Executive Summary: As a single mother, it is not enough if you simply earn a monthly income. Planning your finances is equally important. Financial Planning for a single mom is therefore critical. A 7 point action plan would be to: First know where you stand, replan, set up a contingency fund, buy adequate health and life insurance, plan goals, manage loans and plan your estate.
- Know where you stand: First and foremost, it is important to assess your current financial situation and understand where you stand. A sudden death or separation from the spouse is not easy to deal with, especially when you don't have any emotional and financial support. Assess your bank balance, investments, insurance cover and liabilities. Make a note of these details and remember to claim what is due to you.
- Replan, if needed: A change in your situation may require some adjustments in finances and your future plan. For example, you may have to slightly alter goals which were done with your spouse assuming a double income. You may have to try for a job which pays you more. If you haven't been working, you may want to consider beginning to work to increase cash inflows. Changing plans is not easy, especially if you have to make the decision yourself. Think rationally and with a balanced mind.
- Plan for contingencies: An emergency or contingency fund is critical when you are a single mom. A sudden expense or loss in income can put a huge pressure on cash flows. This is why you should plan for contingencies by keeping aside atleast 6 to 9 months of expenses in a separate account. Invest this in a liquid fund. Vow not to withdraw from this account unless there is an emergency.
- Buy adequate insurance: Te next critical piece in the financia plan of a single mother is purchasing sufficient health and life insurance. Include your child in the health insurance plan you purchase. Consider all important goals and liabilities when you assess the live cover amount you need. Remember not to combine investment and insurance and always buy a pure term insurance to cover your life. Adequate amount of health and life cover is a must before you plan for any goals.
- Map goals and invest: You may have already planned for critical goals when your spouse was around. The first step would be to examine these goals and also consider the existing investments for these goals. As mentioned earlier, replan if necessary. Assess the corpus amount needed for each goal, the time remaining to achieve the goal, amount to be invested every month and the type of investment. Remember to consider important factors such as inflation and the interest rate scenario for each investment type. While mapping goals, do not forget to plan for your retirement and the corpus needed. Investment planning should always be done keeping in mind the goals in your life.
- Manage loans: Liability management is critical when you are a single mom. Any loans taken by your spouse should as far as possible be paid off, as payment of Equated Monthly Instalments (EMIs) can be a huge drain on monthly cash flows. You can use the divorce settlement amount (in the case of a separation) or the insurance settlement amount (in the case of spouse's death) to pay back the loans. Sometimes a part payment may be more beneficial. For example, some loans like home loans give you a tax benefit. Consider this benefit when you think of prepayment. Also, evaluate the return you will make on investments vis-à-vis the interest rate on your home loan before taking a decision.
- Write a Will: Last, but definitely not the least - plan your estate. Most people consider a Will to be necessary only during old age. But this is not true. Further, if you are a single mother, a Will becomes very essential to help easy transfer of your assets to your child, without any legal hassles. If your child is a minor, remember to appoint a guardian for your property till your child attains 18 years of age.
The above action plan requires patience and commitment from your side. Take the help of a professional if needed. Remember - you are doing it for yourself and your child. Starting early and being disciplined can go a long way in easing your finances and managing money better.