Liam Croke: Financial planning for the single parent

Is financial planning any different for single parents than it is for couples?

Is financial planning any different for single parents than it is for couples?

This was a question I was asked last week by a single parent who was wondering whether she needed to do anything differently, from a financial perspective, because she was on her own.

It really was a great question and got me thinking, what are those differences and what are those bigger challenges single parents face that they need to be more mindful of than if they were part of a couple?

And this woman is certainly not alone, according to results obtained in the Census 2011, a staggering one in four people with children live in one parent families. And in Limerick the most up to date figures show that 12% of all households are made up of single parents. So, this is an area that affects an enormous amount of people.

Over the past couple of years in particular, I have had first-hand experience of dealing with people who have lost their jobs; obviously if you were part of a two income earning household, you have that second income that you can fall back on, something a single parent obviously does not have.

And single parents are also more susceptible to financial difficulty, for exactly the same reasons if they were to suffer an illness or accident that prevented them from working.

So, what should they do? Most financial experts recommend that people should save three to six months of their net monthly salary which can be used in the event of an emergency. Whilst this is admirable advice, I believe it is wrong because in the real world trying to accumulate this amount in a short period of time is just unrealistic; it could take some people years before they even reach half way if they are lucky enough not to have dipped into it along the way.

And why should everyone’s emergency fund be the same when everyone’s need for an emergency fund isn’t the same?

A two income household should aim to save, in my opinion, something that is multiplied by three all right but it isn’t their net monthly income, it is the seven things that have to be paid; items like the mortgage, food, utilities, oil, heating, fuel and insurance . That is what they should aim for which is actually achievable.

Single people should, and need to, aim even higher, Their goal, I believe, is to have a five month reserve that covers those seven biggest expenses. A big ask on one income? Absolutely, but this should be their No. 1 financial priority. Once this amount is achieved only then should they move on to other areas.

There is no point in putting saving for retirement above saving for your emergency fund. I come across people all the time who might have some savings in a retirement account that they can’t access until they are 65 and have nothing in what I call the “what if” fund – what if I lose my job, what if I get sick, what if my car packs in, what if my child needs braces etc.

I met a women a couple of weeks ago who lost her job and she has absolutely no savings to pay her mortgage, utilities and so on but has c. €50,000 in a retirement account. Boy does she wish she could get access to that money but she can’t and if she had her time all over again she would have built up that ‘what if’ fund first and then concentrated on her pension.

And on the subject of pensions, this is another area, lone parents need to be much more aware of because it is probably the most challenging of all areas and one that affects women more so than men (about 87% of single parent families are headed by the mother)

Most women leave paid employment for at least a short time after having children, and many leave for a substantial period of years. Some women may never return to the work force and those that go back may be forced to start their careers all over again.

These gaps in a woman’s earnings history may result in lower social welfare and/or pension benefits. Unlike men who receive higher pension benefits because they’ve worked steadily throughout their career.

Did you know the average women spends 15% of her career out of the paid work force, caring for children and ageing parents.

The solution is to save more and for a longer period of time.

One other area that lone parents need to look at, and thankfully this will cost very little, is to make a will.

If anything, God forbid, was to happen to you who would you want to be the guardian of your child? Obviously you need to select someone who will agree to it, and someone who is ideally your age because an older person might not be around if something happens to you.

Based on fundamentals, there is no thought whether you are a single or two parent household, we all want to make as much as possible, whilst paying as little as possible.

But clearly when planning for retirement or managing your money on a daily basis single parents need to make much more adjustments and if that person is you, it’s better to be actively aware of your finances now long before you might be forced into crisis mode.

The solution I believe to move forward is to start in small steps i.e. do some research first or get some financial advice or better still do both.

It is a fact that, people who are the most financially secure are that way because they are the ones who work with financial professionals.

And I appreciate that it can be especially difficult to find the time to devote to long-term financial planning, yet doing so is critical to ensuring the prosperity of you and your family.