Ian Lord
[Editor's Note: This is a guest post from Ian Lord, a stay at home dad who operates a small custom embroidery business called Gryphon Threads. He also blogs parenting, gear and toy reviews, school, and personal finance at NotMrMom.com. Ian was previously a C-5 Galaxy crewmember and is now married to an Air Force HPSP MS3 student. We have no financial relationship.]
As a long time reader of The White Coat Investor I’m very interested in investing a physician’s earnings toward financial independence and early retirement. What makes me a little different is that I am a man, married to a current MS3 and stay at home dad to our 10 month old daughter. My wife was lucky that the timing of our daughter’s arrival coincided with the break between M2 and M3, but needless to say she was not going to delay her education or quit medicine because she became a mom. With our new bundle of joy came a major decision for me: carry on pursuing a full time job as I finished my MBA, or stay home with the kid. One of my major guides for thinking through this process was a post here from a few years ago, The Hidden Cost of a Dual Income Household.
This was not an easy decision for me; I derived a great amount of my identity and job satisfaction from a stint in the military. Childcare seemed at first like I would be losing a lot of that identity by sacrificing my ongoing civilian career. If your spouse feels similarly about giving up that connection with the outside world, he or she might benefit a lot from finding work that can be done from home or fit into the rest of the family’s schedule.
The Dual Income Trap
Two working spouses welcome the second income trap. Since the second income is taxed at the first’s marginal tax rate there is already a significant reduction in take home pay. When there is a small child involved the costs rise even higher once daycare is factored in. It might not make much sense financially to have the second day job if one spouse is willing to be a stay at home parent. While in school I worked part time as a Standardized Patient. A full time starting position in that department working as a trainer might pay in the low $30K range per year. Let’s be generous and say $35,000. After taxes, commuting, professional clothes, extra expenses such as the inevitable dining out during and after work, and of course the big one: CHILD CARE, I figured I would have earned approximately $2.50 an hour for my efforts before any benefits were taken out. For those curious to play with the math, here is a calculator originally run on the USA Today website.
A Third Path
I made an effort to choose the middle path, and work from home while raising my daughter. I’ve founded two businesses in the last year. The first was a custom embroidery business specializing in small run batches such as small business polo shirts, lab coats, and gift items. The second has been a blog covering topics of interests to stay at home dads; gear/toy reviews, parenting tips, work from home matters, and occasional financial topics of Bogleheadish leanings. This work allows me to make money while taking care of my daughter’s needs.
Lower Expenses at Home
So how can a spouse working from home help avoid the second income trap? First, the biggest benefit is dodging the childcare expense bullet. In my area, decent childcare runs $1k a month. That’s more than my mortgage. Avoiding a commute downtown everyday saves me another $3k annually. Doing anything at home that eliminates the need for childcare and a 20 mile daily commute saves me $15,000 a year.
Small Business Tax Deductions
I can take advantage of many of the wonderful and legal tax deductions as a small business owner that are not available to employees. My work expenses come off my gross income, reducing taxable income. That run to the UPS Store is also tax deductible, and it never hurts that the grocery store is on the way home. Web hosting, internet access, offsite backups, cell phone, and the UPS Store mailbox for the business are all tax deductible. If I were an employee, these expenses would have to be explicitly required by my employer, and only the amount exceeding 2% of my income would be deductible. Don’t forget that small business income could be used to open a Solo 401(k) and set up another tax deferred investing opportunity. If the income isn’t necessary for day to day spending, the spouse could even set aside the first $17,500 a year tax deferred, and then 20% of profits after that up to $52,000 limit. Your spouse might not come anywhere close to that upper limit, but if a commercialized hobby brings in $4,000 a year that can be tax deferred when you have already maxed out tax advantaged investing space I’d call that a household victory.
Being a Dad First
As an embroiderer, most of my work is done over the Internet and in the privacy of my home. I’ve never met two thirds of my customers face to face. I certainly don’t need to invest heavily in business attire under those circumstances. I can build my work hours around the baby’s schedule and still meet customer deadlines. I’ve never had to rush out the door to have the kid at daycare in time for me to make it to work. I feel truly bad for people who have to scramble when their kid is too sick to go to daycare or deal with the fallout when the kid keeps getting sick at daycare. My daughter still gets to go on playdates with other kids whose parents stay home, so I’m not too worried about socialization issues.
The odds are against me that I will ever make as much as my wife potentially will. That’s OK by me. My first duty as a stay at home dad is to make sure our kid is taken care of. For me, and I presume many other stay at home parents, there is still a need to feel engaged in the outside world and not live in the bubble of childcare all day. A small side gig, whether it’s crafting, woodworking, computer repair, programming, or any of hundreds of possible careers with flexible time commitments, presents an opportunity to get that satisfaction. A little extra tax advantaged investing space is incredibly valuable, especially if it means your spouse gets to do something they enjoy and do what’s best for the kids at the same time.
What do you think? Do you have a working spouse? Do they work at home or away from home? How did you make that decision? Comment below!
I have thought about this a lot and your approach is nice, but not unique. Everyone starts a blog. Everyone starts an embroidery business. I am being straight forward because I think this topic is important to a lot of people and really requires balancing the tradeoffs.
