Families and couples sometimes choose to live on one income to prioritize specific endeavors. Learning how to live on one income after being in a two-income family can be challenging, but it’s doable! You can survive on one household income while still having money left over at the end of the month to save or spend. Keep reading to learn some financial tips on how to live on one income!
Start a New Budget Plan To Live as a One Income Family
“Can I budget money on a low income?” Yes! If you want to start living as a one-income family, it’s essential to have a new monthly budget plan. Different budget methods are available, but the best depends on your financial priorities, income, and desired level of effort. But before you decide which budget method to follow, calculate your monthly income and expenses, more on that below.
Step One: Calculate Your Monthly Income
Knowing how much your one-income family earns each month is critical to creating an accurate household budget. If you are the sole breadwinner of your family, calculate how much you make in a month after taxes and employee benefit programs. You can use bank statements, paycheck stubs, government award letters, etc.
If the household breadwinner has inconsistent pay, you can still create a monthly budget! Calculate the income taken home for the past six months. Add the six months’ worth of income and divide the total by six. The answer is the average income you can expect to receive each month. Suppose your spouse has earned $6,200 over six months. In that case, the average monthly income for your household is roughly $1,033.33.
Step Two: Calculate and Track Your Monthly Expenses
Once you know how much your one-income household earns monthly, you can calculate your monthly living expenses. Make a list of all your monthly withdrawals, so you know exactly where your money goes. One of the most common budgeting mistakes is forgetting to include all expenses. Ensure you include monthly subscriptions, utilities, groceries, gas, etc., in your expense list.
Consider downloading a budget-tracking app like Mint or Mvelopes to track how you spend money. A budget tracking app can help you track how much you spend and how much you have left in your budget for various necessities. Being able to see how you spend your money can make it easier to cut expenses and start saving money.
Step Three: Determine How Much You Have Leftover
Knowing how much you receive with one income and how much you have to spend can help you determine how much extra money you have to save or spend by the end of the month. Suppose you have roughly $3,000 to spend each month but lose $1,800 after paying living expenses. In that case, you have $1,200 left to spend on discretionary and unexpected expenses. Having a clear understanding of your spending balance can enable you to follow through with a financial plan.
Step Four: Establish a Budget Plan
An accurate income and expense list can make it easier to choose a budget plan. The 50/30/20 rule is an excellent budget method that you can easily alter. This budget plan helps you spend a certain percentage of your income on various categories.
These are the three financial categories of the 50/30/20 budget rule:
- Needs (50%) – Towards necessary expenses you absolutely must pay.
- Wants (30%) – Towards unnecessary expenses that are not essential.
- Savings (20%) – Towards an emergency savings account.
You can adjust this payment plan easily if your expenses and financial goals don’t align with the standard percentages. Do you spend more than half of your income on necessary expenses? If so, you can increase the amount you spend on “Needs” and decrease the amount you spend on nonessential spending or put towards a savings plan.
Many people opt for the 70/20/10 budget plan instead of the 50/30/20 one when monthly expenses exceed 50% of their income. This budget plan reduces the amount of money you can spend on nonessential expenses. However, it helps you prioritize savings and debt repayment. According to the 70/20/10 rule, you should spend 70% of your income on wants and needs, 20% on savings and investments, and 10% on paying off current debt.
Consider your financial priorities to determine which budget plan would benefit your goals. And remember that it’s challenging to stop overspending and save money when you are used to buying everything you want. Following a strict budget plan requires time and effort, so cut yourself slack if you slip up.
How To Start an Emergency Fund on a Single Income
Saving money is essential because it allows you to live a stress-free life. Having extra money available presents various opportunities. You can invest, start your own business, retire early, and purchase assets with an emergency fund!
An emergency fund is a lump sum held in an interest-bearing account. A financial institution pays interest based on the balance of your deposited amount. Everyone should have an emergency fund to help pay for large and unexpected expenses. Emergencies are bound to happen, so it’s best to be prepared—especially if you are a one-income household.
