Single parents often have a hard time juggling household finances and child care costs while living on one income. Moms have it even worse—according to data from the U.S. Census Bureau, the 2014 median income for single mothers is only $26,300, compared with $41,400 for single dads. Women also report feeling less equipped to manage their finances and make important decisions regarding money. As a single mom, you may have additional hurdles that others don’t have to face, but a little financial education can go a long way in boosting the confidence you need to provide for your family.
When it comes to investing, women are generally less sure of themselves than men: 78 percent say they lack the financial savvy to make retirement planning decisions. You don’t need a complicated investing strategy or a list of hot stocks to be a successful single mom investor. In fact, one might say the best approach is simplicity.
With these tips and your financial professional’s help, you can easily prepare a simple investing strategy:
- Determine your short- and long-term goals, how much money you’ll need to achieve them and how much you’ll need to save each month to stay on track.
- Figure out your risk tolerance and choose your asset allocation based on how much risk you can afford to take on.
- Keep some liquid investments in case of emergency. As a single mom,you don’t have a spouse’s income (or income potential) to fall back on if you were to lose your job or experience financial hardship,
- Focus on saving for retirement and your child’s education, but keep in mind that your child can apply for financial aid for school, so your 529 plan shouldn’t be at the expense of your 401(k).
Estate Planning Strategy
Estate planning strategy is all about asset protection, and if you’re a single mom, your child’s well-being is your most important asset to protect. Without your husband’s support, your responsibilities to your children make your estate planning strategy needs even more urgent. If you already had an estate plan strategy prior to becoming widowed or divorced, you’ll need to make some changes as well. Here are the basics to cover:
- Choose a guardian:Guardianship will most likely go to your child’s other parent automatically if he is in the picture.However, if the other parent has died, is unfit to parent or is not apart of your child’s life, you’ll need to select a guardian.
- Create a will:In your will you can designate a guardian for your children and choose beneficiaries for your belongings. It’s not a good idea to leave property to a minor via a will,but if your child is not a minor, you can choose him or her as beneficiary. You’ll also choose an executor, someone in charge of carrying out the terms of the will.Think carefully about which friends or family members would make a responsible executor.
- Consider a trust:To leave assets to a child that is a minor, you have the option of setting up a trust. Your will can designate the trust as beneficiary of your assets, including your life insurance benefit and investment accounts. With a trust, you have more control over how the money can be used and when the child will have access. You can shelter money from an ex-spouse in a trust to ensure that it is only spent as you choose, on your child.
As a single mom, the types of insurance you need are similar to what a married couple needs. What is different is the amount of coverage needed, as there isn’t a second parent or a second income to help shoulder a financial crisis. Specifically, single moms should focus on life insurance, disability income insurance and medical insurance.
- Life insurance:Single moms, especially widows, are the ones who need life insurance most. A good rule of thumb is to get enough coverage for six to eight times your annual salary and additional coverage for debt or your children’s education.
- Disability income insurance:Your ability to earn income is one of your most valuable assets. If you lose that ability through an injury or illness, your family could face financial hardship. Women face a higher probability of becoming disabled because of pregnancy-related conditions or female-only cancers. Make sure to read the fine print before purchasing, because some disability policies won’t coverall of your needs.
- Medical insurance:If you’re recently widowed, you and your children may still be eligible to receive COBRA coverage under your husband’s employer’s plan. If you’re divorced, you may still be eligible for COBRA, and your kids can continue coverage as usual. This is typically determined during the divorce proceedings, and usually the custodial parent becomes responsible for the child’s medical insurance. If your employer doesn’t offer health insurance and you aren’t eligible for COBRA, look into an individual policy or find out if you’re eligible for Medicaid or a state-run program.
You’ll likely change your filing status after becoming a single mom, either to single or head of household. It’s easier to qualify for single status, but filing as head of household can be more beneficial, as it features a lower tax rate and a higher standard deduction. Both divorcees and those who have never been married can be eligible for head of household status as long as they have qualifying dependents and meet all of the requirements.
If your husband died and you have a dependent child, you can file as a Qualifying Widow to continue benefiting from the same tax rate and standard deduction as when you were married. After two years of claiming Qualifying Widow, you must file as single or head of household.
There are no tax credits or deductions specifically for single moms, but there are many that you may be eligible for. Ask your financial professional about the child tax credit, dependent exemption, child and dependent care credit and the earned income tax credit to see if you can save money on your taxes.
Another new tax concern you may have is for alimony and child support payments. Whether you’re paying or receiving support, you’ll need to learn the tax consequences. It’s important not to confuse the two payments—make sure to keep them separate and track what you pay or receive separately.
- Alimony: Counts as an above-the-line deduction for the spouse paying it,and it counts as taxable income for the spouse who receives it. This applies for divorces finalized before the end of 2018. For divorces finalized after 2018, the law reverses so that the pay or will no longer get a deduction and the recipient will no longer need to include the income.
- Child support: You cannot deduct it on your taxes if you’re paying it, but you don’t have to pay taxes on collected child support.
Single income households are generally on a stricter budget, especially when child care costs come into play. If you’re recently divorced or widowed, it’s probably time for a budget overhaul. You may have insurance money or child support coming in along with the loss of your husband’s income. Analyze your cash flow and make a strategy, keeping the following in mind:
- If you had joint accounts with your child’s father and he’s no longer in the picture, make sure to cancel them and reestablish accounts in your own name.
- Make a child care strategy that you can afford. You may have to coordinate with your ex-husband or seek a flexible work arrangement with your boss. Make sure you have an emergency plan in place in case you have to stay late at work or your child gets sick at school.
- Focus your savings efforts on big wins and don’t waste valuable time on activities that don’t yield big results.
- Get your kids involved in the family budget and use this as an opportunity to teach them about financial responsibility and the value of a dollar. Be careful not to spend money on them out of guilt.You may need to explain your financial situation since they probably compare themselves to their friends’ dual-income families.
- An emergency fund is just as important for single moms as adequate insurance coverage is. You don’t have the added safety net of a partner’s income, so focus on building an emergency fund for surprise medical bills, car repairs or other unexpected expenses.
- Child support and alimony don’t last forever, so whether you’re paying or receiving support, make a strategy for when it ends. The same goes for any death benefits you may have received.