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by Liz Knueven
November 15, 2019
by Liz Knueven
November 15, 2019
People choose to be stay-at-home parents for different reasons.
Maybe childcare is prohibitively expensive. Maybe you don't like the idea of sending your child to daycare. Maybe you run the numbers and find that childcare is essentially the price of one person's salary. Maybe your child has special needs that require more than a caregiver can do.
Whatever your reason for considering stay-at-home parenthood, going from two incomes to one is bound to be a change. As you start to consider whether or not it's right for your family, consider the following signs you can afford to be a stay-at-home parent:
There has to be income left over after your obligations are paid, and that's a key to living comfortably after the transition from a dual-income to a single-household.
Financial planner John Pak of Otium Advisory group in Los Angeles, California, suggests looking at how much will be left over each month. Calculate exactly what you need to live on, and how much you want to be saving each month.
Making a budget and sticking to it can be helpful to make sure you're not spending more than you should be.
"Debt-to-income ratio is key for me," says Pak, "because it gives me an idea of how much money is left over after all your obligations have been paid."
You can calculate this figure by adding up all of your monthly payments and dividing that number by your monthly income. While lenders tend to use gross monthly income (how much money you bring home before taxes) for this calculation, Pak suggests calculating your debt-to-income ratio with your net income, or the amount you see coming into your account each month after taxes.
He suggests keeping your debt-to-income ratio below 45% (.45) for this situation. "If it's above 45%, I think you're risking it," he says.
For Pak, an emergency fund is a non-negotiable. To him, it's about preparing for the what-ifs.
"What if you get sick? What if you get terminated? What if your company fires you because they're downsizing? I think that's a legitimate fear," he says. Emergencies can happen anytime, and having the cash on hand to deal with them is essential.
"You need to have a good, hefty savings account that's just reserved for emergency situations," says Pak. "I like to say you should have at least six months worth of expenses in a savings account that you know you're not going to touch."
Whether it's buying your dream home or sending your kids to college debt-free, you shouldn't be giving up on your financial goals to have one parent stay home.
You'll still want to have money left over each month after you've taken care of all of your obligations to keep chasing those goals. "Funnel that extra money into buckets you categorize, like short-term goals and long-term goals, like paying down debt, or saving for the kids' college educations," Pak tells Business Insider.
You should at least price out childcare options before deciding whether it's worth it or not. It might even push you towards making the leap.
"I feel like a lot of young parents or even you know, middle-age parents who are continuing to build their family, they're not ready for this," says Pak. "You go to your local daycare center and you ask 'Can I get a quote?' and for one child, it's going to be $1,500 to $2,500 per month. You're thinking, God, that's my rent!"
Childcare is one of many young families' largest expenses. However, costs vary greatly depending on where you live, so it's at least worth pricing out.
Once you've priced out options, you'll have more knowledge on what you have to gain or lose by giving up one paycheck. If the figures just don't work out, you'll know it will be beneficial for one partner to stay home.
And, remember that it doesn't have to be permanent. "If that's your situation, it would be nice to have one of the spouses stay home long enough to the point where you can send your child to public education first grade without having to pay anything," says Pak.
"Healthcare in the year 2019 is just off the charts in a negative way," says Pak. "It's almost becoming unaffordable."
Employers pay a large chunk of healthcare expenses, but without that, you'd be responsible for much more of that amount. Make sure that you'll still have coverage under the working partner's plan.
Stay-at-home parenting might mean losing a 401(k) match from an employer, but that doesn't mean you should stop saving. Pak says that there are other options to keep putting away cash.
"The stay-at-home spouse can actually walk into a brokerage house like Fidelity or TD Ameritrade and say, 'I want to open up a traditional IRA,'" says Pak. If you don't have an earned income, you won't be eligible to open one on your own. But, as long as your spouse or partner is working and eligible for an IRA, you can open one.
Being on the same page about money as your partner is a critical part of any large financial goal within your relationship. If you've both sat down and talked through it, you might be ready for this big step.
"I think it starts with just sitting down and laying out your big picture, laying out your numbers," says Pak.