The more, the merrier is the general consensus in most financial matters. The higher your income, the better lifestyle you can afford. Living in a household with two or more incomes is a great advantage. Your expenses get divided, your debts are lessened, and your assets are increased. In addition to this, you can save more and plan for more significant purchases with greater ease. However, dual-income families may need to follow some different strategies. The tax liabilities for married couples filing their taxes jointly will differ from single individuals and those filing individually. In addition to this, one spouse’s creditors can impact the other spouse. Individual credit scores can affect loan eligibility for a joint loan and much more.
For these reasons and several others, it is essential to follow specific financial planning tips for dual-income families. These are similar to strategies used by single individuals and single-income households. However, they do offer some unique advantages and solutions to specific dual-income concerns and strategies. If you wish to learn about financial strategies that can help dual-income families plan their finances better, consider seeking the services of a professional financial advisor for the same.
In this article, we will discuss whether financial planning for dual-income families is different compared to others and certain tips that these families can use to secure their financial future.
Is financial planning for dual-income families different from others?
While the basics of financial planning remain the same for everybody, there are some things that dual-income families and couples need to focus on separately.
Some of these have been discussed below:
1. Tax liabilities can be higher for dual-income families:
Since a dual-income household earns a higher income, their tax liabilities are also higher. Married couples can file their taxes jointly under the filing status of married filing jointly. This status allows couples to file taxes jointly and add their incomes, exemptions, and deductions together to file a unified tax return. Filing your taxes jointly can have some benefits and disadvantages. For instance, if one spouse commits an error, both spouses are held equally responsible. Many a time, one spouse may understate their taxes due. However, the state will penalize both partners for this. If you are not entirely sure of your spouse’s intentions, it may be better not to file your taxes together. Further, if both spouses have a considerable number of individual tax deductions, it may be advised to file your taxes separately and claim the deductions individually to get a better tax cut.
But filing jointly also offers some advantages, the first of them being saving time and effort. Filing one return is quicker, cost-effective, and easier than filing two. The government also offers better tax-saving options to a couple, such as tax credits like the Earned Income Credit (EIC), the American opportunity tax credit (AOTC), the child and dependent care credit, the lifetime learning credit (LLC), the saver’s tax credit, etc. You would have to look at your unique situation and pick a filing status accordingly.
2. You can be affected by your spouses’ credit score:
Your spouse’s bad credit can impact you. Typically, your credit score is only linked to you and, likewise, for your spouse. However, things can get complicated in some situations. For instance, if you two are thinking of renting a house, the landlord will look into both of your credit scores for basic verification. A bad credit score can affect the landlord’s decisions and result in a rejection. Likewise, insurance companies may use it to determine the premium for a joint policy. Banks may consider it when opening a joint account or when you apply for a joint loan. Therefore, financial planning for dual-income families needs to address the debt situation of each member. If one spouse has a bad credit score, the repercussions can impact the entire family.
3. You may lack flexibility in a dual-income family:
A dual-income house enjoys a better income and lifestyle, but there are also sacrifices to be made. If both spouses are working, the family has to keep in mind the limitations of both. For instance, as a single-income earner, moving to a new city or state is easier. In fact, a lot of people do this to downsize, be closer to their families when they need help with kids, chase better work opportunities, etc. However, these decisions can be harder to make when both couples are working. You may need to think of the job prospects of both partners and then take a call. While you enjoy dual opportunities, you also have to let go of several others.
7 Tips for dual-income families
Here are some things to keep in mind when planning for your future as a dual-income couple:
1. Discuss your financial goals:
Financial planning for dual-income families is not as easy as it seems, as there are two people putting their money on the line. The objectives of both partners can differ, and so can their attitudes toward money. If one spouse likes to save while the other likes to spend, there is likely going to be a conflict. Most couples assume they are better off being in a dual-income household. The salary is more, the comforts are higher, and there is better liquidity. However, along with these benefits, there are also some disadvantages, the cost of living is higher, and so are the debts. Therefore, it is vital for couples to communicate and make decisions together on financial matters.
You can start by understanding each other’s needs and goals in life. Accordingly, it is essential to make sure that you are saving and investing your money. Retirement planning is a must, so start with maximizing your 401k and Individual Retirement Accounts (IRAs). Other than this, it is also important to be prepared for emergencies. This can be done by maintaining an emergency fund. Emergency savings can help you lower the need for debt and offer better financial security during uncertain times. It is also essential to invest your money toward your individual financial security. If you get divorced or in the unfortunate event of your spouse’s demise, your personal financial wishes and goals should not be compromised.
