home loan, then the equated monthly instalment (EMI) has to be managed from the one income. If it is going to be a strain, then seek options to reduce the monthly outgo—transfer the loan to a lower-cost lender, increase the loan tenor or even prepay a portion. While all of these will reduce the monthly payments, there are costs involved. So, choose the one that meets your specific requirement.
Create a safety net
You need to have a safety net if you slip up on your budget, or if there is an emergency that you cannot meet out of your income, or, in the worst case, if the available income also dries up. Have funds set apart to meet at least six months’ expenses. Be careful to not deal with the emergency fund as an extension of your income, which can be used as you like. Live within your means and use it only for an emergency. If dipping into it becomes a habit, you will never be able to make your budget work.
If you do use some of this money, replenish the emergency fund as soon as possible, if it indeed has to play the role of an effective buffer or back-up. If you are not disciplined enough to live by your budget, then it will be equally difficult to find the excess funds to replace what you have withdrawn.
The need to protect the household against the loss of income is that much higher in a single-income household. Adequate life insurance, preferably a low-cost one, such as term insurance, should be a priority. Health insurance will ensure that unexpected medical costs don’t strain an already tight budget. “Also, since you have only one earning member now, ensure that the person who is earning is adequately insured. The sum assured should be at least 10 times of the annual income,” said Bhatia.
It all adds up
Be money smart in spending and saving. Extend your skill in finding good deals to all aspects of your life. Shop around for the lowest costs and fees for all the financial products and services you use such as bank accounts, credit cards, broking and demat accounts and insurance. Look for facilities that are important to you and don’t pay for services that you will rarely use, if at all. Plug all leaks in your finances. Pay your dues and bills on time so that you don’t pay penalties and fines. Take advantage of all tax breaks, however small, that you are entitled to, which will help you save money. Don’t leave money idle; invest according to a plan so that it works towards goals.
Review your investment portfolio and check if the investments reflect the risks that you are willing to now take given your changed circumstances and rebalance your portfolio accordingly. “You need to continue focusing on essential goals such as child’s education and your retirement. Continue deploying adequately for essential long-term goals. If you find it difficult to continue saving and investing for these, start sacrificing the aspirational needs such as buying a new car or holiday,” said Kartik Jhaveri, founder and director, Transcend Consulting (India) Pvt. Ltd .
Being prepared to deal with the financial consequences of the decision to move to a single income will make a difficult transition that much easier. Beware of pitfalls such as turning to credit cards and other debt to maintain the lifestyle that you have been used to. It will entangle you in repayment obligations that your finances cannot support. Dipping into savings, or sacrificing investments to free up income for spending will prove to be a costly choice for your future.
Even if you are a double-income family, enhance your financial security by containing loan repayments and essential living expenses to one income. If the availability of the second income encourages you to take on higher obligations for a better lifestyle, then consider how you expect one income to grow over the next couple of years and limit it to that. In the event that there is a switch to a single income, the hardships associated with meeting these commitments will not be for long.
Living by a budget, maintaining an emergency fund and being adequately insured, are all good money habits that will ensure that the household is primed to move to a single income.