Single parents know that managing a household, holding down a job, and finding family time is a delicate balancing act. Add managing the family finances into the mix, and it's a busy existence. Your single parenthood coincides with an important time in your life for building assets, saving for retirement, and protecting your children's interests. For that reason, paying attention to your finances and streamlining your efforts is key.
Here are six tips for keeping your finances on course.
1. Know where your money is going.
While keeping track of your expenses may appear time consuming, it is an investment that will reap many rewards, and will save time and effort in the long run. Only when you know where your money is going can you make adjustments that support your values and goals.
2. Expect the Unexpected.
Build an emergency fund. With an emergency fund, unforeseen events such as a car repair, medical bill, or job loss need not send the family into a tailspin. Instead, you can calmly handle life's curve balls.
Build a fund equal to 3-8 months of expenses by setting aside money every pay period.
3. Obtain life and disability insurance.
As the sole breadwinner, you need disability insurance to protect against the loss of ability to work, and life insurance to take care of your children financially in the event of an untimely death.
If you are employed, check with your employer to see if you can obtain this coverage at work. If not, or if you are self-employed, check around on your own for rates and coverage options.
At Finanswer, we recommend term life insurance. Term life insurance is the least expensive option, there are many levels of coverage to choose from. Insurance products that include an investment component are usually poor investing vehicles, and they come with high fees.
4. Make an estate plan .
As a single parent, you need a will to protect and provide for your children. In it you can name your children's guardians, and give instructions about bank accounts, investments, and personal belongings.
If you die without a will, the state becomes the executor.
In addition to a will, prepare a Living Will, in which you express your wishes should you become incapacitated, and a Durable Power of Attorney, in which you name the person who will be empowered to carry out your wishes.
Now is the time to build up your retirement funds. There are a number of tax-advantaged plans available to employed and self-employed individuals. If your employer offers 401k or 403b plans, or other retirement plans, sign up for automatic deductions. Often, employers will match employee contributions up to a certain limit.
Try to put at least 10-15% of your pre tax income away into retirement plans. If you are over 40 you may need to save more aggressively.
6. Decide which tasks and decisions you need help with.
Sometimes you need professional guidance to help you make personal financial management and investment decisions, or to learn how to make decisions yourself. Sometimes DIY is appropriate and worth it; other times it is penny-wise and pound foolish. Get the financial advice you need; and offload your daily money management tasks such as bill-paying if you don't have the time to keep up with them.
Your personal finance consultant will help you put together a comprehensive personal finance roadmap that matches with your needs as a single parent.
Ignore It and It Will Go Away
“I don't like managing my money.”
“I want money to be there when I need it, without me having to think about it.”
“I wish someone would manage my money and tell me what I can spend.”
If you've heard or thought about these phrases, you are not alone. Many find the idea of managing their personal finances overwhelming, distasteful, or scary.
Unfortunately, if you ignore your money, it will go away. It is the mental equivalent to pushing it away. When you don't manage your money, your money gets frittered away.
Money management is not taught at school, and is rarely taught at home. Chances are, your parents did not speak with you much about managing money or involve you in the process at an age-appropriate level while you were growing up.
As an adult, money is a hush-hush topic almost everywhere you go.
Yet, in order to live a balanced and successful financial life, it is necessary to look money in the face (as it were), and put it in its proper place in your life—out of the closet and off center stage.
Getting clear and balanced about finances, and spending, saving and earning money in accordance with your goals, is an important component of taking care of yourself and your family. Just as exercise is important to physical health, clear and conscious use of money is important to your financial and emotional health.
Finanswer can help you get clear about your finances, and become confident and skilled in managing it.
Checklist of Common Tax Blunders
Here is what not to do. Tax professionals report that their clients often make these mistakes in handling their finances and taxes.
If you are not using a tax professional to prepare your return, and especially if you are not using computer software to prepare your taxes, be sure to read this list carefully to make sure you are avoiding these pitfalls.
Not Planning for the Alternative Minimum Tax (AMT)
State taxes, car licenses, real estate taxes, certain home equity interest paid, a portion of your medical expenses, and most miscellaneous itemized deductions (such as tax preparation fees and employee business expenses) are not deductible for AMT purposes.
If a significant portion of your miscellaneous itemized deductions happens to be employee expenses you’re not reimbursed for, check with your employer to see if you can be reimbursed directly for your costs.
Don’t assume that it’s always best to prepay your state income taxes or your property taxes before the end of the year! If you are subject to the AMT, neither of these taxes will garner you any tax benefit.
