Becoming a Financially Savvy Single Parent

Raising children without a partner is an enormous challenge—emotionally, physically, and especially financially. Overwhelmed by the work involved in earning a living and caring for children, single parents can sometimes feel they will never be able to break the cycle of living paycheck to paycheck. But even if you have a limited income, you may find that simply managing your money better can alleviate your financial problems and allow you to save for the future.

Analyze Your Expenses

The first step is to take stock of your situation. What are your fixed costs? How much do you pay for housing, utilities, transportation, and childcare? If these expenses alone eat up most of your income, leaving you with little money for groceries or discretionary spending, then you should consider whether some of these costs can be reduced or eliminated entirely.

If your mortgage, property taxes, and utility bills are too much for you to reasonably handle, selling the house and moving to a smaller place may be your best option. It will likely be difficult for you and your children to leave the family home, but the prospect of having more money to spend on other things may cushion the blow. Similarly, it may make sense to trade in that late-model minivan for a more fuel-efficient used station wagon.

If you need childcare while you are at work, there may be ways to reduce your costs. Daycare centers are often more expensive than programs offered by churches or the local YMCA. If your children only require after-school care, a stay-at-home mother may be willing to help out in exchange for your babysitting services at other times. You may also want to speak to your employer about whether you can work a flexible schedule or do some of your work at home. If you must pay for childcare, be sure to claim all available tax deductions and credits.

Control Spending, Start Saving

Next, assess whether you can cut back on other forms of spending. By keeping a diary of all expenditures over the course of a month, you will likely identify some fat that could be trimmed from your budget. Simply replacing takeout with fresh, but easy to prepare, meals can save a bundle.

By getting your spending under control, you can start planning for the future. After establishing a fund for emergencies, you should think about your retirement and education goals. If your workplace offers a 401(k) plan, try to contribute at least enough to take advantage of your employer match. You may also want to consider putting money into an IRA. If paying for your children’s college education—or your own—is a priority, there are several tax-advantaged accounts that can help you save efficiently.

Secure Insurance Protection

While money may continue to be tight, it is important not to overlook the need for adequate health, life, and disability income insurance. How would your children cope if you were gone or no longer able to work? Having some coverage in place to protect your family may be less expensive than you imagine, and it will ease your mind. All families need health insurance; if you do not receive benefits through your employer, look into a high-deductible catastrophic policy that covers the costs of serious illness or hospitalization. Depending on your income, your children may be eligible for public health insurance programs.

Despite all your efforts to cut costs and adhere to a budget, you may still find yourself with credit card debt. If possible, move the debt from higher-interest to lower-interest credit cards. It is usually best to resist the temptation to consolidate your debt, as many of these services charge high fees.

Sticking to a budget can sometimes feel like an exercise in deprivation, but it doesn’t have to be if you set aside money for a few treats, like a weekly family pizza night. Even if you can only contribute small amounts, create a “fun fund” to be used for a vacation or a trip to the amusement park. Providing for a family on your own is a challenge—but it’s one that can be met with good habits and careful planning.

Education: One of the Best Investments You’ll Ever Make

It wasn’t long ago that an individual went to school, got an education, and embarked on one career that usually lasted a lifetime. Many companies provided on-the-job training, and little thought was given to “going back to school.” It was common to be asked in a job interview where you saw yourself in five or ten years. Many people fresh out of school could see a fairly predictable career track ahead.

In contrast, today’s working world is far different. Trying to keep up with rapid change is challenging enough, let alone trying to figure out the future of five or ten years hence. Technological changes are redefining some jobs and may make others obsolete. On the other hand, ten years from now, an individual may find him or herself in a job that doesn’t yet exist! The bottom line is that to stay employed and employable (either as an employee or independent contractor), almost everyone will need to continually upgrade his or her skills.

The more you can do in a rapidly changing, information-based economy, the more attractive you will be to prospective employers. However, personal growth and development carries a price tag. While some companies might provide, and may even pay for, some forms of training, it may be unrealistic to think employers will bear the entire burden for skill development. Just as more and more workers are being called upon to assume responsibility for funding their own retirements (by virtue of the shift away from defined benefit plans toward defined contribution plans), more workers may have to contribute to their own long-term career development.

Changing the Mind set

The first step toward the ideal of long-term career development is to change the current mindset about education. Rather than seeing education as something over and done with after college, it is becoming increasingly necessary to view education as a process that occurs on an ongoing basis. It is beginning to appear that success in the 21st century work world may require workers to think of themselves as sponges with unlimited abilities to “soak up” new information.

