Emily Campbell of Bluffton and her husband, Lewis, spent their entire marriage preparing for her to take the role of stay-at-home mom.
Most parents have at least nine months to emotionally and financially prepare for the reality of their new addition. But the Campbells' story is a little different. They adopted a little girl, and had less than a month to prepare when the adoption was approved.
The couple had been smart with their money during their six years of marriage. Emily always knew she wanted to be a stay-at-home mom. However, leaving the security and identity her job provided wasn’t as easy as Emily thought.
“After waiting 29 years to become a mom, something I have wanted to be my whole life, I figured that I have the rest of my life to work," Emily said. “After all, this may be our only shot at parenthood and I didn’t want to waste one minute with her.”
Many couples want to stay at home with their children, but there are many factors to consider, including finances, freedom and lifestyle. The first step is to have a heart-to-heart conversation with your spouse and find out how staying home will impact your family.
When determining if you can afford to be a stay-at-home parent, first estimate your current “cost of work,” what you pay for commuting, wardrobe, eating out and child care. After taking all that into account, really look at what your second income amounts to. It might surprise you.
Dennis Morris, a member of the Financial Planners Association, said that parents who are looking to be a one-income family should prepare a projected budget to see how they would fair once the second income is no longer there. There are great budgeting tools at www.mint.com. When preparing the budget, it’s a good idea to add a 10 percent cushion to your projected expenses just in case. Morris stresses couples should have at least three to six months worth of expenses saved in an “emergency fund” in case the working spouse is laid off.
Test out the new day-to-day budget while the mom-to-be is pregnant, living off only one income. Morris said that’s the best way to know if you can handle the financial transition. It also gives the couple an opportunity to use the mother-to-be’s income to build the emergency fund, pay down debt or “sock away money” for a retirement plan.
A lot of stay-at-home parents see their job as making the spouse’s income stretch as far as possible. One way to ensure you stay within your budget is by using an envelope system. Emily puts cash in her “grocery,” “entertainment” and “misc.” envelopes at the beginning of each month. When the cash starts getting low, she knows she has the pull in the spending reigns.
Unfortunately, living off one income often means that there isn't enough money to save for retirement at the pre-baby level. Parents may decide to reduce their retirement contributions for five years or so until the child(ren) are in school. If the working spouse has an employee-sponsored retirement account, he or she should continue to contribute the maximum amount. If possible, include contributions to an IRA retirement account in your projected budget to see if that is an option for the non-employed parent.
After April 15, when tax professionals aren‘t so busy, talk to yours about doing a mock tax return with the new projected income. Because your take-home pay will change, so will the amount you pay in taxes. Also, if you were used to getting a child/dependent care tax credit, that would most likely change if one parent stays home. The IRS pub 503 describes the rules surrounding the child care tax credit, which varied depending on income and how much is spent on day care.
"A married couple needs to have earned income from each person in order to qualify for the credit," said Mark June, managing director of June & Associates accounting firm on Hilton Head Island. "So, if someone is staying at home and produces no earned income, then no credit. If that stay-at-home person has some self-employment income, then they would qualify."
If you're used to paying for daycare and then decide to stay at home, subtracting the cost of the daycare will balance out the loss of the child tax credit, June said.
When researching whether a family can afford to live off one income, Morris suggests they look at all the financial projections and “ramifications before implementation.”
The Baby Expense
When calculating your post-baby budget, make sure to include some of these expenses for the first year of your baby’s life and start saving early:
- Feeding supplies such as breastfeeding pumps or formula can cost you up to $2,500 for the first year.
- The nursery set-up can cost up to $2,000 or more for the furniture, bedding, mattress, etc.
- Baby gear can cost more than $1,500. If you’re lucky, you’ll receive most of what you need at your baby shower or on loan from friends. But other “must-have” items will come up throughout that first year.
- Diapers and changing supplies can total to about $1,000 a year.
- Clothes for the growing monster can also add up to around $1,000 for the first year because they change so fast.
- Other expenses to think about include increasing your insurance plan for the new bundle of joy, which can cost an average of $400 a month in some areas, and upping your life insurance since you have more to protect. This can cost $500 a year and the legal fees associated with preparing a will, which can cost anywhere from $1,000-$4,000 depending on what is needed and the attorney fees in your area.
Besides examining the financial side of becoming a stay-at-home parent, couples must consider the reality of leaving their careers, which could mean a loss of identity or self-esteem. Being a stay-at-home parent isn’t just a financial decision, it’s a lifestyle decision - one which will impact the entire family. Be honest with your spouse about what you need to feel like yourself after spending the day at home with the children. Will you need an hour at the gym three days a week or Saturday mornings to yourself?