The big obstacle that I see are how do you avoid choosing between work or staying at home forever. Starting a business is an option, but it really only holds a lot of value if you have skills from previous work that not everyone can learn easily. It will be hard for you to reenter the workforce even if you get an MBA.
Approaches that I have thought about are:
Having family watch the kids for pay at a normal rate or discounted rate and continue working
Becoming a stay at home parent, but learning a trade that will ease reentering the workforce
-Actuary Exams
-Computer Programming
-Technical School
Working a job from home with limited time in office
I am interested if anyone else has ideas.
Thought about this a lot. Have a 4mo baby, residency ends in <4mo. My wife worked very hard to establish her career, which she is quite good at. Pay isn't exceptional, about like residency pay. She's going back part time. What we've decided to do is take advantage of the excellent 403(b) options provided by her employer and will put about 75% of her gross pay into that, thus maxing it out. The rest will go to child care (although won't cover completely). She's also paying into a pension. Combined with maxing out my 401(k) and employer match this will put us at 20% of gross pay into retirement savings. The other option would be for her to stay home and use personal and spousal IRA to make up the savings gap, but I have a lot of med school debt to pay off so using tax-deferred savings maximizes our take home pay. I think this makes sense…
This is an interesting post. I think it is great if one parent can be home with a child…if that works best for your family. I have a question that is in line with this topic but veers off onto a different path. The title of this blog post actually made me think that the article would be about whether it is worth it for low-earning spouses of high-income professionals to hold a job and be heavily taxed. This is something I’ve been thinking about a lot recently. I worked in the public relations/advertising field when I first met my husband who was a med student (1988). I continued to work while he was a resident and we made similar incomes at the time (he made $26,000 as a resident in the early 90s!) With the birth of our 2 children, I became the stay-at-home parent and did a bit of freelance writing. One child is now in college and one is a junior in high school so I’m finding myself thinking about the next phase of life. Now that my husband is in the second highest tax bracket, we are basically taxed 43% on our earnings (federal, state, local). If I were to work part-time, I would most likely not make more than $10,000 per year. Just wondering if this is even worth it considering the high tax rate. It’s a catch-22. It would be nice to earn some income and do some freelance projects but if most of my income goes to the government, would it be a better use of time to do more volunteer work? Just curious what others in this position do? It’s a difficult topic to discuss with family and friends who aren’t in these high tax brackets.
My spouse does lots of volunteer work for just this reason.
I agree – who is there to talk to about these sorts of things. Our kids are younger and I’ll jump back into the workforce when they are in school m-f.
What to do? In my opinion, it’s got to be a self-employed role. Flexibility and the tax deductions can shield a modest amount of the income coming in. For instance, all of your internet, cell phone bills, it expenses, etc, can cover a good slice of 10k.
Also, you could dabble with real estate – which is what I do now. By utilizing intelligent tax planning, self directed IRAs, paper loss deductions (depreciation or better yet cost segregation depreciation) you have an opportunity to at least increase your net yield from your efforts.
For me, if making 10k a year working for someone else, the net result of that would make me look to volunteer for a cause on my own terms.
Good luck!
Great post. I’m an engineer with an MS1 fiancee. We’ll be getting married this summer so we’re going to get a huge tax bonus since marginal tax rate will be 15% on only my income. After all deductions I’ll probably only be around 40-50k AGI so I might even roll over an old 401k to a roth to get me up to $73,800 – still working out the details.
But in 6-8 years when she starts making a lot my salary will obviously be marginalized. I’m planning on moving to a small business model like you mention but I never thought about just dropping all the income into a 401k, that is a brilliant idea so thanks. Will check out the blog.
Given your soon to be very high income, be sure to be doing as much Roth contributions and conversions as you can while she is in med school and residency.
One thought to share: there are financial costs and personal costs. If your non-medical spouse does not want to work outside the home once his/her salary would not “be worth it” for financial reasons, that’s great. However, my FIL (a physician) did not want my MIL to ever work, either, explaining to her that she just wouldn’t make enough. She is a nurse. She ended up feeling very worthless–like a hanger-on to her husband’s career and ambitions. She liked nursing and feeling purposeful by nursing. His unbendingly financial analysis of their lives (and, her value) made her feel that her talents were unimportant (or, at least, comparatively valueless).
All this to say: an unhappy, depressed spouse is not a good financial investment. Supporting your spouse in their professional aspirations–even if the spouse working is not the most financial savvy strategy–is still a lot cheaper that divorce. I would encourage couples to talk honestly about this before getting married, and certainly on an ongoing basis. Staying at home is great, if that is what you want to do and it is a truly joint decision.
My husband is an academic attending in a surgical subspecialty. He wisely learned from his father, and has repeatedly encouraged me to whatever I want in terms of work–he’ll support my decision. I work outside the home, although a job that is very flexible (we have several kids) so that I am home a lot. However, I make enough to make my working “worth it” financially. But he would support my decision even if I was making half the salary, if I wanted to do it and it was important to me.
Good points. Although this site obviously focuses on financial aspects of life decisions, the most important aspects of major decisions usually aren’t financial.