Strategies For Living On One Income

One idea that seems to resonate with many lawyers is the goal of living off one income and saving the other (if you’re married or otherwise in a committed relationship where finances are shared). It seems like a natural way to save a lot of money without a lot of mental effort.

The more income that a couple has, the higher the desire to find ways to trick yourself into saving more. At least that’s been my experience. While setting savings targets is a solution for many people, there’s something clean and efficient about splitting up the salaries and saving one of them, particularly if you can live off the lower salary.

I assume many people are interested in this because lawyers tend to partner up with other lawyers or professionals, which means a couple often has two healthy income streams when making budgeting and spending decisions.

But this strategy shouldn’t be limited to just couples. If you’re single but with a high-income, why not consider splitting your income into two and living off one while saving the other? There’s nothing that forces a first-year associate in San Francisco making $[table “19” could not be loaded /]
to take the entire income as their own. Nearly all employers will let you deposit your paycheck across multiple accounts. Why not send $80,000 to your checking account and then save the rest as your “partner’s” salary in another account?

I think many people find that saving one income and living off the second income is helpful for the following reasons:

• Forces Lower Expenses.  If you’re only living on one income, you’re naturally forced to keep your expenses within the budget of that one income. Most people don’t have a savings problem. They have a spending problem. And it’s usually not in the form of placing $1,000 bets on black in Las Vegas. It’s in the slow but steady lifestyle inflation that impacts us all. Lifestyle inflation is a silent killer that is difficult to tame. One of the best ways to combat lifestyle inflation is to simply set an artificial spending limit.
• Sets a Saving Goal. Many, many people want to “save more money.” This is a completely counterproductive goal since you’ll never know whether you’ve met it. It takes mental effort to say that you’re going to save $20,000, $30,000 or $40,000 this year. Not only do you have to pick the goal but you need to keep track of your progress over the year to see if you’re meeting the goal. What’s an easier way to skip the mental effort? Decide to save one of the salaries! Now you’ve picked a savings goal and a way to save all at the same time.
• Makes the Thought of a Job Loss Feel Less Stressful. If you’re worried about losing your job, living off one income makes the thought of the loss feel significantly less threatening. You’re already living off one income, so if the other income disappears, you’ll be just fine. While the loss of savings will hurt, you don’t have to worry about not being able to make rent payments or covering basic household expenses. It also gives you flexibility should one spouse want to go part-time, have kids or otherwise make a career change.

How to implement living off one oncome

If you’ve decided to live on one income, you’ll need to take some practical steps to implement the plan. I can think of two ways to do this.

The easy way.

Both income streams should still be contributing to retirement accounts, so I’d set those up so that they’re being maxed out (assuming you have the overall income to do it).

Next, I’d take the income you want to live on and have it deposited into a central checking account. From that checking account, you can make bill payments (i.e. rent, credit cards, etc.). Depending on how you split up “spending money” between the couple, you could further automatically shuttle money to your individual accounts so that each partner had access to an agreed upon amount of funds to spend on their own.

Take the other income have it deposited into a completely separate account (preferably at a different financial institution, away from your regular banking practices – what we don’t see we aren’t tempted to spend). If the purpose of the excess funds is to pay off student loans, I’d have the second income deposited into a checking account and then set up automatic payments to the student loan companies. You should be able to automate it 100% so you’ll never need to log into this account or click anything to make a payment. If you keep track of your net worth monthly, you’ll have the pleasure of watching your student loan balances shrink at an incredibly fast rate.

If the purpose of the money is additional savings, I would have it deposited into a checking account and then set up automatic payments to your various saving buckets. Want to build up a cash fund? A down-payment fund? Or invest in a taxable brokerage account for retirement? All of those decisions can be made according to your investment policy statement and set up automatically. These kinds of systems are powerful. Once you set them up, you’ll be amazed at where you are in a year’s time.

The hard way.

What happens if you can’t quite live off one income? Or if the income you want to live on is more than you need? Sometimes it’s not as easy as simply having one paycheck deposited into a central banking account that can be used for spending.

The slightly harder way to achieve the same result (and the way you’d want to do this if you are single) is to artificially pick an income that works for you.

If you need $60,000 to live on but you’re in a household with two $100,000 incomes, it’s worth spending the extra time to set up the systems as if you were only being paid $60,000.

First, you’ll still want to make sure all retirement accounts are being maxed out (assuming you have the overall income to do it).

Next, I’d have both paychecks deposited into the same checking account, which will more-or-less serve as your savings account going forward (preferably this account will be at a different institution than the one you use regularly).

As soon as those paychecks are deposited, an automatic transfer should send the $60,000 portion (i.e. $5,000 per month) to the checking account that you use regularly. From that account, you can make all the bill payments you need to make as well as further transfer money to separate spending accounts if that’s what works for you.

Meanwhile, now you have a pool of money at the initial checking account that can be automatically distributed to student loans, savings goals or taxable retirement accounts.

Remember, everything should be automated. It’ll take you a few hours to come up with the right amounts and to implement it, but once you’ve got it set up it’ll pay dividends for years to come.

The good thing about the hard way is that you’ve artificially set your income at $60,000 in our example. Need a raise? It’s only a couple of clicks to change that amount to $65,000, so you’ll have plenty of flexibility going forward to adjust as needed.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money and is always negotiating better student loan refinancing bonuses for readers of the site.