Being a single mom is hard. Not only do you have to parent, but your family’s finances and well-being fall solely upon your shoulders. It’s a burden, but you are not alone. Follow these financial tips for single mothers to learn how to make money as a single mom as well as how a single mother can invest.
How Can a Single Mother Make Extra Money?
There’s no question that having to work while serving as your children’s primary caregiver affects your earning ability. While this fact is indisputable, focusing on career advancement is the best way to provide security for yourself and your family.
Trying to survive on one paycheck is tough, and spare time for single moms is hard to come by. Still, there are side gigs that can be done from home so hiring sitters is not necessary. These include:
- Freelance creative work: If you have the skillset, writing, editing, and designing websites are all ways to earn more money from the comfort of your laptop.
- Virtual assistant: Mothers with operations, management, and customer service skills may find assistant work that can be done remotely.
- Childcare provider: Many working mothers with young children need childcare. Some work unconventional schedules, and if you can watch children in the evenings or on weekends, this can mean extra cash. Bonus points if the kids you look after can play with your children.
- Pet sitting: If you like animals, pet sitting is an enjoyable and profitable gig. Many pet owners want to get away for a weekend, which could fit your schedule perfectly.
Everyone has their own unique talents. Determine your strengths and passions to see if you can turn them into a side job.
Update Your Legal Status
If there is an ex-spouse in the picture, make sure to remove that person as a designated beneficiary from any retirement, bank, and brokerage accounts. If something happens to you and your former spouse is still named as the beneficiary or co-owner of an account, they are the owner. Your kids will lose out, with potentially devastating results.
The same holds true if your ex, whether a former spouse or not, holds credit cards jointly with you or if utility bills are in their name. Should they fail to pay their bills, it will harm your credit score.
Why Life Insurance Is Critical
Every family needs life insurance, but for single-parent families, it is absolutely vital. Should something happen to you, there is no partner to take care of your kids.
How much coverage you will need depends on several factors, including your children’s ages and who would look after them if you died. Ask yourself how much money your children’s guardian would need to care for them properly and whether you want to cover all or part of their college expenses.
Even if your parents or siblings agreed to care for your children should that worst-case scenario arise, they might need funds to purchase another dwelling if their current apartment is too small to accommodate children. How much debt you carry also plays a role in the amount of life insurance you need.
For most single parents, a life insurance coverage amount between seven and 10 times their annual income proves sufficient. If you make $100,000 a year, plan on buying between $700,000 and $1 million in coverage. For many parents, a term life insurance policy is the most affordable option.
Create a Financial Foundation
Get started by creating your financial foundation. Single parent finances may not give you much leeway initially, but from tiny acorns grow mighty oaks. When you have that foundation firmly in place, you can make investment plans.
- Build a budget: Put together a budget so you can manage your money as carefully as possible. Account for every dollar spent and cut back as much as possible, then explain to your children why it is necessary. You may find you can save money by cutting back on food spending or by shopping for clothes at thrift sales or garage sales. Take a good look at entertainment expenses — do you really need cable and subscription services? Budgeting is also a valuable money lesson for your children. Need help? Personal Capital can help you organize your finances, and some of its resources are free!
- Create an emergency fund: You never know when that rainy day will hit. A top priority is creating an emergency fund of three to six month’s expenses. It means making sacrifices but can give you some peace of mind.
- Pay off high-interest debts: Make a plan to pay down high-interest credit cards and other debts. This may mean transferring balances on several credit cards to one card with the best rate or taking out a debt consolidation loan at a lower interest rate. Such loans are paid off in monthly installments. Paying down high-interest debts should improve your credit score. A high credit score helps you qualify for more favorable loan terms when buying a house or car.
- Open a savings account: Place your emergency funds in a safe vehicle such as a savings account, offered by banks and credit unions. Up to $250,000 of your money is protected by federal insurance.
