7 Steps Single Parents Can Take To Maximize Their Money
As a new parent, it’s normal to feel both overjoyed and overwhelmed. And especially if you’re also newly single, finances can compound your worries. Fortunately with a game plan in place, money matters will be manageable — and you’ll feel much more in control. Here are seven financial planning steps single parents can take to maximize their money and have financial security.
Step 1: Make a family budget
Let’s face it: It’s rarely easy for anyone to stick to a budget, since we're all focused on getting through today. But think about what you’d like your life to look like — whether that includes a better home, freedom from debt or family vacations. Sticking to a family budget is easier with a goal in mind.
- Crunch the numbers. Figure out your monthly income, including any child support you receive, and tally your fixed monthly expenses. A good plan for most is a 50/30/20 budget: 50 percent of your income goes to housing, set bills and food; 30 percent for extras (gifts, vacations, clothes); and 20 percent goes to savings and paying off debts. And be realistic about the food total: It’s a rare mom of young kids who doesn’t rely to some extent on takeout or prepared foods.
- Lay it all out. An Excel spreadsheet is an easy-to-read option to keep a running tally of expenses. You can also try a special budgeting program, like You Need A Budget.
- Go old school. Many moms swear by a hands-on method: putting cash into envelopes, each representing a different category (supermarket, gas, etc.). Having to touch the money can reduce the urge to spend.
- Try the buddy system. Know someone — a neighbor, coworker or mom pal — who always seems to have her money act together? Ask if she’ll “coach” you. Being accountable to someone you respect and like can help keep you on track.
Step 2: Know the tax benefits for single parents
It’s smart to be aware of all the tax benefits you’re entitled to as a single parent. Make sure to investigate the following. (TIP: A credit is directly subtracted from the amount you owe in taxes, while an exemption is deducted from the total income the amount you owe is based on.)
- File as “Head of Household” instead of “Single.” You’ll probably be able to get a higher standard deduction — though there are a few requirements (including being unmarried on the last day of the previous year).
- The Dependent Exemption. If you share equal custody with your child’s father, only one of you can claim this. Avoid IRS woes by deciding who it will be in advance.
- The Earned Income Tax Credit. Single working parents with low to moderate incomes often qualify.
- The Child and Dependent Care Credit. If you’ve been paying for childcare so that you can work (or look for work), you’re likely entitled.
- The Child Tax Credit. If you qualify, you can get up to $2,000 per child.
- The Adoption Credit. This is intended to offset the expenses of adopting a child.
Step 3: Get a safety net in place
Parents need to be especially prepared for life’s ups and downs — and that’s where insurance comes in. Prioritize coverage in this order:
1. Health insurance
Uncovered medical expenses will put your financial security progress on hold (and can even send you into bankruptcy) faster than anything else. If you don’t have health insurance already, getting it for you and your child is imperative.
If your employer offers coverage, get signed up now. If not, comparison-shop for policies at your state's online Affordable Care Act Marketplace or at HealthCare.gov. (While pregnancy is not a “qualifying event,” the birth of a child is — which will allow you to join your employer’s plan or the marketplace even if you opted out in the past.) You can also find a reliable broker to do the legwork for you (check out the National Association of Health Underwriters for more information about brokers).
Remember, single parents can pare down medical costs by taking advantage of community and state-based programs that provide checkups and low-cost immunizations for minor children. Look for those through your state, county or town’s department of health and human services.
2. Life insurance
While no one likes to think about the worst-case scenario, life insurance is important to ensure your kids are financially taken care of if you aren’t there. Before you shop around, check your benefits through your employer (some companies offer life insurance to employees at affordable rates — just remember that the policy almost always goes away when you leave that company). If not, start the process by figuring out how much you need. The traditional rule of thumb is to buy 10 times your annual income in life insurance. While that may sound like an awful lot, remember that the point is to replace your lost income for years to come — at least to see your child through high school, if not college.
