I noted in a previous article on Financial Independence my wife recently left the workforce to become a stay at home mom. Moving to a single income family has a massive impact on take home pay. However, it may not have as large of an impact on savings rates as it initially appears. You also may be able to mitigate this loss in some ways.
Stay at Home Mom
So, in our case my wife made the decision to be a stay at home mom after some period of working with our 2 kids in daycare. As such any change in our cash available for savings, or even net family inflows, must take into account the impact of day care costs. Before the change in my wife’s status we were paying approximately $25K a year in daycare. This cost comes off by her no longer working.
In addition, tax expenditures are also offset from my wife’s previous salary. So, let’s assume we are in the 25% tax bracket. How far we are in that tax bracket defines how much of her pay is taxed at 25%. Assuming we’re sufficiently into the bracket then lets call it all 25%. Add in a FICA (Social security and medicare) withdrawal rate of 7.65%. Added together thats another 32.65% reduction in pay.
Financial Impact of Wage Loss Net Daycare Expenses and Taxes
So, first there is a hypothetical point where her working nets us 0, or the break even point. This would be ~$37K or in our case $25K/(1-32.65%).
The Cost of Day Care/(1-your total tax rate)= Break Even Point
Beyond this point she actually starts to make money, however, it is not a 1:1 increase due to the tax rate being a percent. Apply your pay rate to the equation below to determine your actual benefit of working.
(Pay-(Day Care Cost))*(1-Tax rate)= The Actual Financial Benefit of Working
At $50K with our current day care costs, we would have $8.5K left. At $75K, the net would be $25K. At $100K, the net would be $42K. That is kind of depressing when you think about all the work someone might put into jobs at these pay rates. At the average American pay rate of $50K we would only need to replace $8.5K in inflows after taxes to remain whole.
Long Term Impact
Now, one could argue that there is a larger potential impact here in my wife’s long term earnings rates. This may be more or less important depending on the job being left behind. If that role had limited advancement opportunity, she were considering a career change, or if she did not want to advance then this would not be a concern. Given I practice stealth wealth, I’m not going to tell you where on the scale we really are, but I will talk to you about some of our mitigating steps for the reduction in inflows.
- The first step was my wife decided to do some freelancing via Upwork. With my wife’s engineering background she should easily be able to find a freelance technical writing gig for $25 dollars an hour. At 5-10 hours a week this will net anywhere from 6,500-13,000 dollars a year. This also may allow my wife to keep her resume up to date, mitigating some of the concerns around future earnings. At this point, the average American Household is now whole. I will assume for these purposes she manages to average 7 hours a week year round, so $9,000.
- The second step is to look at more ways to bring in free money/coupon cut for our existing purchases. I estimate our costs and income will change to the positive by about $1,000 a year between the tools like Swag Bucks for cash back/video watching (which tends to net about 50-100 dollars a month), and cost cutting from coupons. While these steps could have occurred before, my wife now feels like she has enough time with the kids to spend more time on these other tasks.
- The third step I took was to refinance our mortgage. I’ll talk about my no closing cost refinance next week, but this nets us an additional $1,300 in savings a year.
- The final action was to get myself a raise. By my wife being a stay at home mom, I will be able to further focus on my career which should allow me to increase my salary. I was able to meet with my manager and negotiate a salary increase recently and this should cover any remaining financial gaps.
Blogging as a Hobby
One final item you may be asking about, in theory, this blog might also be one of these open ended opportunities. I am currently not viewing it as more then break even entertainment so it is not included as such. That being said you never know.
So net here we have a relatively safe recovery of $11K a year (excluding my salary increase). With just the information I’ve shared the typical family would already have offset their reduction in pay and come out $3.5K ahead! On the high end at 100K there would still be a 21 K gap. However the wild card of the improvement in my career can close more of these gaps. Also, other freelancing on my part could close holes.
Single Income Family Mitigation
Where does that leave us? Simply with a question that led us to my wife’s decision. Is it worth the stress of a full time job that would pay somewhere from $50-$100K a year for a total take home of between $0-$29K depending on where you started? If the answer is no, and you can survive on the lower take home then going to a single family income is an easy decision. To answer this final question, we lived the last 4-5 months on 60% of my salary. Success here shows us that we should have no concerns.
So, ultimately the moral of this story is that the key to making the transition is to execute side hustles and plan for the impact of the lost income. Do you have other side hustle suggestions for a stay at home mom that might have 5 -10 hours a week when the kids are napping or asleep?
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