Living On One Income: How to Budget

Are you thinking of living on one income but aren’t sure how you’ll make ends meet? Whether living on one income becomes a necessity due to an unplanned emergency, or you want to live on a single income as part of a long-term plan to achieve financial independence, there’s good news: you’re not alone! Many families are faced with this challenge and it can be daunting.

Whether you’re a single parent, married couple, or headed by multiple earners in the household, having an intentional strategy for managing money is essential. Planning ahead so that all expenses can be taken care of is a critical part of financial health.

Here, we’ll review how you can budget to live off of one income in a pinch, or how best to allocate your savings if you have an additional salary to put toward your future financial goals.

Emergency Tactics to Stretch One Income

You don’t always get a warning when financial hardship is about to strike—whether it’s a job loss or a medical emergency, it can be shocking to realize living on one income isn’t a choice, but an urgent necessity.

If you weren’t planning on becoming a one-income household but find yourself having to strategize at the last minute how to pay your bills, there are a few tactics that can help you make the transition in an emergency.

Set a New Budget

In the case of a drastic change to your family’s monthly income, the first step is to sit down and create a new budget. (Don’t have one already? Check out our article on budgeting strategies!) Start by identifying exactly how much income will be flowing through your household every month to set a baseline.

After calculating income, turn to your expenses and eliminate any cost that won’t be spent now that one person isn’t working. You might be able to cut back on work-related expenses like transportation costs, dry cleaning, and lunches. If you have kids and therefore daycare expense, you may be able to cut that amount by keeping the kids home with a parent—even if it’s just a couple of days a week.

After making any easy cuts, it’s time to go through each of your categories of spending. Where can you reduce or eliminate spending? It’s important to loop your entire household into this conversation—do they see anything they can cut down on? Are there subscriptions that aren’t being used, or expenses that aren’t necessary right now?

Cut down on your spending as much as possible, as soon as possible. If you don’t know how long you’ll be living on a single income, cutting expenses now can make the future that much easier.

Adjust Your Tax Withholding

With only one income, it’s likely that you’ll owe less in taxes. You can probably increase your allowances, which will reduce the amount the IRS takes out of your check every month. Ask a tax professional to walk you through withholding, or use the IRS Withholding Calculator to determine how much to withhold from your paycheck. Depending on your individual situation, this may add a bit of extra income every month that you may need in your new, reduced budget.

Protect Your Emergency Fund

If you already have an emergency fund, try and avoid using those funds. It might seem tempting to dip into your savings to keep up with your current budget now, but you may be setting yourself up for financial difficulties later. Keep as much of your emergency fund intact as you can.

If you don’t have an emergency fund, it’s important to save at least some of your income every month if you can. The goal might be at least 3 to 6 months’ worth of expenses—but you don’t have to meet that goal all at once! If you’re living off one income, having an emergency fund can help reduce anxiety and make sure you’re prepared for unforeseen costs like medical expenses or car repairs.

Cut Even More Costs

You’ve gone through all of your finances—great! Now that you have the bigger picture and a plan of action, go back to your budget and see if there are any more ways to save. Reviewing your monthly expenses in detail may be helpful, so you can identify any spending that you may not have noticed or thought of. This might mean canceling subscriptions, selling a second car you might no longer need, and choosing to cook at home rather than eating out.

Find a Side Hustle

The core concept behind a single-income budget is this: you can either spend less or make more, but at least one of them needs to happen! If your spending vs income is still not balanced, or you want a little extra breathing room, it’s time to try a side hustle.

There are many different ways to make some extra cash—some of them easier than others, depending on your personal situation. Take stock of the skills and experience available to your household—can anything be leverage for some additional income?

Living on One Income in a Two-Income Household

There is another aspect of living on one income—a planned transition. If you’re fortunate enough to have access to two salaries, choosing to live on one income can completely transform your family’s finances, putting your savings rate into hyper speed. As a bonus, living on one income can prepare you for the event you need to live on only one income.

Decide Which Salary You Want to Live On

The first step is to decide whose salary you’re going to spend and whose you’re going to save. If the two of you have incomes that are similar, the decision may be easy. However, if one of you earns significantly more than the other, how do you decide which income to save? There are a few factors to consider in your situation to make the best decision for your family:

• Your money goals. Are you aggressively trying to pay off your home, save for early retirement, or education costs? Then you may want to save the larger salary.
• Lifestyle. How much does your current lifestyle cost versus the simplest lifestyle you’re comfortable with?
• Level of Challenge. How much are you willing to forego for the sake of savings and future financial stability? You and your partner should discuss how extreme you’d like to take your budgeting. You don’t want to put an unnecessary strain on your relationship.

Reset Your Budget

Just as in the case of an emergency transition to a one-income household, when you choose to live on one income and save the other, you’ll still need to make changes to how you now balance your income with expenses. Cutting costs and protecting your emergency fund are still keys to financial success.

However, in this case, you’ll have some time to plan how to go about it. This can be extremely beneficial for your budget because you have the opportunity to taker a serious look at your spending. You have the luxury of living off of one income—but it doesn’t mean you can’t or shouldn’t cut your spending!

Cutting expenses doesn’t have to be forever, and it doesn’t have to be permanent. Some folks like to practice living on a lower budget before they make a more permanent change—trying it out for three months or so, just to see if they’re still comfortable making those cuts.

Resetting your budget isn’t always about saving, either—sometimes it’s about sacrificing things you don’t actually need for things you really want. For instance, eating out less so you can travel more. It’s all about balancing priorities!

Pay Down Debt

While saving will likely still be a top priority, debt repayments should be a key part of your new budget. Paying off high debt, especially high interest debt, can save you a significant amount of money and increase your ability to build wealth.

Save for Retirement

Another goal that should be reflected in your new, more frugal budget, is retirement savings. By setting aside an entire income, you have a great opportunity to fully fund tax-advantaged retirement accounts such as Independent Retirement Accounts (IRAs) and 401(k)s. Putting a good chunk of money into these accounts can help you reach your retirement goals sooner, potentially even allowing you to retire early and pursue other interests outside of work.

Find the Balance in Your Budget

There’s a middle ground here as well: spending one income and saving most of the other. If your debt is paid down, your retirement savings is in good shape, and you have a healthy emergency fund, you can use some of the second income as a “floating fund” for vacations, gifts, and other extras.

Likewise, making choices that fit your new budget can make this process far more enjoyable. For instance, choosing a mortgage that can be comfortably paid for with one income builds financial stability—in the event that you’re forced to go down to one income, you know that you can still afford your home.

Work with What You Have

Making the decision to live on one income can be a tough call to make. It may be the result of circumstances beyond your control, or it may be a choice you make to save money. However you come to it, there are some important steps you should take in order to make sure that you can still maintain your financial health: protect your emergency fund, create a new budget that takes into account your reduced income, cut spending where possible, and find ways to increase income.

By following the tips above and creating a new budget, you can weather this difficult time and come out stronger financially on the other side. Living frugally doesn’t always mean being deprived; it means finding a balance between spending and saving that works for you and your family. A frugal lifestyle is not easy, but it can have significant benefits for your savings and financial health long term.