Browsed by
Category: Money matters

General money management, including spending, saving, earning, and investing.

How to live on one income

How to live on one income

If you’re reading this, I presume it’s because you want to know how to live on one income. That may be because you want to or because you have to.

The prospect of living on one income may seem daunting, even if its a decision you’re making and in control of. However, it can also be empowering, giving yourself more freedom and flexibility to get what you want from life.

My experience

We spent 5 years building our budget so that, if absolutely necessary, we could live on one income. This meant 5 years of working hard for both of us to earn more money, and 5 years of controlling costs.

To give yourself the best chance, you need to avoid debt and getting bound to ongoing contracts for luxury items.

What is your situation?

Having to live on one income and actively choosing to live on one income are very different. The first step is to understand your situation and what impact that might have on the financial life you are trying to craft for yourself.

If you were in a position where you had to live on one income, due to health or job loss, it may be more acceptable for you to cut certain luxuries completely, such as Christmas gifts or eating out.

If you’re deciding you want to live on one income, you’ll want to have more flexibility in your budget for the occasionally treat, even if this is much less flexibility than you currently have.

Do not waste any time

Either way, use as much time as you have available to plan your new budget. The more time you have, the better. That’s because you’ll have time to adapt and redesign your finances around the life you want to lead. You’ll be able to cancel existing contracts, switch to better deals without being unduly penalised by fees, and get more practice at spending less. You’ll also have more time to build up a savings cushion.

Design your finances

You need to design a budget that can be accommodated by one income as far as possible. This needs to be really comprehensive, even more so that any existing budget you have. So make sure you don’t just include monthly bills and annual costs. You also need to remember ad hoc costs, for example, replacing the car in 5 years. And, of course, emergency savings. Even if you already have an emergency fund, this will need to be replenished as it is used, and this will be slower than if you had 2 incomes available.

Take a look at the single income you’ll be living off against your total annual expenses. It’s likely that the income will be less than your expenses.

Cut out what you can’t afford

The next step is to reduce costs as far as possible. You might already have trimmed some costs down from your current budget, by tweaking your grocery budget or spending less money on travel or entertainment, so if you have, that’s a great way to have started.

Remember, the more time to plan the move to one income, the more you’ll be able to control the transition. If it looks impossible, don’t be disheartened. Small changes can add up, and the longer you plan and manage your finances, the more savings you’ll find.

These are all areas of significant cost that you should try to reduce. These are the things we chose to do, to some extent prior to living on one income, and to a much greater extent when we only had one oncome.

Debt in whatever form, will put strain on your income and make it difficult (maybe even impossible) to live on one income. It generally makes sense to focus on paying off the most expensive debts. Eradicating or reducing debt payments means more is available for other necessary expenses when living on one income.

Note: If you’ve suddenly found yourself in a position of only earning one income, maintaining payments to the highest cost of debt isn’t necessarily the right thing to do. In this case, you need to pay priority debts first, including your mortgage or rent, to ensure you don’t find yourself homeless.

Insurance costs more if paid monthly (at least, the vast majority of the time it does). If you don’t already pay interest premiums annually, one of the best things you can do is to break this cycle by saving up a year’s worth of premiums alongside current payments so that you can break free from monthly insurance payments. After that, by putting the monthly amount into a savings account, you’ll not only benefit from the interest earned (hey, it might not be much but better than paying interest out!) and as long as you’ve not made a claim, you’ll normally be able to find a cheaper premium, meaning you get a budget surplus- woo hoo!

Cancel unnecessary contracts, as long as the cancellation fees don’t outweigh the cost of the keeping the contract until it expires naturally, and cut out or reduce unnecessary expenses- expensive mobile phone contracts, tv subscriptions, eating out, magazine or gym subscriptions… you get the picture.

Reduce your food costs– This is the main category you may feel like you have control over. However, its easy to see the grocery budget in this way and more difficult to live with, especially if your new budget will be drastically below what you currently spend. Start monitoring what you spend, how much food you waste, and what you’re spending your money on so that you can begin reducing your monthly spend (and put any money you save into a rainy day account, investment, or somewhere else where it won’t get swallowed up).

Go from 2 cars to 1. If moving from 2 incomes to 1 seemed daunting, this may seem like an even bigger challenge. Of course, if you’re only temporarily on one income whilst seeking work, this might not be the best option, as owning your own car will give you more options. However, calculate what your car costs you on average per month, and you may be surprised. For example, I own a little 05 plate Fiesta, which costs an average of £81 per month. This takes account of insurance, tax, MOT, service, plus a buffer of £300 per year just in case anything goes wrong. On top of that, there is of course fuel. Getting rid of this would save nearly £1,000 (excl fuel), so even if I had to pay bus fares or even occasional taxi fares, it would still save a considerable amount.

Give it a go

You won’t know what it is like living on your new budget until you try it. There may be some elements of your one income budget you can’t do whilst you’re both working; selling a second car, for example. But there should be lots of things you will be able to try out.

It may seem more difficult when you are working full time, but the more you try out living on one income, the easier it is when you make the transition, one- because you’ve done it already, and two- because you’ve been able to stash away a bit more cash too!

Unless you have a strong earner and low living costs already, these steps probably won’t get you all the way to living on one income. However, they’re good steps to start with and continually revisit.

The spending choices you make, day in, day out will, over time, lead to your success. In the words of Robert Louis Stevenson “Don’t judge each day by the harvest you reap, but by the seeds you plant”.

What seeds have you planted to help you live on one income or are you already reaping the harvest?

When a penny saved is more than a penny earned

When a penny saved is more than a penny earned

The saying ‘a penny saved is a penny earned’ in one that most people know; its certainly something I heard repeated a lot as I was growing up. It’s not a particularly exciting concept though, not spending money.

It gets more exciting when a penny saved is a penny that’s earning (I know, it doesn’t have the same ring to it).

This isn’t intended as financial advice by the way, just information to help you make decisions with your money that will help you to reach your goals. I’m not responsible for decisions you do or don’t make after reading this article.

Putting extra pennies to your debt, be it mortgage, credit card or loan, reduces your balance and reduces your interest, and therefore helps you repay the balance sooner.

Take this example: If you have a mortgage at £100k and pay 3% interest over 25 years, your mortgage will be costing you in the region of £474 every month. For 25 years.

If you ‘save’ some pennies and put them to the mortgage, even as little as £26 per month to round up your monthly payment to £500, you’ll save £3513 in interest and pay your mortgage off 1 year and 11 months sooner (according to the overpayments calculator on moneysavingexpert.com).

£26 doesn’t seem like a huge sum of money to find in a monthly budget, but imagine how incredible it will be in 23 years and 1 month, when all of a sudden, you have that £500 sloshing around in your account EVERY MONTH! Now that’s a bit more exciting.

Now hold on to your hats. What about investing? It’s usually reasonable safe to assume that over a 25 year period, you can achieve a 4% average return by choosing low cost index trackers. (This is the first mention of investments on my blog, so if you’re new to the world of stocks and shares, please, please, make sure you get the low down on investing from a reliable source before jumping in).

So if you used that £26 per month to invest for 25 years (instead of paying it off your mortgage), you would have deposited £7,525 and earned returns of £5,304, leaving you with a nice £12,829 at the end of your mortgage, at which point you get an extra £474 freed up. (I’ve run these figures through an online compound interest calculator)

For investments, you’ll usually find that you need to invest more than £25 per month in funds; £50 is a more usual minimum amount, but the point of this was illustration. It certainly is worth considering.

So rather than being satisfied that a penny saved is a penny earned, aim to have your saved pennies earning more!