Is your family down to a single income? Here’s how to cope

Whether you’re single (newly or otherwise), or simply a household with one spouse not working (by choice or due to the pandemic), there are highly effective ways to maximize your income, and feel secure in your finances anyhow.

Scaling down bigger purchases

Your home. Your car. The milestone vacations you plan to take when travel is more common again. These bigger-ticket purchases have to be tailored carefully to your income, because the monthly payments can be high, but more importantly, they can impact your retirement readiness.

In nearly all cases, it makes sense to set your sights on lower-cost purchases, like a smaller home in a less expensive location. And, if you’re fortunate enough to have bought your home years ago, before the current real estate boom, and it’s appreciated significantly in value, this is a huge advantage that gives you the option to eventually sell and use this money for a downsized home at a much lower cost, or to shore up your investments with the equity, and switch to a flexible rental scenario in your retirement years. Just note that prices in areas that were not expensive just two years ago have often climbed.

Err on the side of a larger emergency fund

Pre-pandemic, the financial community recommended having between three and six months’ worth of essential expenses tucked away in the event of an emergency. Now, resoundingly, we suggest the higher end of that scale because when emergencies strike, they can last an awfully long time. If you’re on a solo income, always have more emergency savings than a double-income household — you don’t have another paycheque to fall back on.

My advice is start building this as early as possible, with regular allocations towards a high-interest saving account (this can be held within a TFSA to avoid taxes). Statistically you’re likely to experience a financial emergency every seven years, so over time you’ll be funding this account, using it and replenishing it. Building up these reserves won’t happen overnight, though, so be prepared to trim back in other areas.

Let budgeting and frugality be your best friends

Single-income homes typically have less money to spend even on core budget categories. Thus, it’s key to stick to well-researched budgeting benchmarks such as 35 per cent of take-home income for housing, 10 for travel/automotive, 20 for groceries and home supplies, 10 for consumer debt repayment, five for saving, 10 for investing, and 10 for entertainment, clothing and wellness. These can be tweaked to suit your needs, but additions to one area must, naturally, be taken from other places.

Budgeting isn’t a one-time event; it’s an ongoing process. So, adopt the practice of regularly budgeting for the month ahead. Anticipate what’s going to happen, then earmark your money for essential, then non-essential purchases. If you’re running out of money, it means trimming from other categories. If you have money left over, congratulations, this gives you the opportunity to save more.

Also, I think this goes without saying, but I’m saying it anyway: Being on a single income does not mix well with consumer debt.

Don’t miss a beat with your retirement planning

Be extra vigilant when planning your retirement, and DIY’ing the process is not recommended. Work with a professional to develop a longer-range plan that ensures you’re saving enough today, and then when the golden years hit, that you spend at a rate that doesn’t erode your nest egg too quickly.

One of the biggest mistakes I see when it comes to retirement plans is when the individual or couple hasn’t spent nearly enough time on a strategic vision. Start here. Conceive what you want retirement to look like and get specific. Then talk this through with your financial planner, and close any gaps between your vision, and your current savings pace.

Opportunities to save on taxes should play a big role when you’re on a single income and supporting others. Your planner will help you wade through tax implications of your financial plans.

Also, lucky you if you have a defined-benefit pension plan — that is, a regular monthly income you can rely on in retirement — but, depending on what you want your retired life to look like, you’ll need to save independently through tools like RRSPs, TFSAs and nonregistered investments.

Some insurance might be more important than ever

You probably have some kind of coverage through work, or independently, in the event that illness or disability strike, but it’s more important to understand the insurance you have, and if there are gaps. Being on a single income can expose you to greater risk, again, when these kinds of disasters strike. The fastest way to determine if you have greater needs for insurance is to work with a licensed insurance professional who has been personally recommended to you. In one meeting they should be able to tell you if you need more coverage than you have. They’ll also talk you through life insurance options, especially if you still have minor children at home.

Some of the greatest financial success stories, and happiest people, are from single-income households who’ve learned to stretch their finances as far as they can go, and live comfortably within their means.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.