Some families really need a second income to get by, but in many cases couples who earn more begin to spend more. Instead of using the extra cash for necessities or increasing their savings, they delude themselves that they’re so comfortable they can afford an extra vacation or another car.
Before too long, they’re hit with a double whammy. First, they find themselves on a reward-guilt cycle: “Because I worked so hard, I’m entitled,” they rationalize, only later to feel guilty, says Linda Kelley, who has written about the pitfalls of a second income in “Two Incomes and Still Broke? It’s Not How Much You Make, It’s How Much You keep” (Times Books, $14).
Second, they’ve forgotten one of the basic economic lessons of marital life: The Internal Revenue Service taxes a second income at a higher rate than the first. As a result, it may not be financially worthwhile for that person to work.
Each family needs to weigh how much a second paycheck provides once they deduct associated costs–what Kelley terms job-related expenses. Some common costs include a baby-sitter or day-care center, a professional wardrobe, higher dry-cleaning costs, lunch and coffee-break money and transportation to and from work, which may involve more than monthly parking and gas, according to Kelley. You may have to add in interest on a car loan, more auto insurance, license tags, maintenance and repairs, she says.
But two-income families also need to consider other expenses and effects of that second career. A second job may produce more stress, less time together and more expensive take-home meals if no one’s home to cook.
Yet for others, a second job may provide such intellectual stimulation and ego inflation that the hassles are less consequential.
Kelley began to reach these conclusions when her youngest of three sons started school years ago. She considered returning to work as a home economist, but after adding up the probable expenses, she realized the job wouldn’t be worth it.
She began working part time for a council on aging and managed a meal site for the elderly. “It was a low-paying job that didn’t seem like much income, but it involved low expenses.”
It also offered her good health insurance and kept her in the job market, which she felt was critical. “I’m not advocating that women shouldn’t work outside their home,” she said. “Many women work for that second paycheck to raise their family’s standard of living. But many choose to stay home for a while if they can afford it. Once they identify all costs associated with either choice, they can make a more intelligent decision.”
How does a person begin? By totaling the job-related expenses. “Although there’s no accurate study of what a working mother with child care clears after taxes, I think they’d be lucky if it’s 20 percent,” Kelley said. “If they don’t have child-care costs or extenuating circumstances such as a long commute, that figure might rise to 50 percent.”
Other big drains on double incomes are expensive gifts, meals eaten away from home and non-work clothing, adds Kay Shirley, a financial adviser with Financial Development Corp. in Atlanta.
But couples make other mistakes. “Too many couples, in particular young ones, are financially uninformed. They’re so busy earning that they don’t take time to manage their funds for the future. They should read about insurance policies, interest rates, retirement plans,” Kelley says.
Nancy Coutu of Money Managers Advisory in Oak Brook says too many young couples get in even deeper over their heads when they have children.
“They think they have to buy the best toys, host the best birthday parties, give their children’s friends the best presents; then, when the children are older, give them cars and go on great vacations,” Coutu says. “What many do is try to compensate for the time they don’t spend with their children.”
And the hole gets still deeper when they start charging any purchases. “Credit-card balances tend to spiral out of control,” Kelley says.
Coutu advises her clients to carry a small spiral notebook in their handbag or briefcase and track every dime they spend for 30 days. “They have to account for everything–whether it’s a prescription drug, breakfast purchased at a drive-through, a Starbucks coffee grabbed before a meeting,” she says.
Shirley recommends a slightly different tack. She asks clients to list previous purchases by totaling canceled checks and credit-card bills over the last 12 months. “It’s amazing how many people forget what they spent money on,” Shirley says.
Once done, the advisers study the results, which couples can do on their own, as long as they don’t invoke any “How could you have spent that?” criticisms. Next, they need to resolve to cut back. “Once you see what you’re spending on those little pleasures of life, you’ll want to compromise. Some may decide to buy a pound of coffee and make it at home, for example. Things like that add up,” Coutu says.
Shirley advises clients not to spend more than six percent and possibly less of their net income on clothing, a maximum of six percent at restaurants and only two percent on gifts. “We’re too much of a gift-giving society. Some people think you can’t spend $50 or less on a wedding gift, but maybe we should.”
They also need to reduce and eliminate credit-card charges by first tackling those with the highest interest-rate charges.
But don’t delude yourself that if you give up a job, you’ll become a superhuman who cooks all your family’s meals from groceries purchased with coupons, never goes to a restaurant, always packs your working spouse’s lunch and cleans your house yourself. “Be realistic, compromise and set goals,” Coutu says.
When you’re debating how much income your second paycheck provides, here are some other potential expenses that Kelley says you should consider:
– Two-income couples often lack the time to fix that stuck front door, clean the carpet, even do their own tax returns. As a result, they spend money to hire others to do work they might have done very cheaply.
– Be prepared if you work to be deluged with requests for group gifts for your colleagues’ new babies, children’s wedding showers, etc. And don’t forget contributing to your boss’ favorite charity.
– If you’re working to help pay for a college tuition, you may actually be hurting your cause. Kelley says that many scholarships and grants are based on financial need, so a second income may push your family out of that category.
