Saturday, January 10, 2009

The Value of Two Incomes

Yesterday an anonymous reader left a comment on my recent post about our 2008 spending
"Does your wife actually make enough marginal income to pay for your childcare expenses? Given your marginal tax rate you might save more on child care, transportation, and dining out than she makes working part time."
I have previously written that stay at home parents pay a professional price, in more ways than one, but there are other serious considerations at play. In addition to losing years of work experience and potential career progression, becoming rusty in their professional skills and facing serious obstacles to moving back into the work force, stay at home parents also face other economic and personal challenges:

1. Increased Economic Risk - in this age of economic uncertainty and massive corporate lay-offs, my opinion is that a family's economic risk is reduced if both parents are working. For example, if I were to lose my job (something which I don't expect to happen in the next 12 months), we would still have one source of income. By both working we are diversifying our income sources;

2. Personal Hardship - I don't know about others, by I know for a fact that I could not be happy staying at home with three small kids as my main occupation. I need the company of adults and the mental stimulation of a dynamic business environment. I love my kids, but being a full time parent is simply not something that would be satisfying for me. I think that my wife is the same way. While she wants more time with the kids than would be afforded by the more than full time marketing position she previously held, that does not mean that she wants the job of a full time parent.

3. Kids Happiness - our kids love school and they love their after school programs. Often when we come to pick them up from day care, one or more of them beg to stay some more, to finish a game or finish listening to a story. They love being with their friends in a rich stimulating environment. We don't want to pull them out of this environment.

So in answer to my reader, my wife's current income is roughly equal to the amount that we spend on day care. However, the long term economic impact of leaving the work force, our personal interests and the need to diversify our income sources mean that even if from a short term cash flow perspective we don't benefit much from my wife's part-time work, in the long run this is absolutely the smart economic and personal decision for us.

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frugal zeitgeist said...

Good for you and the missus for figuring out what works best for you. In this day and age, I think the argument of minimizing risks associated with job loss is extremely meaningful.

Traciatim said...

At least you've actually sat down and figured it out and made the choice for your family. I bet many families are both working without even knowing how little the second income is actually helping, if at all.

The one point I would like to make is that your point 1, Increased Economic Risk, I think is misguided. Many families will use the extra income to buy a second car and increase their home costs to the point that they can no longer survive if one person loses a job (As shown in 'The Two Income Trap').

For those computer geeks like me it's essentially the trade off between a RAID0 and a RAID1. Sure in a RAID0 (Increased Income, leading to lifestyle inflation) you see increased performance, but the cost is that you are twice as likely to suffer a devastating failure. In a RAID1 (IE, increased income, no increased expenses) you don't see the performance gain you do in the other scenario, but in the event of a loss of one half of the array the performance of the whole is generally not effected at all.

So the point I'm making is that it depends on the planning to make two incomes a more secure way of life rather than a ticket to a stressful life that can't even stand up to the slightest bumps in the road.

Shadox said...

Traciatim - well said (even if you only speak geek). There is no point to try to mitigate the risk of a single income if you succumb to lifestyle inflation. We don't.

I do think that there is much to be said for risk reduction, in this or in any other economic environment. It's not just job loss risk we are talking about. Many other bad things could happen which would cause the primary bread winner to be unable to continue in this capacity.

plonkee said...

Many families use a pay rise to justify additional spending, but that doesn't mean that you should refuse a promotion, if all other things are equal.

I think the long term effects associated with taking a break to raise children are not often considered. It's not the current cashflow that's the issue as much as the loss of future income.