The Hidden Costs of a Dual Income Household

The Hidden Costs of a Dual Income Household

There was a time in the not too distant past when dad went to work to bring home the bacon, and mom stayed home, raising kids, running a household, and involving herself with the schools and community.  While it is wonderful to see glass ceilings shattering the world over (most med schools classes are now in fact 50% female), there are a few things about the traditional set-up that just make sense financially speaking.  Sometimes traditions become traditions for a reason.  Consider a couple, married with children, deciding whether they should both keep working.

First of all, let’s skip over the most important part of this debate, which is whether the second spouse wants a career or not for fulfillment purposes or would prefer to stay home for various reasons.  We’re looking at this purely from a financial picture.  Let’s examine the costs of the spouse of a physician going to work.  To make it easy for me, I’ll use the situation of my own spouse, a teacher.

1) Taxes.  The only thing more depressing than the salary of a teacher is seeing what the entire salary of that teacher is when it is taxed at the marginal tax rates of a doctor.  The average salary of a teacher in my state is $42,000.  But if my wife went back to work as a teacher, we’d pay taxes on her entire salary at 33% federal and 5% state.  There goes $16,000.  Oh wait, I forgot about social security and medicare taxes.  Make that $19,200.  That’s right, even though YOU’VE hit the maximum SS contribution for the year (and likely paid the employer portion as well), your spouse still hasn’t and that money will be taken out of her paycheck.

2) Charitable contributions.  Many folks are religious and tithe up to 10% of their gross income.  If this applies to you, you can whack another 10%, or $4200 off that salary.

3) Child care costs.  I’ve got three kids, only one in school all day.  So child care costs for two in my state would average $11,640.  I’m going to knock 1/4 off of that since a teacher could be around during the summer anyway.  That’s $8730.

Let’s stop to add up where we’re at:

Gross Salary: $42,000
Taxes: -$19,200
Charity: -$4200
Child Care: -$8730

Subtotal: $9870

Let’s keep going.

4) Poor consumer decisions.  My wife is a frugal shopper and does a good job avoiding frivolous expenses.  Part of the reason is because she has time to comparison shop and wait for deals.  I do not.  I’m busy working, and when I’m not at work I don’t feel like spending time shopping, so I go to the most convenient place to get what I need and buy it.  If she were working, we’d likely spend more.  It’s hard to quantify this, but let’s say $500 a year.


5) Maid services.  With three small kids, it’s tough to keep our place clean with a stay at home mom.  No way could we do it with my wife working.  We’d have to hire a maid.  At $100 a week, that’s $5200 a year.  Even if we got a deal, and only had them come half as much, that’s still another $2600.  You might also find you need to hire other services out, such as landscaping, snow removal, maintenance etc.

6) Additional food expenses.  Let’s face it, when two earners get home from a long day at work neither of them has the energy to cook a nice meal (much less clean up after it.)  So what do they do?  They order out, or pick something up on the way home, or go out to eat.  How much more does that cost?  Let’s say an extra $200 a month, or $2400.  We have a garden.  If she was working we might still have it, but maybe not.  There’s a few bucks there too.

7) Work expenses.  Many jobs require a professional wardrobe, education costs, licensing costs etc.  This obviously differs quite a bit, but let’s say another $500 in our case.

8) Transportation expenses.  A physician household probably already has a second car, but there will be additional wear and tear and gasoline from the commuting expenses.  Let’s say another $500 a year.

Gross Salary: $42,000
Taxes: -$19,200
Charity: -$4200
Child Care: -$8730
Poor consumer choices: -$500
Maid: -$2600
Additional food: -$2400
Work expenses: -$500
Transportation: -$500

Grand Total: $3870

Now, let’s consider how many hours a teacher works.  Let’s say 8 hours a day, 5 days a week, for 34 weeks a year.  That’s 1360 hours.  $3870 for 1360 hours works out to $2.84 an hour.  Teachers have always been poorly paid, but THAT poorly paid?

Also consider that I’m a shift worker.  A typical shift in emergency medicine is worth $1000-2000.  It is obvious that our family would be a lot better off financially if I worked an additional SHIFT each month (or even every other month) than if my wife worked an additional 20 DAYS each month.

