How to live off one income and save the other

Living off one income and using the other to save or invest for the future can be a smart strategy. Here are seven tips for success.

The Australian Bureau of Statistics estimates the average weekly household income in Australia is $2,348 – which equates to $122,096 annually. Many working couples, especially those earning above this threshold, can comfortably survive on just one income. This frees up the other person’s salary to be used to save for big-ticket items or build wealth for retirement.

If this is something you want to try these seven tips can help you adjust to doing exactly that.

1. Define your goals

Like all money matters, it’s important to consider why you’re doing something before spending a cent. So, ask yourselves the following questions:

• Why this approach?
• What are your goals?
• How will you use the money you save? Paying off the mortgage? Investing? Saving for holidays or home renovations? Topping up your superannuation?

We often think of our money in silos instead of considering the overall picture. A licensed and experienced financial adviser can help you see the big picture and outline options you may not have thought possible.

2. Develop your spending and investment plan

With your goals clearly defined, the next step is to devise a spending and investment plan. It’s important to consider factors such as:

• Which of your incomes can cover your living expenses?
• What happens to any surplus funds?
• Where will your savings go to get the best returns?
• What investments are you willing/not willing to pursue?
• How will major life changes affect your incomes, including having children or changing careers?

Some practical steps for devising your spending and investment plan are:

• Build a budget: Calculate what you realistically need for bills, fun and what’s left for investing. Look at some of your regular expenses and identify ways you may be able to cut costs.
• Go hard from the start: This is when your motivation to save is generally the strongest – use that to your advantage.
• Be frugal: Find ways to reduce your living costs, such as using discount vouchers and cancelling non-essential subscriptions.
• Make it a gradual process. Start by investing the lower of your two incomes or a percentage of the lower income. You can adjust things later.

→ Related: 7 apps that could help you save more than $3,000 a year

It’s a good idea to keep your plan well documented. Having a paper (or digital) trail gives both partners equal visibility, including over who made what contributions. Plus, it helps keep you focused on achieving your goals. It generally doesn’t matter whose name goes on what as if you eventually split up everything goes into a joint asset pool to be divided between you.

3. Get your taxes right

Many people are surprised to discover they’ve been paying too much tax or haven’t claimed incentives they are eligible for.

It’s important to consider the various tax implications of living off a single income as dual-income earners. This might affect superannuation strategies, capital gains tax on the sale of investments and income from investments.

Getting advice from your accountant and financial adviser can potentially help reduce your tax bill, maximising your ability to save and invest.

4. Keep incomes separate

Consider having each of your incomes deposited into separate bank accounts. That way, living expenses come out of one account, investments and savings from the other.

Segregating your income like this gives you better visibility of where the money is going – which in turn keeps you motivated towards reaching your goals.

5. Consider refinancing your home loan

Interest rates are currently at record lows and are expected to stay low for several years. Yet many people haven’t revisited their mortgage, meaning there could be substantial savings available by refinancing. Those savings can be used to pay off the principal faster or put towards other investments. Either way, unlocking that extra cash gives you more options.

→ Related: Tips on how to switch home loans

6. Have a back-up

You may become used to living on a single income, so if you end up losing an income it won’t be as much of a shock as for couples reliant on both to survive. But, if the larger of your incomes stops suddenly there may not be enough money coming in.

Income protection and disability insurances can help cover that loss, provided you have appropriate cover. Or you may need to sell some assets in order to cover that lost income.

The best fallback option though is an emergency fund: cash that can be accessed quickly and easily. Previously three months’ income was considered a good buffer, but given COVID, it’s a good idea to aim for six months.

7. Do things together

Living on one partner’s income and investing the other person’s salary can alter the power dynamics in a relationship, leading to arguments of “I pay for everything” versus “I’m the one setting us up for the future”.

An alternative you may want to consider is for each partner to save or invest the same percentage of their income so that you both contribute proportionally the same.

Either way, it’s important that you both have visibility over your spending and investment streams, and that you’re both involved in making decisions. You are a team after all.

So, be team players and make all decisions jointly – that way, you can enjoy the fruits of your efforts together.

Cover image source: Poh Smith/Shutterstock.com