Define and Prioritize Your Financial Goals
If you do not set goals, you cannot reach them. Define your financial goals and how you intend to reach them. Consider your priorities, whether that’s buying a home for you and your children or saving for a comfortable retirement? Once you set specific goals, you can make a plan for them to come to fruition. Here are a few key factors for setting financial goals:
- Long-term planning: Where do you hope to be in 10, 20, or 30 years? Set a goal for each stage of your life and determine how to get there.
- Healthcare planning: Long-term planning also includes healthcare. Even when covered by Medicare in retirement, you will need private health plans to bridge the gap between what Medicare does not cover. A Fidelity study released in 2020 shows that the amount estimated for post-65 health care expenses for couples is $295,000, so as a single woman, plan for your costs being about $150,000 out-of-pocket.
- Start investing early: The sooner you start investing, the more your savings will compound in the long run. Dollar-cost averaging (DCA) allows you to invest small amounts regularly and build wealth over time.
- Prioritize retirement over college: Many single mothers make the mistake of prioritizing college savings for their children instead of saving for their own retirement. It’s an easy trap to fall into, as you want your children to obtain the best education possible. However, if you don’t save enough for retirement, you could end up working for the rest of your life or asking your children for help. Encourage your children to do well in school and apply for scholarships and financial aid.
Set Up a Retirement Account
If you have an employer-sponsored retirement plan at work, such as a 401(k), try to contribute the maximum amount permitted. Your employer may provide a 401(k) match, which is basically free money, so contribute enough to be eligible. A typical matching amount is 50% of your contribution up to 3% of your salary.
- Those without an employer-sponsored retirement plan can open a traditional IRA and deduct their contributions from their federal taxes. Current annual contribution limits are $6,000 annually for those under age 50 and $7,000 per year for those 50 and up. Traditional IRAs are tax-deferred, so you pay no taxes on income until you begin taking distributions after retirement.
- An alternative is the Roth IRA. Annual contribution amounts are the same as the traditional IRA, although they are based on adjusted gross income. For 2021, a single person or head of household making up to $125,000 may contribute the full amount. Roth IRAs are not tax-deductible, but you pay no taxes once withdrawals start. While traditional IRAs have required minimum distributions after you reach age 72, there is no equivalent for Roth IRAs. You do not ever have to take distributions on a Roth IRA.
Start Investing for the Future
Take advantage of the tools offered by a 401(k) or similar plan. These tools help determine your risk tolerance level and the right types of asset allocation for your life stage. When younger, you can tolerate more risk because there is time to make it up when markets turn bearish. Older workers don’t have that luxury of time, so their investments should reflect more conservative allocations.
A person’s single largest asset is usually their home. For the employee close to retirement who has been fully vested in their 401(k), their retirement plan is likely their biggest asset. There are many other ways to invest in your future if you’re not close to retirement:
- Open 529 plans for your children: Save for your children’s education with a 529 plan, named for its section of the IRS tax code. All states offer 529 educational savings plans. While not tax-deductible, there are no annual contribution limits for these plans. Some colleges and universities sponsor prepaid tuition plans. The 529 plan can also pay for private elementary or high school tuition.
- Automate investing: The easiest way to invest is to set it and forget it via automated investing. This is a form of DCA, whether for IRAs or other types of investments. A specific amount of each paycheck is designated for 401(k)s, and you can set up automated investing for mutual or exchange-traded funds. As your income rises, you can increase the automated amounts. Our recommended investment broker is Ellevest, which is run by women and for women. Read more about Ellevest in our review.
Consider Using a Financial Advisor
Robo advisors and online support can assist with charting your financial future, but there comes a time when you may need a one-on-one approach for your individual situation. That is where a financial advisor comes in.
Seek out a financial advisor who is a fiduciary, who is legally required to act in their client’s best interests. A non-fiduciary advisor makes money by recommending financial products for which they receive compensation, even if they do not meet a client’s investment goals. Fiduciaries charge fees and do not rely on commissions.
Single motherhood presents all sorts of monetary and practical challenges. But with patience, fortitude, and solid financial planning, you can overcome them and continue to create a good life for yourself and your family.