Nowadays, it’s pretty difficult to define what a “traditional” family unit looks like – they literally come in all shapes and sizes. For decades the number of single-parent households has been rising worldwide, with the U.S. having the highest rate of children living in single-parent households.
Economic well-being for these households can often be challenging, since the family’s needs fall on the shoulders of only one person. Often, single parents may feel overwhelmed when it comes to paying expenses and managing debt. Even though budgets may feel stretched, financial planning can help single parents more effectively manage their many responsibilities (raising children, handling money, building financial security, and much more).
Here are some things that single parents must diligently address if they hope to achieve financial security:
#1: Create and follow a family budget. A budget is an essential tool to understand where your money is going. Determine your monthly income and expenses (on paper, in a spreadsheet, or in a financial app) by subtracting your total expenses from your income. Be sure to include:
#2: Look for extra money. Once you have a budget, determine if you have extra money left over at the end of each month. If so, use it to fund an emergency fund, pay down debt, or invest for your future. If you live paycheck to paycheck, now may be the time to ask for a raise or look for a new, higher-paying job.
#3: Purchase life insurance. Life insurance is one way to protect your family from financial hardship if you die prematurely. To determine how much life insurance death benefit you should have, factor in the cost of caring for your children each month and their cost after you are gone each year until age 21. There are several types of life insurance to consider, such as term, guaranteed, or indexed universal. Give us a call do discuss, and we can help you find insurance that meets your unique needs and budget.
#4: Understand the expanded child tax credits-.The American Rescue Plan increased the child tax credit to $3,000 for families with kids ages 17 and under for 2021, with an extra $600 for children under age 6. To qualify for the full credit, single filers need a modified adjusted gross income of less than $75,000. Consult your tax professional to determine if you are eligible for this tax credit before filing your 2021 taxes.
#5: Eliminate debt and control credit card use. Interest rates and fees can negatively impact your finances, especially if you're working toward a secure financial future. High-interest rates cost you more, so work toward paying higher interest rate debts first, negotiating a lower interest rate, refinance, or finding a new lender to consolidate debt at a lower interest rate and transfer balances.
#6: Save for retirement. Saving for retirement through participation in your employer's retirement savings plan is essential. Ensure you are saving enough to receive your employer's match and automatically increase your contributions each year through automation. You may want to consider contributing to a Roth IRA with after-tax dollars and work towards maximizing your contributions.
#7: Build essential legal documents. Generally, a will determines who will care for your children if you die, an estate plan details now your assets will be distributed to beneficiaries, and a power of attorney document gives someone the legal right to make decisions on your behalf while you are still living. Work with a legal professional to determine which legal documents are necessary for your situation to help ensure your children are cared for in the manner you prefer.
Being a single parent can be rewarding and challenging, especially when managing finances independently. By building financial security for yourself and your family, you can more easily address financial shortfalls and plan for a more comfortable future.
Give us a call if you have questions or would like to review your situation. As always, we’re here as your trusted resource.
Courtesy of Fresh Finance.
Financial Planning Tips for Single Parents
August 15, 2022