Single-Income Households — Where the Buffer Comes First

Because there is no second income to fall back on, and because finding new work takes time.

A two-earner household that loses one income drops to a reduced budget. A single-income household that loses its income drops to nothing coming in, and every expense continues. That is a different kind of gap and it needs a bigger cushion.

Our page on building an emergency fund covers where to keep it and how to size it, and our comparison of arbitrage and liquid funds covers where money that is waiting can sit. The version we suggest here is at the longer end of the usual range, and built before any large monthly investing begins.

The most common mistake is an instalment set from a good month.

A single income has the same variability as any other, and more consequence attached. School fees fall due, a repair arrives, a family obligation appears. An instalment sized to a month where nothing happened will fail in a month where something does.

The figure we suggest is one the household could pay in an ordinary difficult month without borrowing. Our page on how much to invest covers arriving at it, and our page on the step-up SIP covers raising it as income grows, which is where the amount should come from rather than optimism.

Three things, in order.

The buffer, in the bank or at the very short end, reachable the same day.

Protection for the household if the earner cannot work. We are a mutual fund distributor and do not deal in that, so it belongs with a qualified professional in that field. We simply say it should be settled before a large investing plan, because everything here depends on one person capacity to earn.

Expensive borrowing cleared, since carrying it while investing usually leaves the household worse off, as our post on SIP or prepay the loan sets out.

This is the part that gets skipped, and the one that causes the most difficulty later.

In many single-income households one person earns, manages the money and holds the details. If something happens to that person, the other adult is left needing information they never had: which folios exist, at which fund houses, with which nominee, and who to contact.

A written list, updated once a year, fixes it. Our page on nomination covers recording the nominee, and our post on transferring holdings after a death describes what a family actually goes through when the list does not exist.

Our page on investing as a homemaker covers the other side of this, where the non-earning partner runs the household finances in practice.

Not for tax reasons, and not as a precaution against the marriage. For independence and for practicality.

A non-earning partner with a folio in their own name, a completed KYC and a bank account they operate is in a far better position if they later need to act alone. Our page on KYC covers completing it once.

It also makes a return to earning easier. Many homemakers eventually take up work or a small business, and having their own arrangement already open removes a step, which our page on investing as a working woman discusses.

It happens, and there is an order that works.

Use the buffer first, which is what it is for. Reduce the instalments rather than stopping them, so the arrangement stays alive, as our page on types of SIP covers. Leave dated goal money alone. Redeem only if the buffer runs out, and redeem from the steadiest holding rather than whatever has fallen most.

What not to do is stop everything on day one out of caution. A household that stops all its instalments during a three-month gap frequently has not restarted them a year later, which our post on restarting a stopped SIP describes.

Once the buffer and the borrowing are handled, the split follows dates like anybody else.

Money needed within a few years belongs somewhere steady. Retirement and a child education, which are typically a long way off, can take equity movement. Our page on asset allocation covers the method and our page on equity versus debt funds covers the basic choice.

One more point specific to a single income. The household should know, roughly, how long the portfolio could support it if the income stopped altogether. Not as a plan, simply as a number somebody has looked at once. Households that know it make calmer decisions in a bad month than households that do not.

One adjustment worth making here: because the household has no second income, the temptation to raid long-term money is higher. A slightly larger buffer is usually a better defence than a more conservative portfolio.

• Build the larger buffer first, before a large monthly amount.
• Set an instalment that survives a bad month, and raise it with income.
• Settle protection and expensive borrowing with the right people.
• Write down what exists, and make sure both adults know.
• Keep something in the non-earning partner name.

We are happy to explain all of it to both of you together, and we prefer to. Get in touch if you want to work through the order for your household.