Not Using a Computer to Plan for and Prepare Your Income Taxes
There are so many interrelationships in the tax law that even if you have a very simple tax return, you can miss something very important by doing your return or tax planning by hand.
Overusing a Home Equity Loan
It can be a good idea to convert otherwise non-deductible personal interest into tax-deductible home loan interest. But don’t get carried away and take 15 years to pay off a three-year car loan – you’ll pay a fortune in interest!
Taking the Home Office Deduction Without Considering the Tax Effects When You Sell Your Home
The part of your home that is used for business may not qualify for the (maximum) $250,000 ($500,000 if Married Filing Joint) exclusion of gain from tax on the sale of your home; you could end up paying taxes on the home office portion of the gain!
Not Claiming all of the Deductions You are Legally Entitled to
Take charitable contributions into consideration. You may not think the clothes you give to charity are worth much, but consider using valuation software, such as It’s Deductible, and see how much items actually sell for when determining how much to claim. You may be surprised!
Not Accounting for Mutual Fund Dividend Reinvestments
Reinvested dividends generate tax basis. Be sure to add them to your cost basis when you calculate your taxable gain from the sale. It is best to update your records annually.
Not Tracking Your Year-to-Year Carryover Items
State and local taxes paid for the prior year in the current year, capital loss carryovers from prior years, and charitable contribution carryovers can get lost in the shuffle.
Not Setting up a Qualified Retirement Plan in Time
Most qualified plans must be established (but not necessarily funded) by December 31 of the tax year in which you want to take the deduction. Many IRAs can be set up through April 15th of the following year, and SEP plans can be set up as late as October 15th of the following year.
Failing to Name (or Naming the Wrong) Beneficiary to an IRA, 401(K), or Other Retirement Plan
Upon death, IRA accounts pass tax-free to your spouse. If you designate no beneficiary for your retirement accounts, many plans name your estate as the beneficiary — which can be the most costly to your estate. Naming grandkids may subject the account to the generation-skipping transfer tax.
Not Maximizing Your 401(k) Contributions, Particularly if Your Employer’s Plan Provides for Matching Contributions
Current tax law provides annual increases in the maximum amount contributable; be sure to take this into consideration when planning for your financial future.
Not Making Your Quarterly Estimated Tax Payments When You’re Self-employed or Have Significant Investment Income
Some taxpayers who have the ability to pay their estimated taxes quarterly either don’t find the time to do so or prefer to wait to pay their taxes when they file their income tax returns. This is a mistake: you’ll pay underpayment penalties to the tune of about 6% per annum for each quarter that the taxes aren’t paid.
Not Planning Correctly for Stock Option Exercise and Selling Activities
Many employees who exercise options and sell stock in same-day transactions find that the gains they realize from such a sale push them into a higher tax bracket than they’d otherwise be in. If this happens to you, and if your employer simply withholds taxes at a fixed rate from your sale transaction, be sure to determine just what your actual income tax liability will be so that you’re not surprised at the amount of tax you owe come April 15 th.
Changing Jobs and not Adjusting Your Withholding Allowances on Form W-4 to Account for Increased Wages or Signing Bonuses
Further, not considering your state income tax withholding allowances once you’ve adjusted your federal numbers. You may be just fine federal-withholding-wise, but forgetting to adjust your state withholding as well may set you up for an unpleasant surprise.
Contributing to a Roth IRA When You’re not Qualified to do so Because Your Income is too High
Individuals whose modified adjusted gross income is over $110,000 ($160,000 for married couples filing a joint return) may not contribute to a Roth IRA; doing so will subject you to a 6% penalty assessed on the amount you contributed.
Making a Federal Estimated Tax Payment Right After a Big Income Event Rather than Waiting Until April 15 th
Why is this a mistake? If you’re otherwise protected from the application of underpayment penalties (because, perhaps, you are paying through withholding and estimates an amount equal to last year’s tax – or for higher income taxpayers, 110% of last year’s tax), there’s really no reason to pay your federal taxes early. Let that money earn interest for you until it’s time to pay Uncle Sam.
Shawn Rummel and Melissa Taylor have been spent a lot of time hunting for the perfect Halloween costumes.
The two friends have scrounged for weeks through thrift stores and retailers for various elements of their "Alice in Wonderland"-themed Halloween costumes, including a blue Alice-like dress for Rummel and White Rabbit bunny ears for Taylor.
