Tuesday, December 8, 2009


Note: The details of the following example are combined from a number of different people and do not represent any one particular individual

A friend of mine is married. Her husband has a pretty high paying job, making $150,000 a year, enough for them to live on.

The conundrum for her is this: Should she get a part-time job now that their child is in school? She can make $20,000 a year working part time and still be able to see the kid off to school and pick him up afterwords - working on a few hours a day, three days a week.

Her friends tell her "don't bother - the additional amount of money you'll make really won't make much of a difference, after taxes and all".

Such a summary view of finances doesn't necessarily address the whole situation, however. When looking at a part-time job or additional income, you have to look to see how it affects your disposable income, not your overall, before-tax income.

Let assume our couple is presently making $150,000 a year. They pay approximately 35% of that in Federal and State income taxes, or about $52,500 a year. Their mortgage payment is $3500 a month, or another $42,000 a year, leaving a balance of $55,500 a year. Their car payment of $350 a month comes for $4200 a year (their other car is wisely paid for) and their other miscellaneous expenses (utilities, etc. ) comes to $6600 a year. So out of $150,000, they end up with $44,200 a year. They try to put $20,000 a year into their 401(k) plan, so they end up with an effective "disposable" income of $22,200 a year, or about $1850 a month.

That money is used to buy groceries, clothes for the kids, the occasional meal out. It is not a lot of money, and they have to stretch a lot to make ends meet. Like many middle class and upper middle class Americans, they are puzzled as to why, after making so much money, they still have to scrimp and save.

Now, if we look at our friend's part-time job proposal, we see that yes, $20,000 a year doesn't look like much compared to her husband's $150,000 a year salary. It is a mere pittance!

But compared to the couple's disposable income, it is a sizable chunk.

Even if we assume that 35% of this is taken in Federal and State taxes, that leave $13,000 on the table.

If added to the couple's existing disposable income, we can see that it increases their disposable income by nearly 60% ! That leaves money left over to invest or to save - and to build more real wealth, rather than just spend it.

Suddenly the blase comments of her jaded housewife friends make a lot less sense (they would rather see her stay at home and have cocktails with them, of course).

Now you can play with and tweak these numbers all you want. But you'll still come to the same or a similar conclusion, namely that a small increase in overall income can mean a big increase in disposable income. The idea that a small part-time job doesn't add anything to the bottom line really isn't true.

Now there are a couple of caveats in this picture, of course.

If you have been awake and alert and reading some of my blog entries, you might look at their finances and say "Well, gee, they could also increase disposable income by spending less - living in a more affordable home, for starters, or spending less money on utilities, like cell phones and cable TV."

And you'd be right. Cutting expenses and keeping overhead low is the first step toward building real wealth. Making more and more money does not make one wealthy - making more and more money while maintaining the same low-cost standard of living allows you to accumulate wealth, and once you start accumulating it, it snowballs into larger and larger sums.

And therein lies the conundrum of the part-time working spouse. In many scenarios, when the spouse takes a second job, the temptation is to increase spending and as a result have no additional disposable income or money to invest. For example, after a hard day at work, the couple says "Oh, we're too tired to cook, let's send out for a Pizza". And $20 later, they have barely a meal to show for it, when that same amount could have bought food for several meals - if prepared at home.

Similarly, a second job might not make any sense if you have to drive long distances to get there. In addition to the fuel costs, the additional wear and tear on your car will mean you will have to buy a new one sooner.

But overall, if you play it right, that part-time job can be a major influx of usable cash, making the financial burden much easier for a couple, and allowing them to get ahead of bills and set money aside. Don't compare gross salaries when considering such a job - consider the effect on your net disposable income - chances are, you might end up way ahead.

Note that a similar mathematical analysis is also true for those on Social Security. Years ago, Social Security benefits were untaxed. Today, they are taxed, and once you start earning a certain level of income, your taxes will go up. Many Seniors tell me that that won't look for work, or if they do work, try to keep their income low (by working less) so their taxes won't go up.

Again, I think when you do the math here, you have to look at the overall effect on how the additional income from work affects your disposable income, not just your gross income or even income after taxes.