Hello all! Andy Hill here … We have a new guest post from personal finance author Elle Martinez from Jumpstart Your Marriage and Your Money. Elle's mission of helping couples improve their money-smart ways is right up my alley. Her article below gives you the skinny on how couples can truly take advantage of a dual income household. Enjoy!
Two incomes are better than one, right?
Marriage can be a beautiful partnership when spouses combine their gifts, talents, and support. Two incomes for a couple can also be a blessing – if used wisely. Let me explain.
The Biggest Trap for Couples Looking to Retire Early
Since 2014, I've been interviewing couples who've done extraordinary things with their money – paying off six figures of debt, traveling the country (or world) together, and retiring early.
Though there were so many different dreams and paths each couple took, certain patterns kept coming up. For those who retired early (talking about 30s and 40s!), one key to their success was avoiding the two-income trap. Think about it, when you and your spouse got married you probably saved some money by sharing expenses.
What did you do with the money saved?
If you're like most couples, you ‘upgraded' some things. Maybe you found a nicer place, got some beautiful furniture to decorate, and went out to eat more. It's not wrong or bad to take things up a notch, but if you're looking to become financially independent, one of the best things you can do is learn to budget and live on one income.
I know there are some areas of the country where that seems impossible, but even if you make that your goal and work towards it, you can reap huge benefits. It can shave decades off your retirement date and it will help reduce financial stress in your marriage.
The Math Behind Retirement
Let's say there's two couples who are trying to retire early. Chris and Melissa take home about $55,000 and their buddies Mike and Alyssa earn $80,000.
All of them worked hard, paid their way through school, and made sure that they had no credit card debts or car loans. They want to maintain a similar lifestyle when they retire so they are saving from day one. They're both using low-cost index funds. Financially speaking they're all ahead of the curve.
Here's where they differ, Mike and Alyssa have set aside 15% of their paychecks to go towards retirement. That's better than average and means they contribute $12,000 per year. Chris and Melissa decided they'd live off one income ($30,000) while socking away the rest, leaving a healthy amount of $25,000 for retirement. How soon do you think they can retire?
For Chris and Melissa, they can retire in just under 19 years. And their friends with the bigger income? They're looking at over 42 years – almost three decades of difference between the two of them!
Okay, let's say Alyssa and Mike step it up. They too put $25,000 into their accounts each year. How soon can they retire? Did you guess 26 1/2 years?
Wait, why didn't they get 15 years like their friends?
It's because it's not just about how much you earn or even the amount you contribute. The key factor to retiring early is the percentage of your income compared to your expenses.
Want to become financially independent faster? Grow that gap between what you earn and what you save and for couples learning to live on one income can be a game changer.
How to Grow That Gap, Fast
If you're like most couples, though, it's going to take some time to get up to that level of savings. The good news is that even if you focus on improving one expense each time, you'll shave off time for retirement.
The question for most is, where do we begin?
There are so many approaches you can take. Some couples like to go for big wins – they look for their biggest expenses and slash them. Others like to knock them down little by little. They feel it is a more sustainable path.
Either approach works, but even before you start on your plan, I want you to do two things:
1. Discuss What Matters Most to You
Sit down one afternoon or evening and talk about what you truly want to do. If money weren't a concern, what would you like to do? Where would you want to go? The more you can describe it, the better off you'll be.
2. Review Your Monthly Expenses for Value
On another day, look at last month's expenses and go through it line by line. We're not trying to find ways to save just yet. Instead, as you go through them, ask yourselves, how important is this? Does this bring us closer to our dream? Once you two have an idea of where you want to go, it becomes easier to move your money in that direction.
Make money dates (or budget parties as Andy calls them 🙂 ) a part of your routine. Use them to not only take care of the finances but keep each other motivated and encouraged.
You two are an awesome team that can achieve some great things when you work together!
How do you take financial advantage of your two-income household?