"I like Halloween so it's worth it to me," Rummel, 21, said recently while she browsed the aisles of Halloween Express in downtown Pleasant Hill.
The holiday "is really fun," said Taylor, 20. "That's one of the reasons I think it's worth it to spend money."
Like Rummel and Taylor, Halloween shoppers have been seemingly unscathed by fears of higher heating bills and gas prices.
Consumers are expected to spend an estimated $3.3 billion this year on costumes, candy and decorations, up by 5.4 percent, from last year, according to the National Retail Federation.
Halloween is only the sixth-largest spending holiday, behind the winter holidays, Valentine's Day, Easter, Mother's Day and Father's Day.
During this year's winter holidays -- which includes Thanksgiving, Christmas, Hanukkah and Kwaanza -- shoppers will spend an estimated $435.3 billion, up 5 percent from last year's holiday season, the retail group says.
That's good news for retailers, but not-so-good news for anyone on a budget, and the huge uptick in spending is happening even as consumer confidence is falling.
The contradiction makes one wonder why we buy so much. What's the payoff?
"There are several reasons," said Sandra Richman, founder and principal of Finanswer, an Oakland financial planning firm that also concentrates on the psychology of money management.
"They're trying to create the perfect fantasy holiday," she said, one that evokes prosperity, happiness, togetherness.
"They want to be seen as successful, together, team players, a perfect family," Richman said. How we do this, she said, "is by buying a lot of gifts."
The compulsion to buy often is triggered by an urge to simply keep up with the Joneses.
"I think it's common among everyone to be concerned about what others think," she said. "That goes across all socioeconomic levels."
Retailers take cues from our insecurities when they decorate storefronts and play holiday-themed music, she said. "In stores, they do everything that triggers us into a trance-like state."
Doing too much of anything -- spending, eating, drinking -- is a common danger for consumers during the holiday season.
That's why some financial planners say they get busier this time of year, coaching clients on how to reasonably spend money.
"I like to have the spending be appropriate with the client's situation," said Gary Smith, owner of Pleasanton Financial Advisors. "If cash flow is very strong, if there seems to be money at the end of the month, and it's very important to the client to buy gifts ... I don't want to stand in the way."
But, he added, "if it's a matter of stacking up some credit card debt that's going to be hard to pay, I would recommend cutting back, even if it's painful."
Victoria Manley covers personal finance issues. She can be reached at 925-952-2635 or vmanley@cctimes.com.
HOLIDAY SPENDING TIPS
Knowing how to control spending, and by how much, can be tricky. Here are some tips that planners offer:
• Have a plan. Knowing before you go shopping how much you can -- and cannot -- spend can spare you from going into debt come January.
• Save in advance. If you haven't already started, save those pennies -- every cent counts.
"It sounds simple -- and it is -- you must discipline yourself to save a few dollars from each paycheck during the year," according to a holiday spending guide issued by the American Financial Services Association.
If you don't have the willpower to save regularly on your own, the association suggests joining an interest-paying savings club offered at some banks and credit unions.
• Make your gifts. Besides being fiscally shrewd, homemade gifts can have special meaning for the recipient.
You don't have to be an expert crafter to make a gift, either, says Gary Smith, owner of Pleasanton Financial Advisors. "Whatever the giver's skills are, they can be utilized to make some kind of meaningful gift."
• Pay with cash -- and leave the credit cards at home.
• Shop after you've eaten, and when you're rested and not in a rush. If you must shop after work, bring something to snack on.
"When you're tired and hungry, you're vulnerable to the ploys that retailers are trying to lure you with," warns Sandra Richman, founder and principal of Finanswer, an Oakland financial planning firm.
• Don't buy everything -- and be OK with that.
"Allow yourself to feel that disappointment ahead of time," Richman said.
Parents shouldn't necessarily worry about disappointing their children, either.
"You may in fact be doing them a favor by not giving them everything they want."
-- Victoria Manley
BY THE NUMBERS
Go towww.contracostatimes.com for a copy of the American Financial Service Association's holiday spending guide.
Holiday spending by the numbers
$435.3 billion
Estimated U.S. spending on winter holidays
$3.3 billion
Estimated U.S. spending on Halloween-related items
$31.9 billion
Retail sales by U.S. department stores in December 2004.
$21.5 billion
Fourth-quarter retail e-commerce sales value in 2004.
47,835
No. of U.S. malls and shopping centers in 2004.
Sources: U.S. Census Bureau, National Retail Federation
