Are you going back to work because you want to, or because you have to?
The decision to go back to work after having children is often based on financial necessity rather than the desire to return to the workforce.
The reality is that paying off the mortgage and covering everyday expenses can be difficult or can even seem impossible on a single wage.
We realised that […] there was no way we would be able to pay the mortgage without my returning to work part-time. Then, on closer inspection of our bills and expenditure, we realised I would actually have to return to work full-time. My dreams of full-time motherhood were shattered…[source: local free parenting magazine]
The good news is that there are steps you can take, both before and after having children, to make it possible for one parent to stay at home and raise the children, while still meeting expenses and living comfortably.
(The mother quoted above was able to realise her dream of full-time motherhood with some creative financial problem solving).
You don’t need a high income to live on a single wage. Our after tax income is around $34,000AUD plus the Family Tax Benefit (much of which we would also receive even if I was working).
What is important is your ratio of expenses to income. In other words, are you able work it so that you spend less than you earn, regardless of how much you earn?
If being at home during your children’s early years is something you want, then the answer is yes, it is possible to do so financially speaking.
Here’s how to make it possible.
1. your total income after children
You won’t be quite on a single income once the children arrive – there are also family tax benefits and other payments to take into consideration (even when both parents are working).
To get an accurate picture of your total income once you or your partner leave the workforce, write down the following:
- the net (after tax) monthly income of the household wage earner.
- the approximate monthly income from the Family Tax Benefit and other entitlements (based on current amounts).
- any other (current and actual) monthly income streams that you may have from investments, home-based business etc. If you’re planning on working from home, don’t factor this income in until it becomes actual income.
Taking into account all net income streams will give you a more accurate measure of future cash flow and whether your single income (plus) will be able to cover your projected expenses.
[For more information on family assistance available see: Australian government assistance options for families.]
2. your Mortgage to income ratio
The single biggest factor that affects whether you can afford to stay at home to raise the kids is the size of your mortgage compared to your income.
The lower your monthly repayments compared to your income, the easier it will be to live comfortably on one income.
So, if you’re looking at buying a house, it pays to consider this before making a purchase.
The general rule of thumb is that repayments should be around 35% of your (single) pre-tax income (30% of a joint income).
The reality however can be closer to the 50% mark or more (this is certainly true in our case), which is where living frugally comes in.
To calculate your hypothetical mortgage repayment to income ratio:
- Use an online calculator to calculate your monthly repayments at a given house price and at today’s current interest rate. The monthly repayment on an average $400,000 mortgage at 6.5% interest over 25 years is $2,701 per month.
- Next, deduct the monthly repayment amount from your monthly projected net income as calculated above. What remains will have to cover living costs.
- To calculate your ratio, divide your monthly repayments by your monthly gross wage, then times this number by 100. If your monthly repayments are $2,701 and your monthly gross income is $6,530 then your mortgage to income ratio is 41% ($2,701 / $6,530 x 100).
- Calculate several scenarios: what are the monthly repayment amounts if the purchase price is higher or lower? If your deposit is higher? When you factor in the first home buyers grant? What is the effect of raising the interest rate by 1%? Or 2%?
Factors that affect your mortgage to income ratio:
- The initial cost of your house – obviously, the lower the purchase price, the lower your mortgage.
- The size of your deposit
- The interest rate
- Changes in income
Things to consider when looking at housing prices include lowering your expectations on what you need in a home (smaller homes are often cheaper and closer to amenities than a large home out in the burbs).
Or you could consider moving to where housing prices are lower (job opportunities, amenities and lifestyle choices need to be taken into account here too). We moved out of Sydney and interstate (and away from my family) in order to afford a house, so I know this isn’t an easy decision to make.
But what if you already have a mortgage?
If having one parent stay at home is something you really want, yet is out of reach based on the size of your current mortgage, there are still options available to you.
- Selling and downsizing may be an option, depending on the property market. Do some research and run some numbers to see if this option is right for you.
- Refinancing your mortgage may also give you the breathing room you need to live on a single income, particularly when interest rates are falling.
- In the article quoted above, the couple decided to rent out their property and move in with parents for a few years in order to be at home for the first few years of their child’s life. Renting out your home and living in a rental is another alternative worth considering.
[For more information on housing affordability, see Can you afford to buy a house?]
3. your current debts
The obvious is worth stating here: the more past expenses (debts) your current income has to cover, the less you have today to pay for today’s expenses or save for tomorrow’s.
Continue to incur debt and tomorrow just gets a whole lot harder.
If you are thinking about having kids or you are currently a two income family, consider ‘practicing’ living on one wage, using the other wage to pay down as much debt as you can now. This will help set you up for living on a reduced income.
[For more information on reducing debt, see Debt free – How to pay off your debts for good.]
4. your expenses
Balancing your cash flow also requires spending less than you earn, which may mean reducing your expenses.
The first step to cutting expenses is to recognise them. You may need to track your expenses for a while if you’re unsure where your money goes. Then draw up a rough budget.
There are obvious expenses that will automatically disappear when you decide to stay at home – you will no longer have work wear, commuting and other job related costs.
(As an aside, if you’re thinking of going back to work, it’s a good idea to calculate your real hourly wage, once you deduct work related expenses and childcare costs, to see if it is really worth it).
Dinners out, all-nighters at the pub, entertaining, afternoon movies – these will be luxuries that you won’t have as much time for, so the associated costs will also be reduced.
Next, look at other discretionary spending that can be reduced or eliminated. The cost of clothing can be reduced. Consumer goods like books, music, DVDs, gadgets games can also be cut (the library is my favourite ‘shop’ for these things).
Depending on your circumstances, you may no longer need two cars, or two mobile phones – this is particularly true if you are living in a smaller house, close to amenities where walking everywhere is more feasible.
Then look at your basic expenses: electricity, groceries, phone and internet, insurance etc., to find ways to reduce these expenses (check out the archives for ideas). The upside to not working is that you will have more time to cook from scratch, hang the washing (rather than use the dryer, for instance) and research better deals.
5. your savings
Living on two incomes is a great time to be building your emergency fund. Dipping into savings later to cover unexpected expenses, rather than relying on debt, will make cash flow easier to manage.
It’s also a good idea to start looking at future expenses and put money aside for those too – things like schooling, dental, household goods, the stay at home partner’s superannuation etc.
Even just $2 a week, which is all we manage to put aside for some things, is better than nothing. It adds up over the years and will make your future expenses that little bit easier to cover. And this money will be earning you interest (as paltry as the interest rate is at the moment), rather than costing you interest in the future.
[For more information on creating a savings plan see: Our savings plan – an example.]
It is possible to live on one wage, even a low wage. The key is to prioritise your values and find the right balance between what you earn and what you spend, which of course is what being frugal is all about.
People sometimes question whether we are actually thriving. After all, we don’t have all the trappings of modern living. We have to make choices and sometimes sacrifices. Sometimes we have to say no or be creative with our money – we can’t just spend money without considering the consequences.
And yet frugality has given us options that are supposedly out of reach for the average person. We have the freedom to choose whether I (or DH) stay at home or go to work, despite living on a modest wage. That, to me, is thriving.