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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Reducing Two Incomes to One: A Lesson in Cutting Back

Whether you've made a conscious choice to switch from a dual-income to single-income household or you have found yourself in this position suddenly as the result of a job loss, there are actions you can take to minimize the financial impact. The New Jersey Society of Certified Public Accountants (NJSCPA) recommends that you take the time to better understand and take charge of your personal financial situation. Here's how to get started.

Calculate Your Net Worth
It's important to know exactly where you stand so that you can adjust to your new financial circumstances. Create a net worth statement by adding up all your assets (what you own) and all your liabilities (what you owe). To calculate your assets, write down the current balances in your savings, checking, and other bank accounts as well as the market value of any stocks, bonds, and mutual funds you own. If you have an insurance policy with a cash value, you should include that amount, as well as the value of your home, and other real estate and personal property you own.

Next, you need to turn your attention toward your liabilities. Make a list of all debts, including the balance of your mortgage loan, the total balances due on any credit cards, and any outstanding car, personal, and student loans. Include any money owed on taxes and major unpaid bills. Finally, subtract your total liabilities from your total assets to arrive at your net worth.

Take A Serious Look At Your Income And Expenses
Once you know your net worth, you will have an accurate idea of your personal financial situation. The next step is to determine how much income you will have to work with in the coming year. Include the amount of take-home pay of the working spouse, unemployment benefits from the non-working spouse (if appropriate), and any investment income from stocks, bonds, and other investments. Divide the total by twelve to arrive at your estimated total monthly income.

Next, take a serious look at expenses. Divide your expenses into those that are fixed and those that are flexible. Fixed expenses include your mortgage or rent payments, utility charges, real estate taxes, loan or credit card payments, insurance premiums, and other bills you are obligated to pay. Flexible expenses are more difficult to estimate but easier to scale back on. Money spent on groceries, clothing, eating out, entertainment, and personal care fall into this category.

Subtract your monthly expenses from your income to see where you stand. If you're "in the red," you'll need to increase income, reduce expenses, or some combination of the two. You may even need to put your college savings or retirement plan funding on hold temporarily and perhaps even tap your savings occasionally to meet expenses.

Increase Income
To increase income, you may consider taking on a part-time job or using a skill such as baking, gardening, or childcare to bring in needed cash. Another option for raising cash might be to sell property you no longer want or need.

Set Priorities For Spending
Because spending decisions affect everyone in your family, all family members should get together to discuss the choices that will need to be made. It's typically easier to abide by decisions that you've played a role in making. Work together to determine which expenses have the highest priority and which can be reduced.

CPAs offer the following additional strategies for living on less:

  • Save on auto and homeowner's insurance premiums by raising your deductible, getting rid of coverage you don't need, and taking advantage of discounts.
  • If interest rates have dropped, consider refinancing your mortgage to lower your monthly payment.
  • Substitute planned purchases for impulsive ones.
  • Eliminate food costs by cutting back on eating out, making a shopping list and sticking to it, and buying in bulk when it makes sense.
  • Take advantage of energy audits offered by utility companies to find ways to reduce energy costs.
  • Manage debt carefully. Do what you can to pay off existing debt and don't resort to using credit cards to maintain your former lifestyle.
  • Lower your entertainment costs. Rent videos in place of going to the movies. Use the library instead of buying books and CDs. Entertain at home.

Finally, be sure to focus on how your reduction in income will impact your tax bill. With lower income and higher expenses for things like medical expenses, you may discover that you qualify for more tax deductions. A CPA can help you claim the deductions you deserve.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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