Future Focus: Dual income, no wealth, how do you build for the future?
Many dual income households are treading water. Here’s how to supercharge your financial security and wealth creation.
My husband and I get a housesitter when we go on holiday to look after our dog Priscilla. It makes us more comfortable to meet them instead of having a stranger show up the morning we leave for a trip. We met Sandra last week, who has a daughter about my age.
Her daughter is a teacher who lives out of home. Sandra explains that she is a great saver but often finds that she feels it isn’t ‘enough’. She can afford the necessities but struggles to save for her future. Sandra’s advice is, ‘well, this’ll be solved when you get a partner.’
Sandra isn’t wrong on the maths. Being in a couple makes things easier financially. Unfortunately, two decent incomes does not magically equal financial security. It is not the silver bullet that Sandra, or her daughter, are looking for.
In Morgan Housel’s book Same As Ever he speaks to how many in the US are nostalgic for the 1950s. They’re yearning for a time when a single-income household was able to provide a good work life balance, two decent cars and a nice lifestyle for a household of two adults and three children. I’ve heard these thoughts echoed by Aussies as well. Where did this balance go? Why is a comfortable life so difficult now?
ABS data shows that the average household income in Australia exceeds $130,000. Yet, financial stress is rising. A study from the Australian National University shows that financial stress is higher than before - or even during - the Covid pandemic, with 34% saying it is difficult to manage on their current income.
We’re seeing a move from a single income household becoming unable to meet financial obligations, to dual income households barely treading water. How do households with dual incomes shift from surviving to building for their future?
Here are a few factors to consider, and importantly a few shifts in perspective and discipline to create the life you want.
Comfort
Sometimes we are too comfortable for our own good. The decade following the Great Depression in the 1930s was one of the most productive in history. Although hours did not increase, productivity increased by almost 40%. There is something to be said about being uncomfortable and driven to improve your prospects.
One of the biggest challenges for dual income households is that it’s easy to get comfortable. Being able to meet all your obligations with the cashflow coming in from two incomes can often make you fall into the trap of treading water.
This is especially true in a situation where you’re able to spend, treat yourself every now and again to simple comforts and not feel the stress of debt or loan obligations. You might even be saving. But there is no strategy behind the efforts, and there’s limited visibility about where you’re going and how you’re going to achieve it. You might have no understanding of what your retirement will look like with your current saving rates. You might decide you want to retire early without knowing what that would take financially. You might not even be saving enough to have an adequate emergency fund – a topic I’ll turn to shortly.
The opportunity cost of not properly planning and harnessing your high earning years is significant. This is particularly important if you are looking to start a family and may be entering periods where you will become a single income household for a short or extended period.
You are unlikely to achieve your financial goals if you are on autopilot. The best path forward may be confronting but it is better than just drifting along.
Next steps
- Review one year of annual expenses for the household. One year may seem like overkill, but it includes one-off costs such as home insurance, car rego, annual or quarterly subscriptions.
- Put together a budget that is realistic but captures your current savings rate. As part of the review of your annual expenses, you may have found places where you believe you can be more efficient. Part of understanding progress is measuring it at set intervals. In a year, you’ll be able to measure your progress and understand whether you have been able to maintain (or grow) your savings rate.
- Guard against lifestyle creep. Two incomes can often mean more freedom with lifestyle, with more disposable household income. The point of life is to enjoy it, but clear boundaries and goals can help with allowing current enjoyment and contributing to future financial security. As you get payrises, bonuses or tax returns, it is easy to direct these funds to discretionary activities without thinking. Have an agreed plan for what to do with these increases in cashflow, including directing a percentage of this to improving the household’s financial position.
Emergency fund for peace of mind
Research from Morningstar’s behavioural research team looks into how to achieve financial wellness.
They’ve found that objective realities like income and total wealth contribute to financial wellbeing, but not as much as one would think.
Financial wellbeing is split into two categories. Each category is a critical component of overall financial wellness. The first is objective, and the most obvious. It is the ability to meet current and future financial needs.
The second is a little more nuanced. It is the subjective feelings of being financially secure and being able to enjoy your life. This feeling will vary from person to person and will require different levels of the ‘objective’ goal to be achieved. For example, one person may feel financially secure holding six months of emergency savings. Another person might still think this is not enough and want at least two years of emergency savings in the bank to have peace of mind.
This feeling of financial security is important as financial stress impacts many of us. It is a key determinant of our emotional wellbeing. According to the Australian Psychological Society, the number one source of stress for Australians is money. One of the leading causes of divorce is disagreements about money. It permeates into every part of your life and impacts your overall happiness.
