The Complete Guide to Money Management for Single Parents
by Bestow Team | January 11, 2019
As a single parent, raising a child takes discipline, courage, and patience. Not only are you expected to teach your child how to behave and interact with others; you must also provide for them financially. No matter how stable your career, this can be a significant challenge.
Being the sole provider of your household, it’s important to plan ahead so that you and your child are prepared for whatever life throws at you. To help you make the best of the situation, we cover everything you need to know below.
Table of Contents:
- Assess Your Financial Situation
- Take Advantage of Single Parent Benefits
- Plan for You and Your Child’s Future
- Additional Resources
Assess Your Financial Situation
Whether you’re recently separated, divorced, or widowed, or have been for some time, it’s important to be in control of your finances.
Even if you’re not struggling financially, raising a child single-handedly requires lots of responsibility on your end, so it’s better to monitor your finances closely so that you can prepare for any unexpected hardships you may encounter in the future.
Determine Your Net Worth
One way to get an honest assessment of the status of your financial health is to determine your net worth. If you’re unfamiliar with this term, a person’s net worth can be found by subtracting their assets (what they own) from their liabilities (things they do not own). The purpose of finding your net worth is to get an idea of the big picture progression of your finances.
Your assets include items you own that could be easily be converted into cash, such as a car, computer, investments, stocks, and any cash in savings or checking accounts. Notice this does not include your salary. Liabilities are anything you are paying back, such as student loans, a mortgage, personal loans, or medical debt.
With that in mind, it’s not unusual to have a negative net worth. In fact, one in five American households have a net worth of zero or less. A negative net worth is common if you’ve taken out large loans to invest in yourself, such as a student loan to finance your education.
If this is the case, and you’re actively paying these loans off, then your net worth will gradually improve over time.
Calculate Your Debt-to-Income Ratio
Once you’ve determined your net worth, it’s a good idea to check your debt. You can do this by calculating your debt-to-income ratio (DTI), which will show you if you’re making enough income to repay your debts.
To do this, simply add up all of your monthly debt payments, divide it by your gross monthly income, and convert that number to a percent. If your DTI is above 40%, then you need to find a way to make more income or pay down debt.
Lastly, it’s always wise to monitor your spending and saving accounts. A general question to ask yourself is, “Am I spending more than I am making? If not, am I putting enough money in savings?”
Saving 20% of your monthly income is a good place to start. If you are spending too much, then create an expense sheet to monitor all of your purchases. This will help you gauge where your money is going.
Consider Any Joint Debt
When you and another person enter into a financial agreement together, you take out what’s called a joint debt. By law, both of your names are on the account, and you are collectively responsible to repay that debt.
Whether you separated amicably, divorced, or were widowed, if you and your partner co-signed a financial contract together, lenders will expect you to pay back what is owed. Although you’re likely aware of the debt you have to pay, there are some things to be aware of.
Joint Debt After Death
Regulations regarding debts of a deceased spouse vary by state, but in general, you are not expected to pay back their debts unless you co-signed a contract together or, in the case of credit card debt, are a joint account holder. If this is the case, you will likely be expected to pay back whatever balance is left.
Joint Debt in Divorce
Your legal obligations regarding debt after a divorce vary from state to state. When it comes to determining who owes what for each type of debt, it’s truly situational. If you and your spouse cannot settle issues amicably, then you may have to take matters to court.
Taking a divorce to court allows a judge to deem who is responsible for what debt. However, if you and your partner are on good terms, you can agree on how to divide your property and resolve matters directly. Bear in mind that if either of you neglect to pay back your debt, your credit will be negatively affected.
Alimony is an amount of money paid by a “supporting spouse” to a “dependent spouse” after a divorce. Generally, the person making more money in a relationship is expected to make the alimony payment, be it a lump sum or a continual monthly amount.
As with divorce debt, the amount and length of alimony payments can be determined by you and your spouse or by the court. If you cannot agree to terms together, the court will set the terms for you based upon factors such as household income or whether or not you have children to care for. The model courts use to determine alimony, however, varies from state to state.
