Being a single parent isn't always easy. Raising a child to age 18 costs an estimated $310,605 today, according to the Brookings Institution. With so much responsibility on your shoulders—and just one income—how can you build a solid financial future for your family? Single parents can improve their financial security by making these five money moves, including buying life insurance, creating an estate plan and paying down debt.
1. Purchase Life Insurance
Safeguard your children's financial future with life insurance, which pays a death benefit to your beneficiary if you die with the policy in force. There are two basic options: permanent life insurance and term life insurance.
Term life insurance lasts for a specific period, typically up to 30 years. Premiums remain the same during that term.
Permanent life insurance lasts your entire life or until age 100. Whole life insurance is the most popular kind of permanent life insurance. In addition to a death benefit, permanent life insurance has cash value that grows tax-deferred over time. However, permanent life insurance costs much more than term life insurance—up to 15 times more in some cases.
The cost of life insurance depends on the amount of coverage, your age, your health and more. According to Policygenius data, a $500,000, 30-year term life insurance policy costs an average of $30.80 per month for a 20-year-old woman. At age 40, however, the premiums rise to $79.87 per month. Purchasing life insurance early locks in lower premiums, saving money.
How much life insurance should you buy? Consider your income, expenses, assets and any other income your children might have after your death, such as Social Security survivor benefits. Employers sometimes offer employees limited term life insurance for free with the option to buy more. Before going this route, find out whether the policy stays in force if you leave your job.
When listing your minor children as beneficiaries of life insurance, retirement plans or other financial accounts, also choose an adult to serve as custodian of the money until your children are of legal age. Companies typically include this option on beneficiary forms.
2. Create an Estate Plan
An estate plan specifies how your assets are distributed after your death. It includes a will, power of attorney for financial and health care decisions, and possibly a living trust.
A will, the backbone of your estate plan, specifies who becomes your children's guardian and trustee if they are minors. A guardian raises your children; a trustee manages their assets. You can choose one person to do both.
Is your child's other parent still alive? Courts almost always award the surviving parent guardianship. Regardless, you should name a guardian and trustee in case the other parent can't take the role. If you believe your ex is unfit, attach a letter to your will explaining why. Give a copy and any documentation supporting your reasons to your chosen guardian.
A living trust can be useful if you have a complex family situation or significant assets. The trust holds your assets, simplifies the inheritance process and gives you greater control over when your children receive your assets.
Many attorneys craft wills or estate plans for flat fees that can range from a few hundred to a few thousand dollars. Doing it yourself using estate planning software or legal websites such as RocketLawyer.com, Nolo.com or LegalZoom typically costs less than $100. Combine savings with peace of mind by using DIY tools to draft your own documents, then having an attorney review them.
3. Build an Emergency Fund
An emergency fund provides a financial cushion for major unexpected expenses, such as a trip to the ER or losing your job. To figure out how much you need, make a budget including your income and expenses. Break the latter into essential expenses (such as rent and food) and discretionary expenses (such as entertainment and dining out). Your emergency fund should cover three to six months' worth of essentials.
Build your emergency fund faster by spending less or earning more money. For example:
- Cook at home instead of eating out.
- Cancel unused subscriptions and services such as gym memberships or streaming services.
- Shop around for lower prices on car and homeowners insurance.
- Take advantage of employer benefits such as flexible spending accounts (FSAs); health savings accounts (HSAs); commuter benefits; discounted child care, products, services and entertainment; or student loan repayment assistance.
- Sell unneeded items online.
- Ask for a raise or look for a better-paying job.
Keep your emergency fund in a separate savings account so you're not tempted to spend it. A high-yield savings account earns more interest than standard savings accounts, while still keeping funds accessible. To save consistently, set up automatic transfers from your checking account to your savings account or have part of your paycheck directly deposited into your savings account.
4. Get Debt Under Control
High-interest debt can make it hard to save. Free up cash for better uses with one of these strategies:
- Use the debt avalanche method or debt snowball method to prioritize which debts to pay off.
- If you have high balances on several credit cards, consider using a debt consolidation loan with a lower interest rate to pay them off.
- Apply for a balance transfer card to shift debt from high-interest credit cards to a card that charges 0% interest during its promotional period.
Can't squeeze another penny out of your budget? A certified credit counselor can help you better manage your finances and develop a plan to pay off debt. In extreme cases, counselors may create a debt management plan and negotiate with your creditors to reduce the amount you owe.
5. Invest for the Future
Save for retirement and you won't need to rely on your children in your old age. If your employer offers a 401(k) or other retirement plan, aim to contribute at least enough to max out any employer match. No company-sponsored retirement plan? You can open a traditional IRA or a Roth IRA on your own.
Starting early and investing consistently, no matter how little, puts the power of time on your side. Consider this: If retirement is 40 years off, saving $232 a month should net you $1 million by then (assuming an 8.7% rate of return). Once retirement is just 10 years away (say, when your youngest has left the nest), you'd have to contribute a whopping $5,218 a month to reach the $1 million goal.
The Bottom Line
Striking a balance between your family's current needs and your future financial goals isn't always easy. But with a little planning and effort, you can put your family on the path to success. A financial advisor who can help you develop a plan for your family's needs could be a wise investment.
Keeping your credit in good shape should be part of your financial plan too. Check your credit report regularly and take advantage of Experian's free credit monitoring service. See your credit score and get alerts to changes that can affect your credit. After all, you've got more pressing things to do—like spending time with your kids.