1. Build an emergency fund
An emergency fund can help reduce some anxiety about living on one income. It can also help protect you from unforeseen future expenses like medical costs, a new baby or an unexpected job loss. It's better to start building your emergency fund while there are 2 paychecks coming in–at least 6 months before you plan to leave your job. By directing at least 25% of each paycheck into a savings account, you're also training yourself to live on one salary. In order to do this, you’ll need to cut your living expenses (see step 2), but you’ll be glad you did it well in advance.
2. Get serious about cutting costs
Don't wait until your last 2-income payday to start cutting costs. Instead, print a list of all your monthly expenses, circle everything you could do without and start cutting. Depending on your situation, this may mean anything from canceling gym memberships and cable to selling a second car or moving into less-expensive housing. These processes can take months, so don't wait to get moving.
3. Set a new budget
Knowing what your new monthly budget will be before you start living off one income will help you make any necessary adjustments before you downsize to one paycheck. That's why it’s so important to make cuts to your budget before actually reducing your income. When you're working on your budget, be sure to factor in how much you'll save by cutting out work-related expenses like commuting, dry cleaning and lunches, as well as other expenses you'll no longer have — including childcare. It's also important to factor monthly savings into your budget, including savings for retirement. Be sure to continue to put money aside for retirement as you make the transition to a single income. Tools like the Merrill Edge retirement calculator can help you determine your retirement savings goal.
4. Pay down debt
High-interest debt on a credit card, car or student loan can be a budget-breaker—and often makes living off one income impractical. Be open to the prospect of pushing back your income-downsizing date if it means you'll have less debt moving forward. To help determine the right time, calculate how long it would take to pay down your debt while still at your 2-paycheck income level—using the extra money you’ve saved thanks to the cuts you made in step 2.
5. Consider tax withholdings
Another factor to consider in building your budget and planning for the future can be the tax implications of transitioning to a single income. Look at your withholdings to see if they can be adjusted given your smaller annual income. If you move to a lower tax bracket, you may be able to increase your exemptions, which means you’ll have less money taken out of your remaining paycheck each month. If you aren't sure, you can consult with a tax professional or contact the IRS directly.
6. Spend time, not money
If you’ve hired help with the housekeeping, lawn care or babysitting, or you've relied on takeout for lunch or dinner because you were busy with your job, that may no longer be possible or necessary. While you won't have as much money moving forward, one thing you will have more of is time–including time for activities with your kids, a new hobby or home improvements.
7. Determine how you’re going to manage finances
There are several options for managing your finances while living on one income. Some families decide that the spouse with more time should be the one to handle money matters, some maintain a joint checking account and others feel it’s easier to track finances by having 2 linked checking accounts for easy transfers of money. Whatever system works best for you, it’s important that the nonworking spouse have access to funds.
Once you've followed these 7 steps, you'll have a much better picture of what it will be like living on one income. Remember: While the transition to living on a single income can be intimidating, you may be amazed by what's possible with preparation and the right plan.
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