If you are going through a divorce with your spouse, then alimony is something you should both discuss to ensure both parties are provided for in the future. You should also consult a legal expert to help you work out the terms, as there are legal requirements and tax benefits to consider.
Protecting Alimony with Life Insurance
If you’re already receiving alimony payments from your ex-spouse, then you probably depend on those payments to help support yourself and your child. So, what happens if your ex-spouse suddenly passes away?
Once those alimony payments stop, you’ll need another means to pay for your family’s expenses. A life insurance policy on your ex-spouse can provide financial protection for you, the dependent spouse, and your children should they pass away.
So, how do you ensure that you and your children are covered? One way is to ask for a life insurance policy as part of the divorce settlement. Your ex-spouse would have to apply for and get approved for coverage, and you could pay the premium to keep the policy current.
If your ex-spouse already has a policy, then you should consult a lawyer to help you determine how much of the benefit you are entitled to.
Take Advantage of Single Parent Benefits
Once you’ve assessed your financial situation, you should also look into benefits and resources out there for single parents. Taking advantage of some of these benefits will help alleviate the financial strain of raising your child on your own.
Government Benefits for Single Parents
For both low-income single mothers and single fathers, there are government assistance programs available:
- Supplemental Nutrition Assistance Program (SNAP): SNAP is a federal nutrition program that provides low-income individuals and families the funds to purchase healthy food.
- The Low Income Home Energy Assistance Program (LIHEAP): LIHEAP is a federal program that assists low-income families with energy costs and minor energy-related home repairs.
- Head Start: Head Start is an initiative run by the United States Department of Health and Human Services that offers early childhood education for low-income children between the ages of zero to five.
- Women, Infants, and Children (WIC): WIC is a federally funded program that provides healthcare and food to low-income pregnant women, breastfeeding women, and children under five.
- National School Lunch Program (NLSP): NLSP is a federally funded meals program for children of low-income families that provides free lunch meals each day.
- The U.S. Department of Housing and Urban Development (HUD): HUD works with landlords and property owners by giving them funds so they can charge an affordable rate for low-income individuals and families.
Child support is an ongoing, court-ordered payment made by a non-custodial parent to a custodial parent, usually after a divorce or separation. How much the non-custodial parent must pay varies by state law. Each state uses one of three models to calculate the payment: The Income Shares Model, the Percentage of Income Model, and the Melson Formula.
Each model bases the child support payment on factors like net or gross income and number of children. Of course, the court has the right to deviate from the state’s prescribed method if need be. In any case, you can file for child support at any point in your relationship, whether you are married, unmarried, divorced, or legally separated, though specific steps to obtain a child support court order vary in each situation.
Child support is usually expected from your spouse until your child turns 18 or graduates from high school, unless your child has a disability of some sort that warrants payments beyond that age. Although child support can be a sensitive topic to broach between you and your partner, if you are struggling to makes ends meet raising your child, then it’s a discussion worth having.
Tax Breaks for Single Parents
As a single mother or father, you are entitled to certain tax breaks that can reduce your taxable income and the amount of tax you must pay. Below are several tax breaks you should be aware of:
Head of Household
If you file as “head of household,” you will pay fewer overall taxes and will receive a larger tax deduction. To see if you qualify for “head of household,” consult a tax representative in your area.
If you file as “head of household,” you can also claim a tax exemption for yourself and each qualifying child. For each exemption, a portion of your income will not be taxed. Depending on your tax bracket, this may result in a bigger tax refund.
Child Tax Credits
Child tax credits are a way to offset the costs of raising a child alone. Essentially, each credit can take as much as $2,000 off of your federal tax bill if you’re in the 10% bracket. For example, if you owe $3,000 to the IRS and you are eligible for $1,200 of child tax credit, you would only owe $1,800.
