Financial Planning for Single Parents
October 18, 2017 by David Bojanic, CPA
Managing a family and a household while holding down a job is enough to keep any single parent busy. When you are taking your children to day care, driving them to other activities and helping with homework, it’s difficult to think about financial planning. But financial planning is essential if you want a secure future for you and your family.
Here are some steps that single parents can take to get started on the road to financial security:
Set Goals
Since it can be difficult to address all of your financial needs at one time, you should prioritize. Determine what’s most important by writing down your short- and long-term goals and create a plan to achieve them. Calculate your income and track your spending for three months in preparation for creating a budget that will help you meet your goals.
Establish a Cash Reserve
Everyone should have an emergency cash fund, but it’s especially important for single parents who don’t have a spouse’s income to fall back on. Most CPAs agree that your emergency cash fund should be equal to six months of income.
Start a College Fund for Each Child
The earlier you begin to save for your children’s college expenses, the more time that money can grow. State-sponsored 529 college savings plans, also known as qualified tuition plans, grow tax-free and are a great way to save money for future higher education costs. If you are divorced, work with your former spouse to determine how much each of you can deposit and how often.
Buy Life Insurance
Having the right type and amount of life insurance can give you peace of mind knowing that your children’s financial future will be secure. Life insurance is a necessity for anyone with dependent children, but the amount of life insurance you need depends on the number and ages of your children, your income level, debt level, and the value of your assets. A good guideline is to buy coverage at six to eight times your annual salary. In general, term life insurance, which is less expensive than permanent or cash value life insurance, is your best choice. Learn more about life insurance at the Michigan Department of Insurance and Financial Services.
Consider Disability Insurance
What if you were injured or became seriously ill? Would you be able to pay your monthly bills? Many single parents overlook the importance of having disability insurance to protect their income in the event of injury or illness. You may be able to pick up extra coverage at a better rate through your insurance coverage at work. Check with your employer before signing up on your own.
Plan for Retirement
As a single parent, it may be difficult to save for both your retirement and your children’s education, but it’s important not to ignore your retirement needs; while student loans are available to pay for college tuition, there’s no such thing as a retirement loan. Take advantage of your company’s 401(k) plan, particularly if your employer matches your contribution. And don’t invest too conservatively — you need growth-oriented investments to achieve your goal.
Write a Will
No matter what your age, it is vital that you have a will to provide for your children in case something happens. Your will names who will inherit your real estate, personal property, bank accounts, and investments, and identifies who will serve as guardians for your children. You should also consult with an attorney about setting up a living will and a durable power of attorney. A living will expresses your wishes if you become terminally ill or incapacitated, and a durable power of attorney empowers someone you trust to carry out your wishes. For more information about wills and how to create one, check out the publication Planning for Your Peace of Mind-A Guide to Medical and Legal Decisions.
Meet with an Advisor
There are a number of tax breaks you may be eligible for as a single parent, such as filing as head of household. Your CPA can help you identify other ways to cut your tax bill and make the most of what you earn.
