A lot has changed since I wrote this post. Back in 2011, I was very dissatisfied with my job and engineering career path. I needed to make a drastic change or I’d have a heart attack! Now, I’m a stay-at-home dad/blogger and life couldn’t be better. The transition wasn’t easy, but we prepared as much as we could and I seized the chance to live outside the box.
To prepare for my early retirement, we saved as much as we could and cut back on our spending. A major part of that process was to save and invest all of my earned income for a year. That accomplished two things. One, it gave a big boost to our dividend portfolio and cash savings. Two, it let us see if we could continue to live our modest lifestyle without my paychecks. It was a year-long early retirement dry run. Living on one paycheck is a great way to ease into early retirement. It prepared us for having a lower household income and minimized our lifestyle inflation. I highly recommend it, especially in these uncertain economic conditions.
*This post was originally written in 2011 and updated in 2019.
Live on one income
If you have two incomes, you should try to live on just one and save the other. Life is unpredictable and you never know what’s going to happen next. Every household needs to prepare for leaner days because we will have a recession before you know it.
Here is how we gradually transitioned to living on one income.
- Age 22-25: This was the most carefree period in my life. I started working as an engineer and I loved it. My income was great and I didn’t have much responsibility. I was single and I had a ton of fun. During this period, I saved through the 401k and Roth IRA. I maxed out those accounts and it paid off handsomely. See – What if you always maxed out your 401k.
- Age 25-33: I got married. Mrs. RB40 worked full-time, but I was the main breadwinner. We continued to max out our 401k and Roth IRA. We also saved and invested in our brokerage account. I didn’t track our finances closely in this period, but I’m pretty sure we saved more than Mrs. RB40 brought in. So we were already living on one paycheck early on. Our lifestyle inflated a bit, but my income was enough to cover our expenses. We saved a little less when Mrs. RB40 took a couple of years off to get her Master’s degree.
- Age 33-36: The golden period of our earning years. Mrs. RB40 started a good career after she finished her Master’s degree. We continued to live modestly and saved a ton of money as a DINK couple. Having two solid incomes and no kid was awesome. It supercharged our investments. Coincidently, this was during the trough of the Financial Crisis. We invested a bunch of money during those down years. It worked and our portfolio grew tremendously. We also started investing in rental properties.
- Age 36-38: The end of DINK. We had a baby and our expenses shot up. (As every parent knows, daycare is expensive!) However, we also changed our goal to financial independence. Previously, we didn’t have a clear financial goal. We cut back in other areas and were able to save all of my income in preparation for my early retirement.
- Age 38-42: I retired from my engineering career and became a stay-at-home dad/blogger. Our preparation worked because we continue to save over $50,000 per year and still enjoy a comfortable lifestyle.
- Age 42–45: Mrs. RB40’s career took off and she rocked it at work. Her income shot up and she could cover our expense by herself. My blog income and blog income also improved tremendously. At this point, we could either live on her income alone OR my blog income + our passive income. We feel financially secure and life is good.
This progression isn’t typical, but every household should strive to live on one paycheck. It will give you more options later on. Here is the chart of our earned income vs expenses.
Unfortunately, most households can’t live on one income. Their expense increases along with their income. Lifestyle inflation can be very difficult to control if you don’t have a clear financial goal. Most families live for today and spend too frivolously. In contrast, we steadily increased our earned income over the years, but we also kept our expenses under control. We lived on one paycheck and invested the other one. That’s what every family should strive for.
The next 50 years
Living on one income is great, but there is the next level. What if you don’t need earned income at all? If you save and invest, your passive income will grow to cover your expenses. That’s financial independence. We’re on the cusp of gaining that freedom. Finally, our passive income exceeds our expense and Mrs. RB40 can retire early, too. Here is what I envision for the next 50 years.
- Age 46-55: Our passive income can cover our expenses. However, part of that passive income is in the pre-tax bucket. I’ll use my blog income to fill the gap and leave the pre-tax accounts alone. Now, I’m actively encouraging Mrs. RB40 to retire early. We should be able to live modestly and enjoy life.
- Age 55-67: Ramp down on work and build our Roth IRA conversion ladder. This will remove some assets from our pre-tax accounts. By this time, the passive income from our taxable accounts should be able to cover our expenses 100%.
- Age 67+: Social Security benefits kick in. Also, we’ll draw down our pre-tax accounts. Money shouldn’t be a problem at this point.
The next inflection point will be when Mrs. RB40 retires. I want her to retire in 2020, but we don’t know if she will. She might continue working if she can find the right job. We should be fine financially because I have my blog income and our passive income is strong.
Passive income is great because it’s another stream of income. It’s your hidden ally. You don’t have to work anymore once your passive income exceeds your expense. It’s like another person working for your household. Let’s include passive income in our chart.
Our household expense is the red line in the chart above. We have 3 sources of income – mine, Mrs. RB40, and passive income. The last 2 years were awesome because the expense is lower than any of those incomes. The great thing about passive income is it should continue to grow. As long as we can keep our passive income ahead of our expense, we’ll be golden.
Side note, our household income is amazing. We had two dips. When Mrs. RB40 went back to college and when I retired from my engineering career. Incredibly, the trend reversed and our household income shot back up. I’m pretty sure this trend won’t survive Mrs. RB40’s early retirement, though. Who knows? Maybe passive income will pick up the slack somehow. Check back in 20 years and see. Oh yeah, Social Security benefits and pension should give us a big boost when we’re 67. That’s a long way to go, though.
Aim for one paycheck
To wrap it up, I think every family with two incomes should aim to live on just one. Invest the other paycheck so you’ll be prepared for the rainy days. If you do this, your passive income will increase and eventually you’ll be able to live on that alone. Living on one income will help you keep a lid on lifestyle inflation, too. It’ll pay off.
What is your household income situation? Dual income no kid? Dual income with kids? One income? Do you live on one paycheck like we do?
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