A couple weeks ago my wife got a call from an old coworker of hers. After their chat, she passively asked me about what it would take for her to come back into the workforce. We briefly discussed numbers and flexibility, but quickly dismissed it out-of-hand. However, her broaching the subject stoked the embers deep within my brain and got me thinking. Then, a couple days ago, I received this article written by a new mom who was blown away with the costs of parenthood. I was particularly amazed at this mother’s shock, given that we actually profited from parenting. But, despite some of her ridiculousness ($4,000 for a new crib and carseat/stroller combo, or $600 more per month for organic groceries, really?), I was in full-fledged piqued-interest-mode, and I knew I had to flesh out the numbers for my readers.
My wife and I both had stay-at-home-moms (SAHMs) growing up. We wanted that for our own kids, as well. When Baby29 showed up on the ultrasound a couple years back, it was due time for Wife29 to exit the workforce and concentrate on nesting that house. (Author’s Note: I recognize that it’s 2015 and it is just as likely that a SAHM can just as likely be a SAHD [stay-at-home-dad]. From here on out I’ll say SAHM, but I acknowledge it could be either parent.)
There are some obvious drawbacks to having a SAHM in the family. On her end, she lacks the social and societal outlet that comes with regular employment. Her days are generally pretty dedicated to raising Baby29. On my end, as I’m now the sole bacon-maker, there’s a bit more pressure to succeed financially and take less risk. On the collective front, we get by with a little less money than we otherwise would, and my dream of significantly early retirement is somewhat hampered and delayed (but not delayed by that much).
It’s that financial impact of choosing to go SAHM that I’m addressing today. Specifically, is a family better off by having a stay-at-home-parent reenter the workforce? Or, “Are two incomes better than one?” Spoiler Alert: Yes, but not by much.
Do You Want Fries With That Daycare?
Let’s first talk about our situation. Then, I’ll include a nice calculator at the bottom so interested readers can run their own numbers (or send to a friend), and tailor the calculations to their own situation.
The biggest benefit of dual incomes is, of course, that second salary:
I put what would be a very solid salary for our locality, assuming the parent returning to work is of the mid-career level with some solid experience and credentials behind them. Not only is this person getting a salary, but a 4% 401(k) match. The assumption, also, is that if the parent is returning to work, then you probably don’t need that salary to live, so it is only logical to max out the 401(k) deferral.
We cannot ignore, however, that all of that income is going to go straight into the marginal tax bracket of the married-filing-jointly couple, with it all (less the 401(k) deferral) getting plunked down on top of the current AGI. As such, there are some serious taxes to consider:
These numbers reflect a couple currently in the 25% federal tax bracket with a 5.75% marginal state tax rate. There’s also Social Security and Medicare taxes. If both parents are working, then it’s logical that the child(ren) will be overseen by some other adult. The current dependent care tax credit is 20-35% of the first $3,000 (for one child) or $6,000 (for more than one child) of childcare costs. The credit starts at 35% at lower incomes and decreases to 20% for AGIs of $43,000 or more (which most dual income families are at or above).
Notice that I’m ignoring the tax exemptions of the children because I’m only accounting for changes from a parent returning to work; those exemptions will be there whether that second parent stays home or not.
We also need to account for increases household expenses that come from two working parents:
I figured an incremental cost of $3/day for work lunches. Obviously a work lunch is more than that, but we’d be spending money on groceries anyway, so an additional $3/day seems reasonable—even if the new working parent brown-bags it a couple times a week.
I also can predict that when we’re both going to pick up Junior at daycare at 6:30 pm, we probably won’t often feel too invigorated to go home and cook a nice dinner and make a mess, so I’m expecting a lot more dinners out and to-go. Childcare in our area for a reputable provider run about $200/week. There is also a need for work clothes and a slightly more polished appearance when one is working every day with clients–so $50/month for that. Then, we must not forget commuting costs of about $100/month. This is alarmingly low, but I’m factoring in some employer reimbursement. I also included $100/mo for “other.” I expect there will be some desire to make up for our newly-detached parenting style, which might mean more pay-to-play activities and events, or toys, or a vinyl original of Harry Chapin’s Cat’s In The Cradle, or what-have-you.
Lastly, it’s important to understand our true time commitment to the new job.
Five days a week for 52 weeks minus 15 vacation days and 10 paid holidays equals 235 work days per year. If you factor in an 8.5-hour workday plus an hour-and-45-minute round-trip commute (make sure to include the time to the daycare), then the new working parent is working 2,408 hours per year.
So, here are the results:
Using the above values, my wife would take home $11.24 per hour in cash, with approximately another $9 per hour hitting her retirement account. Keep in mind this is with taking full use of the 401(k) deferral. If she left the 401(k) alone, then numbers would look like this:
So, more cash in hand, but less total compensation.
So, we needed to ask ourselves, is forgoing full-time baby-raising, having a fair amount more stress, not being able to Facetime with the baby each afternoon, not cooking our own meals, spending much more time in the car, missing baby milestones, and having two work schedules to plan around worth it for an extra $11.24/hour of cash or $20.21/hour in total compensation? Probably not.
