Single Mother? Get A Rainy Day Fund
"It's a common mistake to make interim drawings on your emergency fund to pay for lifestyle expenditures, with the optimistic assumption that you'll be able to top it up later"
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Single Mothers have a daunting task. Doubling up as the emotional care-giver and the financial provider for a young child is no child's play - no pun intended. It's critical to sidestep some common money traps that can severely impact both your future and your child's.
"A single mother has to manage daily expenses, and at the same time plan for the future - completely on her own. This needs solid financial planning and discipline", points out Radhika Binani, Chief Product Officer, Paisabazaar.com.
Stabilise Your Cash Flow
If you're recently widowed or divorced, you may be in receipt of a significant lump sum as a life insurance policy payout or a divorce settlement. In case of the latter, your ex-husband may be required to pay child support or alimony, and this sum may taper off over time depending upon your arrangement. You need to be prepared for this.
Your cash flow situation could get more complicated if you are constrained to opt for part time assignments ? with more irregular cash flows ? over a full-time job, to be able to care for your child.
"Women often quit jobs giving into to circumstances, in turn relinquishing their financial independence", observes Prableen Bajpai, Founder Director, FinFix Research & Analytics.
Regardless of your unique situation, it's vital to project your cash flows over as long a timeframe as possible, and structure your investment portfolio accordingly with an adequate mix of liquid and growth assets.
Resist the temptation to splurge your recently received lump sum on luxury items or so-called "wants", as this could trigger a potentially dangerous and irrecoverable collapse in the state of your personal finances.
Never compromise your 'safety net'
As a single Mother, your emergency fund is going to be a key element of your personal finances. You must aim to have a minimum of six to twelve months of fixed expenditures for yourself and your child, parked into a portfolio of low risk, liquid or short-term debt funds any given point in time.
"A rainy-day fund is essential to leading a peaceful life, without worrying about questions like, 'what if I lose my job?'", says Bajpai.
It's a common mistake to make interim drawings on your emergency fund to pay for lifestyle expenditures, with the optimistic assumption that you'll be able to top it up later. Admittedly, it's difficult to resist a neat pile of liquid savings, when that foreign vacation or fancy new car is staring you in the face. But resist you must, for your child's sake if not for your own.
Purchase adequate term insurance as well as disability coverage
Your life insurance coverage or "death benefit" is of critical importance, as your dependent child will likely not have a fallback option in case of your untimely demise. Unfortunately, in India, we tend to pile on insurance policies without accumulating any significant death benefit in return - as many of us opt for Life Insurance Policies that have a high savings element instead. Avoid "traditional" policies that provide low returns, hardly make a dent in your life coverage requirements, and only stand to benefit your insurance agent.
It's advised to thoroughly evaluate your actual death benefit requirement, keeping in mind your income replacement needs, your child's future goals, and your current liabilities. At the end of the evaluation process, choose a simple term insurance plan to secure your child's future. Make sure you select disability cover riders too, as a partial or total disability could potentially leave you and your dependent child without an income stream for an extended period.
"Get a term policy and a family floater for health insurance for you and your kids. These two steps will financially protect you and your kids in case of an emergency", advises Binani. She goes on to observe that in a Women's Day survey Paisabazaar did last year, only 50 per cent of women believed they were "financially prepared to handle an emergency"
Prioritise your Retirement Planning over your Child's Education
Your child may make it through college with financial aids such as loans or scholarships, but you won't be able to go back in time and create a retirement fund over three decades of your working life. Neither will you be able to avail loans to fund your post-retirement expenditures. As a single mother, you need to be prepared for the possibility that you could be fending for yourself in your non-earning years.
"Expenses will only increase with time, so it's important to plan for them as early as possible", advises Bajpai. Start saving for your retirement systematically in an aggressive, growth oriented mutual fund before any other goal, and commit to never dipping into this fund no matter what. As a mother, it may be tempting to start saving for your child's education before all else, but this could prove to be an unwise move eventually.
"To plan for the future, invest in ELSS, large cap and flexi-cap mutual funds. This will help you save taxes and meet your long term financial goals", guides Binani.
Will your Assets
As a single parent, it's critical to have a well-structured will in place to ensure the smooth transfer of your assets to your children in the unfortunate event of your death. Remember, they'll have nobody to fight lengthy legal battles on their behalf, in case you die intestate. Be sure to specify a legal guardian in your will, and select a trustworthy executor too.
"Estate planning should be a top priority as a single parent, to ensure that your child's financial and emotional needs - often influenced by one's financial position - are taken care of even in your absence", recommends Bajpai in conclusion. Wise words of advice, indeed.
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