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There’s a lot to consider before deciding to pursue stay-at-home parenthood, including things like how you’ll keep saving for your financial goals, afford healthcare, and keep saving for retirement.
A family that can afford it will have an emergency fund, income left over each month after paying the bills, a low debt-to-income ratio, and an understanding of their potential childcare costs compared to lost income.
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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 stay-at-home parent:
1. You won’t be living paycheck to paycheck
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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.
2. Your debt-to-income will still be low
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“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.
3. You have a solid emergency fund
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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.”
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