Having one parent stay home isn’t for every family. While it can be helpful for a number of reasons, including reducing childcare expenses and being able to give extra care to children who may need it, sometimes the numbers just don’t work out.
If you’re considering having one parent stay home, financial planner John Pak of Otium Advisory Group in Los Angeles, California says some red flags will pop up if you’re not ready. From a high debt-to-income ratio to living paycheck-to-paycheck, there are six signs that being a one-income family might not be right for your family right now.
1. You have a high debt-to-income ratio
Having a high debt-to-income ratio could stand in the way of getting new credit in the future. And, it’s indicative of your overall financial health, says Pak. “Debt-to-income ratio is key for me because it gives me an idea of how much money is left over after all your obligations have been paid,” he says.
While your debt-to-income ratio might be in good shape now, you’ll also want to consider what it will look like once one income is gone.
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.
2. You don’t have an emergency fund
If you don’t have an emergency fund to fall back on, you’re not ready to have one parent stay home. The reason is simple: Anything could happen, and you’ll have to be prepared, especially when your family is relying on one income.
“I like to say that you should have at least six months worth of expenses in a savings account that you know you’re not going to touch,” says Pak.
An emergency fund is a non-negotiable, and could save you big money down the road if you need it.
3. You’d have to stop saving for retirement
Whether you’re working or not, saving for retirement is a must — you’ll always need money to live on when you’re older.
Even if you’re losing your 401(k), Pak says an IRA is a good place to keep saving. “There’s a rule that says that as long as one of the spouses is working, the stay-at-home spouse can create a traditional IRA, regardless of whether they’re making money or not,” says Pak.
If staying at home and losing one income means that you won’t be able to keep saving for retirement, you’re probably not ready yet.
4. You’d be living paycheck to paycheck
Living paycheck-to-paycheck means you won’t be able to save for the future, whether that’s retirement, emergency savings, or college tuition — or something a little smaller-scale, like a vacation, or a new car.
“With that extra discretionary, you’re basically funneling that extra money into these buckets that you categorize on your own,” Pak says.
Pak says that families planning to live on one income should still consider how they’ll save for short-term and long-term financial goals, and how losing one income will affect that.
5. You and your partner haven’t had the money talk
If you haven’t’ sat down and talked with your partner about what your finances would look like as a single-income household, you’re probably not ready to make the jump.
“It starts with just sitting down, you know, sitting down and laying out your big picture, laying out your numbers,” says Pak. From pricing out childcare to making a budget for life on one income, if you haven’t gone through the scenarios, you’re not ready.
It takes a bit of planning, and a lot of work to be on the same page about money, but it’s essential for a big decision like this.
6. You can afford childcare, but you can’t afford to lose the extra income
Childcare is a massive expense for many parents. Insider’s Frank Olito reports that in New York, the most expensive state for childcare, the average family will spend over $12,000 per year on childcare.
“I feel like a lot of young parents or even middle-aged parents who are continuing to build their family, they’re not ready for this,” says Pak.
Balancing the costs of childcare against the costs of losing one salary is one thing that can be tough, but each family will know what’s right for them. “Your decision really comes down to qualitative versus quantitative,” says Pak. Though each family’s decision is unique, the signs that it’s not right are very similar.