The study examines a particular relationship that can help people feel more financially secure. They look at how current subjective financial wellness relates to emergency savings behaviour.
Emergency funds protect individuals against financial shocks. An emergency fund is fundamental to financial wellness and supports good investing behaviour. Despite this, the study finds that many people struggle to build an emergency fund.
Building up an adequate emergency fund can give people the confidence that they need to feel more capable and comfortable planning for the future. This can start the positive feedback loop that builds to financial wellness.
In the study, only 41% of people had a fully funded emergency fund. Adding to this, those who did not have fully funded emergency fund had made very little progress towards building one. Most had not reached half their target, and 25% had no emergency savings at all.
The likelihood of having fully funded emergency fund was linked to both objective and subjective financial wellness—those who felt dissatisfied with their finances were less likely to have good emergency-savings behaviour. The effect was larger when a person had lower amounts of investable assets.
However, subjective financial wellness was not always achieved, even by those with the highest investable asset base (more than $349,000 USD). They reported feeling financially dissatisfied. 30% of them failed to reach emergency-savings adequacy.
Emergency savings are critical for financial wellness – both objective and subjective. It is easy for individuals to ignore, but it is so critical that it impacts overall wellbeing. Achieving adequate emergency savings can also create a ripple effect with the feedback loop that our researchers mentioned, allowing you to have the dopamine hit that reinforces good behaviour.
Financial wellbeing isn’t just about how much you earn or how much you have in investable assets. Part of financial wellbeing is subjective. It is easy for investors to follow industry standards such as ‘3-6 months of expenses’, but this is only a rule of thumb.
We reiterate over and over again that personal finance is just that – it is personal. Objectively, 3-6 months of emergency funds may be enough, but does it give you the peace of mind that you need? This will depend on you, your circumstances and your prior experiences.
Even some of our wealthiest participants (those with more than $349k in investable assets) reported feeling dissatisfied with their finances. This echoes previous research that finds objective financial wellness metrics, like income and wealth, are only part of what leads to feelings of financial wellness and are not the whole story.
Next steps
- Think about yourselves from two perspectives – as an individual and a household. An emergency fund is important because it is a form of self-insurance. Relationships are not bulletproof and you must prepare for all potential future circumstances. I am a very strong advocate for having an emergency fund per person. My fund is separate from my husband’s. Ensure that you have enough in your emergency fund to give yourself peace of mind if you needed to access it individually, but also enough in both of your emergency funds collectively for the household.
No way to measure progress
The easiest way to drift away from financial wellness is to not have a plan to steer yourself towards it. Without an agreed upon plan, it is hard to coordinate financial decisions as a household.
It is an involved process to create a financial plan and investment strategy. But, once you have it, you will have a clear reference point for the decisions that you make and how to measure your progress going forward. It will ensure that you are making decisions in the best interests of your future selves.
Next steps
Know your goals, individually and as a household
Understand what your financial goals are, both individually and as a household. Not all financial goals have to be household goals. I have goals that are separate from my husband’s. Here is a great, research-backed framework to understand what your goals are.
Create an investment strategy to meet these goals
Create a detailed plan that outlines how you’re going to reach your goals, with what type of securities you will include and importantly, what you’re not including. Use the budget that you’ve created to understand your surplus and what is sustainable for you.
Here is a podcast episode that outlines how to do it yourself.
Measure your progress
You’ve got to steer the ship. Set aside time for a half-yearly or yearly review to ensure you are on track to meet your goals. I’ve written an article on how to conduct a portfolio review, and another on the metrics you should use to measure your wealth creation.
Final thoughts
Your goals for your life may look different from the 1950s. You might not want the house, two cars and three kids. Whatever you want out of life, an important step to get there is having a plan and understanding where ‘there’ is. Not having a plan means that progress isn’t measurable.
Part of having strong foundations and not feeling like you’re treading water is an emergency fund. The research shows that it improves financial wellness and peace of mind, and can be the jumping off point for supercharging other goals. I’ve written more on how it can enable you to reach further financial goals here.
Lastly, regardless of whether it is more difficult to achieve financial goals as a dual income household in today’s environment, one thing has remained timeless. For almost all of us, creating a better life for ourselves and moving towards financial independence has always involved sacrifice. Sacrifice with time, effort and opportunity cost for funds. When you know what the end goal is, it makes this sacrifice a lot more palatable.
Invest Your Way
For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.
We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.
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