10 Tips for Single Parents to Build a Secure Financial Future

February 23, 2022 Mutual Fund

Single parents have twice the responsibility of giving their child the finest education, experiences, and opportunities available in today’s world. The most daunting task for a single parent is managing their professional and personal life. You have to meet your work obligations, pay utility bills, go grocery shopping, make dinner, do the laundry, and make sure your kids get to school on time. To mention a few things, you’re also a part-time doctor, chauffeur, coach, cheerleader, and tutor.

Amidst the pandemic, the forced lockdown and continued uncertainty have remarkably altered many lives. Statistics reveal a rise in divorce cases and death rates, unfortunately, causing many individuals to become a single parent. The pain of losing a spouse/partner, either due to death or divorce/separation, is probably as difficult to overcome as raising a child alone. Both entails developing significant mental strength, higher emotional intelligence, and possibly, a 360-degree financial shift. All of these changes can be extremely challenging to adapt to. Being a single parent is not only emotionally nerve-wrecking, but also financially.

With no support at hand, many times you may have to struggle with child care and all the financial responsibilities you have to shoulder. When you’re walking such a tightrope, looking for the right avenues to secure the future for your child and you should be paramount. It is never easy to be both the caretaker and the sole breadwinner for the family. As a result, sound financial planning will allow your child to pursue their goals, making you a proud parent.

Recently, while I was in conversation with my friend Sakshi, she informed me that her sister Mrunal got divorced few months back and is now a single parent to their lovely 5-year-old daughter. Sakshi shared how her sister is going through a rough phase, experiencing financial difficulties and is concerned about her daughter’s future. Sakshi requested me to talk to and guide her with financial planning.

Mrunal said, “Mitali, I have been trying to manage my finances to protect my daughter’s future, but owing to the current uncertainty, things aren’t going as planned. Could you kindly explain to me how I should go about improving my financial situation and securing the financial future of my child?”

To which I replied, “Mrunal, I am sorry to hear the news about your separation from your partner; however, stay strong and you will get through this chapter of life. You see, whether due to death, divorce, or choice, single parents do face unique financial challenges. The budgets are often stretched, child care can be a struggle, and saving for the future might feel impossible at times.

As a single parent, you must strive to channel your finances according to your financial needs, while also focusing on protecting your child’s financial future. When you plan for your child’s future, you contribute to their development as a human being and also feel confident along the way.”

Here’s some financial planning tips for single parents that may help you with securing your child’s financial future:

1. Start Budgeting

As a single parent, one of the first and most important things to do is to make a budgeting strategy. If you are unaware of how and where you are spending your money, your finances may suffer. A budget allows you to track your monthly cash flow and find areas where you may save money by reducing unnecessary expenses. You rely on a single source of income and will frequently be forced to stick to tight budgets, particularly during the early years of your child’s life. Loan EMIs must be paid, and they cannot be postponed or skipped. If you stick to a budget, you will be able to adjust to any changes in your finances efficiently.

Set S.M.A.R.T financial goals that you can achieve. Set aside money for bill payments, school fees, and some extra yet useful shopping too and save even if that means putting it in a piggybank. Remember, any or rather all types of saving will reap you benefits.

2. Create an Emergency Fund

An unexpected emergency can eat into your earnings and savings. In most circumstances, setting up an emergency savings fund will come in handy. Look over your budget for the month and make any necessary cuts, as well as allocating a percentage of your income to an emergency fund. Make sure you don’t touch this fund after you’ve set it up. Allow it to grow naturally and see how it develops.

Your emergency fund should be able to cover 12-24 months of living expenditures, including loan EMIs. This emergency fund will eventually provide protection in the event that a parent or child requires money due to unforeseen circumstances or emergencies. A single parent can use this fund to not only construct a specialised fund to satisfy their child’s needs, but also to amass a fair sum to fall back on in the event of an emergency. Throughout the cycle of parenthood, it’s important to remember to make smart judgments so that you’re always prepared and financially secure.

3. Secure your child with Insurance cover

Life can be very uncertain and as a single parent it is always good to safeguard your child and yourself from any potential risk. Getting a life and health insurance that suits your lifestyle and needs is always advisable. The objective is to have an adequate life insurance and health cover that indemnifies the risk to life and covers the cost of medical treatments and healthcare for you, the single parent, and your child/children. Even if you feel confident your child/children will be well cared for by your trusted family members, there are so many financial considerations to plan for in your absence. Adequate insurance cover will enable your child/children to live a good quality of life and provide for their financial requirements. It is essential to get your child a good health cover and select a child insurance plan that offers extensive coverage with an array of benefits, like assured sum after tenure.

4. Stay low on debt

Debt management is an important part of any financial plan. When you’re a single parent, you could be pressured to borrow loans to meet your financial obligations. Having a debt is not inherently bad as long as you are able to return the loan on time. This way you can build a good credit score, have access to funds when you need it, and avoid accumulating a debt burden that could negatively impact your child’s financial future.

