Inside: As a single mom can you honestly say you understand all your financial options? From insurance to retirement to debt here is your guide to all the common single parent financial problems and how to overcome them.
Single parents face a lot of constraints throughout their life. While managing everything single-handedly, they struggle to make ends meet, much less save for their retirement.
We are highlighting some common financial problems of single parents and solutions. If you’re a single parent, you might be able to relate with these.
Common financial problems and how to overcome them
Obstacle 1: You might face difficulties while returning to work after a career gap.
Solution: The first reason for a woman to leave her work for a time period is caring for family, giving birth to a baby, or returning to work after a divorce. As a result, many women are struggling to re-enter the workforce.
And with growing awareness, some companies are also supporting them. For example, IBM is offering “returnships,” especially for women, to return to the workforce.
So, restructure your resume and appear for interviews. And be straightforward about your career gap to your interviewers. And once you get a good job, allot a certain amount from your paycheck towards retirement savings.
Obstacle 2: You might be unable to build a proper emergency fund, resulting in opting for loans.
Solution: Life is unpredictable, and you might need money if an emergency arises. Being a single woman, you have to handle everything single-handedly.
So, you should be prepared enough to deal with any emergency. Having a rainy day fund will save you from taking out loans, and in turn, incurring debts, during exigency!
Obstacle 3: You might lack proper financial planning as you need to handle everything single handed.
Solution: It’s essential for everyone to do proper financial and retirement planning, but single parents should do it earlier, right from their first paycheck! The two reasons are the paycheck gap and the time away from work.
In our country, the Equal Pay Act of 1963 was enacted to abolish the wage discrepancy based on gender. According to a 2016 study by the Bureau of Labor Statistics, women are paid 82 cents to every dollar men receive!
At the same time, women have to take care of their families, children, aging parents. And these things urge them to stay away from work.
The paycheck deficit, along with these responsibilities, makes the creation of a nest egg, a tedious job for single parents! As a result, you end up contributing less for retirement plans (like 401(k) or traditional IRA), due to lack of financial planning.
Obstacle 4: Procrastination of your retirement savings might lead to loss of benefits.
Solution: As a single parent, you should well-plan your retirement. If your employer is offering a 401(k), then you should fully utilize it! The contributions you make are pre-taxed from your paycheck, i.e., you won’t be taxed on that money during the year you earned it. You have to pay taxes while withdrawing during your retirement.
From 2019, you can contribute up to $19,000 of your pre-tax income to the 401(k) plan. And those above 50 years, can make an additional catch-up contribution of $6,000.
So, if your employer offers matching contributions, it will be an excellent start for your retirement plan!
Apart from that, you can also invest in a traditional IRA if your employer doesn’t offer a 401(k). Your investments to the traditional IRA are also a tax-deferred growth. From 2019, if you have an adjusted gross income less than $122,000, then you will be eligible for a traditional IRA.
Related: 44 Ways to Easily Save Money
You can contribute a maximum of $6,000, and if you are above 50 years, you can make an additional contribution of $6,500.
So, start saving for your retirement early to reap all the benefits of these plans even if you’re not able to deposit a significant amount, deposit as much as you can. And, then try to increase the amount when you can manage it.
Obstacle 5: Your child may not feel comfortable in the new situation.
Solution: Your child might suffer from adjustment problems because of your single parenting. He/she might behave weird due to that, resulting in squabbling between you and your child.
The key to this problem is communication and love! So, learn how to stop freaking out at your child and try to understand what your child is going through.
Though it’s not possible for you to fix your child’s sorrows, you can listen to them. Love them to the fullest so that they find a safe haven in you.
Spending one-on-one time with your child also creates a special and unique bond! And this is sometimes better than if you were a nuclear parent.
And, while trying to be financially secure, explain your financial decisions to your child (when he/she can understand) so that the little one gathers knowledge right from a young age.
what you need to know about single parent financial options
Create a budget
According to the USDA, the average cost to raise a child to age 18 is about $233,610!
Keep it in mind that you have to bear this cost all alone. So, the baby step towards being a single super mom is, planning a budget for yourself!
First, you need to write your income from all sources along with your expenses. And then you can chalk out your budget in a spreadsheet. As a result, you will be able to track your expenses and restrict yourself from overspending.
Thus, creating a budget will help you to make a habit of saving and lead a frugal life ahead!
Stay away from debt
You should utilize your emergency fund if you need money to meet your sudden expenses. Still, if you have taken out any loan, you should pay it off at the earliest. But, what will you do if you are trapped with multiple debts?
Well, in that situation, what if you get a chance to pay off your debts at reduced interest rates? Isn’t that interesting?
