According to results from the 2023 Survey of Household Economics and Decisionmaking (SHED) shared by the Federal Reserve, 72% of adults were doing “at least okay” financially around the end of 2023. With an additional 33% of American adults stating that they’re living comfortably, there’s a chance that your family may be in a good financial situation, as well.
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If your family has been focusing on building wealth and you’re debating reducing to one income to change your living situation, you’ll want to consider a few financial figures before you do. Let’s break it down.
The Magic Number for a Family To Go Down to a Single Income
Is there a magic number for a family to survive on a single income? We reached out to financial experts for insights on determining when a family will be ready to go down to one income.
“The idea of a ‘magic number’ for a family to go down to a single income can vary greatly depending on individual circumstances and financial goals,” said Michael Collins, CFA and founder of WinCap Financial. “However, there are some general guidelines and factors to consider when determining this number for your specific situation.”
1. Debt-to-Income Ratio Can’t Exceed 36%
An important factor that can help you out is your debt-to-income ratio, which measures how much debt you have compared to your income.
“It’s generally recommended that your total monthly debt payments should not exceed 36% of your gross (pre-tax) income,” Collins shared. “If you have a high level of debt, it may be more challenging to live comfortably on a single income.”
Generally speaking, lenders prefer to see a lower DTI ratio when deciding if they should loan you money. While you’re not applying for a loan in this situation, it’s a standard that makes sense.
The reality is that this is a tangible figure that will show you where you stand. The good news is that you can lower this ratio by increasing your income or paying down your debt. If you’re trying to bring your family down to one income, the priority should be paying down debt.
A DTI ratio of 36% or less means that your debt load is manageable, and you’ll have money left over after paying bills. The bigger issue with a higher DTI ratio is that you likely won’t have the financial flexibility to handle any unexpected expenses, and you don’t want to put your family in a compromising situation by dropping to one income.
2. Household Income Should Be Double Your Fixed Costs
“Your household income should be at least double your recurring fixed costs like car payments, debt, and insurance,” said Robert Persichitte, a CPA and financial planner at Delagify Financial. “If that number doesn’t work, try to pay down debt or eliminate some recurring costs before switching to one income.”
In this case, the “magic number” may seem steep, but this figure is all about preparing yourself financially so that you dont regret your decision.
Persichitte elaborated, “The ratios are big numbers, but without them, you will feel VERY poor when switching to one income. These are drastic recommendations, but changing to one income drastically impacts your long-term finances.”
The decision to eliminate an income stream from the household shouldn’t be taken lightly since this will impact your family. It’s better to be overprepared than to be caught off guard.
Single Income Considerations
Here are some more factors to consider when choosing a magic number for your family to transition to one income.
Overall Wealth and Savings
When it comes to overall wealth, you’ll want to look at the size of your emergency fund to see how you can handle any unexpected expenses that could come your way.
Collins added, “A good rule of thumb is to have at least 3-6 months’ worth of expenses saved up in case of unexpected financial emergencies. This will provide a safety net for your family if one income suddenly becomes unavailable.”
Retirement Savings
You’ll want to think about how much money you’ve stashed away for your retirement because you don’t want to hurt your future nest egg by making a decision you’re not ready for.
“You should also consider the amount you are saving for retirement when determining if you can live on a single income, which should be at least 10-15% of your income for retirement each year,” noted Collins.
Size of Family
Another factor determining the magic number for a family to eliminate an income stream is the size. Families of three may be more conducive to a single income than families of five or more.
Job Stability
Before you decide to reduce your income to one, you should review the stability and security of both careers.
Collins elaborated. “If one partner has a stable, well-paying job with good benefits, it may be easier to make the transition to one income. However, if there is uncertainty or instability in either partner’s career, it may be more challenging to rely on just one income.”
Mortgage Payments/Debt
Persichitte believes your household income should be at least three times your housing expenses. If this doesn’t work, you may want to downsize or consider renting out space in your home.
Lifestyle Choices
You also can’t ignore your lifestyle choices, such as entertainment options and the cost of living based on where you live. These factors will determine how much money your family needs to get by. Since the cost of living will vary depending on where you live, you may even want to look into moving before you cut out one income stream.
Transitioning to a Single Income
Persichitte suggests a two-month test run before completely eliminating one income. The goal is to use the extra money from the second income to pay down debt or build up your emergency fund. If you can live without these funds, you’ll probably be ready to transition to one income.
Persichitte concluded, “If you struggle with the budget changes, you probably have some issues with the structure of your budget. Before committing, rethink your goals or rework your budget. Either way, you get a great head start on paying down debt and saving.”
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This article originally appeared on GOBankingRates.com: Don’t Try To Support Your Family on a Single Income Until Your Debt Meets This Number
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
