If you’ve been reading for a while you know all about my wife’s transition to a stay at home mom. You also know about the ensuing surprise wealth. While these are important changes in our financial trajectory the true test of our plans and process comes after these items, in the phase we are now entering. As we progress through January we’re now at our new much lower income. We also have a new different set of expenses. All of our plans have to be adjusted to account for our new direction. This post will deal directly with how to prepare and adjust to major income changes.
Minor Increased Expenses and Major Income Reductions
As noted we reduced our income by a significant amount going forward. An estimate would be about 40%. Our expense also had some significant declines in terms of day care and the costs of my wife working in a corporate office. The latter was much higher than we expected, and thereby underestimated the savings we would enjoy. However, we are realizing that there are some new costs to cover. We will experience higher electric bills due to my wife and children being home during the day. We added in a YMCA membership to give my wife the option of a few hours of peace by utilizing their free day care. With these changes realized, the landscape of our existing budgets is no longer valid.
Preparing for Major Income Changes
Thankfully we had forewarning to the changes, so we were able to employ one of the best tactics for adjusting to major income changes. The first and best way to prepare for these changes is to live the new budget before it becomes mandatory. To this end at the decision point we immediately instituted living off our new budget despite still maintaining the pre-execution income. By exercising the new budget when it was optional it gives us time to make adjustments. In some ways we did this long before our decision occurred as we’ve lived our lives since marriage based on living off the lowest income in our household. This made the transition relatively smooth.
During Income Changes
That being said you might not have this forewarning. Or in our case some of our planning was over whelmed by the sheer amount of changes. As such while we were able to maintain the new budget successfully there are some unknowns for which we cannot account. This leads us to the second thing you can do. Once the period of change starts consider making your financial situation simpler until things settle down. In our case in order to adjust to our major income change we are delaying some changes we want to make to the house (basement floor replacement for those who might be interested). This will allow us to observe the changes in isolation to get a better handle on our new life as quickly as possible. This will allow us to make adjustments as necessary. It will also ensure we don’t get too far ahead of ourselves with the financial changes. The worst case scenario would be doing a major remodeling with extra money we thought we had but due to underestimation we could end up tapping our emergency account. Needless to say we want to avoid that so we’ve reduced our extraordinary expenditures for January.
Ease into It
Ultimately our strategy adjustments related to these major income changes are minimal. We are still executing the same philosophy of value based spending we always have. I’ve made some adjustments to redirect tax advantaged contributions from our dependent care FSA and my wife’s Roth IRA to other accounts (i.e. Employee Stock Purchase Plan (ESPP) and taxable accounts) as our eligibility has changed. We’ve also gotten a bit more aggressive with respect to credit card cash back and signup rewards to offset some of the costs. As things stabilize further we’ll crank up the contributions to ESPP and taxable accounts if I under shoot our budget or lower them slightly if I over shoot. Which brings us to the final bit of advice for adjusting to major income changes. Give yourself the ability to adjust. Continue to contribute to your savings accounts but realize you might need to dial it up or back for your new reality. This will avoid you having to tap that emergency account which is not a sustainable long term solution.
Have you ever had to adjust to a major income change? If so how did you do so?