Have Fun with Your Second Income

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Wrapping up Adam’s wonderful request he sent me the other week, I want to explain a bit the rest of Couple Money‘s tag line:

I was looking at the website and love the caption at the top “Learn to Live on One Income and Have Fun with the Second.”  I was curious if you could do an article/blog post about that caption. I think that some people probably don’t totally understand how to do that, and it would be nice to elaborate on your catch phrase, and this history of how it came to be.

I am not sure what the total income would need to be to keep that phrase relate-able to your audience.

If you’re scanning through, you may see some of Dave Ramsey’s Baby Steps in there. While I haven’t taken his class, the financial principles he shares through his books, videos, shows are practical and apply to 99.9% of families (leaving room for the exception 😉 ). I’ve tried my best to keep in mind different income levels and distributions (such as one full-time income and one part-time income) so that most readers can use this as a guide.

Build Some Savings First

First things first, if you two don’t have some savings stashed away, that is a great way to add a bit of safety margin to your budget. How much should you save? Think of possible emergencies that your family can face, such as:

• Car Repair
• Appliance Replacement
• Insurance Deductible
• Loss of One Income

How would your finances be affected?

If an unexpected car repair can throw your budget into chaos, then start by saving enough to cover it. You owe it to yourself and your family have some money tucked away to handle some of life’s bumps.

Many personal finance gurus offer 3-6 months worth of expenses as a goal for families and if you’re using your second income to do that, then it is achievable in a few months. If you two are more conservative with your money and want to have a bigger cushion, then you may want to set aside 3-6 months worth of income (counting both). Should one of you lose your job, your family won’t have to panic as you try to find employment.

The next decision you two should make is where you need to deposit your money. With an emergency fund you need to focus on 3 things:

• Easy access to it in case of emergency – It does you no good to have a high interest rate if you can’t get to it quickly when it’s most needed.
• Safe place to store you money – Whatever you choose, make sure it’s either covered by the FDIC (banks) or NCUA (credit unions).
• A place where it can grow – If you can earn a decent interest rate for your savings while meeting the two previous criteria, then go for it.

Right now we use banks Capital 360 for our primary checking and Ally Bank for savings as they have higher interest rates than the local brick and mortar banks.

Pay Off High Interest Debt

Once you have some savings put away, it’s time to make sure your budget doesn’t have any high interest debt leaks. Keeping the balances on those accounts can not only tie up your cash flow, but they can drain you financially and emotionally. Basically if your interest rate is higher than 10%, then put it in this group. Most times, this will be credit cards and perhaps a bad deal on a car loan.

For us we used a combination of the debt snowball strategy along with snowflakes (small payments and bonuses that we received). As soon as the money came in, it was allocated and scheduled for payment. No temptation to spend it. If your expenses currently equal or exceed both of your incomes , then it’s time to double team and start making phone calls to the credit card companies. Negotiating a doable payment can relieve financial and emotional stress.

If you need some help with getting a sustainable debt payment plan, you can use helpful tools and services like Ready for Zero. It help you manage all of your debts with one account.

Invest in Your Future

Once you have taken care of your family’s immediate needs, it’s important to look at your future. If either of you have a job that offers a match on your retirement contributions, then go for it. That’s free money that you can use when you retire. You two can also contribute to an IRA, allowing you to increase your retirement savings. The easiest way to stay on target for your investment goals is to go ahead and automate your IRA contributions. It has certainly helped me avoid skipping deposits.

There are many places where you can open an IRA such as Vanguard, Charles Schwab, and T. Rowe Price. If the two of you are looking for a simple, no hassle option with passive investing, then I think Betterment could be a good for for you. If you’re interested, you can sign up for a new account at Betterment here.

Choose Your Own Adventure

Ok, so you now have managed to have a financial cushion, paid off all of your high interest debt, and you contribute to your retirement accounts. What’s the next step? That is entirely up to the two of  you.

You can aggressive with all of your debt and use that money to pay everything, including the mortgage off. You can go ahead and save up some more to pursue a dream that the two of you share, like traveling around the world, starting a business, or going back to school for another field. Some couples use the second income for their children, building a college fund or using it for a wedding fund. You could also work together to retire early and start living the Mustachian life.

The point is once you have a foundation, what you do with your second income depends on what your goals are as a couple. That means the two of you have to sit down and talk about what you want most and plan on how you’re going to reach those goals.

Thoughts on How to Use Your Second Income

How about you and your family? If you have 2 incomes, how you budget your second one? What are some of your goals?

Photo Credit:  401K