Behold the modern working couple’s conundrum: You make a good salary, so does your spouse, yet your paychecks never lead you to Easy Street. In fact, after you’ve paid the mortgage, written the check to the baby-sitter, picked up the clothes from the dry cleaner, factored in commuting costs and shelled out a few bucks for take-out meals on the nights you were too tired to cook, your checkbook is just barely in the black. Forget about saving for the future.
You are not alone. A study of Labor Department consumer-spending data has shown that the typical two-career family loses one-half to two-thirds of its second paycheck to the extra expenses incurred when both husband and wife work-costs such as child care, domestic help and transportation to and from both jobs, not to mention the expense of maintaining two professional wardrobes.
What’s more, say researchers Sandra Hanson of Catholic University and Theodora Ooms of the American Association for Marriage and Family Therapy, the payoff of two salaries actually diminishes as household income rises because affluent families spend proportionately more on these work-related expenses. Indeed, according to the study, when the additional taxes paid on the second salary are taken into account, the average middle-class household ends up with only 17 percent more money on hand from having two of its members in the work force, and upper-income families net a scant 5 percent more than they would if just one spouse worked.
Of course, the financial rewards of two careers go beyond cold cash. There are numerous indirect benefits, such as the second wage earner’s gaining access to free or low-cost life and disability insurance as well as pension and other retirement-savings plans. For women in particular, there is what Hanson and Ooms term “divorce insurance”-that is, a means of economic survival in case of a divorce. And beyond financial motivations, there is the psychological and social satisfaction that comes from having your own professional identity.
While two salaries may nearly double expenses, they also present twice as many opportunities for saving. By making use of all the money-saving plans available at work, taking tax breaks, cutting overhead and belt-tightening, you can save hundreds, probably thousands, of dollars annually. Lynn Ballou, a financial planner from Lafayette, Calif., says, “Cutting your expenses by at least 15 percent, without hardship, is an entirely feasible goal.”
The strategies outlined here, addressing the four prime areas of savings, can get you started.
For working couples with kids, child care is by far the heftiest expense of running a dual-career household. A joint study by the National Association for the Education of Young Children and two federal agencies found that working parents typically spend about 10 percent of their gross income-about $3,300 annually-on child care.
That percentage easily can balloon to 15 to 20 percent, with costs running as high as $15,000 a year for families in such expensive urban areas as New York or San Francisco, or for parents who have chosen a particularly pricy kind of child care, such as a full-time nanny.
Mary Kay Leonard, a vice president with Work/Family Directions, a Boston consulting firm, says, “Like a college education, child-care arrangements are now a major financial investment in a child’s future.”
How can you make this investment more affordable without sacrificing top-quality care for your child?
Take advantage of tax breaks available to working parents. Your basic choice: a tax credit families can to take on their 1040 form to help defray child-care costs, or a company-sponsored dependent-care spending account that allows employees to pay for child care with pretax dollars. To qualify for either tax break, you must have a child under age 13 and you must pay your care giver on the books.
Despite these relatively benign requirements, only about one-third of working parents earning $35,000 or more a year claim the tax credit, and a scant 4 percent of eligible employees make use of dependent-care spending accounts.
Of the two, the dependent-care account usually results in far greater savings for families earning more than $24,000 a year. About half of U.S. employers offer these plans and another 23 percent are considering them or planning to offer them within the next year. This provision allows you to direct as much as $5,000 of your salary each year into a special account that you tap to pay for child-care expenses; your contribution is free from federal and Social Security taxes, and sometimes from state and local taxes.
For a working couple with two children and a combined income of $70,000 a year, for example, funding a dependent-care account to the maximum would slash their tax bill by nearly $2,100 a year. By contrast, the tax credit-which ranges from 20 to 30 percent of your expenses, up to $4,800, for two or more kids-produces a maximum savings of only $480 for one child and $960 for two or more for households earning more than $28,000.
Next to child care, additional taxes take the biggest bite out of a dual-career household’s second paycheck. Much of the blame lately lies with hikes at the state and local levels. According to the Tax Foundation, the state and local tax burden on a median-income ($53,984) family of four with two wage earners increased 14 percent from 1980 to 1992, after inflation, while federal taxes decreased by almost 9 percent. That household now spends a total of 39.7 percent of its income on federal, state and local taxes.
To ease the crunch, husband and wife should aim to shelter as much income as possible in tax-advantage retirement-savings plans, including company-sponsored 401(k) and 403(b) plans, individual retirement accounts and Keogh plans for people who are self-employed or have free-lance income.
“Pump every nickel into these plans that you can,” advises Mary Sprouse, a Los Angeles tax attorney and author of Sprouse’s Two-Earner Money Book. One benefit, she explains, is that your savings will grow untaxed until you withdraw your money, presumably after you retire. Even more important, your taxable income is reduced by the amount you contribute, up to limits ranging from $2,000 a year for IRAs (although you can claim the deduction only if you are not covered by a pension plan or you earn less than $50,000) to $8,937 this year for 401(k) plans.
The savings can be sizable. Consider, for example, a wife and husband, each earning $40,000 a year, who both contribute $3,000 annually to their 401(k) plans. Their tax savings: $864, figures Cynthia Holmes, head of the defined-contribution unit in the Los Angeles office of Foster Higgins, a benefits-consulting firm. Says Holmes, “Not using your 401(k) is like throwing money away.”
The name of the game for working couples is to dovetail plans to get the coverage they need at the best price.
About 27 percent of employers currently offer flexible-benefits plans that allow employees to choose benefits, and another 10 percent plan to switch to such a program within the next year or so.
Even if your employers offer traditional benefits plans, you can still save money.
One problem for many two-career families is that as income grows, so does their taste for the finer (read: more expensive) things in life. Some of these outlays are justifiable-say, springing for trendier clothes after you’ve been promoted to a high-profile job or hiring someone to clean your house so that scrubbing toilets won’t rob you of time with your kids at the end of a 10-hour workday.
“People usually spend up to what they have,” maintains Kaycee Krysty, a certified public accountant and financial planner with Moss Adams in Seattle. Some expenditures, are symptoms of what Krysty calls the damn-it-I-work-hard-so-I-deserve-to-have this syndrome. She notes: “Overspending is like overeating: it is usually done on impulse as a reward to yourself when you are tired.”
Organize your life to include rewards that don’t cost a lot of money, she advises. For example, keep your freezer stocked with gourmet prepared meals so you can pop a couple in the microwave when you’re too tired to cook, rather than go out to dinner. If you splurge on a new dress, opt for wash-and-wear rather than a pleated silk number that will cost an extra $200 a year in dry-cleaning.
Financial planner Ballou suggests that you sit down once a year and thoroughly review every dollar you shell out, from food and vacations to insurance and health-club dues. Then set priorities and cut back on or eliminate the last items on your list.
If you’ve neither the time nor the inclination for traditional budgeting, however, Krysty suggests an alternative approach. Begin by making a rough estimate of how much you really need to live on each month and then putting only that amount into your checking account, she says. Direct the rest of your paycheck through automatic payroll deductions to the savings and investment accounts of your choice. Then, at the beginning of every month, write all of your checks for fixed expenses. Include an allowance for yourself and your husband-a private stash of cash about which no questions will be asked. What’s left ought to be enough to get you through the month. “Sure, it’s just a psychological game,” says Krysty, “but it happens to be a highly effective one.”