It may help to think of “investing” in personal growth and development as analogous to the business practice of investing in research and development (R&D). Just as businesses set aside a portion of their revenues to fund R&D that will lead to new products and more customers, individuals should consider setting aside a portion of their incomes to engage in activities (e.g., coursework, advanced degrees, professional or trade meetings, relocation for a better opportunity in another city) that will enhance their job skills and expand their earning capacity.

Consequently, the best investment you might ever make is to begin setting aside funds for your continuing education. In the process, you’ll be reinforcing the sense of responsibility required to control your own destiny and developing the resources necessary to carry out that responsibility. You’ll also be demonstrating to others that you are committed to improving your skills, able to keep up with change, and willing “to go the extra mile.”

“Gifting” Your Way to Estate Tax Savings

If you have been fortunate enough to accumulate substantial assets during your lifetime, do you know that estate taxes could reduce the amount you’ll be able to pass on to your heirs? Federal estate tax rates can reach as high as 45% for estates greater than $2,000,000 in 2008. Therefore, it is very important to develop an estate planning strategy that helps reduce the impact of estate taxes. By making gifts of existing assets during your lifetime, you can help reduce the size of your estate and lessen your family’s future estate tax burden.

Gift-Giving Basics

1. The annual gift tax exclusion allows a donor to give away up to $12,000 (subject to inflation indexing) in 2008, per recipient, without incurring a gift tax liability. If the donor is married and his or her spouse consents to “splitting” the gift, the annual gift tax exclusion increases to $24,000, even if only one spouse actually makes the entire gift.
2. Making gifts during one’s lifetime shifts future appreciation of gifted property to the recipient.
3. Taxable income may be shifted from the high tax bracket of a donor to the lower tax bracket of a recipient, age 19 or older.
4. No gift tax is paid out-of-pocket until taxable gifts exceed the lifetime gift exemption ($1,000,000 for 2008). The federal gift tax is cumulative. If the gift qualifies for the annual gift tax exclusion, it does not count against your lifetime exemption.

What about Life Insurance Gifts?

Life insurance can often be the single largest asset in a gross estate. If this is true in your case, you may wish to consider how to shield the death benefit proceeds from federal estate tax liability. If, at your death, you own a life insurance policy, the death benefit proceeds will be included in your gross estate and could be subject to federal estate taxes (depending on the size of your estate).

An irrevocable life insurance trust (ILIT) can be set up to be the owner and beneficiary of a new policy. The use of this type of trust has been widely regarded as an effective means for keeping life insurance policies from the taxable estate of the insured. When properly drafted, this trust can eliminate the death benefit proceeds not only from your gross estate, but also from the gross estate of the trust’s beneficiary.

If you plan to use an existing policy, you must live for more than three years following the transfer to the ILIT. Otherwise, the policy proceeds will be included in your taxable estate. Also, keep in mind that if the transferred policy has a cash value, a federal gift tax may apply. For a new policy, the trust should be designated as the owner, applicant, and beneficiary.

The use of a tax reduction technique, such as gift giving, can have a positive effect on the reduction of the size of your estate. However, as with all tax planning matters, a qualified professional should be consulted to help ensure planning decisions are consistent with your overall goals and objectives.

Managing Credit Card Costs

The current increased competition among credit card issuers presents an opportunity for you to control your credit card costs. For example, many institutions are willing to raise the line of credit on a standard credit card. Too often, cardholders assume that to obtain a higher credit line, they must purchase a “premium” credit card, which may charge a substantially higher annual fee. Consider the following when shopping for the best credit card to meet your needs:

• Find the Lowest Rate. To further minimize credit card costs, individuals who usually leave unpaid balances at the end of the month should search for the lowest interest rate, regardless of the annual fee.
  
  
• Pay the Lowest Annual Fee. Conversely, those who normally pay off balances before finance charges are applied should obtain a card with a lower annual fee, or no annual fee, regardless of the interest rate.
  
  
• Use a Two-Card Approach. Some cardholders pay off minor purchases quickly and major items gradually. These individuals may want to consider having two cards, one with a low annual fee for minor purchases and another with a low interest rate for major purchases.
  
  
• Look for a Grace Period. Regardless of your bill paying habits, consider obtaining a card that offers an interest-free grace period of at least 20 days from the date of billing. However, many card issuers offer a grace period for new purchases only if the previous month’s balance has been paid in full. Also determine whether the card issuer imposes monthly service charges for pre purchased transactions, such as cash advances.

A credit card can be valuable in helping you attain needed or desired items; however, you can further enhance the benefits of credit if you choose a card according to your needs and use it wisely.