Suppose your car breaks down right after you pay your bills. You can conveniently use your savings to pay for car repairs without applying for a pay day loan online! An emergency fund is always necessary because financial emergencies are almost guaranteed to occur when you least expect them.
Open a Bank Account
In order to start an emergency fund, you need to open a bank account and establish a contribution plan. If you don’t yet have a savings account, know that plenty of options are available when you’re ready to save money. The best savings account for you depends on your time constraints and financial goals.
- Savings Account – A regular savings account is a standard account that earns interest. You can deposit and withdraw money since the savings account is connected to your checking account. However, the number of times you can withdraw funds depends on the terms set by the financial institution.
- High-Yield Savings Account – A high-yield savings account typically has higher interest rates than a standard savings account. The interest offered to customers depends on the financial institution and the federal funds rate set by the Federal Reserve. High-yield accounts tend to have stricter requirements than standard ones; you may need an initial deposit amount or to maintain a minimum balance.
- Money Market Account (MMA) – A money market account is ideal for people who want to deposit a large lump sum immediately. There are monthly withdrawal limits, but you may be able to get a high-interest rate.
- Certificates of Deposit (CD) – A certificate of deposit typically offers the highest interest rates for savings accounts. However, you cannot withdraw your money for a period. You must lock away your money for a few months or several years or risk paying a CD penalty.
You can open a bank account online or at a brick-and-mortar financial institution. You typically need to provide basic personal information, such as your name, birth date, Social Security number (SSN) or Taxpayer Identification Number (ITIN), and contact details. Some financial institutions require an immediate initial deposit, but not all. Once your account is open, you can start making deposits immediately!
Make Regular Contributions
After you open a bank account with your preferred financial institution, you can start depositing money! There is no set amount you should contribute to a savings account, but ideally, you should make at least one deposit monthly.
Consider depositing a set amount each pay period if you have a biweekly pay schedule. Consistency can help you grow a significant savings account over time. Suppose you receive $1,000 every other Friday. If you commit to saving $40 every time you get paid and don’t withdraw any money, you will have $1,040 in a year’s time! Remember, you will end up with more money to use in a financial emergency if you deposit more frequently.
Financial experts advise people to have three to six months’ worth of essential expenses in a savings account. Having enough money to cover necessary bills is critical for single-income families. In the event you unexpectedly lose your job, you have cash available to tide you over until you land another one.
Cut Your Monthly Expenses
Cutting costs can help you start an emergency savings fund! When you have more money to spend, you have more available to put away for a rainy day. Reducing your monthly expenses can also help you live more comfortably on one income!
The easiest way to cut costs is to eliminate any unnecessary bills. For example, you can stop paying for memberships and premium services. Suppose you pay for Netflix ($15.49), Hulu ($12.99), and HBO Max ($14.99) every month, which totals $43.47. If you switch to free video streaming services and watch free antenna TV for one year, you will end up saving $521.64! That’s enough money to make a sizable dent in your credit card debt or pay for car insurance.
Below are a few additional tips on how to cut expenses:
- Reduce electricity use.
- Move to a cheaper apartment if your lease is almost up.
- Refinance loans or consolidate debt.
- Reduce your insurance premiums.
- Prepare and eat more meals at home.
Pay Down Existing Debt
Paying down your debt can make it easier for you to save money. Many people have high-interest debt that ends up costing them hundreds or thousands of dollars every year! Making an effort to pay down debt can reduce the amount you pay in interest, which leaves you with more money to spend. Two effective strategies for becoming debt free include the avalanche and snowball methods.
Final Considerations for Living on One Income
Various households decide to live on one income for multiple reasons. Perhaps you had your first child, and your spouse wants to become a stay-at-home parent, or you want to pursue higher education full-time. No matter the reason, it is possible to live comfortably on one income through budgeting and careful planning.
Creating and sticking to a budget plan ensures that all your essential bills get paid, your savings account balance grows, and you still have leftover money. Having extra money to spend means you can splurge on entertainment, food, vacations, and other discretionary expenses that bring you joy.
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