Question:  

As a single parent, are there things I should review to make sure I’m on the right track?

Answer: 

Deciding how to allocate income as a parent, whether you’re doing it alone or as a team, can be overwhelming. According to U.S. Census Bureau data, about twenty-four million children in the U.S. live in a single-parent household. We have a checklist of action items and considerations to help you get started on the right budgeting path for optimal financial health. 

Create a budget and recalibrate as necessary. “Zero-based” budgeting identifies a purpose for every dollar spent. Another option is the 50/30/20 budget rule, allocating 50% of after-tax income to needs and obligations, 20% to savings, and 30% to wants and desires. Whichever method, success comes from putting pen to paper and holding yourself accountable. Check-in with yourself at regular intervals to adjust what’s not working for you.

Emergency or Opportunity Fund. Maintaining a readily accessible and liquid balance of three to six months of living expenses is highly recommended. Your needs depend on unique criteria, but housing, food, healthcare, childcare and transportation are key components. Focus on steady progress toward your goal and keep your contributions to this category sustainable. 

Review health insurance. Life events such as a divorce or having a child allow you to amend employer sponsored health insurance plans without waiting for open enrollment. If you’re co-parenting, have a conversation with the other parent to determine which one of your health insurance policies has more comprehensive or cost-effective coverage for the children. If you’re concerned about childcare costs, explore a plan with a flexible spending account (FSA) option. This allows you to save up to $5,000 pre-tax to pay for daycare, preschool and summer camp for dependents age 12 and under. 

Revisit your estate plan. Estate planning documents are future protection for your children in case you’re no longer here. A will is the first of these documents appointing a guardian for your children and outlining how your assets will be distributed. A living trust, or revocable trust, can hold assets until it is time to distribute them according to your wishes. 

Cash in on relevant tax allowances. Typically, the parent who cares for the child the majority of the time is the one who can claim them as dependent on their taxes. The 2023 federal child tax credit is worth up to $2,000 per child, and in some states have additional child tax credits for which you may qualify. There’s also the child and dependent care credit, which allows you to claim childcare expenses for children aged twelve and under (up to $3,000 for one child and $6,000 for two or more). In preparation for the upcoming tax year and to account for household changes to income and expenses, determine if you need to change your withholding elections.

Kid’s Future. The best gift to give is the gift of education. A college fund, or 529 plan, is a tax-advantaged, state-sponsored savings plan used for educational expenses. Earnings in 529 plans aren’t subject to federal tax and in most cases, state tax, as long as used for eligible education expenses, such as tuition, room, and board (always check with a tax professional to discuss eligibility for your state). 

Your Future. Saving for your future may not feel like a priority when the focus is on raising children, but it’s still important to set aside funds for your retirement. Take advantage of tax-efficient accounts like a 401(k) and setting up regular contributions. Another plus is that many employers match your contributions to these accounts up to a specified amount. Consider a Roth IRA as well, which is a tax-deferred account that you can reserve for retirement (or use for qualified education expenses for your children if necessary). 

Being a single parent can feel overwhelming at times. Finances shouldn’t add to the pressure. It’s okay to ask for help in how to best allocate funds and where to prioritize so you can focus on your children. Although children may not always listen to us, they are always watching our actions. Stay focused and plan accordingly. 

Source: FactSet August 27, 2023.