Keep in mind, also, that this is with numbers returning to work for a salary that is about 3x the U.S. Median Income. If I quickly change the salary to $50k and remove the 401(k) deferral, then the take-home income is just $6.18/hour—over a dollar less than the federal minimum wage. So, I ask again, do you want fries with that daycare?
Run Your Own Numbers
Everyone’s situation is different, so I included this little calculator and would encourage any family that is considering turning a “stay-at-home” parent into a “stay-at-work” parent to run the numbers (all the numbers) to ensure the decision makes sense.
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God Bless!
Eric
The diversification benefit of having 2 incomes is huge, and should not be overlooked in importance. However, for a SAHS who doesn’t make close to 90k and has 2-3 kids, staying home gets much closer to a no brainer.
That’s a good point. Having two incomes certainly provides for a margin of safety and will keep the family stable in the event of one spouse being laid off.
And yah, as you get to lower incomes or more kids, it becomes even more obvious that two incomes just don’t make sense.
Thanks for commenting!
Eric
Interesting calculator. I hope a lot of people use it, just to get a feeling of the numbers.
Here in Belgium, we made a similar back of the envelop calculation when nr2 came, and the conclusion was to stay working. Main reason is that daycare is a little less than half the cost of your daycare and due to the fact that we managed to keep take away food under control. It required a some organization of who does what.
Now, my wife is working 80pct, taking care of the kids on Wednesday, when there is half a day school here.
Flexible employers can change the decision drastically. If somebody is able to work from home a few days a week, or if you have parents or some other arrangement which removes most of the daycare cost, then it becomes more compelling to have two incomes.
I’m hoping to shed light on accounting for all costs when making this decision, rather than just being enticed by a salary.
Thanks for commenting!
Eric
If I was married, I would think two incomes would be a great way to save even more money. Especially if you did not have kids…
With kids, especially on lower income people, ~$14 per hour, it is not worth it. Maybe if you get Earned Income tax Credit and Child care Tax Credit it might be worth going in.
NNL,
Well, if you didn’t have kids, then it’s pretty clear the second income would be a no-brainer. If there are no kids in the house, what in the world is that stay-at-home-spouse doing all day? Sounds like a Real Housewives scenario.
For low income people that will be paying for daycare, I’d be hard-pressed to find a scenario that makes sense for them to have two working parents.
Financially it just doesn’t make sense for me to work a “regular” job. I would be spending the entirety of my paycheck on daycare, gas, and taxes. I do make some money from home while taking care of our two kids, but it can’t really be considered a second income. I wouldn’t trade this time at home with them for the world though.
Kristi,
I totally get you. As you can see from my calcs, the new expenses would eat up so much of the incremental income that it simply wouldn’t make sense. Our added income wouldn’t enjoy all the great tax benefits of having our kids, add in the many costs of commuting and daycare, and it becomes a tough hurdle to clear.
Eric
I was once identified myself with the tittle of my job. Anyhow, we were brought up to “Be” and to “Do” “great” things whatever that might be. Between a job or between stay home parent, I’d choose to stay home. When I was little, my Mum worked 14 hours a day. I was a needy little kid. Anyhow, my best memories were spending time with my parents. So, I’d rather make a little less and spend more time with my kid if I have any 🙂
Right on! The value of money is disproportionately low compared to the value of time, so the hourly rate of labor needs to be very compelling to get that second parent in the workforce.
I have a lot of friends whose wives stay at home to look after the kids. They save a lot of money on gas, daycare, etc which really does add up at the end of the day. Some of their wives have side gigs from which they can do at home, so that’s a bonus too.
Yah, that’s something our own family has been working on. Mom is able to generate some income while at the house, and it’s just gravy!
In addition to the risk factors mentioned above, you also need to take into account the present discounted value of future income. https://nicoleandmaggie.wordpress.com/2011/11/21/the-wohsah-decision-finances/
And… every daycare my kids have been to has a garden and some of them have indoor plants.
Hi Nicoleandmaggie,
There are certainly a lot of factors that can’t be accounted for in any calculator suitable for mass consumption–this is a little bit of back-of-the-envelope reasoning. I tried to account for the big ticket items. I would hope that any work/don’t work decision would be a slam dunk in one direction or the other, so small adjustments wouldn’t make too much difference.
I was sorta just kidding about “Daddy, my daycare doesn’t have plants” at the top. I would hope most daycares do a lot of outdoorsy stuff. Thanks so much for stopping by and commenting!
Eric
The calculator is really great. I absolutely love it and it will come in handy helping people make an informed decision. From my point of view however, I would say that two incomes are absolutely better than one. This increases the gross income and ensures that family expenses are catered for. Nonetheless, time with kids and watch them grow is definitely something a parent would not want to miss by any means.
Well, two incomes may often be better than one. But, if the second income is simply swallowed up by taxes and expenses, then it’s no so rosy.