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Are Two Incomes Better Than One

In today’s economy, many families have come to rely on two incomes to make ends meet. While this trend may be due to the difficulty of achieving an acceptable standard of living on a single income, it also occurs when both spouses wish to pursue careers. Regardless of the reason, the actual benefit of two incomes may not be equivalent to the dollars earned. How can you determine the true economic benefit of that second income?

A cost-benefit analysis can help you find the answer. This type of analysis compares the marginal income of the second earner with the marginal costs associated with his or her job. By definition, marginal income and expenses are the additional income and expenses that would be eliminated if the second earner stopped working. The worksheet below can help you run the numbers. Perform your own analysis in the column on the right.

Is that second income worth the expense? It all depends. For some people, the net benefit of working may be necessary to maintain their family finances. For others, the additional benefits may not outweigh the additional costs. When looking at the figures below, the gross benefit per hour of $21.39 may make that second income seem worthwhile. However, when the net benefit per hour is only $8.67, you may question whether that second income is really worth it.

Bear in mind that a hidden cost of an additional income is the possibility of being pushed into a higher tax bracket. Further, certain itemized deductions are subject to floor amounts, which means families with higher incomes may not be able to take advantage of these opportunities. Thus, when performing a cost-benefit analysis, it’s important to do a thorough tax projection.

Finally, reducing work to its financial aspects alone may discount important, nontangible benefits. Some people prefer to develop their skills or value feeling fulfilled at their job. Nevertheless, an understanding of the cost/benefit trade-offs is important and can help determine if that second income is worth the expense.

Written and published by Liberty Publishing, Inc.

Posted on 31 August '11 by gedwards, under Financial planning.