A term life insurance policy is most economical. It’s a simple death benefit (unlike whole life, which is more expensive). Shorter term policies (five years vs. 10 or 20) cost less, but keep in mind that if your health has changed when you renew in five years, your rates jack up.
If your child’s other parent has life insurance and has listed your child as the beneficiary, it can be tempting to rely on that. The trouble is that if he or she stops making the premium payments and the policy lapses, you won’t know. So if you’re getting divorced and you’re the custodial parent, check with your lawyer if it’s still possible to negotiate a provision into your divorce settlement that allows you to be the owner of that policy even though your former partner pays the premiums. That way you’ll be notified of any lapse.
3. Disability insurance
While not as critical as health and life insurance, it’s also important as a single parent, since you won’t have a partner’s second income to tide you over if you’re unable to work. Disability policies are offered in short- or long-term. If you have to choose, go with short. It’s less expensive, and most disabilities last weeks or months, not years. This is another benefit that many big companies offer employees; if not, a life insurance broker can also set you up with disability insurance.
Step 4: Don’t forget estate planning
Don’t let the term fool you: You don’t need to have a mansion full of valuables to need estate planning. Essentially, it means making sure your wishes are carried out after you’re gone. And everyone needs to do that, especially single parents. So if you didn’t have a will before, get one now. If you do already have a will, revise it with an attorney to designate guardians (ideally, the same age or a little younger than you) for your children. While you’re at the attorney’s office, pick an executor (the person who will put it into action) — someone you trust who’s savvy with money and organized. While you’re at it, update beneficiary designations on retirement or any other accounts you have.
Step 5: Start saving
If it’s at all feasible, start socking money away — especially if you haven’t in the past. If you don’t, it will be much harder to have financial security and carve out the life you and your child deserve.
Start with an emergency fund: Expensive problems you can’t plan for happen all the time (like squeaky brakes or a broken refrigerator) that can crash your budget before you get started. Putting $1,000 in a separate checking account is a preemptive strike. The hard part is getting it fast, which is key. If you take months to get this fund in place, the purpose is defeated. Funnel in any extra money you can find. Take the jug of change to the bank, go through the attic to find stuff to sell, cash in that old savings bond. Your goal is to build a full emergency fund of three to six months’ worth of expenses. While it seems like a big challenge, it’s so worth it. You’re protecting yourself against having to sell a car to replace an oil burner, or slipping into foreclosure after a layoff. You'll never be in debt again — no matter what comes your way.
Step 6: Get credit cards under control
Speaking of debt, many of us are in a catch-22 with credit cards: Can’t live with them, can’t live without them. But credit cards charge hefty interest rates and fees, which only adds to your bottom-line debt. Breaking the habit of relying on them is the only way to get your finances in order for good.
If you don’t yet have your emergency fund and are in a jam, try to find another option. Ask your human resources department at work if they offer employees loans paid back through paycheck withdrawals — some larger companies do, at no interest. Depending on your personal circumstances, taking a loan from a close relative may be worth considering. If using a credit card is unavoidable, at least be sure the card you’re using is giving you the very best terms you can get. You can compare card rates, fees and terms at Bankrate.com.
If you’re already in over your head with credit card debt, get help from an organization such as the National Foundation for Credit Counseling, which offers free or low-cost help from certified counselors.
Step 7: Be ready for the future
Once you've mastered your day-to-day finances, look toward your two big long-term financial security goals: retirement and your child’s college education.
In the likely event you can’t comfortably save for both at the same time, start with retirement. Why? If worse comes to worse, your child can get loans to fund school — but there’s no such thing as a retirement loan. Start by contributing to any employer-sponsored 401K plan. If your employer is matching contributions, chip in at least enough to get the match (otherwise you’re turning away free money!). Or you can set up an IRA; even $50 a month at first is a start.
When you’re in the habit of regularly contributing to a retirement savings account, turn your attention to college: An ESA (education savings account) and a 529 college savings fund both let you save towards college expenses while getting a tax break.