Now, your situation may differ.  Like I said, the financial picture is only part of it, and arguably not even the most important part of making the decision to go from a two-income family to a one-income family.  Your family’s expenses may be different than mine.  You may only have one child, give less to charity, live in a low tax state, or have minimal commuting expenses.  There might be some additional financial benefits of your spouse working, such as additional tax-deferred investing “space”.  Your spouse may also earn a lot more than a teacher.  The argument starts falling apart quickly if your spouse is an orthopedist.  But you should definitely run the numbers and determine just how much (or how little) your spouse is really bringing home per hour worked.  The numbers look bad for the average American with child care expenses.  For a physician family, they can look much worse.  The traditional family set-up with one parent out working and one at home has worked for millenia.  Perhaps we shouldn’t be so quick to abandon it, at least for financial reasons.


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The Hidden Costs of a Dual Income Household — 31 Comments

  1. Interesting post, but very one sided IMHO. There are many advantages to having a dual income family that you don’t mention. First, you don’t discuss benefits. Many teachers have pension plans or 401k. The contribution may not be much compared to what a physician can save, but not insignificant. This probably adds at least 3-5k/yr. Health insurance can also be extremely valuable. If you are a self employed physicians and you can get health insurance fully paid for through your spouses employer it would save you an expense that would otherwise come directly out of your take home pay. That would probably save around 15k/yr for a family. Also, the social security tax your wife is paying should theoretically be repaid as benefits once she retires, as social security benefit is calculated based on lifetime income. So I don’t think you can really deduct the social security tax paid, and theoretically you should include the employer payroll tax paid to social security as well, which adds about 10% per year or another $4200. So if you add benefits and social security tax to a situation like yours, having your wife work could be worth at least $26,070 a year (3870 + 3000 + 15000 + 4200). I’ll admit the value of the benefits I’ve calculated is pre-tax, but even so…

    Also keep in mind that a situation like yours is not static. Your kids will get older and if you don’t have more kids at some point your wife will be home all day while they are at school. Day care expenses won’t always figure into the equation. And I would also argue that a spouse with a lot of time on their hands will have more opportunities to spend money. I can’t tell you how many physician spouses I have seen that once their kids are older spend most of their time shopping, going out to expensive lunches with friends, taking trips etc. In addition to having less time to spend money, a working spouse is probably more likely to have a better sense of the value of money, and be less likely to spend frivolously. (Of course some spouses may opt to spend their free time at home clipping coupons and selling old clothes and toys on e-bay, but I think this is the exception).

    Finally, for a lot of dual income couples, having both spouses work provides extra stability and the equivalent of an insurance policy should one spouse be unable to work. Most physicians have disability insurance but there are other reasons a physician can be out of work. Physicians are particularly vulnerable if they lose their medical licenses, are investigated by the medical board, have too many malpractice law suits and become uninsurable etc. Groups can break up, hospital privileges can be lost, local politics or referral patterns can change and suddenly a practice is no longer profitable. Also, although unlikely, the market could change and employed physicians could even be laid off. Having a second income essentially diversifies your household income and can really help get through rough spots. However, if a spouse hasn’t worked for years it can be difficult if not impossible to go back to work should something happen to the primary breadwinners income.

    Of course, in the end, culture, religion and personal/lifestyle preference are going to be far more important in deciding whether or not a spouse should work. But we should be careful not to rationalize our preferences with a one-sided financial calculation.

  2. Good points all. I particularly like the concept of the second income as insurance. I would argue against the SS point however. 1/2 of my SS benefit would be far more than my wife’s given relatively meager earnings, so there is no benefit to her paying more payroll taxes.

    There ARE lots of benefits to two incomes. Most, IMHO, are pretty obvious (like higher income, more retirement account options, more benefits etc). Thus the point of a post about the hidden costs, especially when the second income is relatively low.

  3. my wife is a teacher and it’s very easy to maximize the income we get from her job.

    She makes about 42K a year.

    So, we:
    1) have her pay for my health insurance from her account – again tax sheltered and her insurance is provided – a huge benefit.
    2) she has the HSA account through her work that i don’t have, so there’s $6150 that’s not subject to FICA taxes or any other taxes
    3) 403b account – there’s another $16,500 i can save pre-tax that i couldn’t without her job.
    4) in my state she doesn’t pay social security but rather contributes to a defined benefit pension plan that takes away 15% of her income pre-tax (much higher than social security)

    So, after all that we pay negligible taxes on her salary which has been effectively reduced to about $7K a year and with all the additional benefits she gets the total compensation package is a lot closer to about $52 K.

