A Tale of Two Paychecks
After a few beers at the bar last Saturday night, I found myself listening to a friend complain about how his wife doesn’t have a job and the family is dependent on his paycheck. I pointed out that she already has the job of raising their two young kids, but he was intent on ranting about the lack of a second paycheck.
I ended up feeling sorry for his denigrated spouse, which prompted me to devote today’s newsletter to the pros and cons of a two-income household.
You’ll be surprised by what I’ve found.
In the U.S., there’s been a sharp rise over the last 20 years in the number of households in which both spouses are working. To be sure, this is often by choice, but in some circumstances, it is essential for paying bills.
That said, the time and effort of keeping a job can be taxing for a family. There are taxes, of course, and less obvious, additional expenses. It costs money for child care, travel and maintaining a business wardrobe. Are the sacrifices worth the extra money? Every family is different. It’s important to weigh the pluses and minuses carefully.
Consider the theoretical household below in which each parent earns $52,000 for a total family income of $104,000 a year. It would be difficult for such a family to relinquish one of these incomes and cut their earning power in half (If one parent earns significantly less than another, relinquishing the lower-paying job might be easier).
Yours, mine and ours…
But what are the costs to keeping two jobs that pay the same? How much additional income does such a family keep from that second paycheck? The answer: not as much as the family would hope.
Weekly Gross Income from Second Paycheck: $1,000
6.2% Social Security Tax: ($62)
Federal Income Tax: ($175)
State Tax (may vary by state): ($40)
Total Remaining: $723
The expenses don’t end with Uncle Sam. This fictional couple must factor in other expenses associated with the second paycheck. Here are hypothetical examples computed on a weekly basis:
Day Care: ($250)
Dry Cleaning: ($30)
Effective Weekly Income from Second Paycheck: $293
Not a lot of money left, is it?
But remember that $293 adds up to $1,172 a month, and that can help with debt payments, retirement funds, stock investing, and other expenses.
The trick may be to stretch that second paycheck a lot further. Families that drive cars with good gas mileage, eat out sparingly and watch how much they spend on dry cleaning and other services will keep more from their paychecks.
A second paycheck can also make a mortgage more affordable, and allow someone to claim the mortgage interest deduction — a hefty advantage to your finances.
Families can also claim the child tax credit and get a $1,000 tax credit per child on a tax return, as long as children are under age 17 at the end of the tax year.
By the way, the difference between a tax credit and a tax deduction often confuses people. A credit is superior to a deduction because it lowers the income to calculate taxes. The child tax credit removes dollars directly from a tax bill. Moreover, the credit does not preclude exemptions for kids; rather, it’s in addition to exemptions.
What’s the answer? What should families ponder as they decide if both parents should work?
Quality-of-life issues should be a primary consideration. That can cut two ways. A lot of couples enjoy their careers and derive satisfaction from their accomplishments outside the home.
On the other hand, staying home to take care of the kids is a noble occupation — and it just might make financial sense. And that’s exactly what I’m telling my friend, the next time that he starts whining about his unappreciated wife.
Got any questions about the pros and cons of a second paycheck, or about any other financial topics? Drop me a line: firstname.lastname@example.org — John Persinos
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