Parenthood comes with a lot of responsibility and that weight is amplified if you’re among the 23% of single parent homes in the U.S. As a single parent, managing your finances and getting to a point where you feel comfortable are important as you take care of yourself and your family. Though your budget may be smaller than those in two-income households, there are many things you can do now and going forward to set yourself up for success and protect your family’s future.
Set aside time to sit down and look over your finances including bank accounts, retirement accounts, mortgage or other loans, and credit cards. Go through your statements to see what you’re spending money on, if there are any expenses you can eliminate, and to confirm all the charges are expected. You may discover that you’re paying recurring subscription fees for apps or membership programs that you no longer need. This is also a great time to check if you have beneficiaries set up and make sure that it is only you who has access to your accounts and credit lines; for example, if you’ve divorced and had a joint checking account or credit card.
- Budget for the Expected and Save for the Unexpected
A budget is essential and can be the foundation for establishing a healthy relationship with your finances. To get started, determine your total monthly income and list out all your set expenses such as mortgage or rent, utilities, insurances, transportation, credit card or loan payments, etc. Next, consider your other regular expenses such as groceries, gas, and childcare. Do the math to figure out how much you’ll have leftover as discretionary funds, then decide what amount you need to put into savings (emergency fund or retirement account), and whatever remains can be used for other wants and needs like clothing, entertainment, and summer camps.
- Manage Debt and Set Financial Goals
When it comes to debt, most will agree that certain kinds of debt can be beneficial if managed properly. Mortgage and student loan debt is often the least expensive borrowing available, plus you’re building equity or furthering your education in the process. You always want to stay on top of consolidating debt and refinancing to lower the interest costs, but debt can also be used to finance large or unexpected purchases. Your net cash position will decrease if you pay these off, but you can maintain liquidity by keeping this cheaper debt outstanding, essentially allowing you to finance future expenditures with low-cost debt. A financial professional can help you determine the suitable debt ratio for your personal situation.
For credit cards and personal lines of credit, debt is usually expensive due to higher interest rates and paying it off is preferred. Experts recommend paying down your debt with the highest interest first, as it will save you the most money in the long run but, ultimately, you should choose the strategy that works best for you. It may be helpful to write down a list of your debts along with their interest rates to prioritize which you should focus on. If you’re feeling overwhelmed, consider the strategy of paying off your lowest balances first so they can be removed from your list. This may help motivate you to keep eliminating debt as you’ll see the results of your efforts quicker. Other suggestions for paying down debt include paying more than the minimum payment or making additional payments when you have extra cash available.
While you’re paying down debt, set financial goals to encourage you to look beyond where you’re at and have ambitions to work towards. This could be anything you want: buying a house, paying for your children’s college, going on a trip to see your family, or enrolling yourself in higher education or a certification program to further your career.
- Establish or Revise Estate Planning Documents
If you’ve already had your estate documents prepared, great work! If you haven’t, there’s no time like the present! Estate planning can feel like a grim topic, so it may be helpful to view these documents in a positive light as something to bring you peace of mind. They are your backup plan if something were to happen that rendered you unable to care for yourself and your family. There are a few basic documents you’ll want to have, and it’s good to review them every few years to confirm that they’re an accurate reflection of your wishes and needs.
First up is a durable power of attorney, sometimes called a financial power of attorney, which permits a person of your choosing to manage your finances if you’re unable. This person is called your agent, and you can decide what authorities they have. This could be anything from accessing your bank accounts and paying bills to collecting benefits and overseeing investments.
Next is an advanced health care directive, also called a living will, that states your preferences for medical treatment in a variety of end-of-life scenarios. Coinciding with this document is a health care power of attorney, which allows you to select someone you trust to make medical decisions for you, and a HIPAA Waiver to allow your medical information to be released to your loved ones.
Finally, you’ll want to have a will in place to ensure your assets are distributed according to your instructions if you were to pass and to nominate someone as your children’s guardian.
- Purchase Life Insurance or Review Existing Coverage
Piggybacking on the topic of estate planning is life insurance. Life insurance is very important, especially in a single parent household, because if something happens to you, it will help support your child’s ongoing care. It’s a safety net to provide for everyday expenses, college, and more. Even if you have already purchased a policy, you should regularly review your coverage to verify it’s adequate for your child’s needs. It’s recommended that the death benefit be at least ten to fifteen times your annual income, cover college expenses, and account for what it would cost to pay off any outstanding debt. Though your child won’t be responsible for your debts, co-signers are, and your property can be seized for any loans that weren’t cosigned.
When it comes to life insurance, you can either choose term or whole coverage. Both have pros and cons that are worth researching and discussing with an insurance professional when you shop around for policies. In general, “term” is more affordable, but it eventually expires, and “whole” is quite expensive as it’s more of an investment that never expires. When naming a beneficiary for the policy, keep in mind that minors can’t legally accept life insurance proceeds, so it’s preferred that you name their future guardian or a trust as the beneficiary to make sure the payout doesn’t end up contested in court.
Though this list may feel like more homework than your child already brings home, we hope it will help you feel more knowledgeable as you navigate finances as a single parent. Financial security is a crucial part of feeling secure and in control of your present and future. If you aren’t sure how to tackle one of the topics on this checklist, reach out to a trusted professional, such as a CERTIFIED FINANCIAL PLANNER™, with your questions.