Wow, a lot has changed in 5 years since I wrote this post. In 2011, I was very unhappy with my job and I needed to make a drastic change. We saved as much as we could and cut back our spending to prepare for my early retirement. A major part of the preparation was to save all of my earned income. This gave a big boost to our dividend portfolio and cash savings. It also let us test if we could really live without my paycheck. I’m happy to report that this has worked out very well. The test run prepared us for the lower household income and we kept our expenses moderate since then. If you have two incomes, I think living on one paycheck and saving the other is a fantastic idea. Every household should work toward that. Here is how we gradually moved to living on one income.
- Age 22 – 25: I was single and saved mostly through my 401k and Roth IRA. I maxed out those accounts and invested in my brokerage account a little bit.
- Age 25-33: I got married. Mrs. RB40 was earning some income, but I was the main breadwinner. We continued to max out our 401k and Roth IRA. We also saved more 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. 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 got a steady and well paying job after she finished her Master’s degree. We were living modestly and saving a ton of money as a DINK couple. Having two solid incomes and no kid was awesome. Coincidently, this was the trough of the last stock market crash. We invested a bunch of money during these down years and it paid off when the market recovered. We also started investing in rental properties.
- Age 36-38: The end of DINK. We had a baby and our expenses shot up. However, we also made financial independence our goal. We cut back in other areas and were able to save all of my income in preparation for my early retirement from engineering.
- Age 38-42: I quit my job and became a stay at home dad/blogger. Our preparation paid off because we continue to save over $50,000 per year and still enjoy a comfortable lifestyle.
This progression looks normal to me, but it seems very different from the average household who has a lot of difficulties with saving. We steadily increased our household income over the years and we also increased our saving rate. On the other hand, the average family seems to increase their spending in step with their income, while neglecting to save. Our earned income is lower now, but we have income from other sources to help supplement that. Eventually, Mrs. RB40 will retire early and we will transition from living on one paycheck to living with no paycheck. Here is what I envision.
- Age 42-46: Increase our non-job income and continue to save and invest. Mrs. RB40 transition to early retirement or part-time self employment at some point.
- Age 46-55: Hopefully, our passive income and part-time income can cover our expenses during this period. We won’t add much to our retirement savings, but we won’t touch it either. This will give our investments a chance to grow.
- Age 55-65: Ramp down on work and start withdrawing from our retirement funds.
- Age 65+: Social Security kicks in, so our withdrawal rate should decrease a bit.
The next few years are crucial because we’ll have to figure out how to cover our expenses without Mrs. RB40’s W2 income. I think it will be pretty easy if she can transition into part-time work. However, we’ll probably have to cut back on the expense side if she doesn’t have any income. I’m optimistic that we’ll figure it out.
Live on One Paycheck
To wrap it up, I think every families with two incomes should aim to live on only one income. This will give you a bigger cash cushion that you can invest and generate passive income. It will help you keep a lid on lifestyle inflation, too.
What is your situation? Dual income no kids? Dual income with kids? One income? I’m curious to see what everybody’s situation is like. If you have two incomes, can you live with one paycheck?
Image by ANguyenPhoto
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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