In the past 20 years, two-income households have become the norm. As housing prices increase and children's activities rise in cost, having only one spouse working seems unthinkable. When deciding whether it makes sense for your family to have two incomes, however, there are many financial considerations to ponder. You may find that the net benefits of both spouses working do not compensate for the extra expenses. Let's look at the biggest factors to consider before you or your spouse take on an extra income. (For related reading, also take a look at Keep Working Or Stay At Home With The Kids?)
TUTORIAL: How To Manage Credit And Debt
If you have small children, having both spouses working may mean engaging either full-time or part-time child care. Full-time infant care can chew through a second paycheck quickly, leaving little to cover other household costs. While there are tax benefits for those who pay for child care in order to work, the tax benefits only cover a portion of the cost of the care. Many families find that having one spouse work from home alleviates the child care issue while allowing for a second income. Quality of care is also a concern, as many people believe they can offer their children a higher quality of care than daycares, babysitter, or dayhomes can.
This is a cost of working full time that you may not think about. Families who have both spouses working full-time have less time available to plan family meals and to cook. The frozen prepared food industry has built itself up around two-income families. It's easier to throw a frozen pizza in the oven at 6:30pm than to plan ahead and cook from scratch. The downside is that buying prepared foods is, at a minimum, twice as expensive as home cooking. If you're contemplating going back to work, double your current food budget when planning for new expenses.
Many jobs have a dress code that must be followed, whether it is formal business attire or uniforms. The cost of a new work wardrobe can be anywhere from $200 to $1,000. If you are required to wear specialized apparel such as steel-toed work boots or helmets, the price tag can be even more. Also take into account the costs of pressing and dry cleaning work clothes. Most work clothing is not a deductible expense and therefore must come out of after-tax income.
Unless you are in an urban area with ample public transportation, two incomes often means having to maintain two cars. Car expenses can include lease or finance payments, gasoline and oil, repairs and maintenance and insurance. If you find that managing expenses for two cars may be too much, you will have to factor in this substantial expense when deciding if it is financially worth it.
TUTORIAL: Budgeting Basics
Income taxes can affect the net income from a second job in several ways. The higher the income, the higher the tax rate will be and the less paycheck you will be taking home. There are also many income-geared tax credits and deductions that you may lose out on because you have boosted your joint income higher. Medicare and social security taxes will come off of your gross pay as well. Social security is based on your work history, so, if you expect that the program will still be around when you retire, you will benefit from having paid in. (For more on taxes, also see 8 Tax Cuts Set To Expire in 2011.)
Another hidden cost of having a two-income household is a decrease in the amount of time available for planning expenses. One example is not having the time to read grocery store flyers and shop sales, two activities that can greatly lower food bills. There is also less time to review utility bills, check into less expensive phone plans or set aside savings for large future purchases. Every time you shop or spend without planning ahead, you will spend more money. Because most of these expenses are personal in nature, the extra expense comes out of your net pay.
The Bottom Line
Having a second income often involves an increase in cost over having one spouse at home. When deciding if having two incomes is right for your family, you must compare the net paycheck with the new expenses to find out what you are truly adding to the family coffers. Some families realize that the financial benefits are significantly less than they first thought.