Personal Finance
Single parent money shuffle
Tips for building a solid financial future when you're raising kids alone.
May 30, 2002: 3:21 PM EDT
By Leslie Haggin Geary, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Charlotte Jackson is no stranger to stretching dollars. After all, she's a single mother of three.

The Houston divorcee says she receives no child support for her 9-year-old daughter and two sons, ages 11 and 15. So she's learned to get by -- with flying colors. As a special events coordinator at San Jacinto College, Jackson enjoys a comfortable lifestyle on a modest salary; managing to pay the bills, save for the family's annual vacations and tuck away something extra for her retirement.

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Indeed, Jackson has become a whiz at finding affordable resources. Through word of mouth she's found community centers that award camp scholarships. Her family attends free cultural events at the community college. And she recently went to a free financial planning seminar. She was startled more single parents didn't show up.

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"I asked my single friends why they didn't come," said Jackson, who founded a support network called North Channel Single Parents. "They told me, 'Charlotte, let's face it. When you're single there's no such thing as saving.' I told them, 'That's a misconception. Even if it's $5 a month, you can save.' We've got to break through the cycle of saying single parents have to be poor."

Stick to a budget

It's easy to spend too much when life gets overwhelming. Just ask any single parent who's schlepped kids to a restaurant because they're too tired to cook. You may save time -- but the damage to your wallet can be brutal.

"You need to set up a budget," said Dee Lee, a certified financial planner and author of "Let's Talk Money." "What have you got for income? What's your cash flow? What are your major expenses? Can you rely on child support? You've got to set goals."

Another financial pitfall common among single parents involves blowing dollars on their kids out of feelings of guilt, said Mike Kidwell, co-founder of debt counseling service Myvesta.

"When I talk to single parents, I often hear there's no money," said Kidwell. "Then when you look into their budget you see there are a lot of things bought for the kids. I have a client right now who says, 'I'm still taking my daughter to Disney Land whether I can afford it or not.' Or we see where one parent makes more than another and they end up competing with each other."

Examine why and what you're spending periodically to stay on track. For details, see Money 101 lesson on budgeting.

Are you covered?

You'll next need to set up an emergency fund with three-to-six months worth of living expenses -- a financial building block that's especially critical for single parents. That may seem like an impossible goal, but start by salting away as much as you can. Homeowners may also want to take out a home equity line of credit, which lets them tap funds in an emergency, said David S. Rhine, director of family wealth planning at Sagemark Consulting.

And when it comes to rearing kids on your own, the right insurance is everything.

Disability insurance can replace up to two-thirds of your income if you're injured or too sick to work. If you get coverage through work, be sure that it's adequate. For help determining how much you should buy, use our life insurance calculator. You can trim premium costs by increasing your deductible or the time you wait before benefits kick in. For details, see "Ouch! Don't forget disability insurance."

Life insurance also is a must. As a general rule, experts say single parents with school-age kids should be covered with a policy that pays out five-to-seven times their gross annual salary.

And whatever you do, don't get pushed into buying too much coverage. In most cases, term life insurance is all you need. Term plans are about 10 times cheaper than the cash value variety (also called whole life or permanent insurance), depending on your age, and it provides a death benefit to your heirs if you die while you're policy is active. You can get term price quotes

Cash value insurance pays a death benefit, too, and also comes with an investment component that can be used for an annuity. However, you'll pay investment fees on top of your premium, making it more expensive. (Estate planners note that this kind of insurance often is a better option for those who will leave inheritances that are big enough to be hit with estate taxes.)

Single parents also should take special care when setting up insurance plans. "Put it in a trust for the kid and name a trustee to handle the money who's different than the child's guardian," said Lee. "I have seem some awful fights and relatives come out of the woodwork to claim the kid when there's been insurance but no trustee."

Save for your future

When it comes to prioritizing between saving for your retirement or your children's college education, you must be selfish. After all, there are scholarships for school, not retirement.

You'll need between 70 percent and 100 percent of your current annual income during retirement, money that will have come from your own savings, Social Security payments, and any tax-deferred investment tools you may have. When calculating how much you'll need, don't forget to factor in a reasonable life expectancy. (If you're unsure, err on the safe side by using age 95.) Once you've done the math, review your existing plans and assets to determine how much more you'll need to save. Our retirement planner can help.

(Note: If you're divorced but were married for at least 10 years, you'll be eligible for some of your former spouse's Social Security benefits.)

Now start saving. If your employer offers a 401(k) or 403(b) with matching contributions, stash away at least enough to get the match. This year you can save up to $11,000 ($12,000 if you're age 50 or older) tax-deferred. For tips on successful saving, see "The perfect 401(k)."

Next, take advantage of tax-sheltered accounts like a Roth IRA, where earnings can be withdrawn tax free.

Help from Uncle Sam

Recent changes to the federal tax code provide more breaks to parents. Don't leave anything on the table.

For example, make sure you snag the child tax credit, which is now $600 per child under age 17. Your adjusted gross income (AGI) can't top $75,000 and "the credit generally goes to the parent who has custody for the greater part of the calendar year," said Mark Luscombe, director of the national and state tax planning group at CCH, the tax law publisher.

The Earned Income Tax credit has been around for years but many working parents don't ask for it because it's confusing to calculate, Luscombe said. The basics: If you've got two or more kids you may get a credit up to $4,140. To qualify, your AGI can't top $29,201 to $33,178 (depending on your number of kids). For EIC details see Publication 596 on the IRS Web site.

For more on new tax breaks, see ourtax center.

Write your will

Unless you're willing to leave it up to the courts to decide, you need a will, too. You may even need a trust to further protect your children's inheritance. But for simple plans, do-it-yourself software kits cost about $31 from the likes of Nolo Press, which also publishes self-help legal books, along with Nova Publishing.

Though it's likely your ex- will get guardianship of your kids in the event you pass away, you should still choose a guardian. If you pick a married couple, name just one spouse in case they too divorce.

Finally, don't forget that financial planning is a process. It may take no time to feel financially secure or it could take years. But start early and be patient. The Money 101 center answers most of your financial planning questions. And other single parents may have tips, so reach out to them as well.

That's what Jackson did. In fact, after years of tracking down resources, she's now organized a day-long outreach program this summer where Houston-area groups will be available to let single parents know what resources they offer.

"There's nothing wrong in asking for help," said Jackson. "But so often people think they're screwed up because they're divorced. Pick yourself up and get on with it."  Top of page