[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!