Having a single-family income and living within your means

As I referenced in the intro to this blog, and with the site name “The Family WORTH,” there would also be a personal finance angle to the site. In 2013, I stumbled into the world of personal finance and learned a lot from others who shared their experiences through blogs. I decided to share the tools we’ve learned along the way, and how they’ve worked out for us in the event it may be helpful for others.

For most couples, when deciding whether one person should be a stay at home parent, the first and most debated item is the financials. It can be incredibly stressful to determine whether a single income is genuinely enough to live off of and still save for retirement, put away money for kids’ college tuition and pay off debt. When we started down the road to a stay at home parent, this was the most straightforward part for us. Before we tied the knot, we always had pretty open conversations about money and were transparent about our financial lives. 

Live well within your means and calculate your savings rate

For us, living within your means is spending less than you earn, being intentional about saving money each month and making financial decisions that enable the ability to save. While this has not always been easy for us, we always make a conscious effort to put away something every month, even if its $50. Throughout the years we struggled to know how much we were actually saving and if we were doing better or worse than the previous year. In grad school we learned that if you can’t measure it, you can’t improve it. So after some research in the personal finance world, we found that Savings Rate is the established principle for tracking your ability to save.

Savings Rate

So how do you calculate your savings rate?

Savings Rate = Annual Savings / Annual Income

What is Savings? In this sense, I view savings as all income that you can move toward increasing your net worth.  That can be in the form of cash to a savings account, buying investments such as a stock or index fund or paying off debt.  Anything that helps increase net worth should be considered savings.

What is Annual Income? Income can be looked at in 2 ways, 1) Gross Income: Your entire paycheck before any taxes are removed. 2) Net Income: Gross Income less Income Taxes.  I prefer to use Net Income as it is what is yours, you have a complete say over what happens. Spend it, save it, it’s up to you.  This number will probably be larger than what you see in your paycheck, as it includes items like health insurance and 401k contributions.  

So what is a “good” savings rate?  Senator Elizabeth Warren popularized the 50/30/20 rule, which states that 50% of your net income should be put on needs, 30% on wants and 20% to savings.  Or a 20% savings rate.

What about debt?

Early on in our marriage, we didn’t save a lot as far as putting away money into savings accounts or investing in stocks.  We were entirely focused on our debt, which was made up of $70K in student loans, two car payments, and the remainder of a 12-month 0% interest loan for our king size mattress.  It didn’t feel like we were saving as our bank accounts weren’t getting any larger.  We were saving though,  with each payment to our loans, our net worth was increasing.  Each month, we had the decision (even though it didn’t feel like we did) to put extra money against our loans instead of investing.  I’ll get more into this in rule #4, “Debt Free and Ample Cash Reserve, even if the math doesn’t make sense.” We managed to pay off all of this debt by 2014 and shifted our focus to growing our assets like cash reserves and opened a brokerage account to start investing.

Once we started to track our net worth in 2015 via Our Life spreadsheet, calculating our savings rate became a simple by-product of the existing numbers.  It was then that we finally looked back at 2010-2014 to see what our savings rate was during those debt payoff years.  We had managed to save 33% on average throughout those years.  Given that we were able to save 33% without tracking it, monitoring it and setting goals around it, we knew we could now improve upon it.  So since 2015, 33% has been our baseline minimum acceptable rate, and we strive to push this bar higher each year.

How to use your Savings Rate to make financial decisions

One example to illustrate our intentionality around savings was the purchase of our home in 2018. Like most people, this was the single largest purchase we had ever made. When we started to determine how much house we could afford, our savings rate was the first and most important consideration.  The commonly accepted rule for a mortgage payment is 28% of your gross income.  Dave Ramsey, well known personal finance guru sets this number at 25% of your net income

We started with our monthly rent payment at the time.  This payment was something that we were comfortable making, and we knew that it allowed us to achieve our savings rate goal.  One catch, the advantage to renting is your monthly payment covers just about everything.  No trips to Home Depot, no bags of fertilizer for the lawn, it’s all included in that one payment.  Knowing this, we decided to knock off $500 from our current rent and see where we landed.  This number turned out to be ~15% of our net income and still allowed us to save at the same rate as previous years, at or above 33%. 

Per the established guidelines laid out above, we could have afforded more, but we chose to make some sacrifices to be able to continue to save. We bought a house built in the 1960s, not in the 2000s and our kitchen is a far cry from the HGTV kitchen we had envisioned. It did though meet all of the must-haves on our list. It was in a great neighborhood with families, excellent schools, decent size yard for the kids to run around in, and centrally located.

So similar to our decision on how much house we could afford, the decision about being a stay-at-home dad had an easy financial success metric. Can we still save 33%? To calculate, we removed my salary. We removed the assumed cost of daycare for the FW twins ($48,000 annually). Also, with me staying at home, FW Jr. can now switch from full-time daycare to a part-time preschool ($15,800 difference). While it’s not a net zero swap, we have laid the groundwork over the last couple of years to exceed the 33% goal and attempt to push past the 50% mark. Because of this, the loss of my income will not jeopardize the 33% savings goal.

Below is a chart of our savings rate for the last 10 years.  

savings rate fire

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