Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, November 6, 1995 TAG: 9511060018
SECTION: MONEY PAGE PAGE: A10 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
If so, you may find that the move will involve only a small financial sacrifice if you plan properly.
The Virginia Society of Certified Public Accountants says the need to care for children or elderly parents has caused many dual-income households to consider walking away from a good job with a reliable salary.
But, the society said, many two-income families overestimate the real value of a second income. Much of its financial advantage can be eroded by expenses associated with dual careers.
That means you should take a hard look at the economic value of the second income.
The first item to look at is taxes. First, determine the taxes you pay on the two combined incomes. Then compute the taxes on one income and subtract the difference.
The society gave the example of a couple with annual earnings of $35,000 and $15,000 that pays about $12,000 in taxes on their combined earnings. If only one spouse worked and earned $35,000, the couple would pay $8,000 in taxes.
That means the second $15,000 income causes $4,000 ($12,000 minus $8,000) in additional taxes, reducing its real after-tax value to about $11,000.
Once you determine the after-tax value of the second income, deduct the costs associated with earning that second salary, such as child care, commuting, clothing and lunch expenses.
Irene Leech, family finance specialist with the Virginia Tech Cooperative Extension Service, said you should not consider just the salary and overlook the benefits of the job.
The job may provide health insurance, she pointed out. The working spouse might add the stay-at-home partner to his own coverage at the office, but this will cost extra money that must be put onto the scales.
The same is true of disability coverage, which some companies offer and which might be lost. The nonworking spouse probably could not qualify for coverage.
Most important, she said, don't forget the long-term implications of losing pension benefits. Retirement may seem a very long time away when the children are in diapers, but the day will come when it matters that a nonworking spouse lacks a pension.
This benefit would be given up during an era when we are expected to be more and more responsible for our own retirement program, Leech said.
Leech said one way to offset the lost pension plan is to set up two IRA accounts, but the cost would have to be borne by the surviving salary.
Still, the CPAs said, you have the opportunity to subtract costs associated with conveniences that help you cope with being a dual-career family.
For example, many two-income families spend a great deal of money for housecleaning, laundry services, landscaping and restaurant and takeout meals. If a spouse stays at home, these expenses often can be cut by at least half, the CPAs said.
Once the work-associated and discretionary expenses are deducted from your second income, you may be surprised at what you're left with. The couple who thought they were bringing home an extra $15,000 in earnings may discover that they end up with $5,000 or $6,000 in disposable income, the CPAs said.
Leech said the stay-at-home spouse still may be able to earn some income. You can, for instance, baby-sit with another child. Or you may be able to turn a hobby or skill, such as pottery or photography, into a profitable venture. Anyone with a home computer and proficiency in using it might earn income from that source.
The CPAs said the effect of giving up a second income depends on your family's financial situation. It may mean you need to put your college savings and retirement funding plans on hold for a while. It may even require occasionally dipping into your savings. The CPAs offered several learn-to-live-on-less strategies:
Slash insurance costs by raising deductibles on your homeowner's and auto insurance policies. Drop collision coverage on a car that is paid for and is more than 5 years old.
If you have the option, change your health insurance from a traditional plan to the type offered by managed-care companies.
Watch your utility bills. Turn off lights and appliances when they're not in use.
Limit the number of credit cards you use to one or two, and keep consumer debts and credit card charges to a minimum.
Join a car pool or take public transportation to work.
Develop new spending habits. Curtail your entertainment costs by opting for cheaper vacations and by dining at home more frequently. Instead of going to the movies, rent a video. Instead of buying books and CDs, borrow them from the library.
Before you relinquish a job, the CPAs said, be certain you have set aside at least six months' worth of living expenses in an emergency fund. You'll want to be sure you can withdraw money from the fund easily, and be sure to keep it separate from your other savings.
The CPAs also pointed out that it's especially important for the remaining wage earner to have sufficient disability coverage. Review the plan from your employer, because it may provide for a long waiting period, a limited coverage period or a low proportion of your salary. It's often wise to obtain additional disability coverage on your own.
Finally, Leech said, more than money is involved in the decision to quit work. She urged the spouse considering such a move to weigh "the emotional pieces" of leaving the workplace.
Before you relinquish a job, the Virginia Society of Certified Public Accountants said, be certain you have set aside at least six months' worth of living expenses in an emergency fund.
by CNB