The shift from double income to single impacts everything from your savings to the standard of living
Being a single parent, the entire responsibility of taking care of your family and keeping them financially secure rests on your shoulders. This can be challenging if you are a single working mother. The cushion of falling back on your partner’s income does not exist anymore. The shift from double income to single impacts everything from your savings to the standard of living. The situation is worse if your partner was the one who made all the investment-related decisions. If that was the case, you may have to scale up your knowledge regarding financial instruments and savings avenues. The most pressing issue here will be how and from where to start financial planning? Here’s a starter guide that will help you take confident steps:
1. Assess your financial position: The first thing that you need to do is assess where you stand financially. It might be that you have received death benefit from your partner’s life insurance policy or alimony after your divorce. Don’t invest this amount in haste as you may probably end up making serious mistakes. Also avoid locking up the money in illiquid assets, such as real estate. Instead, invest in a liquid fund or bank fixed deposit while you decide where and how to invest.
2. Set financial goals: Once you are done with the assessment of your financial position, you will have to set your financial goals and plan your investments accordingly. The financial goals have to be classified according to the time horizon that you are looking at—whether they are short-term or long-term goals. Your imminent home renovation or down-payment of your loans will qualify as short-term goals. Whereas your child’s higher education or wedding expenses and your retirement planning will qualify as long-term goals. Each of them would require different investment strategies. Short-term financial goals can be best achieved by investing in bank fixed deposits or debt-oriented mutual funds. For long-term goals, invest in equity-oriented mutual funds or unit-linked insurance plan (ULIP).
3. Create an emergency fund: This fund will take care of your short-term routine expenses in case your income stops because of some unforeseen event. So, ensure that you keep at least six months of your family’s expenses in this fund. Instead of storing that money in your savings account, invest it in liquid fund or bank fixed deposits to earn more from them.
4. Take adequate insurance cover: A life insurance policy becomes all the more important for you if you happen to be a single mother. After all, you are the sole-earner of your family now and your absence would seriously jeopardise the financial well-being of your family. Therefore, purchasing adequate insurance cover for your family should be the next step for you. Go for a pure term policy to get a high risk cover at a low cost. Ideally, your life cover should be 15 times of your present annual income. It should also include your current liabilities and the future educational or marriage expenses of your child.
5. Invest in mutual funds or ULIPs for your long-term goals: Once the risk of loss of life has been covered, start investing for your long-term goals and retirement planning. For long term goals, invest your savings in equity mutual funds as equities usually outperform other asset classes such as debt, gold and bank deposits by a wide margin over the long run. If you are not market savvy, take the systematic investment plan (SIP) route for investing in mutual funds. Through an SIP, you can invest a pre-determined amount in a mutual fund scheme at regular intervals. SIPs would also instill financial discipline in you, as well as enable portfolio diversification and capitalize on the ups and downs of the equity market. You can also consider investing in equity unit-linked insurance plans (ULIPs), which also invest in equity markets and provide the twin benefits of life cover and tax savings. For immediate or short-term goals, invest in debt funds.
6. Invest in a child ULIP for your child’s wedding or education plans: As a single parent, providing for your child’s future education or wedding expenses solely rests on you. But you need to take into account life’s uncertainties: what if you are not present anymore to build corpus? To mitigate such risks, invest in a child ULIP. Herein, the insurer will not only pay a lumpsum amount after your untimely death but will also continue investing in the plan on your behalf. Thus, your child’s future will be financially taken care of.
The steps mentioned above require financial discipline and knowledge and it may even look cumbersome to you in the beginning. However, as you start taking these baby steps, you will gain control of your finances and investing will only get easier for you. With proper financial planning in place, you and your dependants can look forward to future with hope instead of fighting it out for everyday survival.
Written By: Naveen Kukreja