Have You Created Income Flexibility for Your Family?

A common scenario that we see with our clients looks like this: they are mid-career or late-career and have climbed the ladder to a high income. They are compensated well for their skill set and experience, and feel like they have “reached the top”. However, the pace is exhausting. Often they are expected to work unsustainable hours or travel frequently. They may see themselves working at this level for another 5-10 years, or they need to take a step down to a lower income level in order to create a healthy work/life balance. They come to us with the question: can I afford to earn a lower salary?

The answer will depend on many different factors, but the biggest obstacle will be your family’s annual cash flow. If you are spending all of your net paycheck, it will be difficult to learn to live on a lower salary. On the contrast, if you are saving a large amount of your income, it will be much easier to adjust to a lower salary. This is due to “income flexibility”, which is the ease of living on various income levels as life adjusts over time.                                                                                            

The best time to create “income flexibility” is at the very beginning of your career. As your income increases over the course of your career, watch for “lifestyle creep”, which is increasing your spending to match your pay raises. For example, if your household income grows to $250,000/year for the household, we suggest creating a life that depends on an income $150,000/year and save the difference. This will give a great deal of flexibility later on, when an income earner is burned out and needs to take a step back, if a family member requires full-time care, if a start-up business opportunity arises, or if one person decides to leave the workforce altogether and the family depends on a single-earner. By creating “income flexibility”, you will have the opportunity to entertain a variety of income options later on. However, if the family has experienced “lifestyle creep” and depends on an income of $250,000/year to meet their annual expenditures, there is little to no flexibility.

Every personal situation looks different but creating a level of income flexibility in your household will give you much more breathing room when you might need it down the road. Life is much too short to spin on an unhealthy hamster wheel.

Julie Fletcher McDaniel, CFP®, has been in the financial services industry since 2006.  She is a co-founder of IMPACTfolio, a wealth management firm that specializes in IMPACT investing and holistic financial planning for one flat-fee.