    There is no way you should be paying $19k in taxes on her salary with all the tax shelters available.

    I absolutely agree that some of the expenses go up… however, I also know that idle hands spend money and that the more time your wife spends at home, the more likely she is to want to do more home remodeling projects or buy more junk for the walls and stuff.

    There’s pros and cons both ways.

  4. one other thing is the concept of adult conversation and feelings about self that revolve around having a job. im in a similar situation where my wife no longer works as a teacher since we started having kids. id say this has caused a few bumps along the road at times. not everyone likes to be the family bus driver.

  5. I have to comment on the SS part – yes, your wife may personally not see a benefit, luckily due to your high salary – but the SS System will not work (stay solvent), if there are no people paying into it. If you were to pass away today, she, and your children would get a benefit from your contributions – likely more than you paid in.

    Being a teacher is a great way to shelter money for future needs – 403b, 457, Pension – you can likely shelter her entire salary – a great place to be, and many duel income households would love to be in that position.

    How do you think people with salary like 2 teachers do it? They have the same costs as you, but much less income.

  6. @ John-

    I hadn’t looked into the societal benefits of 1 worker or two. You cite one societal benefit of two. I’d like to point out a societal cost of two workers. Are you familiar with The Two Income Trap by Elizabeth Warren. The basic argument is that since our society moved to where a larger percentage of families have two earners that we now spend more on housing to buy a house in a good school district and cannot stop doing so without sending our kids to a bad school. The average family (not docs) cannot live in a good school district with only one parent working.

  7. This anaysis also points out why high marginal tax rates are a problem. We need a flatter tax code to make the 2nd spouse working worth it. Same goes for you picking up extra shifts or starting a side business. Also, I hope you and your wife stay together, her ability to earn income will take a hit from being out of the job market.

  8. So far so good! She actually still works a few hours a week at the local school as a volunteer doing exactly what she used to be paid to do, so I don’t think her skills will be impacted too badly. I expect she’ll probably go back to paid work at some point after the kids are all in school.

  9. The true hidden cost of a dual income family cannot be captured by this calculus. You cannot measure the guilt a mother feels as she dresses a sick child so she can ship them off to the daycare while she trades her time (their time) for money. You cannot measure the shame of a man who believes (believes) he’s not good enough to earn enough for his family. You cannot measure the opportunity lost when a child sees the nanny sitting in the front row of the school play instead of mommy or daddy.

  10. Yes, I deliberately mentioned that we were skipping the most important part of the debate, which is non-financial, and looking purely at the financial issues.

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  12. My wife and I are in a similar situation. Her income is sufficient to push us into a high marginal bracket regardless of my income. What this means is that every dollar of my income is taxed at a rate of 35% federal + ~10% state. This means that nearly half of /all/ of my income is paid in taxes. Needless to say, this has a severe impact on my incentive to be productive.

    This problem is a result of the the tax code’s recognition of marriage, and this is where it must be fixed. The tax code should be completely independent of marital status.

  13. I hate to break it to you Sam, but it’s worse than you think. Your first $106,800 is taxed at a rate of at least 50.45%, and possibly as high as 60.9%. Don’t forget those pesky payroll taxes.

    I had a similar situation when I was in the military. I was paying nearly nothing in taxes on less than $75K in taxable income. But if I went to moonlight at a local civilian ED, I would pay 25% federal, plus 6% state, plus 15.3% in payroll taxes- 46.3% marginal tax rate for someone well under 6 figures of income. That’s nuts.

  14. WCI – I agree with your comment regarding the 46.3% marginal rate on moonlighting.
    Sam, even if you eliminate the tax code’s recognition of marriage you still have people opting out of working due to these high marginal rates. I think this happens a lot more often than politicians realize.

  15. I saw a post today on Sermo where the doc talked about the $4300 day camp for their 7 year old for the summer. There’s another expense for a dual income family. I can’t imagine paying that for 3 or 4 or 5 kids. And I thought child care was expensive during the school year.

