Dubai: Suppose you have decided that it would be best for your family to move from two breadwinners to one, or you are considering moving from multiple earners in your household to a single earner.
Before you take the leap to living on one income, consider these steps to join the many people who have successfully made the transition by creatively budgeting their expenses and savings.
Determining your new monthly budget can help you make any necessary adjustments before reducing to a single salary or income.
Internal surveys by global wealth managers indicate that those who have successfully saved on one salary or lived on one salary are becoming more disciplined when it comes to spending.
They depend on a range of strategies to live with less while pursuing a goal. The bottom line: Substantial investments in your future usually require substantial financial adjustments.
Step 1: Transition slowly
If you haven’t yet made the switch to a single-income lifestyle, financial planners recommend doing so in stages.
First, adjust your lifestyle and budget so that you can live on just one income. This is an opportunity to see if living on one income is realistic for you and your family.
If you can live on one income while the two salaried members are still working, this is an opportunity to save money, since you will keep all of one person’s income.
You can use that time to pay off debt, build a substantial cash cushion, or make massive retirement contributions.
Step 2: Target big expenses first
For many households, major expenses include an overpriced mortgage, car payments, dining out, buying clothes, or credit card debt.
If you can reduce these expenses, you can solve a lot of your money constraints and make the transition from two incomes to one much smoother, experts add.
Having wiggle room within your budget often comes down to spending less, not earning more. This may be true if you experienced a bit of “lifestyle creep” with dual income – adding services and amenities as your household income grew.
Review your spending for the past two or three months looking for things you can cut back or cut out altogether to save some extra cash. As soon as you cut back, you will immediately have more wiggle room in your budget.
Step 3: Living with a zero-based budget
If you want to live on one income and support your family, you must have complete and total control of your money. In other words, you must create a specific plan for each dirham of your income.
From saving to donating to paying for all your miscellaneous expenses, if you don’t know exactly where your money is going, it will be extremely difficult for you to live on just one income.
For this reason, if you’re not yet living with a zero-based budget, financial planners recommend now is the time to start.
If you’re unfamiliar with zero-based budgeting, it involves creating a plan for how you’ll spend each dirham at the start of each month.
Having a plan for where your money goes will ensure that you always have enough to cover your expenses. Additionally, creating a budget will help you identify areas of spending where you need to cut.
What is a zero-based budget?
With a zero-based budget, your income minus your donations, savings/investments, and expenses should equal zero. To create a zero-based budget for income, start by determining exactly how much money you will earn each month.
Next, categorize your planned expenses. You should have a line in your budget for each dirham you plan to spend. Everyone’s spending habits are different, so your spending categories may not be exactly the same as someone else’s.
Beyond that, within each category, you need to define the specific expenses you will need throughout the month. Then, to make sure you stay on track with your budget, record your expenses daily.
This way, you won’t have to wait until the end of the month to find out if you’ve overspent. In other words, you can make real-time adjustments to your budget to ensure you live within your one-time income.
Step #4: Get out of debt
Consumer debt is one of the greatest obstacles to the ability to live on one income. After all, the less you have to repay your debts, the more financial leeway you will have and the easier your financial situation will be.
Therefore, even if you have only one income, paying off your debt should remain a priority. In fact, it should become an even bigger priority than when you lived on two incomes, the experts add.
To get out of debt, planners recommend using the debt snowball method.
What is a Debt Snowball Method?
Start by listing your debts and ordering them from smallest to largest. Don’t pay attention to interest rates – only consider the amount you owe.
Then, make only minimum payments on all but the smallest of your debts. For your smallest debt, pay off as much as possible each month. Then, each time you pay off a debt, simply add the payment you were making for that debt to the next largest debt on your list.
Repeat this month after month until all your debts are paid off. The goal of the Debt Snowball Method is to have some success in your debt repayment journey to encourage you to keep going.
Just like a snowball rolling down a hill, your debt repayment efforts will gain momentum and speed until you are debt free. And when you’re debt free, you’ll be amazed at how much easier it is to live on one income.
Step #5: Invest in insurance
Global surveys indicate that many families make the mistake of not buying life insurance for both partners, regardless of the employee.
While you certainly need the breadwinner to have a good life insurance policy, financial planners remind you that you also need to add the non-working member.
If the non-working family member suffers a serious illness or injury, the working member will have to outsource these tasks, which could cost you dearly.
That’s why it’s a smart financial decision to have a life insurance policy for both parents in a family with children.