Having a debt-to-income ratio less than 40% is manageable; particularly if you are able to stick to your budget. Borrow only when you are sure you can repay the total outstanding dues on time. Any default at any stage may create problems, not only for the loan, but for other financial aspects due to low credit score. Aim to maintain a debt-to-income ratio below 40% and prevent falling into debt traps.

5. Open a savings account in your child’s name

The critical skills single parents must teach their child/children are the fundamentals of money management and inculcate the practice of delayed gratification and savings while they are still young, so that they learn the true value of hard-earned money before they begin to spend. Single parents can protect their child/children’s financial future in a variety of ways.

Setting up a bank account in your child’s name is a simple and quick way to get started. Several banks offer the option of opening an account for youngsters as young as three years old. Once the account is set up, you may begin placing a reasonable amount of money into it, which will act as a huge piggy bank for your child. For a girl child, you may consider Sukanya Samriddhi Yojana (SSY) which is a government-backed small deposit scheme for a girl child and her financial needs. As parents, we want to see our child/children achieve their goals and be successful. Children should be taught money basics and financial planning so that they can feel proud of their contribution to the family nest egg and take an active interest in investing and saving money.

6. Invest in SIP

You can consider starting a systematic investment plan (SIP) in financial products, such as equity mutual funds, a debt product like Public Provident Fund (PPF), debt mutual fund, or Gold ETFs, in your child’s name. Even a small amount of investment can enable single parents to accumulate a large corpus of money for their child’s secure financial future over time. Create an investment plan based on your child’s potential needs such as top-class higher education in India/abroad.

To attain long-term goals, consider investing in equity and equity related mutual funds, via SIP, similar to a recurring deposit. Nowadays, this is a smart option as the rate of interest received on an investment depends on the performance of equity markets, which can ultimately help to secure better returns over time. Wealth creation needs time and the earlier you start, the lesser you have to contribute. But do not be too conservative, because you will need the right risk-adjusted-returns to combat inflation and accumulate more.

7. Create a Will

You want your child to be cared for after you pass on. If you haven’t written it down, it could defeat the whole purpose of securing your child’s future and wealth creation. Single parents must make a Will for their child/children to ensure that your wealth and assets are handed to the child/children or any trusted family member in the manner you desire and to safeguard their inheritance. Your child’s life and your vision for them must be described in a letter of intent. This contract can be referred to by future guardians and trustees, and it will safeguard your child’s rights and financial future in your absence.

8. Retirement Planning

Planning your retirement is as important as your present financial plans. You do not wish to be a burden on your child/children in your retirement phase, thus planning for your retirement is essential. Identify the amount of money you will need when you retire from work, adjust your current cash outflows, and park some funds aside for your retirement plan.

Ensure you invest in a robust retirement plan and make investments as per your suitability. If you think it is too early to plan for your retirement, bear in mind that the earlier you start, the larger your retirement corpus will be. Start small, and then gradually increase on what you save every month. As your financial situation improves and your child/children become independent, use the surplus (extra amount) to increase your contributions towards investments and build your net worth.

9. Plan your taxes effectively

Tax planning is important because you don’t want to pay more taxes, which affects the amount you set aside for savings and investments. To save money on taxes, make sure you plan ahead of time, invest sensibly, and claim the appropriate deductions. Furthermore, under the terms of the Income Tax Act of 1961, every Indian taxpayer is entitled to claim deductions for certain expenses related to their children.

Deductions under Section 80C of the Income Tax Act refer to educational expenses spent by children and cover all deductions that can be claimed for fees paid by a taxpayer to any educational institution in India for the education of their child.

10. Financial literacy

Financial literacy is vital in everyone’s life, but it is especially critical for single parents to be financially educated in order to improve their own financial well-being and protect their children’s financial future. You can also make your youngsters aware of the family’s money situation and teach them healthy financial habits. The idea is to keep your family’s finances focused on what’s important, necessary, and affordable. You’ll be raising financially literate children with solid skills and information that they may use freely in their adult life as a result of this approach.

So, it begins with you having financial knowledge since you are a role model for your children. They learn the value of money by the example you set, especially when they see their parents saving, investing, and handling money with discipline in their day-to-day lives. As a single parent, it is your obligation to instil financial planning in your children from a young age. Set up a monthly budget for your children to learn how to manage their minor costs on their own. Additionally, teach kids about internet banking and apps, as well as how to use them wisely to protect their money and access them when the need arises.

To provide a stable future for their children, single parents should effectively handle their resources. Many single parents who are coping with long-term challenges and insufficient support delay financial planning. As a result, they are unable to support their child’s financial needs later in life.

As a single parent, having a financial roadmap and addressing issues at the right time can bring financial security for the child and themselves. Financial literacy will play a major in following the above-mentioned financial tips to secure your child’s financial future.

This article first appeared on PersonalFN here