If you opt for debt consolidation method, you need to negotiate with your creditors for reducing the high-interest rate of your debts. As a result, you have to pay much less amount, in total, due to a reduced interest rate. Thus, it will help you to pay off your debts with ease!
You may opt for balance transfer method to consolidate debts into a single one. It allows you to transfer all your high-interest credit card debts into a new credit card, preferably with a 0% Annual Percentage Rate (APR).
But before choosing a balance transfer card, read the terms and conditions carefully. Most of these cards offer a 0% or very low APR for an introductory period, after which the rate might increase to about 15% to 25%.
But, what if you don’t have enough money to pay off your outstanding balance amount?
In that case, you can choose debt settlement to get rid of your debt trap!
In debt settlement, you have to negotiate with your creditor(s) to reduce the outstanding balance amount. If they agree, you can pay a lump sum amount to settle your debt, which is usually much lesser than your outstanding payable amount.
But after payment, your creditors mark those debts as “paid as settled” and it creates an adverse impact on your credit report for about seven years!
Opt for insurance policies
When you are fighting all odds, you have to be prepared to manage all possible risks. But how so?
Well, you can buy an insurance policy and transfer the cost of potential loss to the company.
You can opt for various insurance policies like:
Health insurance policies
Health Savings Account (HSA):
A recent study, led by a Harvard group, published in The American Journal of Medicine, revealed that 62% of bankruptcies were caused by medical debt!
So, buying a health insurance policy will prevent you from being a victim of medical debts. Usually, contributions are made into the HSA by you or by your employer. It offers you ample benefits like:
- Your contributions towards HSA are not taxed.
- Your distributions for eligible medical expenses are not taxed.
- You can pay for qualified medical expenses, which includes dental, vision, and over-the-counter drugs.
It is a public health insurance program specially designed for low-income folks. In our country, almost 72 million people are covered under this insurance program!
Medicaid is a joint ventured insurance program by federal and state governments. The Affordable Care Act in 2010 suggested expanding the coverage to people with incomes at or below 138% of the national poverty level. From 2016, the federal poverty level is set at $11,880 for a single person and $4160 for each additional family member.
So, you need to check whether or not you are eligible for Medicaid, based on your state and income level.
Related: How to Teach Your Child to Budget
Children’s Health Insurance Program (CHIP)
It’s perfect for single mothers as it provides free or low-cost insurance. You might be eligible for CHIP program if your income is too high for Medicaid.
It will cover your child until he/she attains the age of 19, and it usually includes essential health services.
According to a study by Genworth Financial, about 70% of single parents in our country lack life insurance!
Opting for a life insurance policy will provide your family with an additional source of income if something happens to you. You need to secure your child’s future when you pass away. It’s advisable to buy a policy which will cover at least 50% of your annual income.
You can buy two types of life insurance: term insurance and whole life insurance or permanent life insurance.
Term life insurance covers you for a stipulated time like you can opt for it till the time your kids grow up. You can buy a term life insurance policy for 10 years, 20 years, and so on. And unfortunately, if you die within this term, then the policy will pay out to your nominee.
As the name sounds, whole life insurance will cover you for your entire life! Usually, it is costlier than a term life insurance plan as it consists of a “cash value.”
The value helps you to earn an interest, which is usually tax-deferred until you withdraw from the policy. And you can take out a loan against that cash value if needed.
However, the cash value component serves as a living policyholder benefit. So, you should withdraw that amount at the earliest, once it gets matured.
Opt for an education plan
You can opt for 529 plan which is legally termed as “Qualified Tuition Programs” or “Section 529 Plans”. You can use this plan for saving and paying for your child’s higher education.
Basically, the 529 plan has got two types.
Prepaid tuition plan
It allows you to purchase units or credits at participating colleges and universities at the current rate. Currently, prepaid tuition plans are operated by the state governments.
Education saving plan
It allows you to open an investment account to save for your child’s education.
You can save up to $10,000 per year from your education saving plan for tuition at any public, private, or religious school.
Look for tax credit opportunities
You might be eligible for an income-based tax credit for each of your children. But, before you get confused between tax credit and deduction, let me explain it to you.
The tax credit is the amount you can subtract from the amount of taxes you owe to the government.
Whereas, the tax deduction is the amount which is lowered in tax liability by reducing your taxable income.
However, tax credits are favored over tax deduction because it reduces the total dollar amount. For example, the Child Tax Credit and the Child Dependent Care Credit offer you tax credit.
No matter what
Amidst these hurdles, we believe that being a super single mom, you will emerge as a winner.
Being a single mother is learning about strengths, you didn’t know you had, and dealing with fears you didn’t know existed.
~This was a guest post ~
Valentina Wilson is a personal finance blogger who loves to write on how to manage personal finances in a better way. Traveling is also her passion, and she loves to explore different places alone.