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Adjusting to Major Income Changes

If you’ve been reading for a while you know all about my wife’s transition to a stay at home mom. You also know about the ensuing surprise wealth. While these are important changes in our financial trajectory the true test of our plans and process comes after these items, in the phase we are now entering. As we progress through January we’re now at our new much lower income. We also have a new different set of expenses. All of our plans have to be adjusted to account for our new direction. This post will deal directly with how to prepare and adjust to major income changes.

Minor Increased Expenses and Major Income Reductions

As noted we reduced our income by a significant amount going forward. An estimate would be about 40%. Our expense also had some significant declines in terms of day care and the costs of my wife working in a corporate office. The latter was much higher than we expected, and thereby underestimated the savings we would enjoy. However, we are realizing that there are some new costs to cover. We will experience higher electric bills due to my wife and children being home during the day. We added in a YMCA membership to give my wife the option of a few hours of peace by utilizing their free day care. With these changes realized, the landscape of our existing budgets is no longer valid.

Preparing for Major Income Changes

Thankfully we had forewarning to the changes, so we were able to employ one of the best tactics for adjusting to major income changes. The first and best way to prepare for these changes is to live the new budget before it becomes mandatory. To this end at the decision point we immediately instituted living off our new budget despite still maintaining the pre-execution income. By exercising the new budget when it was optional it gives us time to make adjustments. In some ways we did this long before our decision occurred as we’ve lived our lives since marriage based on living off the lowest income in our household. This made the transition relatively smooth.

During Income Changes

That being said you might not have this forewarning. Or in our case some of our planning was over whelmed by the sheer amount of changes. As such while we were able to maintain the new budget successfully there are some unknowns for which we cannot account. This leads us to the second thing you can do. Once the period of change starts consider making your financial situation simpler until things settle down. In our case in order to adjust to our major income change we are delaying some changes we want to make to the house (basement floor replacement for those who might be interested). This will allow us to observe the changes in isolation to get a better handle on our new life as quickly as possible. This will allow us to make adjustments as necessary. It will also ensure we don’t get too far ahead of ourselves with the financial changes. The worst case scenario would be doing a major remodeling with extra money we thought we had but due to underestimation we could end up tapping our emergency account. Needless to say we want to avoid that so we’ve reduced our extraordinary expenditures for January.

Ease into It

Ultimately our strategy adjustments related to these major income changes are minimal. We are still executing the same philosophy of value based spending we always have. I’ve made some adjustments to redirect tax advantaged contributions from our dependent care FSA and my wife’s Roth IRA to other accounts (i.e. Employee Stock Purchase Plan (ESPP) and taxable accounts) as our eligibility has changed. We’ve also gotten a bit more aggressive with respect to credit card cash back and signup rewards to offset some of the costs. As things stabilize further we’ll crank up the contributions to ESPP and taxable accounts if I under shoot our budget or lower them slightly if I over shoot. Which brings us to the final bit of advice for adjusting to major income changes. Give yourself the ability to adjust. Continue to contribute to your savings accounts but realize you might need to dial it up or back for your new reality. This will avoid you having to tap that emergency account which is not a sustainable long term solution.

Have you ever had to adjust to a major income change? If so how did you do so?


  1. Leo T. Ly @
    Leo T. Ly @ January 23, 2017

    I had two income changes previously when we had the addition of my daughter and son. My wife had to go on a one year maternity leave twice, which cut her income in half. Fortunately, during that time, I also got a new job with higher pay, so the drop in my wife income had a minimal impact on our finances. Hopefully, the next time that the drop in income will be the time that we reach FI.

  2. Smart Provisions
    Smart Provisions January 23, 2017

    Great post, FTF.

    The only major income changes I have were going from unemployed to employed or just the simple raises reaped from switching jobs. In each of these cases, I utilized a budget to keep myself spending as low as possible, while stashing away most of the income to avoid lifestyle creep.

    I expect budgeting to be a major part, just like you said, in making sure I adapt to future income changes, whether it is a decease or increase in income.

    • January 23, 2017

      Lifestyle inflation is of course a major risk when going the other direction that you can use similar techniques on. Thanks for sharing.

  3. Mr Crazy Kicks
    Mr Crazy Kicks January 23, 2017

    We had a couple of big adjustments recently. First when my wife left her corporate job to teach at our community college, and second when I quit my job. Neither were too bad since we were at a 70% savings rate when both working corporate jobs. But since we had a lot of automatic investments, we did have adjustments to make. Both times we left as many of the automatic investments as we though we could handle intact. Then as we started to feel pressure on our checking account we would pare them down to a comfortable level.

    Waiting on extra expenses like your basement floor is probably a good idea. It gives you time to readjust and re-evaluate your plans. Good luck on the transition!

    • January 23, 2017

      It sounds like you were in much the same position we are. Thanks for the well wishes.

  4. Go Finance Yourself!
    Go Finance Yourself! January 23, 2017

    Several years ago, my wife decided she wanted to quit her job and go back to school. Our income was cut by about 40%, plus we added the cost of tuition. We paid for her tuition entirely without taking on any long-term student loans (only a couple short-term ones to float us for a few months). She was able to work some at a local boutique on the side, but it didn’t pay much. It was tough living off of basically one income. We cut expenses to the core. We hardly ever ate out, didn’t travel unless we could get a free trip through credit card points, and pretty much watched every penny we spent.

    It was important to me to continue to save. For the most part, I contributed around 10% of my income to my 401k. At one point I got down as low as 6%, the minimum to still receive the employer match. It was tough going, but in the end it was worth it. When she graduated and got a job it was like we had just won the lottery!

    • January 23, 2017

      That certainly is the flip side. If my wife’s consulting gig takes off we could end up with a surprising upside later in the year. That can’t start for at least 3 more months due to a work cool off period so we’ll see. Thanks for adding your story, what did she go back to school to learn?

  5. Amanda @ centsiblyrich
    Amanda @ centsiblyrich January 23, 2017

    Best wishes for a continued smooth transition! Though there are always surprises with big changes such as this, it sounds like you were well prepared.

    I quit my job 16 years ago to stay home with the kids. We didn’t prepare well for the transition. We didn’t plan ahead by more than a couple of months. It was hard at first, but we were able to make it work – and still do!

    • January 25, 2017

      Sometimes, it’s those tough situations that provide learnings you utilize in the future.

  6. Mrs. BITA
    Mrs. BITA January 24, 2017

    I love that you didn’t just plan for the new financial situation, you actually did a dry run and lived the new situation so that you could be 100% confident of success. Nice!

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