Chopping the budget isn’t the only way to get there.
“Too long a sacrifice can make a stone of the heart. O when may it suffice?”
–William Butler Yeats
One of the quickest paths to financial independence is to have a two-paycheck family but only live on one of them. Thomas Stanley, the author of The Millionaire Next Door (#aff), outlines stories of families who do just this. One of my favorite blog authors, Paula Pant, lives exactly this way, and, by the way, she worked from Paris this summer. Of course, if one of you makes $100,000 per year and the other makes $1, then living on the $100,000 paycheck won’t help much. But, assuming that wages are roughly equal, then this is a good prescription to live on. This approach offers the financial flexibility needed to fast-track your journey to financial independence.
It’s a formula that my wife and I have lived on for years. When I worked at Capital One, we pretty much put everything we could into paying off the student loans I had from law and business school, but we made sure that our actual living expenses were under what she made. When I started my last company, once I actually got paid, we used my paycheck to knock out our mortgage and then for investing.
Once I sold a significant portion of my share in the company, we achieved financial independence. My wife really enjoys what she does and loves the company she works for, so she had no desire to change things. I, being the entrepreneur at heart, wanted to start the work I’d been planning on and thinking about doing for nearly two decades, which is why you’re reading this article.
Since virtually no company starts with revenues from day one, we were prepared for another period where I’d bring in no income. We also had no desire to tap into our accumulated assets for a while yet, so we needed to make sure that we continued to maintain a standard of living that ensured we could live just on her paycheck while I worked on building up my financial planning practice. Through years of practice of doing just that, we went through no change whatsoever when the golden handcuffs from my buyout deal ended and I started Corporate Finance Institute. I can assure you that there were no revenues on day 1!
Were we dependent on both incomes for our living expenses and had we allowed our lifestyle to expand along with our incomes, we would have never had the flexibility to allow me to take a crack at entrepreneurship. We also would not have had the flexibility to allow me to get bought out, because we would have been dependent on my income as well, and I would have needed to find a job immediately after the buyout.
Having that flexibility was and is very important to us as we pursue our priorities in life. Here are some other ways in which living on one paycheck in a dual income family creates flexibility for you:
- If one partner has the entrepreneurial urge, then there is flexibility to pursue it. Had we needed a second paycheck to support our lifestyle, then I’d have never started my last company. As it was, my wife, I’m sure, was pretty close to the end of her rope of supporting me before we started bringing in enough income to allow me to take a paycheck. If you can reasonably live on one paycheck, it does buy you (so to speak) time to take a crack at starting up a small business. If you have a plan for how you’re going to catch up on the other goals you’ve set for yourself if the business doesn’t succeed, then it’s OK to delay saving for six, twelve, or even eighteen months while you take a crack. Just make sure that you have clear milestones and know when to concede defeat if you need to so that you can get back onto your original plan.
- It allows you to have a stay-at-home parent. I have several clients who either would like to or have made the decision to have one parent be a full time stay-at-home parent because they planned appropriately and their living expenses are sufficiently covered by the working parent. This isn’t to say that you should make the leap if you can live hand-to-mouth and barely get by on one income. There needs to be room in there for liquidity in case of a job loss as well as, if you plan on saving for your child’s education, doing that as well.
- It allows you to search for a “dream job.” I know people who have stayed in jobs that they were miserable at, going to work day after day in dread, but needing (or, rather, perceiving that they needed) the paycheck to keep up with their lifestyles. They traded lifestyle inflation, which, arguably, came at decreasing happiness for each increase in lifestyle, for unhappiness 22% of their lives – the time that most people spend at work. If they can stand to have a decrease in income for a while during the time that the unhappy spouse finds a better career fit, then they’ll have the flexibility to pursue those opportunities without needing to look at benefits and compensation first.
- It sets good habits for retirement. Many people, because they’ve expanded their lifestyles to fit their paychecks every time they got a raise, find that retirement is a time of sacrifice and cutting back. They don’t have the huge paychecks anymore, and since they were too busy spending it and throwing bananas in Monkey Brain’s cage, they didn’t save nearly as much as they could or should have in retirement. Social Security, they discover, is meant to be a safety net in retirement, but not much more. As a result, they don’t want to go back to work, but now they’re experiencing a systematic shock as they have to significantly dial back their lifestyles. Prospect theory abounds, as they view this as a loss, and losses are much more painful than their equivalent gains in our lives. Retirement is miserable, at least for a while, until they can adapt to the new, slimmer lifestyle. If you never get on this course, then retirement is simply an addition of free time to pursue your interests.
- You can probably retire earlier. I already evaluated how powerful increased savings rates are. If you’re saving 50% of your income, then you’ll get to financial independence much more quickly. Some people, like Mr. Money Moustache and Jacob from Early Retirement Extreme got there in 10 years. Your results may vary, but saving 50% of your income certainly won’t hurt you.
Not many people or families can actually get to the point where they can live off of 50% of what they make, but if they can get to that point, it opens up a world of possibilities. Having no debt and a significant income-to-expenses buffer has created significant flexibility in our lives, which also turned out to be significant opportunities for us to accelerate our goals.
- John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.
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