    Meanwhile, the child in the single income family gets to run around with the neighborhood kids and go on road trips with the family for basically nothing. Not impossible with the dual income family, but harder to arrange the schedules of two professionals to permit significant vacation time in the summers.

  16. but you can’t have it both ways. the single income family saves buckets of money BECAUSE the 2nd spouse is at home. in effect, this second spouse is working very hard to enable the 1st spouse to work the high income job. i think that is what the SS payments reflect. you also didn’t really compare apples to apples, as the 2 people in the 2 earner home earn much much less then the earner in the 1 earner home. you should compare 2 doctors to 1 doctor or 2 factory workers to 1 factory worker. more often then not that 2nd spouse worked their tail off to put the first through med school and residency. i do agree that a flatter tax code would fix some of these issues.

  17. I am trying to learn as much about taxes as possible which is a huge part of this discussion. Aren’t child care expenses tax deductible which would lower this expense by the marginal rate? I also agree that, financially speaking, health insurance, pensions, and the ability to place most of the 2nd earner’s income into tax-deferred retirement accounts help out here quite a bit.

    • This is a great example of why it is important to actually learn the tax code. There is a credit available for child care expenses. It is $3K for one child, or $6K for more than one child, multiplied by 20%. So the most you’re going to get is $1200 off your taxes. It has nothing to do with your marginal rate. If you spent $40K on child care, you still just get $1200 off on your taxes. It’s still a nice credit especially since there is no phaseout, but it’s not what you thought it was. Here’s the IRS Pub on it: http://www.irs.gov/pub/irs-pdf/p503.pdf and the form where you figure it: http://www.irs.gov/pub/irs-pdf/f2441.pdf

  18. Yeah, I had this whole discussion with my now husband before we got married. I’m an orthopedic surgeon and he was a construction superintendant and salaried. I am trying to encourage him to run his own construction business and also to qualify as a real estate professional (as defined by the IRS) because otherwise, all of his income will be swallowed up by my tax bracket. Of course we have no kids so no worries about child care expenses etc but he obviously made so much more running a jobsite than starting a business that it occasionally makes him feel like he’s not pulling his own weight and he isn’t mollified when I tell him how much I appreciate him making me breakfast… The money stuff and societal/family dynamic stuff all add up to some tricky balances

  19. Besides the benefits, pensions and insurance aspects mentioned by others, there is another aspect. Based on your calculation, your spouse not working reduces contribution to charity by $4200. That’s a direct impact and you can calculate its value over 30 years at 8% return! That’s the amount your religious charity is not getting by her not working.

  20. Curious why you are assuming your wife’s income will hit the 33% tax bracket? I thought you previously said you pay in the 10%-20% range for taxes. I can’t imagine you are filing as separately. Thanks

    • Remember the difference between marginal and effective rates. My effective federal tax rate in 2012 was 9%. My marginal federal tax rate in 2012 was 25%. They’ll both be higher for 2013, for better and for worse. Hopefully the 28% bracket. But 28%+5% state = 33% marginal rate, and that doesn’t include the payroll taxes, another 15% if self-employed, half that if an employee.

  21. You can update this to add the effect if the new Obamacare medicare tax of 1.5% on income over $250K. Assuming your income is at $250K or above, her $42K results in another $630 of tax. That brings the total down to $3,240.

  22. Most of the discussion here is regarding the negatives of a dual income home. I am in a situation where my wife is a dentist, and I am in my residency. Dual incomes have been a huge help while we are both paying off student loans (IBR for me), and contributing to our tax deferred accounts. Also, for down the road, I can see that for situations where the dual income earners clear the SS limit there appears to be a “drop” in the effective tax bracket of the second earner. However, we will both be paying the higher Medicare taxes (0.9%) and a very high marginal federal tax rate (no state taxes here). No matter what the financial benefits/negatives are, I think that the intangible enjoyment of work and satisfaction of earning an income is the most important part of the job for many second earners.

  23. Rookie question here- My fiance and I are both residents and both enrolled in IBR. When we get married in the coming years, does the IBR see both of our incomes as having doubled and then accordingly increase each of our IBR payments? Or does it take into account both of our debt burdens and so the IBR payments won’t change very much? Thanks!!

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