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How to Save Your Second Income

by Coeli Carr

Two-income households are more prevalent than ever before, but many couples haven't been successful at using that second paycheck to achieve financial security. Regardless of their combined income level, the ability to save is within reach of most couples, say financial planners. The best way to build savings is to create a budget that addresses current and future financial obligations, and stick to it.

Take Greg and Aliza Sherman Risdahl, for example.The couple have two goals they want to save for: a family and a new house. The Sherman Risdahls recently moved to Anchorage, Alaska, where Greg took a government job as a wildlife biologist and Aliza is pursuing her career as an independent multimedia producer and teacher. Married one year, the couple would like to buy a house in the $175,000 to $200,000 range. Their biggest challenge is eliminating roughly $20,000 in debt, most of which was incurred after purchasing equipment for Aliza's business. Once they are debt-free, they plan to start saving for a down payment.

Prioritizing Expenses

Molly Balunek, a certified financial planner in Cleveland,was brought in to help the couple achieve their goals. Her advice: Live off Greg's salary and use half of Aliza's salary to eliminate their debt. If they stick to the plan, Balunek says, they'll be debt-free within a year.

By saving the other half of Aliza's income, they will also be able to amass enough money for a 10% down payment on a house within a year, she adds.Then, when Greg becomes eligible for a retirement plan at work, the couple — with their debts paid off and a down payment secured — could start to save for retirement by contributing to his plan.

Balunek explains that understanding cash flow is an important component of saving, because it helps people figure out the expenses they can eliminate in order to free up money.

Because the Sherman Risdahls are in their forties,"they don't really have time on their side for saving for retirement," says Balunek. She advises the couple not to concentrate on putting money aside for their future child's education because down the road they can apply for a loan. Saving for retirement will be more challenging, so that should be their focus.They should refrain from making any more equipment purchases for Aliza's business.

In addition, Balunek says, the couple should buy a modest home that meets their current needs."Make do with a less expensive house," she advises."And then furnish it very simply." She suggests they buy a home that is in move-in condition because fixer-uppers take time and money to repair. As soon as the Sherman Risdahls are free of debt, Balunek says, they can re-evaluate their long-term savings goals. She believes their income is high enough to enable them to make quick progress.

How Much Do You Need to Save?

Sometimes even two-income couples who own their homes and have no debt are concerned that they aren't saving enough for the future. Mary Anne and Doug Kusiak, of Stormville,New York,would love to buy a vacation home near the ocean, but they aren't sure they can afford one. Doug is a captain in the community's municipal fire department and Mary Anne is a self-employed publicist."How much money is enough to live on, and what do you really need to save?" asks Mary Anne.

That question is on the minds of many couples. Financial experts say that each situation requires a unique approach. John Sestina, a certified financial planner in Columbus, Ohio, says that the Kusiaks need to create a budget to give them a clearer picture of where their money goes each month and what they'll need to achieve their goals for the future.

Sestina says one of the biggest mistakes made by couples with two healthy salaries is spending all of their income. He advises the Kusiaks to live on one salary — Mary Anne's in this case, which is the lesser amount — and to use Doug's income to meet their financial goals.

"There is no magic elixir for budgeting," adds Balunek."It takes hard work and discipline to save." Even with two healthy incomes.

Adapted from Today's Focus, Fall, 2005.

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