Financial planning for single parents
One of the reasons financial planning is so difficult is that there are so many competing opinions about what to do. What’s even more difficult is that you’re trying to make preparations for the future, except you don’t know what exactly to prepare for.
One suggestion that may help is to use a financial model to help you make decisions. A model allows you to visualize your financial picture in a way that may help you better understand what’s at work. One of the models we use at our firm shows assets (what you own) and liabilities (debts you owe) covered by a roof of protection components and supported by a foundation of cash flow. This model is called The Living Balance Sheet®.
Cash flow management is probably the most important thing for single parents to understand. It is the foundation of the whole plan. The Living Balance Sheet® uses some basic rules for cash flow.
1. Rule number one—Protection First.
2. Rule number two—Build Assets.
3. Rule three—Pay Down Liabilities.
What’s left is called net income. That’s the money you get to use as you like. And, if you’ve already followed rules one through three, you don’t have to feel guilt about what the net income is spent on!
Protection first means you put back-up plans in place from the start. Those back-up plans include:
1. an emergency savings account to protect you from unexpected events (hint: holiday shopping and vacations are not unexpected events)
2. appropriate insurance programs
3. legal documents such as a will and durable powers of attorney
Insurance programs include car, home, liability, health, life and disability. I recommend reviewing these programs with qualified professionals. Unfortunately, in our world of shopping the cheapest rates, it’s easy to miss the true purpose of the insurance—to protect you from potentially huge expenses from unforeseen circumstances. Insurance should not be chosen simply on the basis of quotes. Use your agent’s expertise. If you want to comparison shop, make sure you’re comparing appropriate coverage.
Disability protection is especially important for single moms. You are the sole source of income for your household. If you were unable to work because of illness or injury, where would you get the money to pay your bills?
The goal of building assets is increasing the positive side of your balance sheet. Assets include savings accounts, retirement accounts, real estate, businesses and personal property. Generally, the most effective way to build assets is to contribute systematically—money coming straight out of your paycheck or directly out of your checking account. The more you build assets, the more you increase your net worth.
Here are some tips for building assets:
1. Liquidity is important. What good is your money if you don’t have access to it? This means you have money (minimum $1,000) in a savings or money market account before funding your retirement plan
2. Financially speaking, your financial security comes before your children’s college fund. Remember what flight attendants say about oxygen masks—place it on yourself before helping your child? It’s the same for money. There are plenty of ways to pay for college. They don’t give scholarships for retirement.
3. Certain life insurance programs may help. These may have additional benefits such as disability protection and can enhance retirement income, as well.
Pay Down Liabilities
You also increase net worth by decreasing liabilities. Paying interest on short-term debt such as car loans and credit card balances robs us of the ability to build assets effectively. The rates of interest are usually much higher than we can get in our savings accounts or even in our investment accounts. High interest credit cards are especially destructive—a card with an 18% APR could double what you owe in less than five years!
The trap I typically see with many individuals is that they don’t have a plan to pay down debt. They throw a little extra money at a credit card when they can, but do that at the expense of building assets somewhere else. A systematic approach allows for a sense of control. You can see the finish line—even if it’s going to take a couple years to get there.
By taking control of your cash flow—building a plan for monthly income and expenses—you give yourself a sense of control over finances. You give yourself the ability to make financial decisions before a crisis occurs. And, you give yourself a permission slip to spend money without guilt.
Every financial decision we make has an effect in other areas. Money we spend on coffee can’t be saved. Interest we pay on credit cards can’t go toward retirement savings. Interest we earn on savings or investments can be used to provide other benefits. Using a financial model helps you to see how those areas are interrelated.
Money is not math. There are unseen forces that work against us and unseen circumstances that affect us. You cannot predict what will happen. The best you can do is to be efficient with what you have and understand the decisions you make.
The Living Balance Sheet ® is a registered trademark of The Guardian Life Insurance Company of America, New York, NY
For more questions about financial planning, contact Brian Simon at (239)561-2900.
Brian Simon is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 14021 Metropolis Avenue, Fort Myers, FL 33912 (239) 561-2900. Securities products/services and advisory services offered through PAS, a registered broker/dealer and investment advisor. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Alliance Financial Group is not an affiliate or subsidiary of PAS.
Return to advice on saving money
Return to Single Parent Home