Child Care Credits
A Child Care Credit reimburses you 20 to 35 percent of some or all child care expenses you paid. The 20 to 35 percent is taken from up to $3,000 of expenses paid per “Qualifying Person.” A Qualifying Person for this tax credit would be a dependent child under 13 at the time care was provided.
So, if you paid for child care costs for two dependent children, you might be eligible for a reimbursement of 20 to 35 percent from up to $6,000 paid in child care expenses. To learn if you qualify, be sure to consult a local tax representative.
Earned Income Tax Credit
Low-income single parents and families are eligible for the earned income tax credit (EITC), especially if they have children. If you qualify, you will owe less taxes and you may also receive a refund.
Plan for You and Your Child’s Future
As a single parent, your child is your top priority, so why not invest in their future now? By taking advantage of college funds and other benefits, you can lessen the financial strain on both of you in the years to come. Here are some ways you can plan accordingly so that you’re both prepared for what lies ahead:
Save for Your Child’s Future
There are plenty of ways you can start saving for your child’s future, even if you don’t have much to invest now. Below are just a few of the different types of methods you can look into to start saving early:
A 529 plan is a college savings plan sponsored by the state that comes with certain tax and financial aid benefits. The money accrued under a 529 plan is exempt from federal taxes and can be used to pay for tuition costs or other education-related expenses.
There are two types of 529 plans available: Prepaid tuition plans and college savings plans. Prepaid tuition plans allow you to prepay tuition costs at the current rate. They are intended to pay for tuition at a specific in-state school, but they can be applied to other schools as well.
A college savings plan functions similar to a Roth IRA account in that it’s an investment vehicle. Your contributions are invested into mutual funds or other investment options, and the value fluctuates with the market.
Coverdell Education Savings Account (ESA)
An ESA is a type of trust or custodial account that helps families pay for education, meaning it’s managed by a bank or brokerage. A Coverdell ESA offers tax-free growth and tax-free withdrawals if the money is spent on education-related expenses. The funds can also be used to pay for elementary or private school.
However, you can only contribute up to $2,000 per year, even across multiple ESA accounts. Once your child turns 18, any further deposits made into the account are subject to an excise tax.
Consider End-of-Life Planning
Although it might seem too early to think about estate planning, there are some preparations you should make now in the event that something happens to you. When considering end-of-life planning, here are a few points to think about:
Write Your Last Will and Testament
A last will and testament, or a will, states your last wishes after you die. Taking the time to write your last will and testament will save your beneficiaries time and money, be it immediate family or your child.
As a single parent, you can determine how and when your estate is bestowed to your child within your will. If you do not have a will, however, your estate will be settled in a probate court, which will deduct court costs from your property.
When done properly with the aid of an estate planning attorney, a will provides instructions as to how your estate should be divided, and ultimately makes the situation less stressful on everyone involved. It also clears up any confusion as to your intentions regarding the distribution of your property, which could diffuse potential feuds between family members.
Buy a Life Insurance Policy
Having a life insurance policy in place is a great way to provide for your child if you unexpectedly pass away. Whether you purchase a term life policy or whole life insurance, the payout from your death benefit will give your child some sense of financial stability, and will make it easier to cope with the situation.
Be Transparent with Your Child
It’s wise to be honest with your child about your finances (to a degree). While you obviously shouldn’t disclose your income or the state of your finances, you should be transparent about why things are the way they are.
For example, if you can’t afford to do certain activities your child has expressed an interest in, you should tell them that you can’t afford it, and suggest an alternative that you can afford. This also presents an opportunity for you to teach your child to appreciate what they do have.
You can also use the opportunity to instill basic financial concepts in your child, such as saving and budgeting. In this way, your child will understand that money doesn’t equate happiness, and that everything has a cost.
Single parenting is a true challenge, which is why it’s crucial to plan your steps financially. By taking advantage of single parent benefits and investing in your child’s future, you’ll make the burden lighter on yourself and give your child the best shot at pursuing their dreams.
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