Should You Both Work?
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Affording life in the Bay Area is expensive. In general, it takes two working parents to make ends meet and be able to save for your bigger financial goals like home, retirement and education savings. The breakeven point is trending upward with the cost of housing, which is most families largest expense (25-45% of all monthly spending). To cover housing, average living expenses and childcare tends to mean that you must gross (before taxes) at least $250,000 per year. If you are making less than that as a family in the Bay Area, your housing is likely inexpensive, you are very frugal, and/or you have family helping you out.

While $250,000 is the average breakeven gross income needed to live life in the Bay Area, it may take even more if your lifestyle includes lots of travel, private school or higher discretionary spending. If private school and discretionary spending are high, you might need to make closer to $400,000-500,000 to cover costs. These are big numbers. In the Bay Area, you may make this much money with one income, which is awesome and brings into question whether it makes sense for both parents to work.

Does it make sense for you both to work?

Most families that ask this question are wondering the answer because they are spending an exorbitant amount of money on childcare. Sometimes it feels like one parent’s income goes solely to the kids. If this is how you feel, try the following exercise:

  1. Calculate how much you currently spend on childcare?
  2. Divide that number by 0.6 to get how much money you need to make before tax to cover those costs. (This assumes taxes are 40%, which is high, but possible given marginal federal tax rates and California income taxes). If you are also saving for retirement, add that retirement savings to the number. For example, if you spend $30,000 per year on childcare, you need to make over $46,000 before tax for it to make sense for you to work. If you are also maximizing contributions to a 401(k) or 403(b), you need to make $46,000 + $18,500= $64,500 pre-tax.

Now you can answer the question of whether it makes sense for you to work. (There are loads of nuances like benefits, employer matching, etc., that change these numbers).

Next, if one parent stays home, determine how the childcare number would change. In addition, what about other spending areas like dog walking, commute expenses and eating out. If you have a stay at home parent, eating out tends to be 20% less than two full-time working parents.

How about saving for other financial goals?

Sometimes a second income can make sense if it enables you as a family to save for financial goals above and beyond everyday living. Add up all the goals and do the exercise above. For example, college savings for two kids to go to a UC = $10,000 x 2 = $20,000, plus a big trip to Europe = $10,000, plus getting on track for retirement = $30,000. Total financial goals = $60,000. You need to make $60,000 / 0.6 = $100,000 to fund all of these financial goals.

What about non-quantitative factors?

Maybe you both like to work and highly value your careers. It isn’t just about money. If you have children under the age of 5, your cash flow will improve as your kids enter public school. You may need to sacrifice long-term savings until they start school, which is okay as long as you are not taking on debt as well. If work makes you miserable or you really want to have a parent at home for your kids, make it happen. It may mean lifestyle changes that would shock your neighbors, but  you need to do what is right for you.

The starting point for figuring out whether both parents need to work is knowing your breakeven point. Do you need to make $250,000 or $500,000? Knowing your number will help you decide if two incomes are necessary to live the life you want to lead. The second question is whether you want to work. This is a much bigger and deeper question.

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