There is likely going to be some disagreement along the way but it is essential to be broadly on the same page when planning your finances. For instance, both partners should be equally proactive with savings and investments. Both partners should be conscious of their expenses and not put the load on the rest of the family. Additionally, both partners should think of the future as much as they do about the present.
2. Consider planning your expenses as a couple:
Earning couples have more disposable income than others. This makes it easier to buy things without prior planning. However, it may still be advised to plan for all the major expenses. If you have a financial need that will cost you a significant amount of money, consider saving up for it in advance so as to avoid impacting your future finances. It may be strongly advised not to overspend. In fact, you can consider saving one person’s salary and spending the other person’s income. This way, no matter what, your expenses will always be in check, and your savings will not be affected.
3. Use the right financial tools for dual-income families:
Having two sources of income can be confusing to manage. However, using the right tools can help. You can use mobile apps to track your expenses, savings, and investments. Mobile apps make it easy to keep a check on your money and identify the mistakes that you may make along the way. You can use a common app that records your spending, income, and investments. This helps you understand how much each of you is contributing to the family’s present needs, future goals, and to yourselves individually, based on which you can plan ahead. Mobile apps also make it easier to pay your bills on time, eliminating the chances of paying penalties. Moreover, they can be used on the go, so every minute and significant expense is recorded, and there are no lapses.
4. Plan your finances for when you have kids:
If you plan to have children, your expenses will drastically increase. The medical costs alone can be high. To add to this, you will have to spend on the child’s food, clothing, education, and more. It is essential to discuss these factors with your spouse and plan accordingly. If you have children, one of you may have to quit your job for some time to take care of the kids at home. This can be a hard decision, personally and financially. Therefore, have an open conversation with your spouse on the matter. While the women usually end up quitting their careers, consider your income and future career prospects when deciding. The spouse who earns more and is likely to bring in more money in the future should ideally continue working to provide for the family.
Having children also requires additional investments dedicated to their future well-being. For instance, you can start investing in the 529 education savings account. This is a tax-advantaged account that allows you to save for your child’s future education expenses. Life and health insurance are also necessary to offer the child a financially secure life later.
5. Discuss each other’s debt liability:
As discussed above, if your spouse has a higher debt liability, you will be affected by it in some way or the other. So, it is important to discuss these matters and come up with a reasonable solution. In most cases, increasing your savings rate can help you lower your debt. The more you save, the less money you need to borrow. So, increase your savings each month. If one or both of you already have debt, try to find ways to pay it off quickly. Firstly, lower your expenses to accommodate the debt repayments. Secondly, cancel your credit cards and keep only one for common family use. It is also essential to use the right instruments to save your money. You can use high-yield savings accounts to ensure that your money does not sit idle and earns interest that keeps it growing. You can also invest your money in stocks, bonds, exchange-traded funds, mutual funds, real estate, gold, and more to earn returns that increase your joint net worth and ultimately make you debt-free.
6. Plan for Social Security benefits:
Social Security benefits are an integral part of financial planning for families. Usually, you can take your Social Security check at the age of 62. However, if you decide to delay it till your full retirement age, you get a higher check. The full retirement age is 66 for those born in 1954 and 67 for those born in 1960 or later. Further, the benefit increases by 8% every year you delay claiming it beyond your full retirement age. If you are a dual-income household and have two Social Security benefits to rely on, consider delaying claiming at least one spouse’s benefits. This way, you can use one person’s check to cover your needs before the full retirement age while the other person’s benefits are increased over the years, offering you a better return later.
7. Take help from a financial advisor:
A financial advisor can offer expert financial planning tips for dual-income families that can help you use your income adequately, manage taxes, plan for the future, and optimize your expenses. The higher income group you fall into, the more challenging it gets to manage your money. This is why hiring a financial advisor becomes essential. Financial advisors can help you invest in the right instruments according to your risk appetite, and help you make the most of emerging market opportunities. They can also help with debt management, retirement planning, estate planning, and more.
Financial planning for dual-income families is not all that complicated. In fact, you need to follow the same advice and tips as you would if you were single or the only one earning in your family. However, it is crucial to understand that there can be some differences that need special attention. In most cases, talking things out with your spouse can help.
In other situations, consider hiring a financial advisor and taking expert advice. Use WiserAdvisor’s free advisor match service to find 1-3 highly qualified and vetted financial advisors that are suited to meet your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.